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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, 20549


FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the Fiscal year ended December 31, 2003


[  ] Transition Report to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-11415

AMERICAN STANDARD COMPANIES INC.

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 13-3465896                          
|                                                               |  |                                     
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|One Centennial Avenue, P.O. Box 6820, Piscataway, New Jersey   |  | 08855-6820                          
|                                                               |  |                                     
|(Address of principal executive office)                        |  | (Zip Code)                          

Registrants telephone number,
including area code:(732) 980-6000

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

|                                                                  |  |                                          
|----------------------------------------------------------------- |  | -----------------------------------------
|Title of each class                                               |  | Name of each exchange on which registered
|                                                                  |  |                                          
|Common Stock, $.01 par value
(and associated Common Stock Rights) |  | New York Stock Exchange, Inc.            

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

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X]  No
[  ]


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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

Yes [X]  No [  ]


The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the Registrant as of the close of business on June 30, 2003
was approximately $5.3 billion based on the closing sale price of the common
stock on the New York Stock Exchange on that date. The company does not have
any non-voting common equity.

Number of shares outstanding of each of the Registrants classes of Common
Stock, as of the close of business on February 20, 2004: Common Stock, $.01 par
value, 72,225,650 shares.

|                                                                                                                |  |                                                           
|--------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------
|Documents incorporated by reference:Document (Portions only)                                                    |  | Part of the Form 10-K into
which document is incorporated.
|                                                                                                                |  |                                                           
|Definitive Proxy Statement used in connection with the Annual
Meeting of Shareholders to be held on May 4, 2004 |  | Part III                                                  



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TABLE OF CONTENTS

|         |  |                                                                                                |  |  |    |      |  | 
|-------- |  | ---------------------------------------------------------------------------------------------- |  |  | -- | ---- |  | 
|         |  |                                                                                                |  |  |    | Page
|         |  |                                                                                                |  |  |    |     
|         |  |                                                                                                |  |  |    |     
|         |  | PART I                                                                                         |  |  |    |     
|         |  |                                                                                                |  |  |    |     
|Item 1.  |  | Business                                                                                       |  |  | 1  |     
|Item 2.  |  | Properties                                                                                     |  |  | 14 |     
|Item 3.  |  | Legal Proceedings                                                                              |  |  | 15 |     
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  |  | 16 |     
|Item 4A. |  | Executive Officers of the Registrant                                                           |  |  | 16 |     
|         |  |                                                                                                |  |  |    |     
|         |  | PART II                                                                                        |  |  |    |     
|         |  |                                                                                                |  |  |    |     
|Item 5.  |  | Market for the
Registrants Common Equity and Related Stockholder Matters                      |  |  | 18 |     
|Item 6.  |  | Selected Financial Data                                                                        |  |  | 19 |     
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  |  | 20 |     
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                     |  |  | 39 |     
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  |  | 41 |     
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  |  | 78 |     
|Item 9A. |  | Controls and Procedures                                                                        |  |  | 78 |     
|         |  |                                                                                                |  |  |    |     
|         |  | PART III                                                                                       |  |  |    |     
|         |  |                                                                                                |  |  |    |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  |  | 79 |     
|Item 11. |  | Executive Compensation                                                                         |  |  | 79 |     
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  |  | 80 |     
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  |  | 82 |     
|Item 14. |  | Principal Accounting Fees and Services                                                         |  |  | 82 |     
|         |  |                                                                                                |  |  |    |     
|         |  | PART IV                                                                                        |  |  |    |     
|         |  |                                                                                                |  |  |    |     
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  |  | 83 |     
|         |  | Signatures                                                                                     |  |  | 89 |     

Important Information Concerning
Forward-Looking Statements

Certain of the statements contained in this report (other than the
historical financial data and other statements of historical fact), including,
without limitation, statements as to managements expectations and beliefs, are
forward-looking statements. Forward-looking statements are made based upon
managements good faith expectations and beliefs concerning future developments
and their potential effect upon the Company. There can be no assurance that
future developments will be in accordance with such expectations or that the
effect of future developments on the Company will be those anticipated by
management. Forward-looking statements can be identified by the use of words
such as believe, expect, plans, strategy, prospects, estimate,
project, anticipate, intends and other words of similar meaning in
connection with a discussion of future operating or financial performance. For
further information as to important risks and factors that could cause actual
results to differ materially from managements expectations, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations-Information Concerning Forward-Looking Statements.





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PART I




ITEM 1. BUSINESS

American Standard Companies Inc. is a global, diversified manufacturer of
high-quality, brand-name products in three major product groups: air
conditioning systems and services (58% of 2003 sales); bathroom and kitchen
fixtures and fittings (26% of 2003 sales); and vehicle control systems for
heavy and medium-sized trucks, trailers, buses, luxury cars and sport utility
vehicles (16% of 2003 sales). American Standard is one of the largest
providers of products in each of its three major business segments. The
Companys brand names include TRANE® and AMERICAN STANDARD® for air
conditioning systems and services, AMERICAN STANDARD®, IDEAL STANDARD®,
STANDARD®, PORCHER®, JADO®, ARMITAGE SHANKS®, DOLOMITE®, MELOH®, VENLO®,
VENESTA®, SOTTINI® and BORMA® for bath and kitchen products, and WABCO® for
vehicle control systems.

American Standard Companies Inc. (the Company) is a Delaware corporation
formed in 1988 to acquire all the outstanding common stock of American Standard
Inc., a Delaware corporation (American Standard Inc.) incorporated in 1929.
In 1999 the Company completed an internal reorganization in which American
Standard Inc. transferred ownership of essentially all its non-U.S.
subsidiaries and their intellectual property rights to another wholly-owned
subsidiary of the Company, American Standard International Inc., a Delaware
corporation (ASII). American Standard or the Company refers to the
Company, or to the Company and American Standard Inc. or ASII, including their
subsidiaries, as the context requires.

Overview of Business Segments

American Standard has three business segments: Air Conditioning Systems
and Services, Bath and Kitchen and Vehicle Control Systems.

Air Conditioning Systems and Services(Air Conditioning). American
Standard is a leading U.S. designer and producer of air conditioning systems
and equipment for both domestic and export sales. It also provides control
systems, aftermarket service and parts for its products, and performance
contracting for the installation and maintenance of heating, ventilation and
air conditioning systems. American Standard also manufactures air conditioning
systems outside the U.S. Sales to the commercial and residential markets
accounted for approximately 73% and 27%, respectively, of Air Conditionings
total sales in 2003. Approximately 60% of Air Conditionings sales in 2003
were in the replacement, renovation and repair markets. Air Conditioning
derived 75% of its 2003 sales in the U.S. and 25% outside. Management believes
Air Conditioning is well positioned for growth because of its high-quality,
energy-efficient, strong brand-name products; significant existing market
presence; the introduction of new products and features such as electronic
controls; its broad distribution and servicing presence; conversion to products
utilizing refrigerants that meet current or future environmental standards, and
expansion of operations throughout the world. Systems capabilities, coupled
with equipment, service and parts have allowed Air Conditioning to be active in
the growing performance-contracting business as a comfort systems solution
provider.

Bath and Kitchen. The Bath and Kitchen segment is a leading producer of
bathroom and kitchen fixtures and fittings in Europe, the U.S. and many
countries in Latin America and Asia. Its products are marketed through retail
and wholesale sales channels for residential and commercial markets. Bath and
Kitchen derived 66% of its 2003 sales outside the U.S. and 34% within.
Management believes Bath and Kitchen is well positioned for growth because of
its strong brands, new products and designs, low-cost manufacturing capability,
global distribution and logistics capabilities, and focus on its total
bathroom concept. The total bathroom concept encompasses providing customers
with integrated suites of products, including sinks, toilets, faucets, tubs,
showers, bathroom furniture and accessories.

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Vehicle Control Systems. Vehicle Control Systems (WABCO) is a leading
manufacturer of electronic controls for braking and control systems for the
worldwide commercial vehicle industry. Its largest-selling products are
braking control systems and related electronic and other control systems.
These include antilock and electronic braking systems (ABS and EBS,
respectively), and automated transmission controls and suspension control
systems, marketed under the WABCO® name for heavy and medium-size trucks,
trailers, and buses. WABCO also sells suspension control systems to
manufacturers of luxury cars and sport utility vehiclesa growing market.
WABCO supplies vehicle manufacturers such as DaimlerChrysler (Mercedes and
Freightliner), Volvo (Volvo and RVI), Iveco (Fiat), Scania, PACCAR, Hino,
Nissan, Rover and GMC. Management believes that WABCO benefits from its strong
market positions in Europe, North America and Brazil and its growing position
in Asia. Management also believes WABCOs products are well positioned for
growth because of increasing demand for ABS and EBS; sophisticated electronic
control systems for automated transmissions; air suspension systems and
stability control systems; and automatic climate control and door control
systems. WABCO has a strong reputation for technological innovation and is a
leading systems development partner with several major vehicle manufacturers.

Company Goals

American Standard has adopted the following performance goals:



| |  |  | Sales growth, including:
| | - |  | ------------------------



| |  |  | - Delivering premier customer service,                                                               
| |  |  | -----------------------------------------------------------------------------------------------------
|
| |  |  | - Technological leadership and product innovation based on knowledge
to meet changing customer needs,
|
| |  |  | - Introducing new products, solutions and services,                                                  
|
| |  |  | - Expanding marketing efforts, building brand awareness and
differentiation, and                     
|
| |  |  | - Geographic expansion.                                                                              



| |  |  | Productivity improvement through:
| | - |  | ---------------------------------



| |  |  | - Materials Management programs, and                 
| |  |  | -----------------------------------------------------
|
| |  |  | - Six Sigma and other productivity-enhancing actions.



| |  |  | Financial goals to improve asset utilization and return on capital,
including:
| | - |  | ------------------------------------------------------------------------------



| |  |  | - Improving earnings per share, margins and cash flow,
| |  |  | ------------------------------------------------------
|
| |  |  | - Achieving investment grade debt rating,             
|
| |  |  | - Maintaining or lowering the effective tax rate, and 
|
| |  |  | - Debt reduction.                                     



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Materials
Management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | The Materials Management initiative is centered on leveraging
collective buying power on a global basis to improve purchasing
efficiency, reduce the number of suppliers and improve supplier
logistics. Materials Management also involves working with suppliers to
develop effective components with lower part counts and easier assembly,
resulting in improved quality and reduced costs. It is also intended to
identify opportunities to substitute lower-cost materials for higher-cost
ones, without compromising quality, durability and safety. With material
costs exceeding 50% of total costs, management believes that continued
improvements realized through Materials Management could result in
substantial savings.
|
| | In 2002 and 2003, the Materials Management initiative focused on
implementation of processes and training. Management adopted challenging
goals for continuous performance improvement. Incremental benefits from
this program were approximately $60 million in 2001, $105 million in 2002
and $100 million in 2003. The Company expects increased savings in 2004.                                                                                                                                                                                                                                                                                                                                                                    

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Six
Sigma                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Six Sigma is a structured approach to achieving significant
productivity improvements in business processes through data-driven
decisions. Originally introduced to American Standard in 2000, more than
20,000 employees have been trained in Six Sigma tools that have
contributed nearly $105 million in productivity gains. During this
initial growth phase, productivity gains have nearly doubled each year.                                                                                                                                                                                                                                                                                                                                                 
|
| | We continue to develop and deploy technical experts (called Six
Sigma Master Black Belts, Black Belts and Green Belts) through aggressive
training and project deployment programs. By the end of 2003, we had 37
Master Black Belts, 532 Black Belts and 3,417 Green Belts who were
certified or in training. To achieve such a designation, specific
projects, timelines, milestones and savings must be achieved. We are
continually broadening the Six Sigma approach to cover functions beyond
manufacturing. In the past two years we have provided specific Six Sigma
training in safety, Materials Management, transactional analysis and
design, deployment of new products, lean manufacturing, sales/marketing,
maintenance and administrative processes.
|
| | Linkage of Goals with Incentive Compensation Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Management has adopted incentive compensation plans that are directly
linked to achievement of the companywide goals described above. Management
believes the attainment of these goals will result in improved financial
performance and enhanced shareholder value.

Air Conditioning Systems and Services Segment

American Standards Air Conditioning Systems and Services products are
marketed under the TRANE® and AMERICAN STANDARD® names. Air Conditioning, with
revenues of $4.975 billion in 2003, accounted for 58% of Company sales and 62%
of segment income. Air Conditioning derived 25% of 2003 sales from outside the
U.S. Approximately 60% of Air Conditionings sales in 2003 were in the
replacement, renovation and repair markets.

Air Conditioning competes in all of its markets on the basis of using
knowledge to provide total solutions, including service, product quality and
reliability, technological leadership, energy efficiency and price/value.

Air Conditioning manufactures two general types of air conditioning
systems. The first, called unitary, is sold for residential and commercial
applications, and is a factory-assembled central air conditioning system which
generally encloses in one or two units all the components to cool, heat,
filter, humidify, dehumidify, and move air in a ducted system. The second,
called applied, is typically custom-engineered for commercial use and
involves on-site installation of several different components of the air
conditioning system. Air Conditioning is one of the largest global
manufacturers of both unitary and applied air conditioning systems.

Product and marketing programs continue to be developed to increase
penetration in the growing replacement, renovation and repair businesses. Much
of the equipment sold in the fast-growing air conditioning markets of the 1960s
and 1970s has reached the end of its useful life. Also, equipment sold in the
1980s may be replaced earlier than originally expected with higher-efficiency
products developed to meet new efficiency standards and to capitalize on the
availability of refrigerants that meet current and future environmental
standards.

Many of the air conditioning systems manufactured by Air Conditioning
utilize HCFCs, and in the past utilized CFCs as refrigerants. Various domestic
and international laws and regulations, principally the 1990 Clean Air Act
amendments and the Montreal Protocol, require the eventual phase-out of the
production of these refrigerants. Phase-in of substitute refrigerants will
encourage replacement or modification of the air conditioning equipment already
installed, which management believes creates an ongoing market opportunity. In
order to ensure that Air Conditioning products will be compatible with the
substitute refrigerants, Air Conditioning has been working closely with the
manufacturers that are developing substitute refrigerants. Air Conditioning
has also been active in supporting industrywide efforts to transition
selectively or when appropriate to these new refrigerants in an orderly and
sensible fashion while giving consideration to key environmental issues such as

ozone depletion and

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global warming (greenhouse gas effects). See GeneralRegulations and
Environmental Matters.

Certain federal and state statutes, including the National Appliance
Energy Conservation Act of 1987, as amended, impose energy efficiency standards
for certain of Air Conditionings air conditioning systems. Air Conditioning
is a leader in developing energy-efficient products that meet or exceed these
standards. However, providing more energy-efficient products will require
additional research and development expense and capital expenditures for air
conditioning manufacturers to continue to offer energy-efficient product
choices to the customer.

The Company, Heatcraft Technologies Inc. (a subsidiary of Lennox
International Inc.) and Copesub, Inc., (a subsidiary of Emerson Electric Co.)
are partners in Alliance Compressors (Alliance), a joint venture that
manufactures compressors for use in air conditioning and refrigeration
equipment. The Company and Heatcraft Technologies Inc. each own a 24.5%
partnership interest and Copesub, Inc. owns the balance. Alliance develops,
manufactures, markets and sells, primarily to the Company and Lennox, scroll
compressors utilized mainly in residential central air conditioning
applications. Alliance operates principally from a facility in Natchitoches,
Louisiana.

In November 2001, the Company entered an alliance with Daikin, a leading
Japanese commercial air conditioning manufacturer, to sell each others
complementary product lines. Through the alliance, the Company and Daikin are
able to provide their customers a complete line of heating, ventilation and air
conditioning products, services and solutions for industrial, commercial and
residential markets. Daikin has strong global market positions in ductless
commercial air conditioners as well as in small chillers, which complement Air
Conditionings product lines. Various cross-sourcing arrangements have been
started by the companies.

As of December 31, 2003, Air Conditioning Systems and Services employed
approximately 26,200 people and had 28 manufacturing plants in 9 countries.

Commercial Systems and Services

Commercial systems and services (commercial systems), which accounted
for 76% of Air Conditioning Systems and Services 2003 sales, encompasses the
manufacture, distribution and servicing of applied and commercial unitary air
conditioning systems and parts throughout the world. The Company also provides
performance contracting arrangements that guarantee energy savings. These
products and services are for air conditioning applications in commercial,
industrial, institutional and large residential buildings. Approximately 67%
of commercial system sales are in the U.S. and 33% in international markets.
Other major suppliers of commercial systems are Carrier, York and McQuay.

In the U.S. and Canada, Air Conditioning markets its commercial systems,
parts and services through 82 district sales and service offices, 45 of which
are company-owned and 37 of which are franchised. In addition, some commercial
unitary products are sold through independent wholesale distributors and dealer
sales offices. Outside the U.S., Air Conditioning also has an extensive
network of 144 sales and service agencies, both company-owned and franchised,
to sell products and provide maintenance, service and parts. Overall, the
Company estimates that commercial equipment markets declined 2% in 2003
following declines of 10% in 2002 and 8% in 2001.

Commercial systems has a significant manufacturing and distribution
presence outside North America. In the Asia-Pacific region, it has
manufacturing operations in China, Malaysia and Taiwan, and a sales and
manufacturing joint venture in Thailand. In Brazil, it has a manufacturing
plant and distribution operations. In Europe, it operates plants in Epinal and
Charmes, France, and in Colchester, U.K. It also has a joint venture in Egypt
that serves markets in the Middle East. Commercial systems also continues to
expand its international distribution network.

For commercial systems, Air Conditioning uses its considerable knowledge
and expertise to provide completely for its customers needs. Commercial
systems provides equipment, controls, service, parts and performance
contracting. During the last five years, Air Conditioning continued to
introduce new applied products, broadening its line of high-efficiency
centrifugal chillers, introducing new water-cooled series R chillers, expanding
the air-cooled series R chiller line and introducing a new indoor central
station air handler, a new water source heat

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pump and a new line of low-pressure air handlers. Sales of commercial
systems that automatically control a buildings performance, including energy
consumption and air quality, continue to grow as a percentage of total sales
with new product introductions such as Tracer Summit®, Tracker and wireless
thermostats. Systems capabilities, combined with equipment, service and parts
have allowed Air Conditioning to be active in the performance-contracting
business as a comfort systems solution provider with guaranteed energy savings
in certain cases. One of the ways Air Conditioning provides complete solutions
to customers heating, ventilation and air conditioning needs is through its
EarthWise custom-engineered systems. An EarthWise solution combines optimal
design of the equipment, systems, software controls and long-term management.
An EarthWise system addresses the customers needs in providing safe, efficient
heating and cooling at the lowest possible cost, both for the initial system
and over its lifetime. New industry wide guidelines covering chiller
efficiency were instituted in October 2001. Management believes that Air
Conditionings chiller efficiency will provide a competitive opportunity as
these guidelines are adopted by all 50 states over the next few years.

During the past five years Air Conditioning also successfully introduced
several new commercial unitary products and their respective controls,
including: an ultra-high-efficiency packaged air conditioner; modulating gas
and variable frequency drive large rooftop units; and rooftop units with
special features that appeal to national accounts. The commercial unitary
business also concentrated on indoor air quality with new products, product
enhancements and new capabilities for existing products. For example, a
packaged fresh air unit was introduced that provides economical, precise
dehumidification while providing 100% fresh, outside air for dilution and
removal of indoor air contaminants. Products representing 75% of commercial
unitary sales were introduced at higher efficiency levels, meeting or exceeding
ASHRAE efficiency standards. These models were also upgraded to provide
enhanced indoor air quality. Air Conditioning introduced a new commercial
unitary product in 2002 named Precedent with capacities from 2 to 10 tons.
Precedent provides improved indoor air quality and higher efficiency, is easier
to configure, easier to install and less expensive to manufacture, having 20%
fewer parts and being 30% smaller than the products it replaces. A new
packaged terminal air conditioner is believed by the Company to be the
industrys quietest. A new platform of variable air volume terminal products
was introduced in 2003, providing operating efficiency with 55% fewer parts and
25% fewer process steps. The technology provides improved acoustics along with
increased market coverage with additional sizes and capabilities.

Residential Systems

Residential systems (residential systems), which accounted for 24% of
Air Conditioning Systems and Services 2003 sales, encompasses the development,
manufacture, marketing and distribution of unitary air conditioning products
and furnaces for residential applications, primarily in North America.
Residential system products are marketed under the TRANE® and AMERICAN
STANDARD® brand names. Sales of residential systems have benefited
significantly from the growth of the replacement market for residential unitary
air conditioning systems in North America. The Company estimates that the
overall residential air conditioning and furnace markets grew by 2% in 2003,
following gains of 9% and 5%, respectively, in 2002. Other major suppliers in
the residential market are Carrier, York, Rheem, Lennox and Goodman Industries.

Residential unitary products range from 1 to 5 tons and include air
conditioners, heat pumps, air handlers, furnaces, coils and related controls
and accessories. These products are sold through independent wholesale
distributors and Company-owned sales offices with over 340 stocking locations
to dealers and contractors who sell and install the equipment. Residential
products are also well positioned in the retail sales channel through an
arrangement with Home Depot, a major home improvement center, through which
certain central heating and air conditioning systems are marketed to
residential customers.

In recent years, Air Conditioning successfully introduced several new
residential products including: a line of multi-stage cooling and heat pump
units offering the industrys highest efficiencies; and an
ultra-high-efficiency gas furnace with variable speed airflow and gas
combustion components. In the fourth quarter of 2001, Air Conditioning
launched a major new residential split-system cooling and heat pump product
that competes in a market covering about 50% of the total residential air
conditioning market in North America. This new product line, with capacities
of 1 to 5 tons, has a very consumer-oriented design and is of higher quality
and efficiency. It is also easier to install and operate, utilizes
refrigerants which meet current and future environmental standards and costs
less to manufacture, requiring 60% fewer parts than the products it replaces.

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Segment reporting for Air Conditioning

The Companys air conditioning segment is organized and managed as two
operating divisions: Trane Commercial Systems (TCS), a global business, and
Residential Systems (RS), a North American regional business. TCS
manufactures and distributes, on a global basis, commercial applied and
commercial unitary equipment, services and parts for commercial and large
residential applications. TCS also distributes residential products outside
North America. RS manufactures primarily residential products, and distributes
both commercial unitary and residential products in North America. RS brings
focus and emphasis to a separate North American distribution channel through
which both commercial unitary and residential products are sold. Since TCS and
RS both sell residential and commercial unitary products, they are not
organized on a purely product-line basis. Approximately 15% of RS sales are
for commercial applications.

Management discusses Air Conditionings operations in Managements
Discussion and Analysis of Financial Condition and Results of Operations as a
single segment, and provides additional information about its principal product
linescommercial systems and services, and residential systems and services, as
described above.

Service and Parts Initiatives

Air Conditioning recognizes the value of providing a convenient and
reliable source of repair parts to service air conditioning products and
systems. In support of current and future Air Conditioning customers, the
Company has been expanding the number of locations and to provide easy access
to parts needed to maintain and repair all products that Air Conditioning sells
or services on a worldwide basis. In addition, Air Conditioning offers annual
service agreements and long-term partnership arrangements to customers.

Bath and Kitchen Segment

In 2003, Bath and Kitchen, with revenues of $2.235 billion, accounted for
26% of the Companys sales and 17% of its segment income. Bath and Kitchen
derived 66% of its total 2003 sales from operations outside the U.S.

Bath and Kitchen sales were 51% from chinaware fixtures, 28% from fittings
(typically brass), 10% from tubs, with the remainder from related bath and
kitchen products. Throughout the world these products are generally sold
through wholesalers and distributors and installed by plumbers and contractors.
In the U.S., a significant and growing number of products are also sold
through home improvement centers. In total, sales to the residential market
account for approximately 80% of Bath and Kitchen sales, with sales to the
commercial and industrial markets providing the remainder.

Bath and Kitchen operates through three primary geographic groups: Europe,
Americas and Asia.

Bath and Kitchen sells products in Europe primarily under the brand names
IDEAL STANDARD, JADO, ARMITAGE SHANKS, DOLOMITE, PORCHER, MELOH, VENLO,
VENESTA, SOTTINI and BORMA. It manufactures and distributes bathroom and
kitchen fixtures and fittings through subsidiaries or joint ventures in
Germany, Italy, France, the U.K., Greece, the Czech Republic, Bulgaria and
Egypt and distributes products in other European countries.

Bath and Kitchen Americas Group manufactures bathroom and kitchen fixtures
and fittings selling under the brand names AMERICAN STANDARD, STANDARD, PORCHER
and JADO (manufactured in Europe) in the U.S. and under the brand names
AMERICAN STANDARD, IDEAL STANDARD, and STANDARD through the Companys wholly
owned operations in Mexico, Canada and Brazil and its joint ventures in Central
America and the Dominican Republic.

In Asia, Bath and Kitchen manufactures bathroom and kitchen fixtures and
fittings, selling under the names AMERICAN STANDARD, IDEAL STANDARD, and
STANDARD through the Companys wholly owned

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operations in South Korea and Indonesia, and its majority-owned operations
in Thailand, the Philippines and Vietnam. The group also operates in China
through a majority-owned joint venture, which has ownership interests in seven
joint ventures.

The Companys bath and kitchen products are sold in the replacement and
remodeling market and the new construction market. The replacement and
remodeling market accounts for about 63% of the Companys European and U.S.
sales and about 20% of the sales in Asia, where there is more growth in new
construction. In the U.S., the replacement and remodeling markets have shown
substantial growth over the last few years and the Company has benefited from
that growth. In Europe the replacement and remodeling markets have
historically been more stable than the new construction markets and have shown
moderate growth over the past several years. The U.S. residential new
construction market grew strongly in 2003 and the two prior years, but the
commercial new construction markets were depressed. The commercial new
construction and residential new construction markets in Europe have been
rather static overall, with the exception of the U.K., which experienced modest
growth, and Germany, which declined. The new construction market, in which
builders or contractors make product selection, is more price-competitive than
the replacement and remodeling market. In the replacement and remodeling
market, consumers make the model selections and, therefore, this market is more
responsive to quality and design than price, making it the principal market for
higher-margin luxury products. Through expansion of manufacturing in low-cost
locations, Bath and Kitchen has become more competitive, enabling it to
increase sales of products in the lower and middle segments of both the
remodeling and new construction markets.

In the U.S., Bath and Kitchen products are marketed through both the
wholesale and retail channels. Sales through the retail home center market
channel have become a significant part of Bath and Kitchen segment sales
(approximately 20% of segment sales in 2003), but represent only approximately
5% of total Company sales.

Bath and Kitchen is also continuing programs to expand its presence in
high-quality showrooms and showplaces featuring its higher-end products in
certain major countries. These programs, along with expanded sales training
activities, have enhanced the image of the Companys products with interior
designers, decorators, consumers and plumbers.

In an effort to capture a larger share of the replacement and remodeling
market, Bath and Kitchen has introduced a variety of new products, suites and
collections designed to suit customer tastes in particular countries. New
offerings include additional colors and ensembles, bathroom suites designed by
internationally known designers and electronically controlled products. Our
new Champion toilet, with Americas Best Flushing System, established strong
presence and achieved good distribution in the wholesale and retail channels in
the last half of 2003 at product margins that are better than the category
average. Champion is having a positive impact on sales and margins in both
wholesale and retail. Faucet technology programs are focused on anti-leak,
anti-scald, filtering and other features to meet emerging consumer and
legislative requirements. Sales in 2003 benefited from our expanded faucet
business. The total bathroom concept, used successfully in Europe, is being
expanded in the U.S. retail channel, by selling integrated suites of products.
Examples of these are the Standard Collection at Home Depot, introduced in
2002, and the Sottini suites, introduced near the end of 2002 at Lowes, and
the Retrospect suite introduced in December 2003, also at Lowes.

Many of the Companys bathtubs sold in the U.S. are made from a
proprietary porcelain-on-metal composite, AMERICAST®. Products made with
AMERICAST have only one-half the weight of cast iron products and are resistant
to breaking and chipping. AMERICAST products are easier to ship, handle and
install and are less expensive to produce than cast iron products. Use of this
advanced composite has been extended to kitchen sinks and bathroom lavatories. In
Europe, a similar composite called IDEALCAST is also used on acrylic-surfaced
products.

As of December 31, 2003, Bath and Kitchen employed approximately 27,300
people and, including affiliated companies, had 67 manufacturing plants in 26
countries and sold products in more than 40 countries.

Bath and Kitchen has several major competitors in foreign markets, for the
most part operating nationally. Friederich Grohe, the major manufacturer of
fittings in Europe, is a pan-European competitor. In Europe, Sanitec and Roca
are the major fixtures competitors and, in Asia, Toto is the major competitor.
In the U.S., Bath and Kitchen has several major competitors, including Kohler
and, in selected product lines, Masco and Fortune Brands

7



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(Moen). Bath and Kitchen competes in most of its markets on the basis of
service to customers, product quality and design, reliability and price/value.

Vehicle Control Systems Segment

Operating under the WABCO® name, Vehicle Control Systems designs,
manufactures and sells braking and control systems primarily for the worldwide
commercial vehicle industry, and derives 78% of its sales in Europe. WABCOs
largest-selling products are pneumatic braking control systems and related
electronic controls (ABS and EBS) and conventional components for trucks,
trailers, buses and sport utility vehicles. In 2003 WABCO, with sales of $1.358
billion, accounted for 16% of the Companys sales and 21% of its total segment
income. The Company believes that WABCO is the worldwide technology leader for
braking, suspension and transmission controls for commercial vehicles.
Electronic controls, first introduced in ABS in the early 1980s, are
increasingly applied in other control systems sold to the commercial vehicle
industry. WABCO also supplies electronic suspension controls to the luxury car
market and sport utility vehicle market.

WABCOs products are sold directly to vehicle and component manufacturers.
Spare parts are sold through both original equipment manufacturers and an
independent distribution network. Although the business is not dependent on a
single or related group of customers, sales of truck braking systems are
dependent on the demand for heavy trucks. Some of the Companys largest
customers are DaimlerChrysler (Mercedes and Freightliner), Volvo (Volvo and
RVI), Iveco (Fiat), Scania, Paccar, Hino, Nissan and Rover. WABCOs principal
competitor is Knorr/Bremse. WABCO competes primarily on the basis of customer
service, quality and reliability of products, technological leadership and
price/value.

The European market for new truck and bus production increased 3% after
decreases of approximately 8% in both 2002 and 2001. The Brazilian market
increased 10% in 2003 following decreases of 10% in 2002 and 2% in 2001.
During the years 2000 through 2003, WABCO has generally outperformed the heavy
vehicle manufacturing markets as a whole, primarily from increased content per
vehicle and improved market penetration.

In North America, WABCO markets ABS and other vehicle control products
through its fifty percent-owned, unconsolidated joint venture with Arvin
Meritor Automotive Inc. (Meritor WABCO). Meritor WABCO, which supplies the
North American truck manufacturing market, grew significantly from 1997 through
1999, in part because of regulations mandating antilock braking systems on
commercial vehicles. Although truck production in North America declined
significantly in 2000 and 2001, Meritor WABCO continued to expand its customer
base and range of products sold to major truck manufacturers. In 2002, the
North American truck market experienced 12% growth as U.S. customers actively
purchased vehicles before the change in diesel engine emissions regulations
affecting trucks manufactured after October 1, 2002. In 2003, the North
American truck market grew 1%. WABCO also sells non-brake-related products
directly to manufacturers in North America.

WABCO has developed an advanced electronic braking system, stability
control systems, electronically controlled air suspension systems, automated
transmission controls, automatic climate-control and door-control systems
for the commercial vehicle industry. These systems have resulted in greater
sales per vehicle for WABCO. WABCO participates in the passenger car market
with an advanced, electronically controlled air suspension system now featured
by the three leading German luxury car manufacturers. WABCO has expanded the
air suspension system family to other luxury car and sport utility vehicle
manufacturers in Europe and North America. A leading European truck
manufacturer now includes WABCO electronic controls for automated transmissions
in heavy vehicles as standard equipment. The Company believes that automated
transmission control will be increasingly important in the industry. In 2001,
WABCO began production of its automated transmission system for a new range of
heavy-duty trucks introduced in 2002 in Europe by a global truck manufacturer.
Other new products under development include further advancements in electronic
braking, and stability and safety controls, as well as driveline-control and
suspension-control systems.

Vehicle Control Systems is headquartered in Brussels, Belgium. Its
principal manufacturing operations are in Germany, France, the United Kingdom,
Poland, the Netherlands, Brazil and South Korea. In the U.S., the Meritor
WABCO joint venture supplies the North American truck manufacturing market.
The Company also has majority-

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owned partnership in the U.S. with Cummins Engine Co. (WABCO Compressor
Manufacturing Co., a manufacturing partnership formed to produce air
compressors designed by WABCO), and a majority-owned joint venture in China
with MAFF to produce conventional products for the local market and export. In
addition, WABCO has minority equity investments in joint ventures in India with
TVS Group (Sundaram Clayton Ltd.) and in South Africa.

As of December 31, 2003, WABCO and affiliated companies employed
approximately 6,400 people and had 10 manufacturing facilities and 19 sales
organizations operating in 25 countries.

Business Segment Data

Information concerning revenues and segment profit attributable to each of
the Companys business segments and geographic areas is set forth in Item 6,
Selected Financial Data, in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, and in Note 14 of Notes to
Financial Statements, all of which are incorporated herein by reference.
Information concerning identifiable assets of each of the Companys business
segments is set forth in Note 14 of Notes to Financial Statements, which is
incorporated herein by reference. Information on backlogs and the seasonal
aspects of the Companys business are set forth in Managements Discussion and
Analysis of Financial Condition and Results of Operations, under the captions
Results of Operations by Business Segment and Cyclical and Seasonal Nature
of Business, respectively.

General

Raw Materials

The Company purchases a broad range of materials and components throughout
the world in connection with its manufacturing activities. Major items include
steel, copper tubing, aluminum, ferrous and nonferrous castings, clays, motors,
electronics and natural gas. The ability of the Companys suppliers to meet
performance and quality specifications and delivery schedules is important to
the Companys operations. Since 2000, the Company has integrated much of its
raw materials procurement efforts into its Materials Management initiatives,
resulting in lower costs and more efficient supply. The energy and materials
required for its manufacturing operations have been readily available, and the
Company does not foresee any significant shortages. Also see Company
GoalsMaterials Management.

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Patents, Licenses and Trademarks

The Companys operations are not dependent to any significant extent upon
any single or related group of patents, licenses, franchises or concessions.
The Companys operations also are not dependent upon any single trademark,
although some trademarks are identified with a number of the Companys products
and services and are of importance in the sale and marketing of such products
and services. Some of the Companys trademarks are:

|                                      |  |                   
|------------------------------------- |  | ------------------
|Business Segment                      |  | Trademark         
|                                      |  |                   
|Air Conditioning Systems and Services |  | TRANE®            
|                                      |  | AMERICAN STANDARD®
|                                      |  |                   
|Bath and Kitchen                      |  | AMERICAN STANDARD®
|                                      |  | IDEAL STANDARD®   
|                                      |  | STANDARD®         
|                                      |  | PORCHER®          
|                                      |  | JADO®             
|                                      |  | ARMITAGE SHANKS®  
|                                      |  | DOLOMITE®         
|                                      |  | AMERICAST®        
|                                      |  | MELOH®            
|                                      |  | VENLO®            
|                                      |  | BORMA®            
|                                      |  | CLEARTAP         
|                                      |  | VENESTA®          
|                                      |  | SOTTINI®          
|                                      |  | SANGRA®           
|                                      |  |                   
|Vehicle Control Systems               |  | WABCO®            

The Company from time to time has granted patent licenses to, and has
licensed technology from, other parties.

Research and Product Development

The Company made expenditures of $192 million in 2003, $185 million in
2002 and $184 million in 2001 for research and product development and for
product engineering in its three business segments. The expenditures for
research and product development alone were $128 million in 2003, $129 million
in 2002 and $133 million in 2001 and were incurred primarily by Vehicle Control
Systems and Air Conditioning Systems and Services. Vehicle Control Systems,
which expended the largest amount, has conducted research and development in
recent years on advanced electronic braking systems, heavy-duty disc brake
systems, and additional electronic control systems for commercial vehicles. Air
Conditioning Systems and Services research and development expenditures were
primarily related to alternative refrigerants, compressors, heat transfer
surfaces, air flow technology, acoustics and micro-electronic controls.

10



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Regulations and Environmental Matters

The Companys U.S. operations are subject to federal, state and local
environmental laws and regulations. The Company has a number of proactive
programs underway to minimize its impact on the environment and believes that
it is in substantial compliance with environmental laws and regulations. A
number of the Companys plants are undertaking responsive actions to address
soil and groundwater issues. In addition, the Company is a party to a number of
remedial actions under various federal and state environmental laws and
regulations that impose liability on companies to clean up, or contribute to
the cost of cleaning up, sites at which hazardous wastes or materials were
disposed or released. Remedial actions to which the Company is a party include
26 current proceedings under the Comprehensive Environmental Response,
Compensation and Liability Act (Superfund) and similar state statutes in which
the Company has potential liability based either on a past or current ownership
interest in the site requiring remedial actions or based on disposal or alleged
disposal of waste products at the site requiring remedial actions.
Expenditures in 2003, 2002 and 2001 to evaluate and remediate such sites were
not material. On the basis of the Companys historical experience and
information currently available, these environmental actions should not have a
material adverse effect on its financial condition, results of operations or
liquidity.

Additional sites may be identified for environmental remediation in the
future, including properties previously transferred by the Company and with
respect to which the Company may have contractual indemnification obligations.
The Company cannot estimate at this time the ultimate aggregate costs of all
remedial actions because of (a) uncertainties surrounding the nature and
application of environmental regulations, (b) the Companys lack of information
about additional sites at which it may be listed as a potentially responsible
party, (c) the level of cleanup that may be required at specific sites and
choices concerning the technologies to be applied in corrective actions, (d)
the number of contributors and the financial capacity of others to contribute
to the cost of remediation at specific sites and (e) the time periods over
which remediation may occur.

The Companys international operations are also subject to various
environmental statutes and regulations. Generally, these requirements tend to
be no more restrictive than those in effect in the U.S. Currently, ten of the
Companys international operations have ISO 14001 certification, and the
Company believes it is in substantial compliance with existing domestic and
foreign environmental statutes and regulations. As in the U.S., a number of the
Companys facilities are undertaking responsive actions to address groundwater
and soil issues. Expenditures in 2003, 2002 and 2001 to evaluate and remediate
these sites were not material. On the basis of the Companys historical
experience and information currently available, these environmental actions
should not have a material adverse effect on its financial condition, results
of operations or liquidity.

The Company has derived significant revenues in recent years from sales of
Air Conditioning Systems and Services using chlorofluorocarbons (CFCs) and
hydrochloroflurocarbons (HCFCs). Production of certain CFCs, HCFCs and other
ozone-depleting chemicals is being phased out over various periods of time
under regulations that require use of substitute permitted refrigerants in new
equipment. Also, utilization of new refrigerants will encourage replacement or
modification of existing air conditioning equipment. The Company believes that
these regulations will have the effect of generating additional product sales
and parts and service revenues, as existing air conditioning equipment
utilizing CFCs or HCFCs, is converted to operate on other refrigerants or
replaced. The Company is unable to estimate the magnitude or timing of these
conversions or replacements. The Company has been working closely with
refrigerant manufacturers that are developing refrigerant substitutes for CFCs
and HCFCs, so that the Companys products will be compatible with those
substitutes. Although some of the Companys commercial, residential and light
commercial products will require modification for refrigerant substitutes, the
Company does not expect any significant problems in complying with this
changing regulatory environment.

Certain federal and state statutes, including the National Appliance
Energy Conservation Act of 1987, as amended, impose energy efficiency standards
for certain of the Companys air conditioning systems. The Company is a leader
in developing energy-efficient products that meet or exceed these standards.
However, providing more energy-efficient products will require additional
research and development expense and capital expenditures for air conditioning
manufacturers to continue to offer energy-efficient product choices to the
customer.

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Employees

The Company employed approximately 60,000 people as of December 31, 2003
(excluding employees of unconsolidated joint venture companies). The Company
has 17 major labor union contracts in the Americas (covering approximately
13,200 employees); eight of which were set to expire in 2004 (covering
approximately 7,700 employees) of which one was successfully renegotiated in
February 2004 (covering approximately 1,000 employees). Six of these contracts
expire in 2005 (covering approximately 2,300 employees), and three expire in
2006 (covering approximately 3,000 employees). In addition, there are 18 other
contracts covering approximately 500 employees in Air Conditioning Systems and
Services sales offices. There can be no assurance that the Company will
successfully negotiate the labor contracts expiring during 2004 without a work
stoppage. However, the Company does not anticipate any problems in
renegotiating these contracts that would materially affect its results of
operations.

In March 2002, 450 Air Conditioning Systems and Services employees went on
strike for approximately three weeks at the Ft. Smith manufacturing facility
and in February 2001, 1,200 Air Conditioning Systems and Services employees
went on strike for 30 days at the Lexington, Kentucky, manufacturing plant,
before new contracts were negotiated.

The Company also has 36 major labor contracts outside North America
(covering approximately 18,000 employees) and approximately 15 other contracts
covering locations with small numbers of employees. In December 2000, there
was a 20-day work stoppage at the chinaware manufacturing plant of the
Indonesia Bath and Kitchen subsidiary, involving 950 employees. Other than the
Indonesian work stoppage, the Company has not experienced any significant work
stoppage in the last five years outside North America.

Although the Company believes relations with its employees are good, there
can be no assurance that the Company will not experience significant work
stoppages.

Customers

The business of the Company taken as a whole is not dependent upon any
single customer or a few customers.

International Operations

The Company conducts significant non-U.S. operations through subsidiaries
in most of the major countries of western Europe, the Czech Republic, Bulgaria,
Poland, Canada, Brazil, Mexico, Central American countries, China, Malaysia,
the Philippines, Indonesia, Japan, South Korea, Thailand, Taiwan, Vietnam and
Egypt. In addition, the Company conducts business in some of these countries
and in other countries through affiliated companies and partnerships in which
the Company owns 50% or less of the equity interest in the venture.

Because the Company has manufacturing operations in 28 countries,
fluctuations in currency exchange rates may have a significant impact on its
financial statements. Such fluctuations have much less effect on local
operating results, however, because the Company primarily sells its products
within the countries in which they are manufactured. However, a growing
portion of the Companys products are manufactured in lower-cost locations and
sold in various countries, resulting in increased exposure to foreign exchange
effects. The Company is also subject to political risks related to its foreign
operations.

Available Information

The Companys Web site is www.americanstandard.com. Our periodic reports
and all amendments to those reports required to be filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 are
available free of charge through our Web site. During the period covered by
this report, the Company posted its periodic reports on Form 10-K and 10-Q and
its current reports on Form 8-K and any amendments to those documents to its
Web site as soon as reasonably practicable after those reports were filed or
furnished electronically with the Securities and Exchange Commission. The
Company will continue to post to its Web site such reports and

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amendments to those reports as soon as reasonably practicable after those
reports are filed with or furnished to the Securities and Exchange Commission.
There were no amendments to the Companys periodic reports in 2003, 2002 and
2001.

Availability of Corporate Governance Principles and Board of Director Committee
Charters

The Board of Directors has adopted charters for its Audit Committee,
Management Development and Compensation Committee and Corporate Governance and
Nominating Committee. The Board has also adopted Corporate Governance
Principles. The Corporate Governance Principles and each of the charters are
available on the Companys Web site. These materials, together with the Code
of Conduct and Ethics referenced below, are available in print to any
shareholder who requests them in writing by contacting the Secretary of the
Company at One Centennial Avenue, Piscataway, New Jersey 08855.

Code of Conduct and Ethics

The Companys Code of Conduct and Ethics, which applies to all employees,
including all executive officers and senior financial officers (including our
Chief Financial Officer and our Controller) and directors, is posted on our Web
site www.americanstandard.com. The Code of Conduct and Ethics is compliant
with Item 406 of SEC Regulation S-K and the New York Stock Exchange corporate
governance listing standards. Any changes to the Code of Conduct and Ethics
that affect the provisions required by Item 406 of Regulation S-K will also be
disclosed on our Web site. Any waivers of the Code of Conduct and Ethics for
our executive officers, directors or senior financial officers must be approved
by the Companys Audit Committee and those waivers, if any are ever granted,
would be disclosed on our Web site under the caption Exemptions to the Code of
Conduct and Ethics. There have been no waivers to the Code of Conduct and
Ethics.

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ITEM 2. PROPERTIES

As of February 20, 2004, the Company conducted its manufacturing
activities through 105 plants in 28 countries of which the principal facilities
are:

|                     |  |                            |  |                                             
|-------------------- |  | -------------------------- |  | --------------------------------------------
|Business Segment     |  | Location                   |  | Major Products Manufactured at Location     
|                     |  |                            |  |                                             
|Air Conditioning     |  | Clarksville, TN            |  | Commercial unitary air conditioning         
|Systems and Services |  | Fort Smith, AR             |  | Unitary air conditioning                    
|                     |  | La Crosse, WI              |  | Applied air conditioning systems            
|                     |  | Lexington, KY              |  | Air handling products                       
|                     |  | Macon, GA                  |  | Commercial air conditioning systems         
|                     |  | Pueblo, CO                 |  | Applied air conditioning systems            
|                     |  | Rushville, IN              |  | Air handling products                       
|                     |  | Trenton, NJ                |  | Residential gas furnaces and air handlers   
|                     |  | Tyler, TX                  |  | Residential air conditioning                
|                     |  | Vidalia, GA                |  | Residential air handlers                    
|                     |  | Waco, TX                   |  | Water source heat pumps and air handlers    
|                     |  | Monterrey, Mexico          |  | Reciprocating compressors                   
|                     |  | Charmes, France            |  | Applied air conditioning systems            
|                     |  | Epinal, France             |  | Unitary air conditioning systems            
|                     |  | Taicang, China             |  | Applied and unitary air conditioning systems
|                     |  | Taipei, Taiwan             |  | Unitary air conditioning systems            
|                     |  | Sao Paulo, Brazil          |  | Unitary air conditioning systems            
|                     |  |                            |  |                                             
|Bath and Kitchen     |  | Salem, OH                  |  | Enameled-steel fixtures and acrylic bathtubs
|                     |  | Tiffin, OH                 |  | Vitreous china                              
|                     |  | Cambridge, Ontario, Canada |  | Enameled-steel fixtures                     
|                     |  | Sevlievo, Bulgaria         |  | Vitreous china and brass fittings           
|                     |  | Teplice, Czech Republic    |  | Vitreous china                              
|                     |  | Hull, England              |  | Vitreous china and acrylic bathtubs         
|                     |  | Middlewich, England        |  | Vitreous china                              
|                     |  | Rugeley, England           |  | Vitreous china and acrylic bathtubs         
|                     |  | Wolverhampton, England     |  | Brass fittings                              
|                     |  | Dole, France               |  | Vitreous china                              
|                     |  | Revin, France              |  | Vitreous china and bathtubs                 
|                     |  | Wittlich, Germany          |  | Brass fittings                              
|                     |  | Orcenico, Italy            |  | Vitreous china                              
|                     |  | Brescia, Italy             |  | Vitreous china                              
|                     |  | Trichiana, Italy           |  | Vitreous china                              
|                     |  | Aguascalientes, Mexico     |  | Vitreous china                              
|                     |  | Mexico City, Mexico        |  | Vitreous china                              
|                     |  | Monterrey, Mexico          |  | Brass fittings                              
|                     |  | Tlaxcala, Mexico           |  | Vitreous china                              
|                     |  | West Java, Indonesia       |  | Vitreous china                              
|                     |  | Beijing, China             |  | Enameled-steel fixtures                     
|                     |  | Guangdong Province, China  |  | Vitreous china, fittings and bathtubs       
|                     |  |                            |  | and enameled-steel fixtures                 
|                     |  |                            |  |                                             
|                     |  | Shanghai, China            |  | Vitreous china and brass fittings           
|                     |  | Tianjin, China             |  | Vitreous china                              
|                     |  | Manila, Philippines        |  | Vitreous china                              
|                     |  | Seoul, South Korea         |  | Brass fittings                              
|                     |  | Bangkok, Thailand          |  | Vitreous china                              
|                     |  |                            |  |                                             
|Vehicle Control      |  | Campinas, Brazil           |  | Vehicle control systems                     
|Systems              |  | Leeds, England             |  | Vehicle control systems                     
|                     |  | Claye-Souilly, France      |  | Vehicle control systems                     
|                     |  | Hanover, Germany           |  | Vehicle control systems                     
|                     |  | Mannheim, Germany          |  | Foundation brakes                           
|                     |  | Wroclaw, Poland            |  | Vehicle control systems                     

All the plants described above are owned by the Company or a subsidiary
except for the properties located in Taipei, Taiwan; Manila, Philippines;
Monterrey, Mexico (air conditioning plant); and Claye-Souilly, France, which
are leased. The Company considers that its properties are generally in good
condition, are well maintained, and are generally suitable and adequate to
carry on the Companys business.

In 2003, the Companys manufacturing plants, taken as a whole, operated
moderately below capacity.

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The Company also owns or leases warehouse and office space for
administrative and sales staff. The Company headquarters, which is leased, is
located in Piscataway, New Jersey.




ITEM 3. LEGAL PROCEEDINGS

In October 1999, in Haynes Trane Service Agency, Inc. and Frederick M.
Haynes v. American Standard, Inc., d/b/a The Trane Company,in the United
States District Court for the District of Colorado, verdicts were returned
against the Company for a total of $18 million on the claim that it wrongfully
terminated distribution agreements. On August 28, 2002, the appellate court
ruled in favor of the Company and vacated the $18 million judgment. The
appellate court also reinstated the Companys counterclaims, including fraud,
and remanded to the trial court limited portions of Haynes initial claims.

Over the years, the Company has been named as a defendant in numerous
lawsuits alleging various asbestos-related personal injury claims arising
primarily from sales of low-risk-profile products, such as boilers and railroad
brake shoes. The Company believes it has ample insurance and has never had an
unfavorable court judgment. In these asbestos-related lawsuits, the Company is usually named as one of
a large group of defendants, often in excess of one hundred companies. Many of
these lawsuits involve multiple claimants, do not allege a connection between
any Company product and the claimed injury or disease, and/or do not contain
any allegations regarding the type of claimed injury or disease incurred. As a
result, numerous lawsuits have been placed and may remain on inactive or
deferred dockets, which some jurisdictions have established. Through December 31, 2003, there have been 139,733 claims filed against
the Company. At year-end 2003, there were 116,282 pending claims, compared
with 96,541 and 52,211 at the end of 2002 and 2001, respectively. Since
receipt of its first asbestos claim more than fifteen years ago through
December 31, 2003, the Company has resolved 23,451 claims, and $36 million in
settlement payments have been made, for an average payment per claim of $1,535.
These settlement payments have been paid or reimbursed or are expected to be
reimbursed by insurance. The Company has recorded an obligation of $69 million, which represents
the Companys estimated payments to claimants associated with the 116,282
pending asbestos claims. It also has recorded a related asset of $47 million,
which represents the probable recoveries from insurance companies for such
payments to claimants. The amount of the estimated obligations is based on the
claims resolved, the assessment of claims pending, the status of ongoing
litigation, defense and settlement strategies, and an assessment of other
entities responsibilities for the claims. The amount of the probable
recoveries is based on an analysis of insurance coverage, the insurers
financial strength and insurance payments made to date. Additional developments may occur that could affect the Companys estimate
of asbestos liabilities and recoveries, such as the nature of future claims,
the average payment to claimants and the amount of insurance recovery. No
liability has been recorded for unknown asbestos claims. However, the Company
has substantial insurance coverage for future claims. The Company believes that it is not reasonably possible
that a net loss material to the liquidity and financial condition of the
Company has been incurred.


For a discussion of environmental issues see Item 1.
BusinessGeneralRegulations and Environmental Matters. See also Note 13 of
Notes to Financial Statements.

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

No matter was submitted to a vote of the Companys shareholders during the
fourth quarter of 2003.




ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information as of February 10, 2004
with respect to each person who is an executive officer of the Company:

|                     |  |     |    |                       |  |                                                               
|-------------------- |  | --- | -- | --------------------- |  | --------------------------------------------------------------
|Name                 |  | Age |    | Position with Company
|                     |  |     |    |                      
|Frederic M. Poses    |  |     | 61 |                       |  | Chairman and Chief Executive Officer                          
|Lawrence B. Costello |  |     | 56 |                       |  | Senior Vice President, Human Resources                        
|G. Peter DAloia     |  |     | 59 |                       |  | Senior Vice President and Chief Financial Officer             
|W. Craig Kissel      |  |     | 52 |                       |  | Senior Vice President, and President, Trane Commercial Systems
|J. Paul McGrath      |  |     | 63 |                       |  | Senior Vice President, General Counsel and Secretary          
|Marc R. Olivié       |  |     | 50 |                       |  | Senior Vice President, and President, Bath and Kitchen        
|Jacques Esculier     |  |     | 44 |                       |  | Vice President, and President, Vehicle Control Systems        
|R. Scott Massengill  |  |     | 41 |                       |  | Vice President and Treasurer                                  
|David R. Pannier     |  |     | 53 |                       |  | Vice President, and President, Residential Systems            
|Richard S. Paradise  |  |     | 42 |                       |  | Vice President and Controller                                 

Each officer of the Company is elected by the Board of Directors to a term
of office expiring on the date of the first Board meeting after the Annual
Meeting of Shareholders next succeeding his election or such officers earlier
resignation or removal.

Set forth below is the principal occupation of each of the executive
officers named above during the past five years.

Mr. Poses was elected as a director in October 1999 and as Chairman and
Chief Executive Officer effective January 1, 2000. Prior to assuming that
position, Mr. Poses was President and Chief Operating Officer at AlliedSignal
Inc. (now known as Honeywell). Previously he was President of AlliedSignals
Engineered Materials sector from 1988 to 1998 and served as Director of that
company from 1997 until 1999. Mr. Poses is a director of Raytheon Company and
Centex Corporation.

Mr. Costello was elected Senior Vice President, Human Resources, effective
June 2000. From April 1994 until that date, he served in various capacities at
Campbell Soup Company, including Senior Vice President, Global Human Resources.

Mr. DAloia was elected Senior Vice President and Chief Financial Officer
effective February 2000. Prior to that he was employed by AlliedSignal Inc.,
most recently serving as Vice PresidentBusiness Development. He spent 27
years with AlliedSignal Inc. in diverse management positions, including Vice
PresidentTaxes, Vice President and Treasurer, Vice President and Controller,
and Vice President and Chief Financial Officer for the Engineered Materials
sector.

Mr. Kissel was elected Senior Vice President of the Company in January
1998 and serves as President of Trane Commercial Systems, effective January
2004. From 1998 through December 2003 he served as President of Vehicle Control
Systems. Before that he was Vice President of Air Conditioning Systems and
Services Unitary Products Group, and later named Group Executive.

Mr. McGrath was elected Senior Vice President, General Counsel and
Secretary, effective January 2000. From 1996 until that date, he served as
Senior Vice President, General Counsel and Secretary of FMC Corporation.

Mr. Olivié was elected Senior Vice President of the Company in March 2001,
to serve as President of its Global Bath and Kitchen sector, effective May
2001. Mr. Olivié is expected to leave the company on May 1, 2004. Prior to
joining American Standard, Mr. Olivié had been President and Chief Executive
Officer of Armstrong Floor

16



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##### 



Products, the largest business of Armstrong Holdings Inc. He joined
Armstrong Holdings Inc. as President of its Worldwide Building Products
Operations in 1996 and prior to that, worked for Sara Lee Corporation where he
was President of its European sportswear business.

Mr. Esculier was elected President of WABCO, the Vehicle Control Systems
business effective January 1, 2004. He joined the company in June 2002 as Vice
President of Tranes International Commercial Systems in Europe. Prior to that
he spent more than six years in a variety of leadership positions with
AlliedSignal Inc./Honeywell.

Mr. Massengill was elected Vice President and Treasurer effective April
2001 and assumed additional responsibility for Business Services Operations in
January 2004. He was Assistant Treasurer of Bristol-Myers Squibb Company from
1999 to March 2001 and before that was with AlliedSignal Inc. and Exxon
Corporation (now ExxonMobil) in various financial management positions.

Mr. Pannier was elected Vice President of the Company in January 1998, and
since January 2002 has served as President, Residential Systems. From January
1998 until January 2002 he served as Group Executive, North American Unitary
Products Group.

Mr. Paradise was elected Vice President and Controller in July 2002. He
joined the Company as Assistant Controller in February 2000. Prior to that he
spent ten years with AlliedSignal Inc. in a variety of financial management
positions, including Director of Six Sigma and Credit, after beginning his
career with Price Waterhouse (now known as PricewaterhouseCoopers) as an
auditor.

17



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##### 






PART II




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

The common stock of the Company is listed on The New York Stock Exchange
(the Exchange) under the symbol ASD. The common stock was first traded on
the Exchange on February 3, 1995 concurrent with the underwritten initial
public offering of shares of the Companys common stock. Prior to the offering
there was no established public trading market for the Companys shares.

In January 1995 the Company adopted a Restated Certificate of
Incorporation, Amended Bylaws and a Rights Agreement. The Restated Certificate
of Incorporation authorizes the Company to issue up to 200,000,000 shares of
common stock, par value $.01 per share, and 2,000,000 shares of preferred
stock, par value $.01 per share, of which the Board of Directors designated
900,000 shares as a new series of Junior Participating Cumulative Preferred
Stock. Each outstanding share of common stock has associated with it one right
to purchase a specified amount of Junior Participating Cumulative Preferred
Stock at a stipulated price in certain circumstances relating to changes in
ownership of the common stock of the Company.

As of February 20, 2004 there were 762 holders of record of the Companys
common stock. A significant number of the outstanding shares of common stock
which are beneficially owned by individuals or entities are registered in the
name of a nominee of The Depository Trust Company, a securities depository for
banks and brokerage firms. The Company believes that there are approximately
33,000 beneficial owners of its common stock as of February 20, 2004.

No dividends have been declared on the Companys common stock since the
initial public offering, and the Company does not currently intend to pay
dividends. See Managements Discussion and Analysis of Financial Condition
and Results of OperationsLiquidity and Capital Resources for a description of
the Companys stock repurchase program.

On February 5, 2004, the Board of Directors approved a three-for-one stock
split, subject to shareholder approval of an amendment to the Companys charter
to increase the authorized shares of common stock at the Annual Meeting on May
4, 2004.

Set forth below are the high and low sales prices for shares of the
Companys common stock for each quarterly period in 2002 and 2003.

|               |      |   |        |  |     |   |       |  | 
|-------------- | ---- | - | ------ |  | --- | - | ----- |  | 
|               |      |   | High   |  | Low
|               |      |   |        |  |    
|               | 2002 |   |        |  |     |   |       |  | 
|               |      |   |        |  |    
|First quarter  |      | $ | 71.20  |  |     | $ | 58.20 | 
|Second quarter |      | $ | 79.00  |  |     | $ | 69.40 | 
|Third quarter  |      | $ | 76.67  |  |     | $ | 61.24 | 
|Fourth quarter |      | $ | 76.00  |  |     | $ | 58.89 | 
|               | 2003 |   |        |  |     |   |       |  | 
|               |      |   |        |  |    
|First quarter  |      | $ | 72.18  |  |     | $ | 63.83 | 
|Second quarter |      | $ | 79.55  |  |     | $ | 68.20 | 
|Third quarter  |      | $ | 85.12  |  |     | $ | 72.08 | 
|Fourth quarter |      | $ | 102.00 |  |     | $ | 84.50 | 

18



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ITEM 6. SELECTED FINANCIAL DATA

|                                                      |                                       |            |         |            |                         |      |         |            |   |      |         |            |   |      |         |            |   |      |         |            |   |      | 
|----------------------------------------------------- | ------------------------------------- | ---------- | ------- | ---------- | ----------------------- | ---- | ------- | ---------- | - | ---- | ------- | ---------- | - | ---- | ------- | ---------- | - | ---- | ------- | ---------- | - | ---- | 
|                                                      |                                       |            |         |            | Year Ended December 31,
|                                                      |                                       |            |         |            |                        
|(Dollars in millions, except per share data)          |                                       | 2003       |         | 2002       |                         | 2001 |         | 2000       |   | 1999
|                                                      |                                       |            |         |            |                         |      |         |            |   |     
|Segment and Income Statement Data:                    |                                       |            |         |            |                         |      |         |            |   |      |         |            |   |      |         |            |   |      |         |           
|Segment sales:                                        |                                       |            |         |            |                         |      |         |            |   |      |         |            |   |      |         |            |   |      |         |           
|                                                      | Air Conditioning Systems and Services |            | $       | 4,974.6    |                         |      | $       | 4,743.9    |   |      | $       | 4,692.2    |   |      | $       | 4,726.1    |   |      | $       | 4,336.6    |  
|                                                      | Bath and Kitchen                      |            |         | 2,234.8    |                         |      |         | 1,994.4    |   |      |         | 1,812.7    |   |      |         | 1,803.5    |   |      |         | 1,754.4    |  
|                                                      | Vehicle Control Systems               |            |         | 1,358.2    |                         |      |         | 1,057.1    |   |      |         | 960.4      |   |      |         | 1,068.8    |   |      |         | 1,098.3    |  
|                                                      |                                       |            |         |            |                         |      |         |            |   |      |         |            |   |      |         |            |   |      |         |           
|Total sales                                           |                                       | $          | 8,567.6 |            |                         | $    | 7,795.4 |            |   | $    | 7,465.3 |            |   | $    | 7,598.4 |            |   | $    | 7,189.3 |           
|                                                      |                                       |            |         |            |                         |      |         |            |   |      |         |            |   |      |         |            |   |      |         |           
|Segment income:                                       |                                       |            |         |            |                         |      |         |            |   |      |         |            |   |      |         |            |   |      |         |           
|                                                      | Air Conditioning Systems and Services |            | $       | 521.6      |                         |      | $       | 537.4      |   |      | $       | 515.2      |   |      | $       | 531.4      |   |      | $       | 452.5      |  
|                                                      | Bath and Kitchen                      |            |         | 139.5      |                         |      |         | 154.7      |   |      |         | 147.5      |   |      |         | 161.5      |   |      |         | 164.2      |  
|                                                      | Vehicle Control Systems               |            |         | 176.6      |                         |      |         | 138.7      |   |      |         | 124.4      |   |      |         | 146.8      |   |      |         | 134.4      |  
|                                                      |                                       |            |         |            |                         |      |         |            |   |      |         |            |   |      |         |            |   |      |         |           
|Total segment income(a)                               |                                       |            | 837.7   |            |                         |      | 830.8   |            |   |      | 787.1   |            |   |      | 839.7   |            |   |      | 751.1   |           
|Equity in net income of unconsolidated joint ventures |                                       |            | 25.9    |            |                         |      | 26.6    |            |   |      | 18.5    |            |   |      | 30.0    |            |   |      | 36.9    |           
|Gain on sale of water heater business (b)             |                                       |            |        |            |                         |      |        |            |   |      |        |            |   |      | 57.3    |            |   |      |        |           
|Restructuring and asset impairment charges (c)        |                                       |            |        |            |                         |      |        |            |   |      |        |            |   |      | (69.5   | )          |   |      | (14.7   | )         
|Interest expense                                      |                                       |            | (117.0  | )          |                         |      | (129.0  | )          |   |      | (168.7  | )          |   |      | (198.7  | )          |   |      | (187.8  | )         
|Corporate and other expenses (a)                      |                                       |            | (197.4  | )          |                         |      | (172.2  | )          |   |      | (160.6  | )          |   |      | (149.4  | )          |   |      | (134.0  | )         
|                                                      |                                       |            |         |            |                         |      |         |            |   |      |         |            |   |      |         |            |   |      |         |           
|Income from continuing operations before income
taxes |                                       |            | 549.2   |            |                         |      | 556.2   |            |   |      | 476.3   |            |   |      | 509.4   |            |   |      | 451.5   |           
|Income taxes (a)                                      |                                       |            | (144.0  | )          |                         |      | (185.2  | )          |   |      | (181.3  | )          |   |      | (194.2  | )          |   |      | (187.4  | )         
|                                                      |                                       |            |         |            |                         |      |         |            |   |      |         |            |   |      |         |            |   |      |         |           
|Income from continuing operations                     |                                       | $          | 405.2   |            |                         | $    | 371.0   |            |   | $    | 295.0   |            |   | $    | 315.2   |            |   | $    | 264.1   |           
|                                                      |                                       |            |         |            |                         |      |         |            |   |      |         |            |   |      |         |            |   |      |         |           
|                                                      |                                       | Per share: |         |            |                         |      |         |            |   |      |         |            |   |      |         |            |   |      |         |            |   |     
|                                                      |                                       |            | Basic   |            | $                       | 5.60 |         |            | $ | 5.13 |         |            | $ | 4.13 |         |            | $ | 4.49 |         |            | $ | 3.74 | 
|                                                      |                                       |            | Diluted |            | $                       | 5.50 |         |            | $ | 5.04 |         |            | $ | 4.04 |         |            | $ | 4.36 |         |            | $ | 3.63 | 
|Average number of outstanding common shares:          |                                       |            |         |            |                         |      |         |            |   |      |         |            |   |      |         |            |   |      |         |           
|                                                      | Basic                                 |            |         | 72,269,886 |                         |      |         | 72,349,975 |   |      |         | 71,453,219 |   |      |         | 70,123,285 |   |      |         | 70,524,145 |  
|                                                      | Diluted                               |            |         | 73,716,824 |                         |      |         | 73,641,566 |   |      |         | 73,117,996 |   |      |         | 72,197,672 |   |      |         | 72,666,406 |  
|Balance Sheet Data(at end of period):                 |                                       |            |         |            |                         |      |         |            |   |      |         |            |   |      |         |            |   |      |         |           
|Total assets                                          |                                       | $          | 5,878.7 |            |                         | $    | 5,143.8 |            |   | $    | 4,831.4 |            |   | $    | 4,744.7 |            |   | $    | 4,686.0 |           
|Total debt                                            |                                       | $          | 1,679.1 |            |                         | $    | 1,959.2 |            |   | $    | 2,212.1 |            |   | $    | 2,471.7 |            |   | $    | 2,642.8 |           

(a) In 2003 segment income includes expenses of $38.9 million ($27.3
million net of taxes, or $.37 per diluted share) related to the elimination of
870 jobs in the fourth quarter, comprised of $8.4 million for Air Conditioning
Systems and Services, $20.8 million for Bath and Kitchen and $9.7 million for
Vehicle Control Systems. Income taxes include a tax benefit of $11.6 million
related to those expenses. Income taxes in 2003 also includes a $26.7 million
benefit ($.36 per diluted share) principally because of the resolution of a
German tax audit and approval of claims for research and development tax
credits in the U.S. In the fourth quarter of 2001 the Company recorded
expenses of $53.1 million ($35.8 million net of taxes, or $.49 per diluted
share) related to the elimination of approximately 1,700 salaried positions,
comprised of $12.7 million for Air Conditioning Systems and Services, $14.7
million for Bath and Kitchen, $15.8 million for Vehicle Control Systems and
$9.9 million for corporate headquarters.

(b) In 2000, the Company sold its Calorex water heater business for a gain
of $57 million ($52 million net of taxes, or $.72 per diluted share).

(c) In 2000, the Company recorded a net restructuring and asset impairment
charge of $70 million ($51 million, net of tax benefits, or $.71 per diluted
share). These charges consisted of $26 million for Air Conditioning Systems and
Services, $34 million for Bath and Kitchen and $15 million for Vehicle Control
Systems, partly offset by a $5 million reduction of charges taken in prior
years. In 1999, the Company recorded restructuring and asset impairment
charges of $15 million ($9 million, net of tax benefits, or $.13 per diluted
share). The 1999 charges consisted of restructuring charges of $30 million
principally for Vehicle Control Systems and a $13 million impairment charge
relating to a minority equity interest in a non-core business, partly offset by
a reduction of charges taken in 1998 to restructure North American Bath and
Kitchen operations.

For a comparative analysis of certain line items in the Segment and Income
Statement Data section of this table, see Managements Discussion and Analysis
of Financial Condition and Results of Operations which follows.

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

Overview

American Standard has three business segments: Air Conditioning Systems
and Services, Bath and Kitchen and Vehicle Control Systems. For the third year
in a row the Company faced weak markets for commercial air conditioning
equipment, and weak economic conditions in the U.S. and many other parts of the
world. Despite the challenging economic conditions, the Company achieved
record sales, net income, earnings per diluted share, and cash flow from
operating activities. Earnings were $5.50 per diluted share, up 9% from $5.04
a year ago. Sales were $8.568 billion, up 10% from $7.795 billion a year ago.
Net income rose to $405.2 million from $371.0 million, up 9%. The Company
generated $651.2 million in net cash provided by operating activities and
reduced debt by $280 million to $1.679 billion. Management believes the
Companys sales growth outperformed its markets in 2003, with all segments
contributing to the gain. Segment income for 2003 was $837.7 million, an
increase of 1%, driven primarily by a 27% increase for Vehicle Control Systems
and aided by favorable foreign exchange translation effects. Those gains were
partly offset by declines in segment income for Air Conditioning and Bath and
Kitchen. Excluding favorable foreign exchange translation effects, segment
income for 2003 decreased 4%. That decrease resulted primarily because segment
income included expenses of $38.9 million ($27.3 million net of $11.6 million
tax benefit, or $.37 per diluted share) for the elimination of 870 jobs as a
result of streamlining actions initiated in the fourth quarter. These actions
are expected to result in cost savings of $30 million in 2004 and $36 million
in 2005 and later years. The income tax provision for 2003 included a $26.7
million tax benefit ($.36 per diluted share) principally from the resolution of
a German tax audit and approval of claims for research and development tax
credits in the U.S. The combined effect of the $26.7 million tax benefits that
occurred in the fourth quarter, together with other ongoing tax planning
activities, reduced the effective income tax rate to 26.2% for the year, well
below the rate of 33.3% for 2002. Without the $26.7 million of tax benefits
discussed above and excluding job elimination expenses and the related tax
benefit, the tax rate for 2003 would have been 31%.

The following discussion and analysis addresses changes in segment sales
and segment income and, in certain cases, segment operating margins, for 2003
compared with 2002, both with and without the effects of foreign exchange
translation and job elimination expenses described above. It also addresses
income taxes with and without the tax benefits described above. Presenting
results of operations excluding certain recorded amounts is not in conformity
with generally accepted accounting principles (GAAP), but management analyzes
the data in this manner because it is useful to them in understanding past
financial performance and prospects for the future. Management also uses data
adjusted in this manner for purposes of determining incentive compensation.
Accordingly, management believes that presenting the analysis in this manner is
also useful to shareholders in understanding the core business segment
operating results and trends. Approximately half of the Companys business is
outside the U.S., therefore changes in exchange rates can have a significant
effect on results of operations when presented in U.S. dollars. Management
consistently analyzes sales, segment income and segment operating margins with
and without the effects of foreign exchange translation and believes these
comparisons are useful to shareholders. Year-over-year changes in sales and
segment income are calculated in terms of constant U.S. dollars. Similarly,
management believes it is useful to shareholders to analyze year-over-year
changes in operating results with and without the effects of the job
elimination expenses to obtain a complete understanding of segment operating
results. In addition, management believes it is useful to shareholders to
analyze income taxes with and without the effects of settlement of the tax
issues described above that caused the effective income tax rate for 2003 to
drop to 26.2%, which is not necessarily reflective of past or future tax rates.
These additional measurements are not meant to be a substitute for
measurements prepared in conformity with GAAP, nor to be considered in
isolation.

Similarly, management has analyzed the results of operations for 2002
compared with 2001 with and without the effects of foreign exchange
translation, and with and without fourth quarter 2001 job elimination expenses
and goodwill amortization included in 2001, but not in 2002. Goodwill
amortization was eliminated as an accounting requirement beginning in 2002 by a
new goodwill accounting standard. Management believes that presenting the
analysis in this manner is useful to shareholders in assessing the overall
performance of the business on a comparative basis from year to year.

20



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For a five-year summary of segment sales and income and other income
statement information, refer to Item 6, Selected Financial Data on page 19,
and for additional data on segments refer to Note 14 of Notes to Financial
Statements. The following discussion and analysis addresses year-to-year
changes in certain line items shown in the Segment and Income Statement Data in
the Selected Financial Data on page 19. Sales are presented based upon country
of destination.

Results of Operations for 2003 Compared with 2002
and 2002 Compared with 2001

Consolidated sales for 2003 were $8.568 billion, an increase of $773
million, or 10% (5% excluding favorable foreign exchange translation effects),
from $7.795 billion in 2002. Sales increased 5% for Air Conditioning Systems
and Services, 12% for Bath and Kitchen and 28% for Vehicle Control Systems.

Segment income for 2003 was $837.7 million, an increase of $7 million, or
1% (a decrease of 4% excluding favorable foreign exchange translation effects),
from $830.8 million in 2002. Segment income increased 27% for Vehicle Control
Systems, but decreased 3% for Air Conditioning Systems and Services and 10% for
Bath and Kitchen. Segment income for 2003 included $38.9 million of expense
for the elimination of 870 jobs, comprised of $8.4 million for Air Conditioning
Systems and Services, $20.8 million for Bath and Kitchen and $9.7 million for
Vehicle Control Systems.

Consolidated sales for 2002 were $7.795 billion, an increase of $330
million, or 4% (3% excluding favorable foreign exchange translation effects),
from $7.465 billion in 2001. Sales increased 1% for Air Conditioning Systems
and Services, 10% for Bath and Kitchen and 10% for Vehicle Control Systems.

Segment income for 2002 was $830.8 million, an increase of $43.7 million,
or 6% (5% excluding favorable foreign exchange translation effects), from
$787.1 million in 2001. Segment income increased 4% for Air Conditioning
Systems and Services, 5% for Bath and Kitchen and 12% for Vehicle Control
Systems. Segment income for 2001 included a $43.2 million expense for the
elimination of 1,640 salaried positions, comprised of $12.7 million for Air
Conditioning Systems and Services, $14.7 million for Bath and Kitchen and $15.8
million for Vehicle Control Systems. The improvement in 2002 also included the
effect of adopting a new goodwill accounting standard as of January 1, 2002,
which eliminated the amortization of goodwill, thereby increasing segment
income in 2002 by approximately $32.2 million ($29.7 million net of tax
benefits, or $.40 per diluted share) compared with 2001. The $32.2 million of
goodwill amortization in segment income in 2001 included $8.3 million for Air
Conditioning Systems and Services, $13.5 million for Bath and Kitchen and $10.4
million for Vehicle Control Systems. See Note 2 of Notes to Financial
Statements, Accounting Policies-Goodwill for a comparative summary of the
effects of the goodwill accounting change on net income and net income per
share for 2003, 2002 and 2001.

21



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Following are tables showing the percentage of total sales and segment
income for each of the Companys business segments and the geographic
distribution of sales and segment income.

Segment Percentages of Sales

|                                      |  |      |     |      |  |      |     |   |  |  |     |  
|------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                      |  | 2003 |     | 2002 |  | 2001
|                                      |  |      |     |      |  |     
|Air Conditioning Systems and Services |  |      | 58  | %    |  |      | 61  | % |  |  | 63  | %
|Bath and Kitchen                      |  |      | 26  | %    |  |      | 26  | % |  |  | 24  | %
|Vehicle Control Systems               |  |      | 16  | %    |  |      | 13  | % |  |  | 13  | %
|                                      |  |      |     |      |  |      |     |   | 
|                                      |  |      | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                                      |  |      |     |      |  |      |     |   | 

|              |  |      |     |      |  |      |     |   |  |  |     |  
|------------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|              |  | 2003 |     | 2002 |  | 2001
|              |  |      |     |      |  |     
|United States |  |      | 53  | %    |  |      | 57  | % |  |  | 57  | %
|Europe        |  |      | 31  | %    |  |      | 28  | % |  |  | 27  | %
|Other         |  |      | 16  | %    |  |      | 15  | % |  |  | 16  | %
|              |  |      |     |      |  |      |     |   | 
|              |  |      | 100 | %    |  |      | 100 | % |  |  | 100 | %
|              |  |      |     |      |  |      |     |   | 

Segment Percentages of Segment Income

|                                      |  |      |     |      |  |      |     |   |  |  |     |  
|------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                      |  | 2003 |     | 2002 |  | 2001
|                                      |  |      |     |      |  |     
|Air Conditioning Systems and Services |  |      | 62  | %    |  |      | 65  | % |  |  | 65  | %
|Bath and Kitchen                      |  |      | 17  | %    |  |      | 18  | % |  |  | 19  | %
|Vehicle Control Systems               |  |      | 21  | %    |  |      | 17  | % |  |  | 16  | %
|                                      |  |      |     |      |  |     
|                                      |  |      | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                                      |  |      |     |      |  |     

Geographic Distribution of Segment Income

|              |  |      |     |      |  |      |     |   |  |  |     |  
|------------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|              |  | 2003 |     | 2002 |  | 2001
|              |  |      |     |      |  |     
|United States |  |      | 53  | %    |  |      | 67  | % |  |  | 65  | %
|Europe        |  |      | 30  | %    |  |      | 23  | % |  |  | 22  | %
|Other         |  |      | 17  | %    |  |      | 10  | % |  |  | 13  | %
|              |  |      |     |      |  |     
|              |  |      | 100 | %    |  |      | 100 | % |  |  | 100 | %
|              |  |      |     |      |  |     

Results of Operations by Business Segment

Air Conditioning Systems and Services Segment

|                      |  |                         |         |      |  |      |         |  |  |   |         | 
|--------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                      |  | Year Ended December 31,
|                      |  |                        
|(Dollars in millions) |  | 2003                    |         | 2002 |  | 2001
|                      |  |                         |         |      |  |     
|Sales                 |  | $                       | 4,974.6 |      |  | $    | 4,743.9 |  |  | $ | 4,692.2 | 
|Segment income        |  | $                       | 521.6   |      |  | $    | 537.4   |  |  | $ | 515.2   | 

In 2003, sales of Air Conditioning Systems and Services increased 5% (3%
excluding favorable foreign exchange translation effects).

Following is an analysis of changes in sales from 2002 to 2003 showing the
effect of foreign exchange translation and an analysis of changes in segment
income and operating margin showing the effect of job elimination expenses in
the fourth quarter of 2003 and foreign exchange translation.

|                         |  |          |         |          |  |                              |         |                    |  |                      |                    |                  |  |  |      |      |  |               |         |   |  |  |      |     
|------------------------ |  | -------- | ------- | -------- |  | ---------------------------- | ------- | ------------------ |  | -------------------- | ------------------ | ---------------- |  |  | ---- | ---- |  | ------------- | ------- | - |  |  | ---- | ----
|                         |  |          |         |          |  | Year Ended December 31, 2003
|                         |  |          |         |          |  |                             
|                         |  |          |         |          |  |                              |         |                    |  |                      |                    |                  |  |  |      |      |  | Excluding job
|                         |  |          |         |          |  |                              |         |                    |  | Excluding job        |                    | eliminations and
|                         |  |          |         |          |  |                              |         |                    |  | elimination expenses |                    | foreign exchange
|                         |  |          |         |          |  |                              |         |                    |  |                      |                    |                 
|                         |  | 2002     |         | 2003     |  | Adjusted                     |         | Percentage change  |  | Adjusted             | Percentage change 
|(Dollars in millions)    |  | Reported |         | Reported |  | Amount                       |         | compared with 2002 |  | Amount               | compared with 2002
|                         |  |          |         |          |  |                              |         |                    |  |                      |                   
|Segment sales            |  | $        | 4,743.9 |          |  | $                            | 4,974.6 |                    |  |                      |                   |                  |  |  |     |      |  | $             | 4,899.7 |   |  |  | 3    | %   
|Segment income           |  | $        | 537.4   |          |  | $                            | 521.6   |                    |  | $                    | 530.0              |                  |  |  | -1   | %    |  | $             | 526.2   |   |  |  | -2   | %   
|Segment operating margin |  |          | 11.3    | %        |  |                              | 10.5    | %                  |  |                      | 10.7               | %                |  |  | -0.6 | pts. |  |               | 10.7    | % |  |  | -0.6 | pts.

The sales gain in 2003 was led by a 10% increase in residential air
conditioning sales in the U.S., and an 8% increase in commercial parts, service
and solutions sales. Those increases were partly offset by lower sales in the
North American and European applied equipment markets. In our commercial air
conditioning business, sales performance was in line with the equipment markets
on a global basis. Commercial equipment sales, which account for approximately
45% of the air conditioning segment sales, continued to feel the effects of a
difficult economic environment and were flat year over year (down 2% excluding
favorable foreign exchange translation effects). Commercial

22



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applied equipment sales decreased 3% and commercial unitary equipment
sales decreased 1% on an exchange-adjusted basis, with the unitary business
achieving sales gains in the second half of the year. The commercial equipment
market in the U.S. was down an estimated 5% in 2003 (based upon preliminary ARI
(Air-Conditioning & Refrigeration Institute) data for commercial unitary markets and our own estimates for applied markets),
following drops of 11% in 2002 and 8% in 2001. This represents a cumulative
decline of 22% since 2000. Customers continued to defer replacement of
equipment, which accounts for about 57% of our equipment sales, and we estimate
that non-residential construction activity in the U.S. declined approximately
4% year over year. Overall, we believe our share remained stable in these
commercial markets which were weak and price competitive. Sales of parts,
services and solutions continued to grow, with double-digit growth rates
outside the U.S. and 4% growth domestically. Sales of parts and solutions were
strongest, as customers have less discretion to defer those types of purchases,
with lower growth in routine services, where customers have more flexibility to
defer spending. Sales outside the U.S., which are substantially commercial,
grew 13% (7% excluding favorable foreign exchange translation effects), led by
strong growth in Asia.

We continue to outperform the domestic residential unitary market, which
we estimate was up 2% for 2003 compared with last year, based upon data
published by ARI. In addition,
the furnace market was up an estimated 2%. Residential sales benefited from
strong demand for replacement units and a shift in demand towards
high-efficiency units. Consumers continue to look for reliability and
efficiency options. Our high-efficiency product lines capitalize on this
demand. Our strong position in the premium, high-efficiency market was
evidenced by a substantial sales increase of new higher-efficiency models.
Sales of our high-efficiency furnaces were up approximately 20% for 2003
compared with the prior year. We also continued to see growth in our marketing
arrangement with Home Depot through which certain residential central heating
and air conditioning systems are offered. The Companys market share for
residential products increased slightly more than one-half percentage point
year over year, aided by the successful introduction of new products.
Residential products distributors experienced good sell-through of our products
to dealers in the year, resulting in their inventory levels remaining low
versus historical levels. In addition, combined factory and distributor
inventory levels ended the year approximately even with the average levels
since 1992, even though the market has grown substantially.

Distribution of Air Conditioning sales
by market and geography

|                        |                                    |      |     |      |   |      |     |    |   |  |     |    |  
|----------------------- | ---------------------------------- | ---- | --- | ---- | - | ---- | --- | -- | - |  | --- | -- | -
|                        |                                    | 2003 |     | 2002 |   | 2001
|                        |                                    |      |     |      |   |     
|Market distribution     |                                    |      |     |      |   |      |     |    |   |  |     |   
|                        | Commercial                         |      |     | 73   | % |      |     | 74 | % |  |     | 80 | %
|                        | Residential                        |      |     | 27   | % |      |     | 26 | % |  |     | 20 | %
|                        |                                    |      |     |      |   |      |     |    |   |  |     |   
|                        |                                    |      | 100 | %    |   |      | 100 | %  |   |  | 100 | % 
|                        |                                    |      |     |      |   |      |     |    |   |  |     |   
|                        | Replacement, Renovation and
Repair |      |     | 57   | % |      |     | 60 | % |  |     | 64 | %
|                        | Commercial New Construction        |      |     | 34   | % |      |     | 32 | % |  |     | 30 | %
|                        | Residential New Construction       |      |     | 9    | % |      |     | 8  | % |  |     | 6  | %
|                        |                                    |      |     |      |   |      |     |    |   |  |     |   
|                        |                                    |      | 100 | %    |   |      | 100 | %  |   |  | 100 | % 
|                        |                                    |      |     |      |   |      |     |    |   |  |     |   
|Geographic distribution |                                    |      |     |      |   |      |     |    |   |  |     |   
|                        | U.S.                               |      |     | 75   | % |      |     | 77 | % |  |     | 76 | %
|                        | Asia                               |      |     | 10   | % |      |     | 9  | % |  |     | 9  | %
|                        | Europe                             |      |     | 7    | % |      |     | 7  | % |  |     | 6  | %
|                        | Other                              |      |     | 8    | % |      |     | 7  | % |  |     | 9  | %
|                        |                                    |      |     |      |   |      |     |    |   |  |     |   
|                        |                                    |      | 100 | %    |   |      | 100 | %  |   |  | 100 | % 
|                        |                                    |      |     |      |   |      |     |    |   |  |     |   

Segment income of Air Conditioning Systems and Services in 2003 decreased
3% (4% excluding favorable foreign exchange translation effects) to $521.6 million from
$537.4 million in 2002. Segment income for 2003 included $8.4 million of
expense for the elimination of 234 jobs primarily in the U.S. Excluding those
job elimination expenses, segment income in 2003 would have decreased 1% (2%
excluding favorable foreign exchange translation effects). That decrease was
attributable primarily to lower volume and price, and unfavorable mix in
applied and unitary products in the commercial equipment business. Those
declines were partly offset by improved results in the residential business,
from higher volumes and a favorable shift in customer demand to
higher-capacity, higher-efficiency products with higher margins, and growth in
commercial parts, service and solutions. Operating results also improved in
all international operations, where segment income almost doubled. The
positive impact of

23



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Materials Management and Six Sigma productivity initiatives offset cost
escalations and investments in new product initiatives. Overall margins
decreased from 11.3% in 2002 to 10.5% in 2003.

Following is an analysis of changes in sales from 2001 to 2002 showing the
effect of foreign exchange translation and an analysis of changes in segment
income and operating margin showing the effect of job elimination expenses in
the fourth quarter of 2001, a change in accounting for goodwill amortization
and foreign exchange translation.

|                         |  |          |         |          |  |                              |         |          |  |                          |       |                               |  |             |      |      |  |   |         |             |  |  |      |     
|------------------------ |  | -------- | ------- | -------- |  | ---------------------------- | ------- | -------- |  | ------------------------ | ----- | ----------------------------- |  | ----------- | ---- | ---- |  | - | ------- | ----------- |  |  | ---- | ----
|                         |  |          |         |          |  | Year Ended December 31, 2001
|                         |  |          |         |          |  |                             
|                         |  |          |         |          |  |                              |         |          |  | Excluding job            |       | Excluding job                
|                         |  |          |         |          |  |                              |         |          |  | elimination expenses and |       | eliminations, goodwill amort.
|                         |  |          |         |          |  |                              |         |          |  | goodwill amortization    |       | and foreign exchange         
|                         |  |          |         |          |  |                              |         |          |  |                          |       |                              
|                         |  |          |         |          |  |                              |         |          |  |                          |       |                               |  | Percentage  |      |      |  |   |         | Percentage 
|                         |  |          |         |          |  |                              |         |          |  |                          |       |                               |  | change 2002 |      |      |  |   |         | change 2002
|                         |  | 2002     |         | 2001     |  | Adjusted                     |         | to 2001  |  | Adjusted                 |       | to 2001                      
|(Dollars in millions)    |  | Reported |         | Reported |  | Amount                       |         | Adjusted |  | Amount                   |       | Adjusted                     
|                         |  |          |         |          |  |                              |         |          |  |                          |       |                              
|Segment sales            |  | $        | 4,743.9 |          |  | $                            | 4,692.2 |          |  |                          |      |                               |  |             |     |      |  | $ | 4,695.6 |             |  |  | 1    | %   
|Segment income           |  | $        | 537.4   |          |  | $                            | 515.2   |          |  | $                        | 536.2 |                               |  |             | 0    | %    |  | $ | 537.1   |             |  |  | 0    | %   
|Segment operating margin |  |          | 11.3    | %        |  |                              | 11.0    | %        |  |                          | 11.4  | %                             |  |             | -0.1 | pts. |  |   | 11.4    | %           |  |  | -0.1 | pts.

In 2002, sales of Air Conditioning Systems and Services increased 1% (with
little effect from foreign translation exchange) to $4.744 billion from $4.692 billion for
2001. Overall sales performance in our air conditioning businesses was better
than the air conditioning markets as a whole. Residential air conditioning
sales increased 14% on strong demand for replacement units, warmer-than-normal
summer weather in most parts of the U.S. and volume increases in premium,
high-efficiency products. Commercial parts, service and solutions sales
increased 9%, aided modestly by the acquisition of a sales office in the first
quarter of 2002. Commercial equipment sales declined 7% on lower volume in
markets that were weak and price competitive.

Segment income of Air Conditioning Systems and Services in 2002 increased
4% (with little effect from foreign translation exchange) to $537.4 million from $515.2
million in 2001. The increase was attributable primarily to the residential
business, from higher volumes and a favorable shift in customer demand to
higher-capacity, higher-efficiency products with higher margins, and growth in
commercial parts, service and solutions. Those gains were partly offset by
lower volume and price, and unfavorable mix in commercial applied and
commercial unitary products. In addition, 2002 segment income also benefited
from the lack of goodwill amortization ($8.3 million in 2001) and because 2001
included $12.7 million of expense for salaried job eliminations. Overall
margins increased from 11.0% in 2001 to 11.3% in 2002.

BACKLOGThe worldwide backlog for Air Conditioning Systems and Services as of
December 31, 2003, was $592 million, a decrease of 5% from December 31, 2002,
excluding foreign exchange translation effects. This decrease primarily
reflected a decline in commercial equipment markets in North America. Backlog
is not necessarily predictive of future business as it relates only to some of
our products and services. We expect markets to be up slightly in 2004.

24



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Bath and Kitchen Segment

|                      |  |                         |         |      |  |      |         |  |  |   |         | 
|--------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                      |  | Year Ended December 31,
|                      |  |                        
|(Dollars in millions) |  | 2003                    |         | 2002 |  | 2001
|                      |  |                         |         |      |  |     
|Sales                 |  | $                       | 2,234.8 |      |  | $    | 1,994.4 |  |  | $ | 1,812.7 | 
|Segment income        |  | $                       | 139.5   |      |  | $    | 154.7   |  |  | $ | 147.5   | 

Following is an analysis of changes in sales from 2002 to 2003 showing the
effect of foreign exchange translation and an analysis of changes in segment
income and operating margin showing the effect of job elimination expenses in
the fourth quarter of 2003 and foreign exchange translation.

|                         |  |          |         |          |  |                              |         |                    |  |                      |       |                    |  |  |      |      |  |   |         |   |  |  |      |     
|------------------------ |  | -------- | ------- | -------- |  | ---------------------------- | ------- | ------------------ |  | -------------------- | ----- | ------------------ |  |  | ---- | ---- |  | - | ------- | - |  |  | ---- | ----
|                         |  |          |         |          |  | Year Ended December 31, 2003
|                         |  |          |         |          |  |                             
|                         |  |          |         |          |  |                              |         |                    |  | Excluding job        |       | Excluding job     
|                         |  |          |         |          |  |                              |         |                    |  | elimination expenses |       | eliminations and  
|                         |  |          |         |          |  |                              |         |                    |  | and tax benefits     |       | foreign exchange  
|                         |  |          |         |          |  |                              |         |                    |  |                      |       |                   
|                         |  | 2002     |         | 2003     |  | Adjusted                     |         | Percentage change  |  | Adjusted             |       | Percentage change 
|(Dollars in millions)    |  | Reported |         | Reported |  | Amount                       |         | compared with 2002 |  | Amount               |       | compared with 2002
|                         |  |          |         |          |  |                              |         |                    |  |                      |       |                   
|Segment sales            |  | $        | 1,994.4 |          |  | $                            | 2,234.8 |                    |  |                      |      |                    |  |  |     |      |  | $ | 2,080.0 |   |  |  | 4    | %   
|Segment income           |  | $        | 154.7   |          |  | $                            | 139.5   |                    |  | $                    | 160.3 |                    |  |  | 4    | %    |  | $ | 147.1   |   |  |  | -5   | %   
|Segment operating margin |  |          | 7.8     | %        |  |                              | 6.2     | %                  |  |                      | 7.2   | %                  |  |  | -0.6 | pts. |  |   | 7.1     | % |  |  | -0.7 | pts.

Sales by Bath and Kitchen were $2.235 billion in 2003, an increase of 12%
(4% excluding favorable foreign exchange translation effects), from $1.994
billion in 2002. Sales of $25 million from a small acquisition in Europe
completed in the first quarter of 2003 added one percentage point of that gain.
Sales in the Americas increased 4% (3% excluding favorable foreign exchange
translation effects), which came on top of 14% growth in 2002 (with little
effect from foreign exchange translation) when sales were helped by the expansion of our
jetted-tub program at Home Depot. Sales in 2003 benefited from our expanded
faucet business and the continued success of our total bathroom concept in
the retail channel, selling integrated suites of products. Examples of these
are the Standard Collection at Home Depot, introduced in 2002, and the Sottini
suites, introduced near the end of 2002 at Lowes, both of which continued to
experience good sales growth. In the wholesale channel, sales of luxury
faucets increased significantly for the year and contributed to margin
expansion. Our new Champion toilet, with Americas Best Flushing System,
established strong presence and achieved good distribution in the wholesale
channel in the last half of 2003 at product margins that are better than the
category average. Champion is having a positive impact on sales and margins in
both wholesale and retail channels in the U.S. In Europe, where our business
is larger and our margin structure is better, sales increased 20% (4% excluding
favorable foreign exchange translation effects). Approximately half of that
increase came from a small acquisition we made in the first quarter of 2003,
and half from volume increases in markets that we estimate were flat overall,
year over year. We continue to reinforce our strong market positions across
Europe. In the fourth quarter of 2003, we launched new suites, advertising and
promotional campaigns in France, Italy, the U.K. and Eastern Europe. In Asia,
sales increased 14% (11% excluding favorable foreign exchange translation
effects), off a small but growing base. The new residential market continues
to be strong in China, and our sales significantly outgrew the market, driven
by promotional activities surrounding our suites and the refurbishment of
retail outlets. Sales in Korea and Thailand also increased strongly in 2003,
resulting from successful new suite introductions.

25



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##### 



Distribution of Bath and Kitchen sales
by market and geography

|                        |                                    |      |     |      |   |      |     |    |   |  |     |    |  
|----------------------- | ---------------------------------- | ---- | --- | ---- | - | ---- | --- | -- | - |  | --- | -- | -
|                        |                                    | 2003 |     | 2002 |   | 2001
|                        |                                    |      |     |      |   |     
|Market distribution     |                                    |      |     |      |   |     
|                        | Residential                        |      |     | 80   | % |      |     | 78 | % |  |     | 75 | %
|                        | Commercial                         |      |     | 20   | % |      |     | 22 | % |  |     | 25 | %
|                        |                                    |      |     |      |   |      |     |    |   |  |     |   
|                        |                                    |      | 100 | %    |   |      | 100 | %  |   |  | 100 | % 
|                        |                                    |      |     |      |   |      |     |    |   |  |     |   
|                        | Replacement, Renovation and
Repair |      |     | 60   | % |      |     | 62 | % |  |     | 60 | %
|                        | Residential New Construction       |      |     | 26   | % |      |     | 24 | % |  |     | 25 | %
|                        | Commercial New Construction        |      |     | 14   | % |      |     | 14 | % |  |     | 15 | %
|                        |                                    |      |     |      |   |      |     |    |   |  |     |   
|                        |                                    |      | 100 | %    |   |      | 100 | %  |   |  | 100 | % 
|                        |                                    |      |     |      |   |      |     |    |   |  |     |   
|Geographic distribution |                                    |      |     |      |   |      |     |    |   |  |     |   
|                        | Europe                             |      |     | 50   | % |      |     | 47 | % |  |     | 47 | %
|                        | U.S.                               |      |     | 34   | % |      |     | 38 | % |  |     | 37 | %
|                        | Other                              |      |     | 16   | % |      |     | 15 | % |  |     | 16 | %
|                        |                                    |      |     |      |   |      |     |    |   |  |     |   
|                        |                                    |      | 100 | %    |   |      | 100 | %  |   |  | 100 | % 
|                        |                                    |      |     |      |   |      |     |    |   |  |     |   

Segment income of Bath and Kitchen was $139.5 million for 2003, a decrease
of 10% (18% excluding favorable foreign exchange translation effects) from
$154.7 million for 2002. Operating margin was 6.2%, down from 7.8% in 2002.
Segment income in 2003 included $20.8 million of expense for the elimination of
526 jobs in the Americas and Europe. Excluding those job elimination expenses,
segment income in 2003 would have increased 4%. Excluding job elimination
expenses and the favorable effects of foreign exchange translation, segment
income would have decreased by 5% and overall margins would have decreased from
7.8% in 2002 to 7.1% in 2003. Segment income and margins for 2003 benefited
from volume increases and from fixing the operational issues that adversely
affected our results in 2002. Those benefits were more than offset by
continued investment in new products with better performance features, new
suite introductions, and our total bathroom strategy, unfavorable pricing
overall and an unfavorable sales mix of lower-margin fittings products. We
continued to decrease costs and improve productivity through Materials
Management and Six Sigma initiatives that offset cost escalations.

Following is an analysis of changes in sales from 2001 to 2002 showing the
effect of foreign exchange translation and an analysis of changes in segment
income and operating margin showing the effect of job elimination expenses in
the fourth quarter of 2001, a change in accounting for goodwill amortization
and foreign exchange translation.

|                         |  |          |         |          |  |                              |         |          |  |                          |       |                               |  |             |      |      |  |   |         |             |  |  |      |     
|------------------------ |  | -------- | ------- | -------- |  | ---------------------------- | ------- | -------- |  | ------------------------ | ----- | ----------------------------- |  | ----------- | ---- | ---- |  | - | ------- | ----------- |  |  | ---- | ----
|                         |  |          |         |          |  | Year Ended December 31, 2001
|                         |  |          |         |          |  |                             
|                         |  |          |         |          |  |                              |         |          |  | Excluding job            |       | Excluding job                
|                         |  |          |         |          |  |                              |         |          |  | elimination expenses and |       | eliminations, goodwill amort.
|                         |  |          |         |          |  |                              |         |          |  | goodwill amortization    |       | and foreign exchange         
|                         |  |          |         |          |  |                              |         |          |  |                          |       |                              
|                         |  |          |         |          |  |                              |         |          |  |                          |       |                               |  | Percentage  |      |      |  |   |         | Percentage 
|                         |  |          |         |          |  |                              |         |          |  |                          |       |                               |  | change 2002 |      |      |  |   |         | change 2002
|                         |  | 2002     |         | 2001     |  | Adjusted                     |         | to 2001  |  | Adjusted                 |       | to 2001                      
|(Dollars in millions)    |  | Reported |         | Reported |  | Amount                       |         | Adjusted |  | Amount                   |       | Adjusted                     
|                         |  |          |         |          |  |                              |         |          |  |                          |       |                              
|Segment sales            |  | $        | 1,994.4 |          |  | $                            | 1,812.7 |          |  |                          |      |                               |  |             |     |      |  | $ | 1,841.4 |             |  |  | 8    | %   
|Segment income           |  | $        | 154.7   |          |  | $                            | 147.5   |          |  | $                        | 175.7 |                               |  |             | -12  | %    |  | $ | 178.8   |             |  |  | -13  | %   
|Segment operating margin |  |          | 7.8     | %        |  |                              | 8.2     | %        |  |                          | 9.7   | %                             |  |             | -1.9 | pts. |  |   | 9.7     | %           |  |  | -1.9 | pts.

Sales by Bath and Kitchen were $1.994 billion in 2002, an increase of 10%
(8% excluding favorable foreign exchange translation effects), from $1.813
billion in 2001. The increase was the result of gains in each of the major
geographical areas in which Bath and Kitchen operates. Sales in the Americas
increased 14% (with little effect from foreign exchange translation), led by strong growth
in North America from continued strong demand in replacement and home
improvement markets. Sales in Canada increased 20% from higher volume as
markets improved. In Europe, sales were up 6% (2% excluding favorable foreign
exchange translation effects) as we were able to gain market share in a
difficult economic environment. European sales also benefited from three small
fittings businesses

26



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##### 



acquired in 2001. In Asia, sales increased 15% (21% excluding favorable
foreign exchange translation effects), off a small but growing base.

Segment income of Bath and Kitchen was $154.7 million for 2002, an
increase of 5% (2% excluding favorable foreign exchange translation effects)
from $147.5 million for 2001. Overall margins declined from 8.2% in 2001 to
7.8% in 2002. Segment income in 2002 benefited from the lack of goodwill
amortization ($13.5 million in 2001) and because 2001 included $14.7 million of
expense for salaried job eliminations. Excluding goodwill amortization, job
elimination expense and the favorable effects of foreign exchange translation from 2001,
segment income would have decreased 14%. Those favorable factors were partly
offset by the effects of operational issues (now remedied) and our investment
spending in new product development and marketing programs. Benefits from
Materials Management and Six Sigma initiatives offset cost escalations.
Without the effects of goodwill amortization and job elimination expense,
overall margins declined from 9.7% in 2001 to 7.8% in 2002.

BACKLOGBacklog is not an important indicator of future business in the
plumbing industry, which typically has a short cycle between customer order and
shipment.

Vehicle Control Systems Segment

|                      |  |                         |         |      |  |      |         |  |  |   |       | 
|--------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ----- | 
|                      |  | Year Ended December 31,
|                      |  |                        
|(Dollars in millions) |  | 2003                    |         | 2002 |  | 2001
|                      |  |                         |         |      |  |     
|Sales                 |  | $                       | 1,358.2 |      |  | $    | 1,057.1 |  |  | $ | 960.4 | 
|Segment income        |  | $                       | 176.6   |      |  | $    | 138.7   |  |  | $ | 124.4 | 

Following is an analysis of changes in sales from 2002 to 2003 showing the
effect of foreign exchange translation and an analysis of changes in segment
income and operating margin showing the effect of job elimination expenses in
the fourth quarter of 2003 and foreign exchange translation.

|                         |  |          |         |          |  |                              |         |                    |  |                      |       |                    |  |  |     |      |  |               |         |   |  |  |     |     
|------------------------ |  | -------- | ------- | -------- |  | ---------------------------- | ------- | ------------------ |  | -------------------- | ----- | ------------------ |  |  | --- | ---- |  | ------------- | ------- | - |  |  | --- | ----
|                         |  |          |         |          |  | Year Ended December 31, 2003
|                         |  |          |         |          |  |                             
|                         |  |          |         |          |  |                              |         |                    |  |                      |       |                    |  |  |     |      |  | Excluding job
|                         |  |          |         |          |  |                              |         |                    |  | Excluding job        |       | eliminations and  
|                         |  |          |         |          |  |                              |         |                    |  | elimination expenses |       | foreign exchange  
|                         |  |          |         |          |  |                              |         |                    |  |                      |       |                   
|                         |  | 2002     |         | 2003     |  | Adjusted                     |         | Percentage change  |  | Adjusted             |       | Percentage change 
|(Dollars in millions)    |  | Reported |         | Reported |  | Amount                       |         | compared with 2002 |  | Amount               |       | compared with 2002
|                         |  |          |         |          |  |                              |         |                    |  |                      |       |                   
|Segment sales            |  | $        | 1,057.1 |          |  | $                            | 1,358.2 |                    |  |                      |      |                    |  |  |    |      |  | $             | 1,167.7 |   |  |  | 10  | %   
|Segment income           |  | $        | 138.7   |          |  | $                            | 176.6   |                    |  | $                    | 186.3 |                    |  |  | 34  | %    |  | $             | 160.1   |   |  |  | 15  | %   
|Segment operating margin |  |          | 13.1    | %        |  |                              | 13.0    | %                  |  |                      | 13.7  | %                  |  |  | 0.6 | pts. |  |               | 13.7    | % |  |  | 0.6 | pts.

Vehicle Control Systems sales for 2003 were $1.358 billion, an increase
of 28% (10% excluding favorable foreign exchange translation effects), from
$1.057 billion in 2002. The increase was attributable primarily to increased
content per vehicle, including new applications, and continued globalization of
our technology. We had strong performance in truck and bus brake control
systems and transmission control systems, and in air suspension systems for
luxury cars and sport utility vehicles. Sales in Europe, our largest market,
increased 29% (6% excluding favorable foreign exchange translation effects) in
2003, outperforming the European truck and bus market, which increased 3%.
Sales increased 18% in North America, outperforming a market that increased an
estimated 1%. In Asia and Latin America, our sales also outperformed truck and
bus markets in the year. Our sales continue to outperform the heavy vehicle
manufacturing markets through sales of our new control systems, expanding
penetration on other vehicle platforms, new applications with existing
customers, and geographic expansion in Asia.

27



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Distribution of Vehicle Control Systems Sales
by Market and Geography

|                 |  |      |     |      |  |      |     |   |  |  |     |  
|---------------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                 |  | 2003 |     | 2002 |  | 2001
|                 |  |      |     |      |  |     
|OEM Conventional |  |      | 40  | %    |  |      | 39  | % |  |  | 39  | %
|Electronic       |  |      | 36  | %    |  |      | 36  | % |  |  | 38  | %
|Aftermarket      |  |      | 24  | %    |  |      | 25  | % |  |  | 23  | %
|                 |  |      |     |      |  |      |     |   |  |  |     |  
|                 |  |      | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                 |  |      |     |      |  |      |     |   |  |  |     |  
|Europe           |  |      | 78  | %    |  |      | 78  | % |  |  | 80  | %
|U.S.             |  |      | 11  | %    |  |      | 11  | % |  |  | 10  | %
|Other            |  |      | 11  | %    |  |      | 11  | % |  |  | 10  | %
|                 |  |      |     |      |  |      |     |   |  |  |     |  
|                 |  |      | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                 |  |      |     |      |  |      |     |   |  |  |     |  

Segment income in 2003 increased 27% (8% excluding favorable foreign
exchange translation effects) to $176.6 million from $138.7 million in 2002.
Segment operating margin was 13.0%, down from 13.1% in 2002. Segment income in
2003 included $9.7 million of expense for the elimination of 110 jobs in
Europe. Excluding those job elimination expenses, segment income in 2003 would
have increased 34%. Excluding job elimination expenses and the favorable
effects of foreign exchange translation, segment income would have increased
15% and margins would have increased to 13.7%. Those improvements in operating
income and margins primarily reflected volume leverage, savings from Materials
Management and Six Sigma initiatives, and lower warranty costs incurred in
2003.

Following is an analysis of changes in sales from 2001 to 2002 showing the
effect of foreign exchange translation and an analysis of changes in segment
income and operating margin showing the effect of job elimination expenses in
the fourth quarter of 2001, a change in accounting for goodwill amortization
and foreign exchange translation.

|                         |  |          |         |          |  |                              |       |          |  |                          |       |                               |  |             |      |      |  |   |       |             |  |  |      |     
|------------------------ |  | -------- | ------- | -------- |  | ---------------------------- | ----- | -------- |  | ------------------------ | ----- | ----------------------------- |  | ----------- | ---- | ---- |  | - | ----- | ----------- |  |  | ---- | ----
|                         |  |          |         |          |  | Year Ended December 31, 2001
|                         |  |          |         |          |  |                             
|                         |  |          |         |          |  |                              |       |          |  | Excluding job            |       | Excluding job                
|                         |  |          |         |          |  |                              |       |          |  | elimination expenses and |       | eliminations, goodwill amort.
|                         |  |          |         |          |  |                              |       |          |  | goodwill amortization    |       | and foreign exchange         
|                         |  |          |         |          |  |                              |       |          |  |                          |       |                              
|                         |  |          |         |          |  |                              |       |          |  |                          |       |                               |  | Percentage  |      |      |  |   |       | Percentage 
|                         |  |          |         |          |  |                              |       |          |  |                          |       |                               |  | change 2002 |      |      |  |   |       | change 2002
|                         |  | 2002     |         | 2001     |  | Adjusted                     |       | to 2001  |  | Adjusted                 |       | to 2001                      
|(Dollars in millions)    |  | Reported |         | Reported |  | Amount                       |       | Adjusted |  | Amount                   |       | Adjusted                     
|                         |  |          |         |          |  |                              |       |          |  |                          |       |                              
|Segment sales            |  | $        | 1,057.1 |          |  | $                            | 960.4 |          |  |                          |      |                               |  |             |     |      |  | $ | 995.8 |             |  |  | 6    | %   
|Segment income           |  | $        | 138.7   |          |  | $                            | 124.4 |          |  | $                        | 150.6 |                               |  |             | -8   | %    |  | $ | 152.9 |             |  |  | -9   | %   
|Segment operating margin |  |          | 13.1    | %        |  |                              | 12.9  | %        |  |                          | 15.7  | %                             |  |             | -2.6 | pts. |  |   | 15.4  | %           |  |  | -2.3 | pts.

Vehicle Control Systems sales for 2002 were $1.057 billion, an increase
of 10% (6% excluding favorable foreign exchange translation effects), from $960
million in 2001. The increase resulted primarily because of a significant
increase in sales from Europe to our North American marketing joint venture.
The North American truck market experienced 11% growth as U.S. customers
actively purchased vehicles before the change in diesel engine emissions
regulations affecting truck engines manufactured after October 1, 2002. Sales
in the U.S. increased 23%, modestly outperforming the market. Sales in Europe
grew 8% (3% excluding favorable foreign exchange translation effects),
excluding sales to the North American marketing joint venture, primarily as a
result of higher content per vehicle and higher aftermarket sales in a market
that declined 8% in 2002. Sales increased 19% (21% excluding unfavorable
foreign exchange translation effects) in Asia and decreased 10% (increased 9%
excluding unfavorable foreign exchange translation effects) in Latin America.
Our sales outperformed the heavy vehicle manufacturing markets through sales of
our new control systems, expanding penetration on other vehicle platforms, new
applications with existing customers, and geographic expansion in Asia.

Segment income in 2002 increased 12% (10% excluding favorable foreign
exchange translation effects) to $138.7 million from $124.4 million in 2001.
Segment income in 2002 benefited from the lack of goodwill

28



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##### 



amortization ($10.4 million in 2001) and because 2001 included $15.8 million of
expense for salaried jobs elimination. Excluding the goodwill effect and job
elimination expenses from 2001, and the favorable effects of foreign
exchange translation,
segment income would have decreased 9%. This decline primarily reflected lower
pricing and higher warranty expense, which more than offset the effect of the
volume increases discussed above. Segment income in 2001 also benefited from a
one-time sale to a customer to help them deal with a product recall caused by
another supplier. Productivity improvements from Six Sigma and Materials
Management initiatives overcame other cost escalations. Margins increased from
12.9% in 2001 to 13.1% in 2002.

BACKLOGVehicle Control Systems backlog as of December 31, 2003, was $612
million, an increase of 12% from December 31, 2002, excluding foreign exchange
translation effects, primarily reflecting an increase in Europe related to
market growth and expansion of business in Asia. Backlog is not necessarily
predictive of future business as it relates only to some of our products. We
expect markets to be up 7% to 9% in 2004.

Other Income Statement Data (as summarized in Item 6, Selected Financial Data)

The small decrease in equity in net income of unconsolidated joint
ventures for 2003 compared with 2002 primarily reflects our decision to
terminate our receivables discounting joint venture with TransAmerica in the
third quarter of 2002; a decision which has resulted in lower interest costs.
That decrease was partly offset by higher net income for both our Vehicle
Control Systems joint venture in India from higher volume and our Air
Conditioning compressor joint venture in the U.S. from higher volume and
improved productivity. The increase in 2002 compared with 2001 primarily
reflects higher net income for our joint venture in India, and higher net
income for our Air Conditioning compressor joint venture in the U.S.

Interest expense decreased by $12.0 million in 2003 compared with 2002,
and by $39.7 million in 2002 compared with 2001, primarily because of lower
average debt balances in both years, and additionally because of lower average
interest rates in 2002 (including the effect of interest rate swaps). See
Liquidity and Capital Resources and Note 10 of Notes to Financial Statements.

Corporate and other expenses, as shown in the Segment and Income Statement
Data table in Item 6, were $197.4 million for 2003, compared with $172.2
million for 2002 and $160.6 million for 2001. The increase in 2003 was due
principally to increased provisions for various self-insured costs,
third-party-provided insurance, pensions, and higher minority interest
elimination. Those increases were partly offset by lower receivables
discounting fees, reflecting our decision to terminate our receivables
discounting joint venture with TransAmerica in the third quarter of 2002. The
increase in 2002 was due principally to higher pension, medical and insurance
costs, higher incentive compensation, the cost of expanding the scope of
corporate office functions, and higher minority interest elimination, offset
partly by lower foreign exchange losses. The increase in post-retirement and
medical costs in both periods includes higher accretion expense on retirement
plans. The increase in accretion expense on retirement plans is attributable
primarily to a lower return on assets and lower assumed discount rates and
projected increases in future medical costs. The Company recorded a net gain
on foreign exchange transactions in 2002 as opposed to a net loss in 2001,
primarily as a result of an increase in the value of the Euro. See Notes 4 and
5 of Notes to Financial Statements for additional information on
accretion expense and foreign exchange transactions. Corporate and other
expenses, shown in the Segment and Income Statement Data table in Item 6,
primarily include some of the expenses classified as selling and administrative
expenses in the Consolidated Statement of Income on page 43. Corporate and
other expenses also include certain items classified in Other expense in the
Consolidated Statement of Income (see Note 4 of Notes to Financial Statements).
Year-to-year changes in the significant components of Other expense are
explained by the comments in this paragraph on corporate expenses, or in the
first paragraph of this section on equity in net income of unconsolidated joint
ventures.

The income tax provisions for 2003, 2002 and 2001 were $144.0 million,
$185.2 million and $181.3 million, respectively. The effective income tax
rates were 26.2% of pre-tax income in 2003, 33.3% in 2002 and 38.0% in 2001.
The rate in 2003 was expected to be 31% as a result of certain initiatives
undertaken in 2002 and 2003. Principally from the resolution in the fourth
quarter of 2003 of tax audit issues in Germany and approval of claims for
research and development tax credits in the U.S., the effective rate decreased
to 26.2%. The Company expects that its effective income tax rate in 2004 will
be 31%. The effective income tax rates have decreased since 2001 because of
various initiatives undertaken. The rates also reflect the effects of rate
differences and withholding

29



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taxes related to foreign operations, nondeductible goodwill amortization (for
2001 only) and higher state income taxes in the U.S. See Note 6 of Notes to
Financial Statements and Critical Accounting Policies and Estimates on page 34.

Liquidity and Capital Resources

Net cash provided by operating activities was $651.2 million for 2003.
This compared with net cash provided by operating activities, excluding net
proceeds from the initial sales of receivables, of $542.2 million for 2002 and
$495.8 million for 2001. Major factors contributing to the increase in 2003
were higher net income, lower payments on income taxes (including the effect of
a $55 million payment as part of a German tax settlement made in 2002), and
because 2002 included payments of job elimination expenses accrued in 2001.
Those increases were partly offset by increased retained interest in
receivables sold under our accounts receivable securitization program, and
increased investments in tooling. In 2002, proceeds from the initial sale of
receivables under the receivables securitization arrangements, net of the
effect of termination of previously existing arrangements, increased cash
provided by operating activities by $81.4 million to a total of $623.6 million
(see Note 7 of Notes to Financial Statements). Other factors contributing to
the 2002 increase were higher net income, partly offset by a $55 million
payment as part of a German tax settlement, a $50 million contribution to the
Companys U.S. pension plan and payments of job elimination costs accrued in
2001.

In investing activities, the Company made capital expenditures of $240
million for 2003, including $170 million on plant and equipment, $25 million of
investments in affiliated companies and other businesses, and $45 million in
computer software. This compared with capital expenditures of $235 million in
2002, including $165 million on plant and equipment, $24 million of investments
in affiliated companies and other businesses, and $47 million in computer
software. The Company also received $23 million from the sale of property,
plant and equipment in 2003, compared with $21 million in 2002. The 2002
period also included a return of invested capital and accumulated earnings of
$26 million from the dissolution of the U.S. receivables financing joint
venture.

Most of the excess of cash provided by operating activities over cash used
for investing activities in 2003 was used to fund financing activities totaling
$420 million. This included net cash debt repayments of $371 million. Total
Company debt reflected on the balance sheet was reduced by a net $280 million
during 2003, as those cash repayments were partly offset by net non-cash
increases of $84 million, including an $89 million foreign exchange translation
effect. Other investing activities included payment of $150 million for the
purchase of 2.0 million shares of common stock pursuant to the Companys share
repurchase program. Those were partly offset by proceeds realized from the
exercise of stock options of $55 million and cash proceeds of $38 million from
the settlement of foreign exchange forward contracts. The net effect of all
operating, investing and financing activities for 2003 was an increase in cash
and cash equivalents of $15 million. In 2002 financing activities funded
totaled $420 million, including net debt repayments of $337 million and
purchases of 2.1 million shares of the Companys common stock for $141 million,
offset by proceeds realized from the exercise of stock options totaling $56
million.

The Companys Board of Directors has approved plans to purchase shares of
the Companys common stock to offset the dilutive effect of issuing shares of
common stock pursuant to the Companys stock option plans and other incentive
and benefit plans funded with shares of stock. As of December 31, 2003, the
unexpended authorization was $313 million. The Company purchased 2,001,800
shares in 2003 for $152 million, 2,075,200 shares in 2002 for $141 million,
1,921,050 shares in 2001 for $117 million, and 6,152,950 shares in prior years
for $227 million. The Company plans to increase the amount expended to
purchase shares in 2004 under this program to about $250 million.

The Company has one primary bank credit agreement. That agreement
provides the Company and certain subsidiaries (the Borrowers) with a senior,
unsecured, five-year $1 billion multi-currency revolving credit facility that
expires in November 2006. The Company did not renew a related 364-day, U.S.
dollar revolving credit facility of $150 million when it expired on November 4,
2003, because amounts available under the five-year facility and other sources
of financing available were considered sufficient for Company needs. The
Company also has a Euro-denominated, 364-day bank credit agreement of $50
million (at December 31, 2003 exchange rates) that expires on October 31, 2004,
and that was fully utilized as of December 31, 2003. Debt outstanding under
that agreement was classified as long-term debt in the balance sheet as of
December 31, 2003 and 2002, because the Company has the

30



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ability and the intent to renew it or to refinance it with borrowings under the
five-year facility. In addition, the Company has other non-U.S. lines of
credit for $20 million.

The aggregate borrowings of up to $1 billion provided by the primary bank
credit facility can be used for general corporate purposes, of which up to $250
million may be used for issuing letters of credit and up to $125 million for
same-day, short-term borrowings. Each loan outstanding under these facilities
is due at the end of each interest period (a maximum of 12 months). The Company
can, however, concurrently re-borrow equivalent amounts subject to compliance
with certain conditions contained in the agreement.

The Company, American Standard Inc., American Standard International Inc.
and certain of their domestic subsidiaries guarantee obligations under the
primary credit agreement. In addition, certain foreign subsidiaries guarantee
obligations of certain foreign subsidiaries that borrow under that credit
agreement.

The primary bank credit agreement contains various covenants that limit,
among other things, indebtedness, liens, sale and leaseback transactions,
subsidiary indebtedness including preferred stock, mergers, consolidations,
dissolutions and asset sales, investments or acquisitions, dividends and
redemptions of capital stock, loans and advances, and certain other business
activities. The covenants also require the Company to meet certain financial
tests: ratio of consolidated debt to EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization), and consolidated free cash flow to interest
expense. The Company is currently in compliance with the covenants contained in
the credit agreement. See Note 10 of Notes to Financial Statements.

At December 31, 2003, the Companys total indebtedness was $1.679 billion
and annual scheduled debt maturities were $2 million, $213 million, $569
million, $1 million and $335 million for the years 2004 through 2008,
respectively. The Company had remaining availability under its primary bank
credit agreement at December 31, 2003, of $668 million after reduction for
borrowings of $210 million and $122 million of outstanding letters of credit.
The Company has $11 million available under other bank credit facilities after
reduction for borrowings of $50 million and letters of credit usage of $9
million. In addition, the Company had $247 million available at December 31,
2003, under overdraft facilities that can be withdrawn by the banks at any
time. See Note 10 of Notes to Financial Statements.

The Companys improved cash flows, the reduction in total debt outstanding
and an improved credit rating have made alternative sources of financing more
readily available to the Company. The Company believes that the amounts
available from operating cash flows, funds available under its credit
agreements and future borrowings under the remaining $540 million of a $1
billion shelf registration statement filed with the Securities and Exchange
Commission in 1998 (the 1998 Shelf Registration) will be sufficient to meet
its expected operating needs and planned capital expenditures for the
foreseeable future.

On January 8, 2002, the Company redeemed all of the 9 1/4% Sinking Fund
Debentures, at a redemption price of 102.313% of the face amount of the bonds
plus unpaid interest up to the redemption date. The total redemption cost of
$38.7 million, including accrued interest of $.4 million, was paid with
lower-cost borrowings under the Companys five-year bank credit facility and a
loss of $1.3 million was recognized.

The Company redeemed its 7 1/8% Senior Notes on their due date, February
15, 2003, for $129.5 million, including accrued interest with borrowings under
its five-year bank credit facility.

In
January 2003, a European subsidiary of the Company issued
30
million ($38 million at December 31, 2003 exchange rates) of 7.59% Guaranteed
Senior Bonds due 2013 in a private placement as part of some changes in the
financial structure and organization of its European subsidiaries. The bonds
are guaranteed by the Company. The proceeds were used to repay borrowings
under bank credit agreements.

Debt securities (Senior Notes) sold under the 1998 Shelf Registration are
issued by American Standard Inc. and unconditionally guaranteed by American
Standard Companies Inc. These Senior Notes can not be redeemed prior to their
maturity date. The Company intends to use the net proceeds from any future
sales of such debt securities under the 1998 Shelf Registration for general
corporate purposes, which may include refinancing existing debt as it matures,
certain investments, acquisitions, additions to working capital or capital
expenditures.

31



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In 2002, the Company concluded negotiations with The State Finance
Administration for North Rhine-Westphalia, Germany concerning certain tax
issues covering the years 1984 through 1994. On January 15, 2002, the Company
settled all issues for those years by making a cash payment of approximately
$55 million plus $30 million previously deposited in escrow. Since the Company
previously had made provision for those issues, the settlement had no impact on
results of operations. See Note 6 of Notes to Financial Statements.

Off-Balance Sheet Arrangements

The Company employs several means to manage its liquidity and is not
dependent upon any one source of funding. In addition to funds available from
operating cash flows, bank credit agreements and the public debt and equity
markets as described above, the Company uses two principal off-balance-sheet
techniques: operating leases and receivables financing arrangements. Operating
leases are employed as an alternative to purchasing certain property, plant and
equipment. Receivables financing arrangements are used to reduce borrowing
costs and accelerate the realization of accounts receivable. Future rental
commitments under all non-cancelable leases in effect at December 31, 2003,
total $570 million. That total represents the equivalent of approximately $450
million of off-balance-sheet debt, discounted at an assumed rate of 7.5%. See
the following table of Aggregate Contractual Obligations for a summary of
amounts due under operating leases.

To reduce its borrowing cost, during 2002 the Company established new
accounts receivable financing facilities in Europe and the U.S., and terminated
a previously existing arrangement in the U.S. See Note 7 of Notes to Financial
Statements. As part of these facilities, the Company formed wholly owned,
special-purpose entities (the SPEs) for the sole purpose of buying and
selling receivables generated by the Company. Under these facilities, the
Company, irrevocably and without recourse, transfers all eligible accounts
receivable to the SPEs which in turn, sell them, or undivided ownership
interests in them, to conduits administered by banks. The assets of the SPEs
are not available to pay the claims of the Company or any of its subsidiaries.
The Company retains a subordinated interest in the receivables sold of
approximately 15% in Europe and approximately 45% in the U.S. The conduits
obtain the funds to purchase the receivables, other than the retained interest,
by selling commercial paper to third-party investors. Advances from the
conduits to the SPEs are limited to approximately $491 million
(250
million, or approximately $316 million at December 31, 2003 exchange rates,
under the European facility, and $175 million under the U.S. facility). The
Company retains responsibilities for the collection and administration of
receivables subject to these facilities. These facilities are for three years,
subject to annual renewals and for the European facility, the maintenance of
specified debt-rating levels, and for the U.S. facility, the maintenance of
certain financial covenants. The Company is currently in compliance with these
covenants. The receivables sold are removed from the balance sheet since they
meet the applicable criteria of Statement of Financial Accounting Standards No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The Companys retained interest is recorded at
fair value in other current assets in the Companys Consolidated Balance Sheet.
To the extent that the cash received and value of the retained interest is less
than the net book value of the receivables sold, losses are recognized at the
time of sale. Those losses amounted to $41.7 million for 2003 and $21.5
million for 2002. The receivables represented by the retained interest are
exposed to the risk of loss for any uncollectible amounts in the pool of
receivables sold under this arrangement.

On August 31, 2002, the Company terminated its activities in American
Standard Financial Services, a financial services partnership with Transamerica
Commercial Finance Corporation that had previously provided receivables
financing in the U.S., and bought back $256 million of trade receivables. The
proceeds from the initial sale of receivables under the new European and U.S.
arrangements, net of the effect of termination of previously existing
arrangements, resulted in an increase in cash flows of $81 million. In
connection with dissolution of the U.S. partnership with Transamerica, the
Company also received a return of invested capital and accumulated earnings of
$26 million.

The Company has commitments and performance guarantees, including energy
savings guarantees totaling $37 million extending from 2004 to 2021, under
long-term service and maintenance contracts related to its air conditioning
equipment and system controls. Through 2003 the Company has experienced no net
losses under such arrangements and considers the probability of losses to be
unlikely. The Company also guarantees debt of third parties in the amount of
$4 million as of December 31, 2003.

32



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Following is a summary of contractual obligations, both on and off the
balance sheet as of December 31, 2003.

Aggregate Contractual ObligationsAs of December 31, 2003(Millions of dollars)

|                                                              |  |                            |       |      |  |          |     |          |  |      |       |      |  |        |     |  |  |   |       | 
|------------------------------------------------------------- |  | -------------------------- | ----- | ---- |  | -------- | --- | -------- |  | ---- | ----- | ---- |  | ------ | --- |  |  | - | ----- | 
|                                                              |  | Payments due by period (1)
|                                                              |  |                           
|                                                              |  |                            |       |      |  |          |     |          |  | 2005 |       | 2007 |  | Beyond
|Contractual Obligations                                       |  | Total                      |       | 2004 |  | and 2006 |     | and 2008 |  | 2008
|                                                              |  |                            |       |      |  |          |     |          |  |     
|Long-term debt obligations
(principal plus interest) (2)(3)   |  | $                          | 2,025 |      |  | $        | 161 |          |  | $    | 893   |      |  | $      | 415 |  |  | $ | 556   | 
|Operating lease obligations (4)                               |  |                            | 570   |      |  |          | 132 |          |  |      | 191   |      |  |        | 132 |  |  |   | 115   | 
|Purchase obligations (5)                                      |  |                            | 570   |      |  |          | 570 |          |  |      |      |      |  |        |    |  |  |   |      | 
|Unfunded pension and
post-retirement benefits (6)             |  |                            | 598   |      |  |          | 48  |          |  |      | 103   |      |  |        | 114 |  |  |   | 333   | 
|Other long-term liabilities
included on the balance sheet (7) |  |                            | 104   |      |  |          | 42  |          |  |      | 31    |      |  |        | 16  |  |  |   | 15    | 
|                                                              |  |                            |       |      |  |          |     |          |  |      |       |      |  |        |     |  |  |   |       | 
|Total                                                         |  | $                          | 3,867 |      |  | $        | 953 |          |  | $    | 1,218 |      |  | $      | 677 |  |  | $ | 1,019 | 
|                                                              |  |                            |       |      |  |          |     |          |  |      |       |      |  |        |     |  |  |   |       | 

Notes to table



| | (1) |  | Amounts shown in the table are not necessarily representative
of, and may vary substantially from, amounts that will actually be
paid in future years. For example, the actual amount to be paid
under long-term debt obligations in 2006 upon expiration of the
Companys primary credit agreement will depend on the amount of debt
repaid or additional amounts borrowed before that date.                                                                                                                                                                       
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Amounts shown for long-term debt obligations include the
associated interest calculated at the December 31, 2003 rates
applicable to each type of debt.                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (3) |  | Obligations under capital leases are not material
(approximately $9 million) and are included in long-term debt
obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (4) |  | Amounts include future rental commitments under all
non-cancelable leases in effect at December 31, 2003. The present
value of the $570 million total is equivalent to approximately $450
million, discounted at an assumed rate of 7.5%.                                                                                                                                                                                                                                                                                                                           
|
| | (5) |  | In the normal course of business the Company expects to
purchase approximately $4.2 billion in 2004 of materials and
services, and estimates that on average no more than approximately
$500 million is outstanding at any one time in the form of legally
binding commitments. The Company also expects to spend
approximately $200 million on capital expenditures for plant and
equipment and $30 million for purchased computer software during
2004, and estimates that no more than $70 million is committed under
legally binding agreements at any one time.
|
| | (6) |  | Unfunded pension and post-retirement benefit obligations
include amounts expected to be paid under plans that either are not
funded or are partially funded, and therefore will be paid from the
assets of the Company rather than from plan assets.                                                                                                                                                                                                                                                                                                                
|
| | (7) |  | Other long-term liabilities include amounts payable under
workers compensation and general liability claims.                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Capital Expenditures

The Companys capital expenditures for 2003 were $240 million (including
$170 million on plant and equipment, $25 million of investments in affiliated
companies and other businesses, and $45 million on computer software), compared
with $235 million for 2002 (including $165 million on plant and equipment, $23
million of investments in affiliated companies and other businesses, and $47
million on computer software). Capital spending on plant and equipment in 2003
was devoted primarily to equipment for the manufacture of new products and
productivity improvements.

Capital expenditures for Air Conditioning Systems and Services for 2003
were $90 million (including $16 million for computer software), a decrease of
17% from 2002 expenditures of $109 million (including $23 million of
investments in affiliated companies and $16 million for computer software).
Major expenditures in 2003 primarily related to projects for new products and
product improvements and improvements related to productivity.

33



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Bath and Kitchens capital expenditures for 2003 were $76 million
(including $58 million on plant and equipment and $18 million on computer
software), an increase of 7% from 2002 capital expenditures of $54 million
(including $16 million for computer software). Bath and Kitchen also expended
$25 million in 2003 on small acquisitions and investments in affiliated
companies, compared with $23 million of similar expenditures in 2002. Major
expenditures on plant and equipment in 2003 included projects related to
productivity (process improvements), new products, and product improvements.

Capital expenditures for Vehicle Control Systems in 2003 were $45 million
(including $8 million for computer software) essentially the same as
expenditures of $46 million in 2002 (including $11 million for computer
software). Expenditures on plant and equipment in 2003 were primarily related
to capital equipment for new products and cost reduction, and capacity
expansion.

Corporate headquarters incurred minor amounts of spending on equipment and
computer software in each of the last two years.

The Company believes capital spending in recent years has been sufficient
to maintain efficient production capacity, to implement important product and
process redesigns, to expand capacity to meet increased demand and to make
strategic investments and acquisitions. Six Sigma projects have freed up
capacity in our manufacturing facilities and are expected to continue to do so.
The Company expects to continue investing to expand and modernize its existing
facilities and to consider entering into joint ventures and making
complementary acquisitions. The Company expects to make capital expenditures
on plant and equipment in 2004 of approximately $200 million, excluding
potential acquisitions and capitalized computer software.

Effect of Recently Issued Accounting Standards

The Financial Accounting Standards Board (FASB) has recently issued
several new Statements and Interpretations. For the disclosures required by
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure, see Note 2 of Notes to Financial
Statements-Accounting Policies-Stock-Based Compensation. For the disclosures
required by Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others,see Note 13 of Notes to Financial Statements. For the disclosures
required by Statement No. 132 (revised 2003) Employers Disclosures about
Pensions and Other Postretirement Benefits,see Note 5 of Notes to Financial
Statements. Some of the disclosure requirements of the revised Statement No.
132 related to foreign plans, interim periods and certain other matters are not
effective until mid-2004. The Company has adopted the provisions of
Statement No. 146, Accounting for Costs Associated with Exit or Disposal
Activities.For a discussion of the impact of FASB Staff Position No. SFAS
106-1, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 which addresses
the accounting and disclosure implications that are expected to arise as a
result of the Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the Act) enacted on December 8, 2003, see Note 5 of Notes to Financial
Statements. Other Statements and Interpretations recently issued by the FASB
that are applicable to the Company have had little or no immediate effect on
the Company. Those statements included No. 143, Accounting for Asset
Retirement Obligations;No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets;No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13 (leases), and Technical Corrections; No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities;and No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.Interpretation No. 46,
Consolidation of Variable Interest Entities,parts of which will become
effective for the Company in the first quarter of 2004, is being evaluated by
the Company and is expected to have little impact.

Critical Accounting Policies and Estimates

The Companys discussion and analysis of its financial condition and
results of operations are based upon the Companys consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of financial
statements in conformity with those accounting principles requires management
to make judgments and estimates that affect the amounts reported in the

34



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consolidated financial statements and accompanying notes. Those judgments and
estimates have a significant effect on the financial statements because they
result primarily from the need to make estimates about the effects of matters
that are inherently uncertain. Actual results could differ from those
estimates. The Company frequently re-evaluates its judgments and estimates that
are based upon historical experience and on various other assumptions that are
believed to be reasonable under the circumstances.

The Company believes that of its significant accounting policies (see Note
2 of Notes to Financial Statements), the ones that may involve a higher degree
of uncertainty, judgment and complexity are post-retirement benefits,
warranties, goodwill, income taxes and commitments and contingencies.
Management has reviewed the following disclosures with the Audit Committee of
the Board of Directors.

Post-retirement benefitsThe Company has significant pension and
post-retirement benefit costs and liabilities that are developed from actuarial
valuations. Inherent in these valuations are key assumptions including discount
rates, expected return on plan assets, mortality rates, merit and promotion
increases and the health care cost trend rate. The Company is required to
consider current market conditions, including changes in interest rates and
health care costs, in making its assumptions. Changes in the related pension
and post-retirement benefit costs or liabilities may occur in the future due to
changes in the assumptions. The assumption as to the expected long-term rate
of return on plan assets is based upon the composition of plan assets,
historical long-term rates of return on similar assets and to a lesser extent
on current market conditions. Similarly, the discount rate used to calculate
the present value of projected benefit obligations is based upon interest rates
on a long-term corporate bond index, which is influenced by current interest
rates. A decrease of one percentage point in the assumed rate of return on
plan assets and a commensurate decrease in the discount rate applied to
projected benefit obligations would increase annual pension expense by
approximately $22 million. An increase of one percentage point in the assumed
health care cost trend rate in each future year would increase annual health
insurance costs by approximately $21 million. See the disclosures about
pension and post-retirement obligations, the composition of plan assets,
assumptions and other matters in Note 5 of Notes to Financial Statements.
Recently enacted legislation may have the effect of reducing the Companys
future post-retirement medical costs by an amount that cannot be estimated
currently.

WarrantiesProducts sold are generally covered by a warranty for periods
ranging from one to ten years for most products, and for the lifetime of
certain bath and kitchen faucets. At the time of sale the Company accrues a
warranty reserve for estimated costs to provide equipment, parts or services to
satisfy warranty obligations. The Companys estimate of costs to service its
warranty obligations is based on historical experience and expectation of
future conditions. To the extent the Company experiences changes in warranty
claim activity or costs associated with servicing those claims, its warranty
accrual is adjusted accordingly. The Company also sells extended warranty
contracts for up to 10 years on some of its products. Revenues from the sales
of extended warranties are deferred and amortized on a straight-line basis over
the terms of the contracts or based upon historical experience. Costs to
satisfy obligations under extended warranty contracts are charged to cost of
sales as incurred. Warranty accrual estimates made in prior years can change
significantly, and sometimes unexpectedly, based upon the most current warranty
claims information available. Such changes in estimates decreased warranty
expense by a net $8 million in 2001, increased it by a net $6 million in 2002,
and increased it by $8 million in 2003. See Note 13 of Notes to Financial
Statements for a three-year summary of warranty costs.

GoodwillOn January 1, 2002 the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, analyzed
its goodwill for impairment, and will make similar evaluations on a periodic
basis in the future. During 2003 the Company performed the required annual
impairment tests of goodwill and indefinite-lived intangible assets and
determined that there was no impairment. In assessing the recoverability of
the Companys goodwill and other intangibles, the Company must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. If these estimates or their related assumptions
change the fair value of these assets in the future, the Company may be
required to record impairment charges for them.

Income taxesThe Company records a valuation allowance to reduce its
deferred tax assets to the amount that it believes is more likely than not to
be realized. While the Company has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, in the event the Company were to determine that it would
not be able to realize all or part of its net deferred tax assets in the

35



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future, an adjustment to decrease the net deferred tax assets would be charged
to income in the period such determination was made. Likewise, should the
Company determine that it would be able to realize its deferred tax assets in
the future in excess of its net recorded amount, an adjustment to increase the
net deferred tax assets would increase income in the period such determination
was made. Deferred tax assets have been reduced by a valuation allowance of
$100 million. A decrease in that valuation allowance of 10% would increase net
income by approximately $10 million. The Company also estimates its effective
income tax rate periodically, considering all known factors and the estimated
effects of future events or tax planning strategies that can cause that rate to
vary from the statutory rate. Estimating the outcome of future events is
inherently uncertain and final resolution of those events can cause the
effective rate to vary significantly. For example, in the fourth quarter of
2003, the Company resolved certain German tax audit issues and received
approval for claims on research and development tax credits in the U.S., which
were the principal factors that reduced the full year effective income tax rate
to 26.2% from 31%.

Commitments and ContingenciesThe Company is subject to proceedings,
lawsuits and other claims related to environmental, asbestos, labor, product
and other matters. The Company is required to assess the likelihood of any
adverse judgments or outcomes to these matters as well as potential ranges of
probable losses. A determination of the amount of liability to be recorded, if
any, for these contingencies is made after careful analysis of each individual
issue. The liability recorded may change in the future, possibly by significant
amounts, due to new developments in any of the matters.

Over the years, the Company has been named as a defendant in numerous
lawsuits alleging various asbestos-related personal injury claims arising
primarily from sales of low-risk-profile products, such as boilers and railroad
brake shoes. The Company believes it has ample insurance and has never had an
unfavorable court judgment. In these asbestos-related lawsuits, the Company is usually named as one of
a large group of defendants, often in excess of one hundred companies. Many of
these lawsuits involve multiple claimants, do not allege a connection between
any Company product and the claimed injury or disease, and/or do not contain
any allegations regarding the type of claimed injury or disease incurred. As a
result, numerous lawsuits have been placed and may remain on inactive or
deferred dockets, which some jurisdictions have established. Through December 31, 2003, there have been 139,733 claims filed against
the Company. At year-end 2003, there were 116,282 pending claims, compared
with 96,541 and 52,211 at the end of 2002 and 2001, respectively. Since
receipt of its first asbestos claim more than fifteen years ago through
December 31, 2003, the Company has resolved 23,451 claims, and $36 million in
settlement payments have been made, for an average payment per claim of $1,535.
These settlement payments have been paid or reimbursed or are expected to be
reimbursed by insurance. The Company has recorded an obligation of $69 million, which represents
the Companys estimated payments to claimants associated with the 116,282
pending asbestos claims. It also has recorded a related asset of $47 million,
which represents the probable recoveries from insurance companies for such
payments to claimants. The amount of the estimated obligations is based on the
claims resolved, the assessment of claims pending, the status of ongoing
litigation, defense and settlement strategies, and an assessment of other
entities responsibilities for the claims. The amount of the probable
recoveries is based on an analysis of insurance coverage, the insurers
financial strength and insurance payments made to date. Additional developments may occur that could affect the Companys estimate
of asbestos liabilities and recoveries, such as the nature of future claims,
the average payment to claimants and the amount of insurance recovery. No
liability has been recorded for unknown asbestos claims. However, the Company
has substantial insurance coverage for future claims. The Company believes that it is not reasonably possible
that a net loss material to the liquidity and financial condition of the
Company has been incurred.


36



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Cyclical and Seasonal Nature of Business

Approximately 60% of Air Conditioning Systems and Services and Bath and
Kitchen sales on a combined basis are to the replacement, remodeling and repair
markets that tend to be less cyclical than other markets. In 2003, about 6% of
the Companys sales were associated with new housing in the U.S. and about 13%
with new commercial construction in the U.S., both of which are cyclical. The
Companys geographic diversity mitigates the effects of fluctuations in
individual new construction markets. Vehicle Control Systems sales are
dependent to a large extent on production levels of medium-sized and heavy
trucks and buses, particularly in Europe and the U.S., which have been
cyclical.

Total Company sales and related segment income tend to be seasonally
higher in the second and third quarters of the year because, in the U.S. and
other Northern Hemisphere markets, summer is the peak season for sales of Air
Conditioning Systems and Services. In addition, a significant percentage of Air
Conditioning Systems and Services sales are related to U.S. residential and
commercial construction activity, which is generally higher in the second and
third quarters of the year.

Information Concerning Forward-Looking Statements

Certain of the statements contained in this report (other than the
historical financial data and other statements of historical fact), including,
without limitation, statements as to managements expectations and beliefs, are
forward-looking statements. Forward-looking statements are made based upon
managements good faith expectations and beliefs concerning future developments
and their potential effect upon the Company. There can be no assurance that
future developments will be in accordance with such expectations or that the
effect of future developments on the Company will be those anticipated by
management. Forward-looking statements can be identified by the use of words
such as believe, expect, plans, strategy, prospects, estimate,
project, anticipate, intends and other words of similar meaning in
connection with a discussion of future operating or financial performance.
This Report on Form 10-K includes important information as to risk factors in
the sections titled Legal Proceedings and Managements Discussion and
Analysis of Financial Condition and Results of Operations. Many important
factors could cause actual results to differ materially from managements
expectations, including:



| |  |  | the level of construction activity in the Companys Air
Conditioning Systems and Services and Bath and Kitchen markets
and the level of truck and bus production in the Companys
Vehicle Control Systems markets;                                                          
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the extent to which the Company will be able to realize the
estimated savings from Materials Management and Six Sigma
initiatives;                                                                                                                                            
|
| |  |  | Additional developments may occur
that could affect the Companys estimate of asbestos liabilities and recoveries, such as
the nature of future claims, the average payment to claimants, the
amount of insurance recovery or legislation affecting claims criteria or payout;
|
| |  |  | unpredictable difficulties or delays in the development of
new product technology;                                                                                                                                                                                            
|
| |  |  | changes in U.S. or international economic conditions, such
as inflation, interest rate fluctuations, foreign exchange rate
fluctuations or recessions in the Companys markets;                                                                                               
|
| |  |  | pricing changes to the Companys supplies or products or
those of its competitors, and other competitive pressures on
pricing and sales;                                                                                                                                      
|
| |  |  | increased difficulties in obtaining the supply of basic
materials such as steel, aluminum, copper, clays, electronics
and natural gas necessary to avoid disruptions of operations;                                                                                           
|
| |  |  | increased difficulties in obtaining a consistent supply of
those basic materials at pricing levels which will not have an
adverse effect on results of operations;                                                                                                            

37



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| |  |  | labor relations; integration of acquired businesses;                                                                                                                                                                  
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | difficulties in obtaining or retaining the management and
other human resource competencies that the Company needs to
achieve its business objectives;                                                                
|
| |  |  | the impact on the Company or a segment from the loss of a
significant customer or a few customers;                                                                                                                    
|
| |  |  | risks generally relating to the Companys international
operations, including governmental, regulatory or political
changes;                                                                                          
|
| |  |  | changes in environmental, health or other regulations that
may affect one or more of the Companys current products or
future products;                                                                               
|
| |  |  | assumptions made related to post-retirement benefits,
including rate of return on plan assets, the discount rate
applied to projected benefit obligations and the rate of
increase in the health care cost trend rate;
|
| |  |  | changes in laws or different interpretations of laws that
may affect the Companys expected effective tax rate for 2004;                                                                                              
|
| |  |  | transactions or other events affecting the need for, timing
and extent of the Companys capital expenditures.                                                                                                         

38



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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

The Company is exposed to fluctuations in the price of major raw material
commodities used in the manufacturing process, foreign currency fluctuations
and interest rate changes. From time to time the Company enters into hedge
agreements to reduce its risks related to commodity price, foreign currency and
interest rates. Such agreements hedge only specific transactions or
commitments. To minimize the risk of counter-party nonperformance, such
agreements are made only through major financial institutions with significant
experience in such financial instruments.

To minimize the risk of fluctuations in the market price of major raw
material commodities, such as copper and aluminum used in the manufacturing
process, the Company may enter commodity-forward contracts to effectively fix
the cost of the commodity. Maturity dates of the contracts are scheduled to
coincide with market purchases of the commodity. Cash proceeds or payments
between the Company and the counter-party at maturity of the contracts are
recognized as an adjustment to the cost of the commodity purchased, to the
extent the hedge is effective. Charges or credits resulting from ineffective
hedges are recognized in income immediately. The Company generally does not
enter commodity hedges extending beyond eighteen months. The notional value of
commodity-forward contracts outstanding as of December 31, 2003 and 2002, was
$57 million and $65 million, respectively. A 10% change in the price of
commodities hedged would change the fair value of the hedge contracts by
approximately $7 million as of December 31, 2003 and $6 million as of December
31, 2002.

The Company conducts significant non-U.S. operations through subsidiaries
in most of the major countries of western Europe, Canada, Brazil, Mexico,
Bulgaria, the Czech Republic, Poland, Central American countries, China,
Malaysia, the Philippines, Indonesia, South Korea, Thailand, Taiwan and Egypt.
In addition, the Company conducts business in some of these countries through
affiliated companies and partnerships in which the Company owns 50% or less of
the stock or partnership interest. Because the Company has manufacturing
operations in 28 countries, fluctuations in currency exchange rates may have a
significant impact on its financial statements. Such fluctuations have much
less effect on local operating results, however, because the Company to a
significant extent sells its products within the countries in which they are
manufactured. However, a significant and growing portion of the Companys
products are manufactured in lower-cost locations and sold in various
countries, resulting in increased exposure to foreign exchange effects. The
asset exposure of foreign operations to the effects of exchange volatility has
also been partly mitigated by the denomination in foreign currencies of a
portion of the Companys borrowings. The Company is also subject to political
risks in its foreign operations.

Since the Company sells certain finished products in currencies different
than the currency of the subsidiary that manufactured the products, the Company
is exposed to foreign currency risk on such transactions. The Company hedges
some of this risk by entering foreign-currency-forward contracts that
effectively fix the transaction cost. Cash settlement proceeds or payments upon
maturity of the contracts are included in the price of the transaction hedged,
to the extent the hedge is effective. Charges or credits resulting from
ineffective hedges are recognized in income immediately. The Company generally
does not enter currency hedges extending beyond one year. No foreign exchange
forward contracts were outstanding as of December 31, 2003 and the notional
value of outstanding contracts was $5 million as of December 31, 2002. A 10%
change in the exchange rate of the currencies hedged would have changed the
fair value of the contracts by approximately $1 million as of December 31,
2002. See Note 12 of Notes to Financial Statements for more information on
financial instruments.

To manage the balance between floating interest rate debt and fixed
interest rate debt, the Company has entered into interest rate swaps that
effectively convert fixed-rate debt to variable-rate debt. The maturity date
of these swap contracts coincides with the maturity date of the underlying
debt. Under these swaps, the Company pays a specified variable interest rate
and receives the fixed rate applicable to the underlying debt. The interest
rate swaps are designated as fair-value hedges of the underlying debt. The
fair value of the hedges is recorded in other long-term assets or liabilities
with a corresponding increase or decrease in the debt obligation. The change
in fair values of the hedge instrument and the debt are recorded as equal and
offsetting unrealized gains and losses. The existing fair value hedges are
100% effective and therefore there is no effect on current earnings from hedge
ineffectiveness.

39



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The notional value (the value of the underlying debt) of interest rate swaps
outstanding as of December 31, 2003, was $300 million. Including that $300
million, as of December 31, 2003, approximately $610 million of the Companys
$1.7 billion total debt bore interest at variable rates based upon the London
Interbank Offered Rate (LIBOR). A 10% change in swap rates would change the
fair value of the interest rate swaps by approximately $3 million as of
December 31, 2003.

To convert Pounds Sterling financing under the European receivables
securitization program to U.S. dollar equivalent financing, the Company enters
into currency-forward contracts that effectively fix the transaction costs in
U.S. dollars. These forward contracts are defined as speculative hedges and
accordingly, changes in the market value of the contracts are recorded in other
income/expense as incurred, with a corresponding increase or decrease in other
assets. The recorded gains or losses are essentially offset by gains or losses
on the Companys Sterling-denominated debt. Use of similar currency-forward
contracts on Euro financing of receivables was discontinued in the third
quarter of 2003.

The Company has commitments and performance guarantees, including energy
savings guarantees totaling $37 million as of December 31, 2003, extending from
2004 to 2021, under long-term service and maintenance contracts related to its
air conditioning equipment and system controls. Through 2003 the Company has
experienced no net losses under such arrangements and considers the probability
of losses to be unlikely.

40



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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Managements Report on Financial Statements

The accompanying consolidated balance sheet at December 31, 2003 and 2002,
and related consolidated statements of income, shareholders equity (deficit)
and cash flows for the years ended December 31, 2003, 2002 and 2001, have been
prepared in conformity with generally accepted accounting principles, and the
Company believes the statements set forth a fair presentation of financial
condition and results of operations. The Company believes that the accounting
systems and related controls which it maintains are sufficient to provide
reasonable assurance that the financial records are reliable for preparing
financial statements and maintaining accountability for assets. The concept of
reasonable assurance is based on the recognition that the cost of a system of
internal control must be related to the benefits derived and that the balancing
of those factors requires estimates and judgment. Reporting on the financial
affairs of the Company is the responsibility of its principal officers, subject
to audit by independent auditors who are engaged to express an opinion on the
Companys financial statements. The Board of Directors has an Audit Committee
of outside Directors which meets periodically with the Companys financial
officers, internal auditors and the independent auditors and monitors the
accounting affairs of the Company.

|                        |  |                           |  |                        
|----------------------- |  | ------------------------- |  | -----------------------
|-s- Frederic M. Poses   |  | -s- G. Peter D Aloia     |  | -s- Richard S. Paradise
|Frederic M. Poses       |  | G. Peter DAloia          |  | Richard S. Paradise    
|Chairman and            |  | Senior Vice President and |  | Vice President and     
|Chief Executive Officer |  | Chief Financial Officer   |  | Controller             

March 2, 2004

41



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Report of Independent Auditors

The Board of Directors and Shareholders of American Standard Companies Inc.

We have audited the accompanying consolidated balance sheet of American
Standard Companies Inc. as of December 31, 2003 and 2002, and the related
consolidated statements of income, shareholders equity (deficit), and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements 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 in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Standard Companies Inc. at December 31, 2003 and 2002, and the consolidated
results of its operations and its consolidated 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.

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

|                   |  |                      
|------------------ |  | ---------------------
|                   |  | -s- Ernst & Young LLP
|New York, New York |  |                      
|January 23, 2004   |  |                      

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CONSOLIDATED STATEMENT OF INCOME

AMERICAN STANDARD COMPANIES INC.

|                                         |                                     |      |                         |            |  |      |         |            |  |   |         |            | 
|---------------------------------------- | ----------------------------------- | ---- | ----------------------- | ---------- |  | ---- | ------- | ---------- |  | - | ------- | ---------- | 
|                                         |                                     |      | Year Ended December 31,
|                                         |                                     |      |                        
|(Dollars in millions, except share data) |                                     | 2003 |                         | 2002       |  | 2001
|                                         |                                     |      |                         |            |  |     
|Sales                                    |                                     | $    | 8,567.6                 |            |  | $    | 7,795.4 |            |  | $ | 7,465.3 |           
|                                         |                                     |      |                         |            |  |      |         |            |  |   |         |           
|Costs, expenses and other income:        |                                     |      |                         |            |  |      |         |            |  |   |         |           
|                                         | Cost of sales                       |      |                         | 6,527.8    |  |      |         | 5,912.9    |  |   |         | 5,617.5    | 
|                                         | Selling and administrative expenses |      |                         | 1,363.0    |  |      |         | 1,190.5    |  |   |         | 1,194.1    | 
|                                         | Other expense                       |      |                         | 10.6       |  |      |         | 6.8        |  |   |         | 8.7        | 
|                                         | Interest expense                    |      |                         | 117.0      |  |      |         | 129.0      |  |   |         | 168.7      | 
|                                         |                                     |      |                         |            |  |      |         |            |  |   |         |           
|                                         |                                     |      | 8,018.4                 |            |  |      | 7,239.2 |            |  |   | 6,989.0 |           
|                                         |                                     |      |                         |            |  |      |         |            |  |   |         |           
|Income before income taxes               |                                     |      | 549.2                   |            |  |      | 556.2   |            |  |   | 476.3   |           
|Income taxes                             |                                     |      | 144.0                   |            |  |      | 185.2   |            |  |   | 181.3   |           
|                                         |                                     |      |                         |            |  |      |         |            |  |   |         |           
|Net income applicable to common shares   |                                     | $    | 405.2                   |            |  | $    | 371.0   |            |  | $ | 295.0   |           
|                                         |                                     |      |                         |            |  |      |         |            |  |   |         |           
|Net income per common share:             |                                     |      |                         |            |  |      |         |            |  |   |         |           
|                                         | Basic                               |      | $                       | 5.60       |  |      | $       | 5.13       |  |   | $       | 4.13       | 
|                                         |                                     |      |                         |            |  |      |         |            |  |   |         |           
|                                         | Diluted                             |      | $                       | 5.50       |  |      | $       | 5.04       |  |   | $       | 4.04       | 
|                                         |                                     |      |                         |            |  |      |         |            |  |   |         |           
|Average outstanding common shares:       |                                     |      |                         |            |  |      |         |            |  |   |         |           
|                                         | Basic                               |      |                         | 72,269,886 |  |      |         | 72,349,975 |  |   |         | 71,453,219 | 
|                                         | Diluted                             |      |                         | 73,716,824 |  |      |         | 73,641,566 |  |   |         | 73,117,996 | 

See Notes to Financial Statements.

43



---



##### 






CONSOLIDATED BALANCE SHEET




AMERICAN STANDARD COMPANIES INC.

|                                                                                           |                                                                                                                              |                                                     |         |                         |         |   |         |        |         |  
|------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ------- | ----------------------- | ------- | - | ------- | ------ | ------- | -
|                                                                                           |                                                                                                                              |                                                     |         | Year Ended December 31,
|                                                                                           |                                                                                                                              |                                                     |         |                        
|(Dollars in millions, except share data)                                                   |                                                                                                                              | 2003                                                |         | 2002                   
|                                                                                           |                                                                                                                              |                                                     |         |                        
|ASSETS                                                                                     |                                                                                                                              |                                                     |         |                         |         |   |         |       
|Current assets:                                                                            |                                                                                                                              |                                                     |         |                         |         |   |         |       
|                                                                                           | Cash and cash equivalents                                                                                                    |                                                     | $       | 111.7                   |         |   | $       | 96.6   |        
|                                                                                           | Accounts receivable, less allowance for doubtful
accounts$45.3 in 2003; $38.1 in 2002                                       |                                                     |         | 1,022.8                 |         |   |         | 881.4  |        
|                                                                                           | Inventories                                                                                                                  |                                                     |         | 909.9                   |         |   |         | 770.7  |        
|                                                                                           | Future income tax benefits                                                                                                   |                                                     |         | 161.0                   |         |   |         | 48.7   |        
|                                                                                           | Other current assets                                                                                                         |                                                     |         | 285.3                   |         |   |         | 217.0  |        
|                                                                                           |                                                                                                                              |                                                     |         |                         |         |   |         |       
|                                                                                           |                                                                                                                              | Total current assets                                |         |                         | 2,490.7 |   |         |        | 2,014.4 |  
|Facilities, at cost, net of accumulated depreciation                                       |                                                                                                                              |                                                     | 1,515.4 |                         |         |   | 1,430.1 |       
|Goodwill, net of accumulated amortization$413.1 in 2003; $370.9 in 2002                   |                                                                                                                              |                                                     | 1,140.4 |                         |         |   | 1,012.8 |       
|Capitalized software costs, net of accumulated amortization$202.6 in 2003; $131.7 in 2002 |                                                                                                                              |                                                     | 239.3   |                         |         |   | 242.0   |       
|Debt issuance costs, net of accumulated amortization$22.4 in 2003; $17.4 in 2002          |                                                                                                                              |                                                     | 21.2    |                         |         |   | 26.5    |       
|Other assets                                                                               |                                                                                                                              |                                                     | 471.7   |                         |         |   | 418.0   |       
|                                                                                           |                                                                                                                              |                                                     |         |                         |         |   |         |       
|                                                                                           |                                                                                                                              | $                                                   | 5,878.7 |                         |         | $ | 5,143.8 |       
|                                                                                           |                                                                                                                              |                                                     |         |                         |         |   |         |       
|LIABILITIES AND SHAREHOLDERS EQUITY                                                       |                                                                                                                              |                                                     |         |                         |         |   |         |       
|Current liabilities:                                                                       |                                                                                                                              |                                                     |         |                         |         |   |         |       
|                                                                                           | Loans payable to banks                                                                                                       |                                                     | $       | 49.8                    |         |   | $       | 36.3   |        
|                                                                                           | Current maturities of long-term debt                                                                                         |                                                     |         | 2.5                     |         |   |         | 4.5    |        
|                                                                                           | Accounts payable                                                                                                             |                                                     |         | 684.3                   |         |   |         | 601.6  |        
|                                                                                           | Accrued payrolls                                                                                                             |                                                     |         | 294.3                   |         |   |         | 281.0  |        
|                                                                                           | Current portion of warranties                                                                                                |                                                     |         | 153.1                   |         |   |         | 118.0  |        
|                                                                                           | Taxes on income                                                                                                              |                                                     |         | 136.0                   |         |   |         | 98.9   |        
|                                                                                           | Other accrued liabilities                                                                                                    |                                                     |         | 713.5                   |         |   |         | 525.3  |        
|                                                                                           |                                                                                                                              |                                                     |         |                         |         |   |         |       
|                                                                                           |                                                                                                                              | Total current liabilities                           |         |                         | 2,033.5 |   |         |        | 1,665.6 |  
|Long-term debt                                                                             |                                                                                                                              |                                                     | 1,626.8 |                         |         |   | 1,918.4 |       
|Other long-term liabilities:                                                               |                                                                                                                              |                                                     |         |                         |         |   |         |       
|                                                                                           | Post-retirement benefits                                                                                                     |                                                     |         | 657.4                   |         |   |         | 623.3  |        
|                                                                                           | Warranties                                                                                                                   |                                                     |         | 202.9                   |         |   |         | 197.9  |        
|                                                                                           | Deferred tax liabilities                                                                                                     |                                                     |         | 218.5                   |         |   |         | 108.9  |        
|                                                                                           | Other                                                                                                                        |                                                     |         | 425.8                   |         |   |         | 399.9  |        
|                                                                                           |                                                                                                                              |                                                     |         |                         |         |   |         |       
|                                                                                           |                                                                                                                              | Total liabilities                                   |         |                         | 5,164.9 |   |         |        | 4,914.0 |  
|Commitments and contingencies                                                              |                                                                                                                              |                                                     |         |                         |         |   |         |       
|Shareholders equity:                                                                      |                                                                                                                              |                                                     |         |                         |         |   |         |       
|                                                                                           | Preferred stock, 2,000,000 shares authorized; none issued and outstanding                                                    |                                                     |         |                        |         |   |         |       |        
|                                                                                           | Common stock, $.01 par value, 200,000,000 shares authorized;
shares issued and outstanding: 200372,638,326; 200272,613,736 |                                                     |         | .7                      |         |   |         | .7     |        
|                                                                                           | Capital surplus                                                                                                              |                                                     |         | 755.5                   |         |   |         | 724.4  |        
|                                                                                           | Unearned compensation                                                                                                        |                                                     |         | (0.7                    | )       |   |         | (2.3   | )      
|                                                                                           | Treasury stock, at cost: 11,280,868 shares in 2003; 11,301,604 in 2002                                                       |                                                     |         | (584.3                  | )       |   |         | (534.6 | )      
|                                                                                           | Retained earnings                                                                                                            |                                                     |         | 833.2                   |         |   |         | 428.0  |        
|                                                                                           | Accumulated other comprehensive income:                                                                                      |                                                     |         |                         |         |   |         |        |        
|                                                                                           |                                                                                                                              | Foreign currency translation effects                |         |                         | (204.5  | ) |         |        | (309.2  | )
|                                                                                           |                                                                                                                              | Deferred gain (loss) on hedge contracts, net of tax |         |                         | 7.1     |   |         |        | (2.0    | )
|                                                                                           |                                                                                                                              | Minimum pension liability adjustment, net of tax    |         |                         | (93.2   | ) |         |        | (75.2   | )
|                                                                                           |                                                                                                                              |                                                     |         |                         |         |   |         |       
|                                                                                           |                                                                                                                              | Total shareholders equity                          |         |                         | 713.8   |   |         |        | 229.8   |  
|                                                                                           |                                                                                                                              |                                                     |         |                         |         |   |         |       
|                                                                                           |                                                                                                                              | $                                                   | 5,878.7 |                         |         | $ | 5,143.8 |       
|                                                                                           |                                                                                                                              |                                                     |         |                         |         |   |         |       

See Notes to Financial Statements.

44



---



##### 






CONSOLIDATED STATEMENT OF CASH FLOWS
AMERICAN STANDARD COMPANIES INC.

|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |        |       |  |       |  
|------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------ | ------------------------------------------------------------------------------ | ----- | ----------------------- | ------ | ------ | ----- | - | ------ | ------ | ----- |  | ----- | -
|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       | Year Ended December 31,
|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       |                        
|(Dollars in millions)                                                                       |                                                                  | 2003                                                                              |        | 2002                                                                           |       | 2001                   
|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       |                        
|Cash provided (used) by:                                                                    |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|                                                                                            | Operating activities:                                            |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |        |      
|                                                                                            |                                                                  | Net income                                                                        |        | $                                                                              | 405.2 |                         |        | $      | 371.0 |   |        | $      | 295.0 | 
|                                                                                            |                                                                  | Adjustments to reconcile net income to net cash
provided by operating activities: |        |                                                                                |       |                         |        |        |       |   |        |        |       | 
|                                                                                            |                                                                  |                                                                                   |        | Depreciation                                                                   |       |                         | 161.8  |        |       |   | 150.3  |        |       |  | 153.9 |  
|                                                                                            |                                                                  |                                                                                   |        | Amortization of goodwill                                                       |       |                         |       |        |       |   |       |        |       |  | 32.2  |  
|                                                                                            |                                                                  |                                                                                   |        | Amortization of capitalized software and other
intangibles                     |       |                         | 85.0   |        |       |   | 62.4   |        |       |  | 46.2  |  
|                                                                                            |                                                                  |                                                                                   |        | Equity in earnings of unconsolidated joint
ventures, net of dividends received |       |                         | (14.3  | )      |       |   | (13.5  | )      |       |  | (2.8  | )
|                                                                                            |                                                                  |                                                                                   |        | Non-cash stock compensation                                                    |       |                         | 60.4   |        |       |   | 55.4   |        |       |  | 60.1  |  
|                                                                                            |                                                                  |                                                                                   |        | Deferred income taxes                                                          |       |                         | 31.5   |        |       |   | 67.2   |        |       |  | 43.7  |  
|                                                                                            |                                                                  |                                                                                   |        | Gain on sale of property, plant and equipment                                  |       |                         | (7.9   | )      |       |   | (3.3   | )      |       |  | (6.2  | )
|                                                                                            |                                                                  |                                                                                   |        | Changes in assets and liabilities:                                             |       |                         |        |        |       |   |        |        |       |  |       |  
|                                                                                            |                                                                  |                                                                                   |        | Accounts receivable                                                            |       |                         | (86.3  | )      |       |   | (52.6  | )      |       |  | 7.3   |  
|                                                                                            |                                                                  |                                                                                   |        | Inventories                                                                    |       |                         | (76.5  | )      |       |   | (89.3  | )      |       |  | (57.9 | )
|                                                                                            |                                                                  |                                                                                   |        | Accounts payable                                                               |       |                         | 33.4   |        |       |   | (36.8  | )      |       |  | (49.1 | )
|                                                                                            |                                                                  |                                                                                   |        | Other accrued liabilities and taxes                                            |       |                         | 188.2  |        |       |   | (13.9  | )      |       |  | (7.6  | )
|                                                                                            |                                                                  |                                                                                   |        | Post-retirement benefits                                                       |       |                         | (9.4   | )      |       |   | (16.6  | )      |       |  | 8.9   |  
|                                                                                            |                                                                  |                                                                                   |        | Other current and long-term assets                                             |       |                         | (132.8 | )      |       |   | 52.4   |        |       |  | (34.6 | )
|                                                                                            |                                                                  |                                                                                   |        | Other long-term liabilities                                                    |       |                         | 12.9   |        |       |   | 9.5    |        |       |  | 6.7   |  
|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|Net cash provided by continuing operations before
proceeds from initial sale of receivables |                                                                  |                                                                                   | 651.2  |                                                                                |       |                         | 542.2  |        |       |   | 495.8  |       
|                                                                                            |                                                                  | Proceeds from initial sale of receivables, net                                    |        |                                                                                |      |                         |        |        | 81.4  |   |        |        |      | 
|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|Net cash provided by operating activities                                                   |                                                                  |                                                                                   | 651.2  |                                                                                |       |                         | 623.6  |        |       |   | 495.8  |       
|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|Investing activities:                                                                       |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|                                                                                            | Purchases of property, plant and equipment                       |                                                                                   |        | (170.7                                                                         | )     |                         |        | (165.1 | )     |   |        | (166.5 | )    
|                                                                                            | Investments in affiliated companies and other businesses         |                                                                                   |        | (25.0                                                                          | )     |                         |        | (23.6  | )     |   |        | (36.9  | )    
|                                                                                            | Investments in computer software                                 |                                                                                   |        | (44.9                                                                          | )     |                         |        | (46.9  | )     |   |        | (58.3  | )    
|                                                                                            | Proceeds from dissolution of receivables financing joint
venture |                                                                                   |        |                                                                               |       |                         |        | 25.8   |       |   |        |       |      
|                                                                                            | Proceeds from disposal of property, plant and equipment          |                                                                                   |        | 23.2                                                                           |       |                         |        | 21.4   |       |   |        | 11.4   |      
|                                                                                            | Proceeds from sale and leaseback transactions                    |                                                                                   |        |                                                                               |       |                         |        |       |       |   |        | 26.6   |      
|                                                                                            | Other                                                            |                                                                                   |        |                                                                               |       |                         |        | (1.1   | )     |   |        | 9.3    |      
|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|Net cash used by investing activities                                                       |                                                                  |                                                                                   | (217.4 | )                                                                              |       |                         | (189.5 | )      |       |   | (214.4 | )     
|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|Financing activities:                                                                       |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|                                                                                            | Proceeds from issuance of long-term debt                         |                                                                                   |        | 33.0                                                                           |       |                         |        |       |       |   |        |       |      
|                                                                                            | Repayments of long-term debt, including redemption premiums      |                                                                                   |        | (129.6                                                                         | )     |                         |        | (43.6  | )     |   |        | (27.7  | )    
|                                                                                            | Net change in revolving credit facilities                        |                                                                                   |        | (276.4                                                                         | )     |                         |        | (272.3 | )     |   |        | (179.0 | )    
|                                                                                            | Net change in other short-term debt                              |                                                                                   |        | 1.8                                                                            |       |                         |        | (24.5  | )     |   |        | (24.0  | )    
|                                                                                            | Purchases of treasury stock                                      |                                                                                   |        | (149.5                                                                         | )     |                         |        | (141.1 | )     |   |        | (116.5 | )    
|                                                                                            | Purchase of warrants                                             |                                                                                   |        |                                                                               |       |                         |        |       |       |   |        | (35.2  | )    
|                                                                                            | Proceeds from exercise of stock options                          |                                                                                   |        | 54.9                                                                           |       |                         |        | 56.1   |       |   |        | 96.9   |      
|                                                                                            | Proceeds from foreign exchange forward contracts                 |                                                                                   |        | 38.2                                                                           |       |                         |        |       |       |   |        |       |      
|                                                                                            | Other common stock issued or reacquired, net and other           |                                                                                   |        | 7.5                                                                            |       |                         |        | 5.4    |       |   |        | 2.7    |      
|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|Net cash used by financing activities                                                       |                                                                  |                                                                                   | (420.1 | )                                                                              |       |                         | (420.0 | )      |       |   | (282.8 | )     
|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|Effect of exchange rate changes on cash and cash equivalents                                |                                                                  |                                                                                   | 1.4    |                                                                                |       |                         | .4     |        |       |   | (1.9   | )     
|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|Net increase (decrease) in cash and cash equivalents                                        |                                                                  |                                                                                   | 15.1   |                                                                                |       |                         | 14.5   |        |       |   | (3.3   | )     
|Cash and cash equivalents at beginning of period                                            |                                                                  |                                                                                   | 96.6   |                                                                                |       |                         | 82.1   |        |       |   | 85.4   |       
|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|Cash and cash equivalents at end of period                                                  |                                                                  | $                                                                                 | 111.7  |                                                                                |       | $                       | 96.6   |        |       | $ | 82.1   |       
|                                                                                            |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|Cash paid during the year for:                                                              |                                                                  |                                                                                   |        |                                                                                |       |                         |        |        |       |   |        |       
|                                                                                            | Interest                                                         |                                                                                   | $      | 114.1                                                                          |       |                         | $      | 125.1  |       |   | $      | 169.0  |      
|                                                                                            | Taxes                                                            |                                                                                   | $      | 40.9                                                                           |       |                         | $      | 115.4  |       |   | $      | 105.0  |      

See Notes to Financial Statements.

45



---



##### 






CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (DEFICIT)

AMERICAN STANDARD COMPANIES INC.

|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   |       |       | 
|------------------------------------------------------- | -------------------------- | ----- | ------ | ------- | ------- | ------ | ------- | ----- | -------- | -------- | -------- | --------- | ----- | ------- | ----------- | ---- | -------- | ------ | -------------- | - | -------- | - | -------------------- | - | ------- | - | ------- | - | ------- | - | ----- | - |  | - | ----- | ----- | 
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   | Accumulated Other    |   |         |   |        
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   | Comprehensive Income |   |         |   |        
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |        
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        | Retained       |   |          |   |                      |   |         |   |         |   | Minimum |   |       |   | 
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        | Earnings       |   | Deferred |   | Foreign              |   | Pension |   | Compre-
|                                                        |                            |       |        |         |         |        |         |       |          |          | Unearned |           |       |         |             |      | (Accumu- |        | Gain (Loss) on |   | Currency |   | Liability            |   | hensive
|                                                        |                            |       | Common |         | Capital |        | Compen- |       | Treasury |          | lated    |           | Hedge |         | Translation |      | Adjust-  |        | Income        
|(Dollars in millions)                                   |                            | Stock |        | Surplus |         | sation |         | Stock |          | Deficit) |          | Contracts |       | Effects |             | ment |          | (Loss)
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |       
|Balance at December 31, 2000                            |                            | $     | .7     |         |         | $      | 617.8   |       |          | $        | (8.0     | )         |       | $       | (453.4      | )    |          | $      | (238.0         | ) |          | $ |                     |   |         | $ | (312.0  | ) |         | $ |      |   |  |   |       |      
|Net income                                              |                            |       |       |         |         |        |        |       |          |          |         |           |       |         |            |      |          |        | 295.0          |   |          |   |                     |   |         |   |        |   |         |   |      |   |  | $ | 295.0 |      
|Foreign currency translation                            |                            |       |       |         |         |        |        |       |          |          |         |           |       |         |            |      |          |        |               |   |          |   |                     |   |         |   | (19.8   | ) |         |   |      |   |  |   | (19.8 | )    
|Deferred loss on hedge contracts                        |                            |       |       |         |         |        |        |       |          |          |         |           |       |         |            |      |          |        |               |   |          |   | (1.0                 | ) |         |   |        |   |         |   |      |   |  |   | (1.0  | )    
|Minimum pension liability
adjustment, net of taxes      |                            |       |       |         |         |        |        |       |          |          |         |           |       |         |            |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   | (11.7 | ) |  |   | (11.7 | )    
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   |       |      
|                                                        | Total comprehensive income |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   | $     | 262.5 | 
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   |       |      
|Treasury stock purchased                                |                            |       |       |         |         |        |        |       |          |          |         |           |       |         | (116.5      | )    |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Warrants purchased                                      |                            |       |       |         |         |        | (35.2   | )     |          |          |         |           |       |         |            |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Stock options exercised
including tax benefit           |                            |       |       |         |         |        | 106.4   |       |          |          |         |           |       |         | 20.2        |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Common stock issued to
Employee Stock Ownership Plan    |                            |       |       |         |         |        | 14.3    |       |          |          |         |           |       |         | 41.1        |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Common stock issued to
Employee Stock Purchase Plan     |                            |       |       |         |         |        | .4      |       |          |          |         |           |       |         | 6.7         |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Amortization of unearned
compensationrestricted stock  |                            |       |       |         |         |        |        |       |          |          | 2.8      |           |       |         |            |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Compensation charge upon
acceleration of option vesting |                            |       |       |         |         |        | 1.1     |       |          |          |         |           |       |         |            |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Other common stock issued
or reacquired                 |                            |       |       |         |         |        | 2.4     |       |          |          |         |           |       |         | (3.4        | )    |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   |       |      
|Balance at December 31, 2001                            |                            |       | .7     |         |         |        | 707.2   |       |          |          | (5.2     | )         |       |         | (505.3      | )    |          |        | 57.0           |   |          |   | (1.0                 | ) |         |   | (331.8  | ) |         |   | (11.7 | ) |  |   |       |      
|Net income                                              |                            |       |       |         |         |        |        |       |          |          |         |           |       |         |            |      |          |        | 371.0          |   |          |   |                     |   |         |   |        |   |         |   |      |   |  | $ | 371.0 |      
|Foreign currency translation                            |                            |       |       |         |         |        |        |       |          |          |         |           |       |         |            |      |          |        |               |   |          |   |                     |   |         |   | 22.6    |   |         |   |      |   |  |   | 22.6  |      
|Deferred loss on hedge contracts                        |                            |       |       |         |         |        |        |       |          |          |         |           |       |         |            |      |          |        |               |   |          |   | (1.0                 | ) |         |   |        |   |         |   |      |   |  |   | (1.0  | )    
|Minimum pension liability
adjustment, net of taxes      |                            |       |       |         |         |        |        |       |          |          |         |           |       |         |            |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   | (63.5 | ) |  |   | (63.5 | )    
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   |       |      
|                                                        | Total comprehensive income |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   | $     | 329.1 | 
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   |       |      
|Treasury stock purchased                                |                            |       |       |         |         |        |        |       |          |          |         |           |       |         | (141.1      | )    |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Stock options exercised
including tax benefit           |                            |       |       |         |         |        | (3.6    | )     |          |          |         |           |       |         | 72.8        |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Common stock issued to
Employee Stock Ownership Plan    |                            |       |       |         |         |        | 17.9    |       |          |          |         |           |       |         | 34.7        |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Common stock issued to
Employee Stock Purchase Plan     |                            |       |       |         |         |        | 1.7     |       |          |          |         |           |       |         | 5.6         |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Amortization of unearned
compensationrestricted stock  |                            |       |       |         |         |        |        |       |          |          | 2.9      |           |       |         |            |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Other common stock issued
or reacquired                 |                            |       |       |         |         |        | 1.2     |       |          |          |         |           |       |         | (1.3        | )    |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   |       |      
|Balance at December 31, 2002                            |                            |       | .7     |         |         |        | 724.4   |       |          |          | (2.3     | )         |       |         | (534.6      | )    |          |        | 428.0          |   |          |   | (2.0                 | ) |         |   | (309.2  | ) |         |   | (75.2 | ) |  |   |       |      
|Net income                                              |                            |       |       |         |         |        |        |       |          |          |         |           |       |         |            |      |          |        | 405.2          |   |          |   |                     |   |         |   |        |   |         |   |      |   |  | $ | 405.2 |      
|Foreign currency translation                            |                            |       |       |         |         |        |        |       |          |          |         |           |       |         |            |      |          |        |               |   |          |   |                     |   |         |   | 104.7   |   |         |   | (2.3  | ) |  |   | 102.4 |      
|Deferred gain on hedge contracts                        |                            |       |       |         |         |        |        |       |          |          |         |           |       |         |            |      |          |        |               |   |          |   | 9.1                  |   |         |   |        |   |         |   |      |   |  |   | 9.1   |      
|Minimum pension liability
adjustment, net of taxes      |                            |       |       |         |         |        |        |       |          |          |         |           |       |         |            |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   | (15.7 | ) |  |   | (15.7 | )    
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   |       |      
|                                                        | Total comprehensive income |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   | $     | 501.0 | 
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   |       |      
|Treasury stock purchased                                |                            |       |       |         |         |        |        |       |          |          |         |           |       |         | (151.9      | )    |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Stock options exercised
including tax benefit           |                            |       |       |         |         |        | 7.1     |       |          |          |         |           |       |         | 61.9        |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Common stock issued to
Employee Stock Ownership Plan    |                            |       |       |         |         |        | 21.1    |       |          |          |         |           |       |         | 37.7        |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Common stock issued to
Employee Stock Purchase Plan     |                            |       |       |         |         |        | 1.6     |       |          |          |         |           |       |         | 5.6         |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Amortization of unearned
compensationrestricted stock  |                            |       |       |         |         |        |        |       |          |          | 1.6      |           |       |         |            |      |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|Other common stock issued
or reacquired                 |                            |       |       |         |         |        | 1.3     |       |          |          |         |           |       |         | (3.0        | )    |          |        |               |   |          |   |                     |   |         |   |        |   |         |   |      |   |  |   |       |      
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   |       |      
|Balance at December 31, 2003                            |                            | $     | .7     |         |         | $      | 755.5   |       |          | $        | (.7      | )         |       | $       | (584.3      | )    |          | $      | 833.2          |   |          | $ | 7.1                  |   |         | $ | (204.5  | ) |         | $ | (93.2 | ) |  |   |       |      
|                                                        |                            |       |        |         |         |        |         |       |          |          |          |           |       |         |             |      |          |        |                |   |          |   |                      |   |         |   |         |   |         |   |       |   |  |   |       |      

See Notes to Financial Statements.

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NOTES TO FINANCIAL STATEMENTS

AMERICAN STANDARD COMPANIES INC.

NOTE 1. Description of Company

American Standard Companies Inc. (the Company) is a Delaware corporation
and owns all the outstanding common stock of American Standard Inc. and
American Standard International Inc. (ASII), both Delaware corporations. In
these notes, American Standard or the Company will refer to the Company, or
to the Company and American Standard Inc. and ASII, including their
subsidiaries, as the context requires.

American Standard is a global diversified manufacturer of high quality,
brand-name products in three major business groups: air conditioning systems
and services for commercial, institutional and residential buildings; fixtures
and fittings for bathrooms and kitchens; and vehicle control systems for
medium-sized and heavy trucks, buses, trailers, sport utility vehicles and
luxury cars.

NOTE 2. Accounting Policies

Financial Statement PresentationThe consolidated financial statements
include the accounts of majority-owned subsidiaries; intercompany transactions
are eliminated. Investments in unconsolidated joint ventures are included at
cost plus the Companys equity in undistributed earnings. Certain
reclassifications of amounts reported in prior years have been made to conform
to the 2003 classifications.

Use of EstimatesThe preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. Some of the most significant estimates
included in the preparation of the financial statements are related to
post-retirement benefits, warranties, goodwill, income taxes and commitments
and contingencies.

Foreign Currency TranslationAdjustments resulting from translating
foreign functional currency assets and liabilities into U.S. dollars are
recorded in a separate component of shareholders equity. Gains or losses
resulting from transactions in other than the functional currency are reflected
in the Consolidated Statement of Income, except for transactions which hedge
net investments in a foreign entity and intercompany transactions of a
long-term investment nature. For operations in countries that have
hyper-inflationary economies, net income includes gains and losses from
translating assets and liabilities at year-end rates of exchange, except for
inventories and facilities, which are translated at historical rates.

The losses from foreign currency transactions and translation losses in
countries with hyper-inflationary economies reflected in expense were
negligible in 2003, $.3 million in 2002 and $2.6 million in 2001.

Revenue RecognitionSales of manufactured products are principally
recorded when shipment occurs and title passes to a customer. Revenues from
air conditioning equipment and the related installation sold under long-term
contracts are recorded on the percentage-of-completion method, and amounted to
approximately 5% of total company sales. Revenue under long-term service
contracts for the maintenance of air conditioning equipment is recorded over
the term of the contract. Other service revenues are recorded as the service is
performed. Shipping and handling costs are generally billed to customers and
are included in sales.

Cash EquivalentsCash equivalents include all highly liquid investments
with a maturity of three months or less when purchased.

InventoriesInventory costs are determined principally by the use of the
last-in, first-out (LIFO) method, and are stated at the lower of such cost or
realizable value.

FacilitiesThe Company capitalizes costs, including interest during
construction, of fixed asset additions, improvements, and betterments that add
to productive capacity or extend the asset life. Maintenance and repair
expenditures are expensed as incurred.

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DepreciationDepreciation and amortization are computed on the
straight-line method based on the estimated useful life of the asset or asset
group, which is 40 years for buildings and 5 to 10 years for machinery and
equipment.

Computer SoftwareThe Company capitalizes the costs of obtaining or
developing internal-use computer software, including directly related payroll
costs. The Company amortizes those costs over periods up to seven years,
beginning when the software is ready for its intended use.

GoodwillIn 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized but are subject to annual impairment
tests. Other intangible assets continue to be amortized over their useful
lives. The Company applied the new rules at the beginning of 2002. Application
of the non-amortization provisions of FAS 142 resulted in an increase in net
income of approximately $30 million, or $.40 per diluted share in 2002 and
2003, and will result in a similar effect in subsequent years. During 2002 and
2003, the Company performed the required impairment tests of goodwill and
indefinite-lived intangible assets and determined that there was no impairment.

Following is a summary of net income for the years ended December 31,
2003, 2002 and 2001 as reported and as adjusted to exclude goodwill
amortization (dollars in millions):

|                                                   |                       |   |                         |      |      |   |       |      |  |   |       |      | 
|-------------------------------------------------- | --------------------- | - | ----------------------- | ---- | ---- | - | ----- | ---- |  | - | ----- | ---- | 
|                                                   |                       |   | Year Ended December 31,
|                                                   |                       |   |                        
|                                                   |                       |   | 2003                    |      | 2002 |   | 2001 
|                                                   |                       |   |                         |      |      |   |      
|Reported net income                                |                       | $ | 405.2                   |      |      | $ | 371.0 |      |  | $ | 295.0 |     
|Add goodwill amortization, net of
income taxes (a) |                       |   |                        |      |      |   |      |      |  |   | 29.7  |     
|                                                   |                       |   |                         |      |      |   |       |      |  |   |       |     
|Adjusted net income                                |                       | $ | 405.2                   |      |      | $ | 371.0 |      |  | $ | 324.7 |     
|                                                   |                       |   |                         |      |      |   |       |      |  |   |       |     
|Basic net income per share:                        |                       |   |                         |      |      |   |       |      |  |   |       |     
|                                                   | Reported net income   |   | $                       | 5.60 |      |   | $     | 5.13 |  |   | $     | 4.13 | 
|                                                   | Goodwill amortization |   |                         |     |      |   |       |     |  |   |       | .41  | 
|                                                   |                       |   |                         |      |      |   |       |      |  |   |       |     
|                                                   | Adjusted net income   |   | $                       | 5.60 |      |   | $     | 5.13 |  |   | $     | 4.54 | 
|                                                   |                       |   |                         |      |      |   |       |      |  |   |       |     
|Diluted net income per share:                      |                       |   |                         |      |      |   |       |      |  |   |       |     
|                                                   | Reported net income   |   | $                       | 5.50 |      |   | $     | 5.04 |  |   | $     | 4.04 | 
|                                                   | Goodwill amortization |   |                         |     |      |   |       |     |  |   |       | .40  | 
|                                                   |                       |   |                         |      |      |   |       |      |  |   |       |     
|                                                   | Adjusted net income   |   | $                       | 5.50 |      |   | $     | 5.04 |  |   | $     | 4.44 | 
|                                                   |                       |   |                         |      |      |   |       |      |  |   |       |     

(a)  In certain foreign countries goodwill amortization is deductible for
tax purposes.

In addition, the Company assesses long-lived assets for impairment
periodically, including goodwill associated with assets acquired in a purchase
business combination or when events or circumstances indicate that the carrying
amount of those assets may not be recoverable.

Debt Issuance CostsThe costs related to the issuance of debt are
capitalized and amortized to interest expense using the effective interest
method over the life of the related debt.

WarrantiesThe Company provides for estimated warranty costs at the time
of sale of products sold with a limited warranty. The Company also sells
extended warranty contracts on certain products, and the revenues therefrom are
deferred and amortized on a straight-line basis over the terms of the contracts
or based upon historical experience. Costs to satisfy extended warranty
obligations are charged to cost of sales as incurred. See Note 13 for a
summary of warranties.

Post-retirement BenefitsPost-retirement benefits are provided for
substantially all employees of the Company, both in the U.S. and abroad. In the
U.S. the Company also provides various post-retirement health care and life
insurance benefits for certain of its employees. Such benefits are accounted
for on an accrual basis using actuarial assumptions.

Research and Development ExpensesResearch and development costs are
expensed as incurred. The

48



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Company expended approximately $192 million in 2003, $185 million in 2002 and
$184 million in 2001 for research activities and product development and for
product engineering. Expenditures for research and product development only
were $128 million, $129 million and $133 million in the respective years.

Income TaxesDeferred income taxes are determined on the liability method,
and are recognized for all temporary differences between the tax bases of
assets and liabilities and their reported amounts in the consolidated financial
statements. No provision is made for U.S. income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely
reinvested.

Advertising ExpenseThe cost of advertising is expensed as incurred. The
Company incurred $128 million, $122 million and $127 million of advertising
costs in 2003, 2002 and 2001, respectively.

Earnings per ShareBasic earnings per share have been computed using the
weighted-average number of common shares outstanding. The average number of
outstanding common shares used in computing diluted earnings per share included
average incremental shares of 1,446,938 in 2003, 1,291,591 in 2002 and
1,664,777 in 2001, primarily from the assumed exercise of stock options issued
under the Companys stock option plans (see Note 11).

Comprehensive IncomeComprehensive income consists of net income, deferred
gains or losses on hedge contracts, foreign currency translation adjustments
and minimum pension liability adjustments, and is presented in the Consolidated
Statement of Shareholders Equity (Deficit). The Companys investments in its
foreign subsidiaries are considered to be permanently invested and no provision
for income taxes on the related foreign exchange translation adjustments of
those subsidiaries has been recorded.

Financial Instruments with Off-Balance-Sheet RiskThe Company from time to
time enters into agreements to reduce its risk related to foreign currency,
commodity prices and interest rates. Gains and losses from underlying rate or
price changes are included in income unless the contract hedges a net
investment in a foreign entity, a firm commitment, or related debt instrument,
in which case gains and losses are included as a component of foreign currency
translation effects in shareholders equity or included as a component of the
transaction. Gains or losses from ineffective hedges are included in income
(see Note 12).

Stock-Based CompensationThe Company has three stock-based compensation
plansthe 2002 Omnibus Incentive Plan, the Stock Incentive Plan and the
Employee Stock Purchase Plan (ESPP)which are described in Note 11. Under the
first two plans, the Company has granted options to employees and directors to
acquire a fixed number of shares of the Companys common stock at a specified
price, and also has made grants of restricted shares. The 2002 Omnibus
Incentive Plan was approved by shareholders on May 2, 2002. Under the ESPP,
employees are entitled to purchase shares of the Companys common stock at a
discount of 15% from the market price on the date of purchase. The Company
accounts for those plans under the recognition and measurement principles of
APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25),and
related Interpretations. Compensation cost is not recorded for substantially
all options granted because the option exercise price was equal to the market
value of the underlying common stock on the date of grant. Nor is compensation
cost recorded for the 15% discount on shares purchased under the ESPP, which is
not considered compensation under APB 25. Compensation cost is recorded for
the value of restricted share awards, amortized over the vesting period of the
award.

49



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The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation,to stock-based
employee compensation.

|                                                                                                                                                              |                     |      |                         |      |  |      |       |      |  |   |       |      | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ---- | ----------------------- | ---- |  | ---- | ----- | ---- |  | - | ----- | ---- | 
|                                                                                                                                                              |                     |      | Year Ended December 31,
|                                                                                                                                                              |                     |      |                        
|(Dollars in millions)                                                                                                                                         |                     | 2003 |                         | 2002 |  | 2001
|                                                                                                                                                              |                     |      |                         |      |  |     
|Net income, as reported                                                                                                                                       |                     | $    | 405.2                   |      |  | $    | 371.0 |      |  | $ | 295.0 |     
|Deduct: Total stock-based compensation expense
determined under fair value based method for all
stock option awards, net of tax, and discounts
under the ESPP |                     |      | (19.9                   | )    |  |      | (22.4 | )    |  |   | (17.9 | )   
|                                                                                                                                                              |                     |      |                         |      |  |      |       |      |  |   |       |     
|Pro forma net income                                                                                                                                          |                     | $    | 385.3                   |      |  | $    | 348.6 |      |  | $ | 277.1 |     
|                                                                                                                                                              |                     |      |                         |      |  |      |       |      |  |   |       |     
|Earnings per share:                                                                                                                                           |                     |      |                         |      |  |      |       |      |  |   |       |     
|                                                                                                                                                              | Basicas reported   |      | $                       | 5.60 |  |      | $     | 5.13 |  |   | $     | 4.13 | 
|                                                                                                                                                              |                     |      |                         |      |  |      |       |      |  |   |       |     
|                                                                                                                                                              | Basicpro forma     |      | $                       | 5.33 |  |      | $     | 4.82 |  |   | $     | 3.88 | 
|                                                                                                                                                              |                     |      |                         |      |  |      |       |      |  |   |       |     
|                                                                                                                                                              | Dilutedas reported |      | $                       | 5.50 |  |      | $     | 5.04 |  |   | $     | 4.04 | 
|                                                                                                                                                              |                     |      |                         |      |  |      |       |      |  |   |       |     
|                                                                                                                                                              | Dilutedpro forma   |      | $                       | 5.23 |  |      | $     | 4.74 |  |   | $     | 3.79 | 
|                                                                                                                                                              |                     |      |                         |      |  |      |       |      |  |   |       |     

The fair value of the stock options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
risk-free interest rate of 3.08% in 2003, 2.49% in 2002 and 4.4% in 2001;
volatility of 28% in 2003, 29% in 2002 and 30% in 2001; an expected average
life of 5 years in 2003, 2002 and 2001; and a dividend yield of zero.

NOTE 3. Effect of Recently Issued Accounting Standards

The Financial Accounting Standards Board (FASB) has recently issued
several new Statements and Interpretations. For the disclosures required by
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure, see Note 2 of Notes to Financial
Statements-Accounting Policies-Stock-Based compensation. For the disclosures
required by Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others,see Note 13 of Notes to Financial Statements. For the disclosures
required by Statement No. 132 (revised 2003) Employers Disclosures about
Pensions and Other Postretirement Benefits,see Note 5 of Notes to Financial
Statements. Some of the disclosure requirements of the revised Statement No.
132 related to foreign plans, interim periods and certain other matters are not
effective until mid-2004. The Company has adopted the provisions of Statement
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.For
a discussion of the impact of FASB Staff Position No. SFAS 106-1, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 which addresses the accounting and
disclosure implications that are expected to arise as a result of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act)
enacted on December 8, 2003, see Note 5 of Notes to Financial Statements. Other
Statements and Interpretations recently issued by the FASB that are applicable
to the Company have had little or no immediate effect on the Company. Those
statements included No. 143, Accounting for Asset Retirement Obligations;No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets;No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13 (leases), and Technical Corrections; No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities;and No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity.Interpretation No. 46, Consolidation of Variable Interest Entities,
parts of which will become effective for the Company in the first quarter of
2004, is being evaluated by the Company and is expected to have little impact.

50



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NOTE 4. Other Expense

Other expense (income) was as follows:

|                                                      |  |                         |       |      |  |      |       |   |  |   |       |  
|----------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                      |  | Year Ended December 31,
|                                                      |  |                        
|(Dollars in millions)                                 |  | 2003                    |       | 2002 |  | 2001
|                                                      |  |                         |       |      |  |     
|Equity in net income of unconsolidated
joint ventures |  | $                       | (25.9 | )    |  | $    | (26.6 | ) |  | $ | (18.5 | )
|Minority interest elimination                         |  |                         | 15.6  |      |  |      | 10.7  |   |  |   | 7.6   |  
|Accretion expense on retirement plans                 |  |                         | 34.4  |      |  |      | 30.3  |   |  |   | 16.1  |  
|Foreign exchange (gain) loss                          |  |                         | (9.6  | )    |  |      | (6.8  | ) |  |   | 11.5  |  
|Interest income                                       |  |                         | (1.6  | )    |  |      | (1.4  | ) |  |   | (2.2  | )
|Other, net                                            |  |                         | (2.3  | )    |  |      | 0.6   |   |  |   | (5.8  | )
|                                                      |  |                         |       |      |  |      |       |   |  |   |       |  
|                                                      |  | $                       | 10.6  |      |  | $    | 6.8   |   |  | $ | 8.7   |  
|                                                      |  |                         |       |      |  |      |       |   |  |   |       |  

The Company has investments in affiliates that are accounted for on the
equity method. The most significant of these investments is in Meritor WABCO
Vehicle Control Systems (Meritor/WABCO). Meritor/WABCO, in which the Company
has a 50% equity ownership, is a U.S. sales and marketing organization serving
truck, trailer, bus and sport utility vehicle manufacturers and providing
aftermarket distribution for Vehicle Control Systems. The small decrease in
equity in net income of unconsolidated joint ventures for 2003 compared with
2002 primarily reflects our decision to terminate our receivables discounting
joint venture with TransAmerica in the third quarter of 2002; a decision which
has resulted in lower interest costs. That decrease was partly offset by
higher net income for both our Vehicle Control Systems joint venture in India
(Sundaram Clayton Ltd.) from higher volume and our Air Conditioning compressor
joint venture in the U.S. from higher volume and improved productivity. The
increase in equity in net income of unconsolidated joint ventures in 2002 from
2001 was primarily attributable to an increase in the net income of the joint
venture in India as a result of strong sales in local markets, and an increase
in net income in its Alliance Compressor joint venture in the U.S. from
improved productivity. The minority interest elimination increase in 2003 and
2002 reflects higher net income earned by our majority-owned joint ventures.
The increase in accretion expense on retirement plans in the last two years is
attributable primarily to a lower return on assets and a lower assumed discount
rate in those plans and increases in future medical costs. The Company
realized a net gain on foreign exchange transactions in 2003 and 2002 as
opposed to a loss in 2001, primarily as a result of an increase in the value of
the Euro. See Managements Discussion and Analysis of Financial Condition and
Results of OperationsOther Income Statement Data, for additional information
on year-over-year changes in items of other income and expense.

NOTE 5. Post-retirement Benefits

The Company sponsors post-retirement benefit plans covering substantially
all employees, including an Employee Stock Ownership Plan (the ESOP) and a
401(k) savings plan (the Savings Plan) for the Companys U.S. salaried
employees and certain U.S. hourly employees. The ESOP and Savings Plan are
individual-account defined contribution plans. Shares of the Companys common
stock held by the ESOP and Savings Plan are allocated to the accounts of
eligible employees (primarily through basic allocations of 3% of covered
compensation in the ESOP, and a matching Company contribution to the Savings
Plan of up to 6% of covered compensation). Prior to December 31, 2002, the 3%
basic allocation and the matching contribution were made to the ESOP. On
December 31, 2002, the balances of prior matching contributions were
transferred into the Savings Plan. Since 2000, the Company has funded basic
and matching allocations through weekly contributions of shares of the
Companys common stock based upon the closing price each Friday for those
shares quoted on the New York Stock Exchange. The Company will fund the ESOP
and Savings Plan in future years through contributions of either cash or shares
of the Companys common stock. Effective September 1, 2003 the Company
established a pension plan for salaried and non-union U.S. employees. Eligible
employees may participate in the pension plan and receive a credit equal to 3%
of eligible pay. For these employees the Company match in the Savings Plan is
50% of the employee contribution (up to a Company match of 3%). For employees
who do not participate in the pension plan, the Company match in the Savings
Plan is 100% of the employee contribution (up to a Company match of 6%).

Benefits under defined benefit pension plans on a worldwide basis are
generally based on years of service and employees compensation during the last
years of employment. In the U.S. the Company also provides various
post-retirement health and life insurance benefits for certain of its
employees. Funding decisions are based upon the tax and statutory
considerations in each country. At December 31, 2003, funded plan assets
related to pensions were held primarily in equity and fixed income funds.
Post-retirement health and life insurance benefits are funded as incurred.

51



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In January 2004, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position (FSP) No. SFAS 106-1, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 which addresses the accounting and disclosure
implications that are expected to arise as a result of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act)
enacted on December 8, 2003. The Act introduces a prescription drug benefit
under Medicare as well as a federal subsidy to sponsors of retiree health care
benefit plans that provide a benefit that is at least equivalent to Medicare.
The benefit obligation and net post-retirement benefit cost of an employer that
provides post-retirement prescription drug coverage will be decreased by
provisions of the Act, but the accounting for those effects is uncertain.
Under the FSP, companies have a one-time election to defer the effects of the
new legislation in financial statements for years ending after December 7,
2003. Companies that elect to defer the effects of the Act must defer
recognition of the effects until the FASB issues clarifying guidance on how the
legislation should be interpreted. The Company has elected to defer the
effects of the Act. All measures of the benefit obligation and net
post-retirement benefit costs included in the financial statements do not
reflect the effects of the Act. The Company is reviewing the provisions of the
Act in conjunction with the Companys post-retirement benefit plan.

The following table provides a reconciliation of the changes in pension
and post-retirement health and life insurance benefit obligations and fair
value of assets for the years ending December 31, 2003 and 2002, and a
statement of the funded status as of December 31, 2003 and 2002:

|                                             |                                                |          |          |          |           |          |          |          |          |          |           |          |         |   |       |        |          |   |        |        |   |   |        |        |  
|-------------------------------------------- | ---------------------------------------------- | -------- | -------- | -------- | --------- | -------- | -------- | -------- | -------- | -------- | --------- | -------- | ------- | - | ----- | ------ | -------- | - | ------ | ------ | - | - | ------ | ------ | -
|                                             |                                                |          | 2003     |          | 2003      |          | 2003     |          | 2002     |          | 2002      |          | 2002   
|                                             |                                                |          |          |          |           |          |          |          |          |          |           |          |        
|                                             |                                                |          |          |          |           |          | Domestic |          |          |          |           |          |         |   |       |        | Domestic |   |        |        |  
|                                             |                                                |          | Domestic |          | Health &  |          | Foreign  |          | Domestic |          | Health &  |          | Foreign
|                                             |                                                |          | Pension  |          | Life Ins. |          | Pension  |          | Pension  |          | Life Ins. |          | Pension
|(Dollars in millions)                        |                                                | Benefits |          | Benefits |           | Benefits |          | Benefits |          | Benefits |           | Benefits
|                                             |                                                |          |          |          |           |          |          |          |          |          |           |         
|Reconciliation of benefit obligation:        |                                                |          |          |          |           |          |          |          |          |          |           |          |         |   |       |        |          |   |        |        |   |   |        |       
|                                             | Obligation at beginning of year                |          | $        | 549.0    |           |          | $        | 275.7    |          |          | $         | 649.6    |         |   | $     | 510.6  |          |   | $      | 280.5  |   |   | $      | 557.3  |  
|                                             | Service cost                                   |          |          | 15.9     |           |          |          | 7.9      |          |          |           | 25.6     |         |   |       | 13.3   |          |   |        | 7.6    |   |   |        | 23.2   |  
|                                             | Interest cost                                  |          |          | 37.1     |           |          |          | 17.4     |          |          |           | 34.5     |         |   |       | 35.4   |          |   |        | 18.5   |   |   |        | 31.9   |  
|                                             | Participant contributions                      |          |          |         |           |          |          | 2.6      |          |          |           | 3.5      |         |   |       |       |          |   |        | 3.2    |   |   |        | 3.4    |  
|                                             | Plan amendments                                |          |          | 9.4      |           |          |          | 1.2      |          |          |           | 0.2      |         |   |       | 14.3   |          |   |        | (19.0  | ) |   |        |       |  
|                                             | Actuarial loss (gain)                          |          |          | 60.2     |           |          |          | 24.4     |          |          |           | 45.1     |         |   |       | 7.6    |          |   |        | 4.0    |   |   |        | (6.5   | )
|                                             | Curtailment                                    |          |          | (1.1     | )         |          |          | (0.5     | )        |          |           |         |         |   |       |       |          |   |        |       |   |   |        |       |  
|                                             | Special termination benefits                   |          |          | 2.2      |           |          |          |         |          |          |           |         |         |   |       |       |          |   |        |       |   |   |        |       |  
|                                             | Benefit payments                               |          |          | (32.5    | )         |          |          | (21.1    | )        |          |           | (43.2    | )       |   |       | (32.2  | )        |   |        | (19.1  | ) |   |        | (34.6  | )
|                                             | Effect of settlement                           |          |          |         |           |          |          |         |          |          |           |         |         |   |       |       |          |   |        |       |   |   |        | 0.7    |  
|                                             | Foreign exchange effects                       |          |          |         |           |          |          |         |          |          |           | 112.5    |         |   |       |       |          |   |        |       |   |   |        | 74.2   |  
|                                             |                                                |          |          |          |           |          |          |          |          |          |           |          |         |   |       |        |          |   |        |        |   |   |        |       
|                                             | Obligation at end of year                      |          | $        | 640.2    |           |          | $        | 307.6    |          |          | $         | 827.8    |         |   | $     | 549.0  |          |   | $      | 275.7  |   |   | $      | 649.6  |  
|                                             |                                                |          |          |          |           |          |          |          |          |          |           |          |         |   |       |        |          |   |        |        |   |   |        |       
|Reconciliation of fair value of plan assets: |                                                |          |          |          |           |          |          |          |          |          |           |          |         |   |       |        |          |   |        |        |   |   |        |       
|                                             | Fair value of plan assets at beginning of year |          |          | 378.0    |           |          |          |         |          |          |           | 310.6    |         |   |       | 385.4  |          |   |        |       |   |   |        | 326.9  |  
|                                             | Actual return (loss) on assets                 |          |          | 76.6     |           |          |          |         |          |          |           | 47.8     |         |   |       | (26.2  | )        |   |        |       |   |   |        | (41.3  | )
|                                             | Divestitures                                   |          |          |         |           |          |          |         |          |          |           | 0.6      |         |   |       |       |          |   |        |       |   |   |        | (1.3   | )
|                                             | Employer contributions                         |          |          | 50.0     |           |          |          | 18.5     |          |          |           | 41.6     |         |   |       | 51.0   |          |   |        | 15.9   |   |   |        | 31.6   |  
|                                             | Participant contributions                      |          |          |         |           |          |          | 2.6      |          |          |           | 3.5      |         |   |       |       |          |   |        | 3.2    |   |   |        | 3.4    |  
|                                             | Benefit payments                               |          |          | (32.5    | )         |          |          | (21.1    | )        |          |           | (43.2    | )       |   |       | (32.2  | )        |   |        | (19.1  | ) |   |        | (34.6  | )
|                                             | Other expenses                                 |          |          |         |           |          |          |         |          |          |           | (3.2     | )       |   |       |       |          |   |        |       |   |   |        | (2.1   | )
|                                             | Foreign exchange effects                       |          |          |         |           |          |          |         |          |          |           | 48.1     |         |   |       |       |          |   |        |       |   |   |        | 28.0   |  
|                                             |                                                |          |          |          |           |          |          |          |          |          |           |          |         |   |       |        |          |   |        |        |   |   |        |       
|Fair value of plan assets at end of year     |                                                | $        | 472.1    |          |           | $        |         |          |          | $        | 405.8     |          |         | $ | 378.0 |        |          | $ |       |        |   | $ | 310.6  |       
|                                             |                                                |          |          |          |           |          |          |          |          |          |           |          |         |   |       |        |          |   |        |        |   |   |        |       
|Funded Status at December 31:                |                                                |          |          |          |           |          |          |          |          |          |           |          |         |   |       |        |          |   |        |        |   |   |        |       
|                                             | Funded status                                  |          | $        | (168.1   | )         |          | $        | (307.6   | )        |          | $         | (422.0   | )       |   | $     | (171.0 | )        |   | $      | (275.7 | ) |   | $      | (339.0 | )
|                                             | Unrecognized prior service cost (benefit)      |          |          | 59.4     |           |          |          | (38.4    | )        |          |           | 5.1      |         |   |       | 59.3   |          |   |        | (44.5  | ) |   |        | 4.8    |  
|                                             | Unrecognized net actuarial loss                |          |          | 111.9    |           |          |          | 139.3    |          |          |           | 124.2    |         |   |       | 102.2  |          |   |        | 121.1  |   |   |        | 88.4   |  
|                                             |                                                |          |          |          |           |          |          |          |          |          |           |          |         |   |       |        |          |   |        |        |   |   |        |       
|Net amount recognized                        |                                                | $        | 3.2      |          |           | $        | (206.7   | )        |          | $        | (292.7    | )        |         | $ | (9.5  | )      |          | $ | (199.1 | )      |   | $ | (245.8 | )     
|                                             |                                                |          |          |          |           |          |          |          |          |          |           |          |         |   |       |        |          |   |        |        |   |   |        |       

The Company expects to contribute $50 million to the domestic pension plans in 2004.

52



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The following table provides a summary of pension plans with assets in
excess of accumulated benefit obligations and plans with accumulated benefit
obligations in excess of assets for the foreign and domestic pension benefits
as of December 31:

|                           |                                                     |             |             |        |              |             |             |        |              |  |   |       |  |  |   |        |  
|-------------------------- | --------------------------------------------------- | ----------- | ----------- | ------ | ------------ | ----------- | ----------- | ------ | ------------ |  | - | ----- |  |  | - | ------ | -
|                           |                                                     |             | 2003        |        | 2003         |             | 2002        |        | 2002        
|                           |                                                     |             |             |        |              |             |             |        |             
|                           |                                                     |             | Assets In   |        | Accumulated  |             | Assets In   |        | Accumulated 
|                           |                                                     |             | Excess of   |        | Benefit      |             | Excess of   |        | Benefit     
|                           |                                                     |             | Accumulated |        | Obligations  |             | Accumulated |        | Obligations 
|                           |                                                     |             | Benefit     |        | In Excess of |             | Benefit     |        | In Excess of
|(Dollars in millions)      |                                                     | Obligations |             | Assets |              | Obligations |             | Assets
|                           |                                                     |             |             |        |              |             |             |       
|Domestic pension benefits: |                                                     |             |             |        |              |             |             |        |              |  |   |       |  |  |   |       
|                           | Projected benefit obligation                        |             | $           |       |              |             | $           | 640.2  |              |  | $ |      |  |  | $ | 549.0  |  
|                           | Accumulated benefit obligation                      |             |             |       |              |             |             | 624.0  |              |  |   |      |  |  |   | 534.6  |  
|                           | Fair value of plan assets                           |             |             |       |              |             |             | 472.1  |              |  |   |      |  |  |   | 378.0  |  
|                           | Accrued benefit liabilities                         |             |             |       |              |             |             | (159.3 | )            |  |   |      |  |  |   | (159.1 | )
|                           | Intangible asset                                    |             |             |       |              |             |             | 62.5   |              |  |   |      |  |  |   | 58.9   |  
|                           | Accumulated other comprehensive income              |             |             |       |              |             |             | 100.0  |              |  |   |      |  |  |   | 90.6   |  
|Foreign pension benefits:  |                                                     |             |             |        |              |             |             |        |              |  |   |       |  |  |   |       
|                           | Projected benefit obligation                        |             | $           | 336.0  |              |             | $           | 491.8  |              |  | $ | 251.0 |  |  | $ | 398.6  |  
|                           | Accumulated benefit obligation                      |             |             | 289.3  |              |             |             | 460.7  |              |  |   | 205.4 |  |  |   | 380.6  |  
|                           | Fair value of plan assets                           |             |             | 310.0  |              |             |             | 95.8   |              |  |   | 237.1 |  |  |   | 73.5   |  
|                           | Prepaid benefit costs (accrued benefit
liabilities) |             |             | 66.6   |              |             |             | (394.8 | )            |  |   | 54.9  |  |  |   | (330.8 | )
|                           | Intangible asset                                    |             |             |       |              |             |             | 1.9    |              |  |   |      |  |  |   | 1.8    |  
|                           | Accumulated other comprehensive income              |             |             |       |              |             |             | 33.6   |              |  |   |      |  |  |   | 28.3   |  

For certain domestic and foreign plans for which the accumulated benefit
obligation exceeded the total of plan assets, in 2003 and 2002 the Company
recorded an additional minimum liability of $14.8 million (net of $3.6 million
increase from foreign exchange) and $110.7 million, respectively, as part of
its liability for post-retirement benefits. In connection with recording the
additional minimum liability, additional intangible assets were recorded in
Other Assets for $3.4 million (net of $0.3 million increase from foreign
exchange) and $11.0 million as of December 31, 2003 and 2002, to the extent of
unrecognized prior service cost. Accumulated other comprehensive income (in
shareholders equity) was charged $11.4 million (excluding a $3.3 million
foreign exchange effect) in 2003 for the additional minimum liability. Other
comprehensive income in 2003 also included a charge of $4.3 million
representing an adjustment to the prior year tax benefit net of the current
year tax benefit. Accumulated other comprehensive income was charged $99.7
million ($63.5 million net of tax) in 2002.

The projected benefit obligation for post-retirement benefits was
determined using the following assumptions:

|                               |                                            |  |          |      |         |  |          |            |         |  |  |      |   |  |  |            |  
|------------------------------ | ------------------------------------------ |  | -------- | ---- | ------- |  | -------- | ---------- | ------- |  |  | ---- | - |  |  | ---------- | -
|                               |                                            |  | 2003     |      | 2003    |  | 2002     |            | 2002   
|                               |                                            |  |          |      |         |  |          |            |        
|                               |                                            |  | Domestic |      | Foreign |  | Domestic |            | Foreign
|                               |                                            |  |          |      |         |  |          |            |        
|Assumptions as of December 31: |                                            |  |          |      |         |  |          |            |         |  |  |      |   |  |  |           
|                               | Discount rate                              |  |          | 6.00 | %       |  |          | 4.00%-6.00 | %       |  |  | 6.75 | % |  |  | 4.25%-6.50 | %
|                               | Long-term rate of inflation                |  |          | 2.80 | %       |  |          | .30%-2.80  | %       |  |  | 2.80 | % |  |  | .50%-2.80  | %
|                               | Merit and promotion increase               |  |          | 1.70 | %       |  |          | 1.70       | %       |  |  | 1.70 | % |  |  | 1.70       | %
|                               | Rate of return on plan assets for the year |  |          | 8.50 | %       |  |          | 4.75%-6.50 | %       |  |  | 8.50 | % |  |  | 4.75%-6.50 | %

The Domestic Pension Plan is invested in a broadly diversified portfolio
of equity and fixed income assets, and seeks to generate a competitive rate of
return consistent with appropriate levels of risk. The 8.5% rate of return on
plan assets for the year assumes 67% of assets invested in a broadly
diversified equity portfolio earning approximately 10%, and 33% invested in a
predominantly domestic fixed income portfolio earning approximately 5.5%. The
expected returns for equity and fixed income securities were based on
historical returns and forward looking analysis.

The following table provides a categorization summary for the Domestic
Pension Plan assets:

|                  |  |            |     |                           |  |      |     |   |  |  |     |  
|----------------- |  | ---------- | --- | ------------------------- |  | ---- | --- | - |  |  | --- | -
|                  |  | Target     |     | Percentage of Plan Assets
|                  |  | Allocation |     | as of December 31,       
|                  |  |            |     |                          
|Asset Category    |  | 2004       |     | 2003                      |  | 2002
|                  |  |            |     |                           |  |     
|Equity securities |  |            | 67  | %                         |  |      | 67  | % |  |  | 64  | %
|Debt securities   |  |            | 33  | %                         |  |      | 33  | % |  |  | 36  | %
|                  |  |            |     |                           |  |      |     |   |  |  |     |  
|Total             |  |            | 100 | %                         |  |      | 100 | % |  |  | 100 | %
|                  |  |            |     |                           |  |      |     |   |  |  |     |  

The weighted-average annual assumed rate of increase in the health care
cost trend rate is 9.5% for 2003 and is assumed to decrease to 9.0% in 2004 and
gradually decline to 5% over the next 9 years. The health care cost trend rate
assumption has a significant effect on the amounts reported. A change in the
assumed rate of one

53



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##### 



percentage point for each future year would have the following effects:

|                                                                                                                  |  |             |      |             |  |   |       |  
|----------------------------------------------------------------------------------------------------------------- |  | ----------- | ---- | ----------- |  | - | ----- | -
|(Dollars in millions)                                                                                             |  | 1% Increase |      | 1% Decrease
|                                                                                                                  |  |             |      |            
|Effect on the health care component of accumulated post-retirement
obligation                                     |  | $           | 19.1 |             |  | $ | (16.8 | )
|Effect on total of service and interest cost components of net periodic
post-retirement health care benefit costs |  | $           | 1.6  |             |  | $ | (1.4  | )

Total post-retirement costs were:

|                                                         |  |                         |       |      |  |      |       |  |  |   |       | 
|-------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                         |  | Year ended December 31,
|                                                         |  |                        
|(Dollars in millions)                                    |  | 2003                    |       | 2002 |  | 2001
|                                                         |  |                         |       |      |  |     
|Pension benefits                                         |  | $                       | 76.0  |      |  | $    | 55.6  |  |  | $ | 32.5  | 
|Health and life insurance benefits                       |  |                         | 26.1  |      |  |      | 28.3  |  |  |   | 20.1  | 
|                                                         |  |                         |       |      |  |      |       |  |  |   |       | 
|Defined benefit plan cost                                |  |                         | 102.1 |      |  |      | 83.9  |  |  |   | 52.6  | 
|Defined contribution plan cost, principally ESOP         |  |                         | 58.8  |      |  |      | 52.6  |  |  |   | 55.4  | 
|                                                         |  |                         |       |      |  |      |       |  |  |   |       | 
|Total post-retirement costs, including
accretion expense |  | $                       | 160.9 |      |  | $    | 136.5 |  |  | $ | 108.0 | 
|                                                         |  |                         |       |      |  |      |       |  |  |   |       | 

Post-retirement pension, health and life insurance costs had the following
components:

|                                                        |  |                         |       |           |  |          |      |           |  |          |       |           |  |   |      |   |  |          |       |   |  |   |      |  
|------------------------------------------------------- |  | ----------------------- | ----- | --------- |  | -------- | ---- | --------- |  | -------- | ----- | --------- |  | - | ---- | - |  | -------- | ----- | - |  | - | ---- | -
|                                                        |  | Year Ended December 31,
|                                                        |  |                        
|                                                        |  | 2003                    |       | 2003      |  | 2002     |      | 2002      |  | 2001     |       | 2001     
|                                                        |  |                         |       |           |  |          |      |           |  |          |       |          
|                                                        |  |                         |       |           |  | Health & |      |           |  |          |       | Health &  |  |   |      |   |  | Health &
|                                                        |  | Pension                 |       | Life Ins. |  | Pension  |      | Life Ins. |  | Pension  |       | Life Ins.
|(Dollars in millions)                                   |  | Benefits                |       | Benefits  |  | Benefits |      | Benefits  |  | Benefits |       | Benefits 
|                                                        |  |                         |       |           |  |          |      |           |  |          |       |          
|Service cost-benefits earned during the period          |  | $                       | 41.5  |           |  | $        | 7.9  |           |  | $        | 36.5  |           |  | $ | 7.6  |   |  | $        | 32.1  |   |  | $ | 6.6  |  
|Interest cost on the projected benefit
obligation       |  |                         | 71.6  |           |  |          | 17.4 |           |  |          | 67.3  |           |  |   | 18.5 |   |  |          | 62.5  |   |  |   | 14.2 |  
|Less assumed return on plan assets                      |  |                         | (55.0 | )         |  |          |     |           |  |          | (54.9 | )         |  |   |     |   |  |          | (60.6 | ) |  |   |     |  
|Amortization of prior service cost                      |  |                         | 6.3   |           |  |          | (4.2 | )         |  |          | 5.6   |           |  |   | (1.5 | ) |  |          | 4.9   |   |  |   | (.7  | )
|Amortization of net (gain) loss                         |  |                         | 5.7   |           |  |          | 5.1  |           |  |          | (0.8  | )         |  |   | 3.7  |   |  |          | (6.4  | ) |  |   |     |  
|                                                        |  |                         |       |           |  |          |      |           |  |          |       |           |  |   |      |   |  |          |       |   |  |   |      |  
|Defined benefit plan cost                               |  |                         | 70.1  |           |  |          | 26.2 |           |  |          | 53.7  |           |  |   | 28.3 |   |  |          | 32.5  |   |  |   | 20.1 |  
|                                                        |  |                         |       |           |  |          |      |           |  |          |       |           |  |   |      |   |  |          |       |   |  |   |      |  
|Curtailment loss                                        |  |                         | 5.9   |           |  |          | (0.1 | )         |  |          | 1.9   |           |  |   |     |   |  |          |      |   |  |   |     |  
|                                                        |  |                         |       |           |  |          |      |           |  |          |       |           |  |   |      |   |  |          |       |   |  |   |      |  
|Net defined benefit plan cost after
curtailments        |  | $                       | 76.0  |           |  | $        | 26.1 |           |  | $        | 55.6  |           |  | $ | 28.3 |   |  | $        | 32.5  |   |  | $ | 20.1 |  
|                                                        |  |                         |       |           |  |          |      |           |  |          |       |           |  |   |      |   |  |          |       |   |  |   |      |  
|Accretion expense reflected
in Other expense (income) |  | $                       | 16.9  |           |  | $        | 17.5 |           |  | $        | 11.8  |           |  | $ | 18.5 |   |  | $        | 1.9   |   |  | $ | 14.2 |  
|                                                        |  |                         |       |           |  |          |      |           |  |          |       |           |  |   |      |   |  |          |       |   |  |   |      |  

Amortization of prior service cost is computed on the straight-line method
over the average remaining service period of active participants.

54



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##### 



NOTE 6. Income Taxes

The Companys income before income taxes and the applicable provision
(benefit) for income taxes were:

|                            |                 |          |       |                         |       |      |       |       |       |   |       |       |       | 
|--------------------------- | --------------- | -------- | ----- | ----------------------- | ----- | ---- | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                            |                 |          |       | Year Ended December 31,
|                            |                 |          |       |                        
|(Dollars in millions)       |                 | 2003     |       | 2002                    |       | 2001
|                            |                 |          |       |                         |       |     
|Income before income taxes: |                 |          |       |                         |       |      |       |       |       |   |       |      
|                            |                 | Domestic |       | $                       | 253.4 |      |       | $     | 279.5 |   |       | $     | 326.5 | 
|                            |                 | Foreign  |       |                         | 295.8 |      |       |       | 276.7 |   |       |       | 149.8 | 
|                            |                 |          |       |                         |       |      |       |       |       |   |       |      
|                            |                 | $        | 549.2 |                         |       | $    | 556.2 |       |       | $ | 476.3 |      
|                            |                 |          |       |                         |       |      |       |       |       |   |       |      
|Provision for income taxes: |                 |          |       |                         |       |      |       |       |       |   |       |      
|                            | Current:        |          |       |                         |       |      |       |       |       |   |       |       |      
|                            |                 | Domestic |       | $                       | 55.3  |      |       | $     | 64.3  |   |       | $     | 116.8 | 
|                            |                 | Foreign  |       |                         | 55.7  |      |       |       | 17.8  |   |       |       | 20.8  | 
|                            |                 |          |       |                         |       |      |       |       |       |   |       |      
|                            |                 |          | 111.0 |                         |       |      | 82.1  |       |       |   | 137.6 |      
|                            |                 |          |       |                         |       |      |       |       |       |   |       |      
|                            | Deferred:       |          |       |                         |       |      |       |       |       |   |       |       |      
|                            |                 | Domestic |       |                         | 12.1  |      |       |       | 56.6  |   |       |       | 18.1  | 
|                            |                 | Foreign  |       |                         | 20.9  |      |       |       | 46.5  |   |       |       | 25.6  | 
|                            |                 |          |       |                         |       |      |       |       |       |   |       |      
|                            |                 |          | 33.0  |                         |       |      | 103.1 |       |       |   | 43.7  |      
|                            |                 |          |       |                         |       |      |       |       |       |   |       |      
|                            | Total provision |          | $     | 144.0                   |       |      | $     | 185.2 |       |   | $     | 181.3 |      
|                            |                 |          |       |                         |       |      |       |       |       |   |       |      

A reconciliation between the actual income tax expense provided and the
income taxes computed by applying the statutory federal income tax rate of 35%
in 2003, 2002 and 2001 to the income before income taxes is as follows:

|                                                            |  |                         |       |      |  |      |       |   |  |   |       |  
|----------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                            |  | Year Ended December 31,
|                                                            |  |                        
|(Dollars in millions)                                       |  | 2003                    |       | 2002 |  | 2001
|                                                            |  |                         |       |      |  |     
|Tax provision at statutory rate                             |  | $                       | 192.2 |      |  | $    | 194.7 |   |  | $ | 166.7 |  
|Decrease in valuation allowance                             |  |                         | (13.1 | )    |  |      | (2.5  | ) |  |   | (6.8  | )
|Nondeductible goodwill amortization and
goodwill write-offs |  |                         |      |      |  |      |      |   |  |   | 7.5   |  
|Foreign tax effects                                         |  |                         | (15.3 | )    |  |      | (16.1 | ) |  |   | (.9   | )
|State tax provision                                         |  |                         | 6.7   |      |  |      | 7.7   |   |  |   | 9.9   |  
|Benefit of tax audit settlements                            |  |                         | (26.7 | )    |  |      |      |   |  |   |      |  
|Other, net                                                  |  |                         | .2    |      |  |      | 1.4   |   |  |   | 4.9   |  
|                                                            |  |                         |       |      |  |      |       |   |  |   |       |  
|Total provision                                             |  | $                       | 144.0 |      |  | $    | 185.2 |   |  | $ | 181.3 |  
|                                                            |  |                         |       |      |  |      |       |   |  |   |       |  

The decrease in the valuation allowance in 2003 was primarily attributable
to the utilization of foreign tax credits, offset by a net increase in foreign
net operating loss carryforwards. The decrease in the valuation allowance in
2002 was primarily attributable to the utilization of foreign net operating
losses and foreign tax credits. The decrease in the valuation allowance in
2001 was primarily attributable to utilization of a domestic capital loss
carry-forward.

55



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The following table details the gross deferred tax liabilities and assets
and the related valuation allowances:

|                          |                                                                                                 |      |                         |        |   |  |       |        |  
|------------------------- | ----------------------------------------------------------------------------------------------- | ---- | ----------------------- | ------ | - |  | ----- | ------ | -
|                          |                                                                                                 |      | Year Ended December 31,
|                          |                                                                                                 |      |                        
|(Dollars in millions)     |                                                                                                 | 2003 |                         | 2002  
|                          |                                                                                                 |      |                         |       
|Deferred tax liabilities: |                                                                                                 |      |                         |        |   |  |       |       
|                          | Facilities (accelerated depreciation, capitalized
interest and purchase accounting differences) |      | $                       | 235.9  |   |  | $     | 193.9  |  
|                          | Inventory (LIFO and purchase accounting
differences)                                            |      |                         | 18.7   |   |  |       | 12.9   |  
|                          | Employee benefits                                                                               |      |                         | 26.9   |   |  |       | 18.9   |  
|                          | Other                                                                                           |      |                         | 140.9  |   |  |       | 109.9  |  
|                          |                                                                                                 |      |                         |        |   |  |       |       
|                          |                                                                                                 |      | 422.4                   |        |   |  | 335.6 |       
|                          |                                                                                                 |      |                         |        |   |  |       |       
|Deferred tax assets:      |                                                                                                 |      |                         |        |   |  |       |       
|                          | Post-retirement benefits                                                                        |      |                         | 132.4  |   |  |       | 129.9  |  
|                          | Warranties                                                                                      |      |                         | 78.8   |   |  |       | 81.5   |  
|                          | Foreign net operating losses, tax credits
and capital losses                                    |      |                         | 100.4  |   |  |       | 113.5  |  
|                          | Reserves                                                                                        |      |                         | 54.4   |   |  |       | 44.9   |  
|                          | Inventory                                                                                       |      |                         | 2.2    |   |  |       | 4.8    |  
|                          | Facilities                                                                                      |      |                         | 33.0   |   |  |       | 8.8    |  
|                          | Other                                                                                           |      |                         | 64.1   |   |  |       | 39.6   |  
|                          | Valuation allowances                                                                            |      |                         | (100.4 | ) |  |       | (113.5 | )
|                          |                                                                                                 |      |                         |        |   |  |       |       
|                          |                                                                                                 |      | 364.9                   |        |   |  | 309.5 |       
|                          |                                                                                                 |      |                         |        |   |  |       |       
|                          | Net deferred tax (liabilities) assets                                                           |      | $                       | (57.5  | ) |  | $     | (26.1  | )
|                          |                                                                                                 |      |                         |        |   |  |       |       

Deferred tax assets related to foreign tax credits and foreign net
operating loss carry-forwards have been reduced by a valuation allowance since
realization is dependent in part on the generation of future foreign source
income, as well as on income in the legal entity which gave rise to tax losses.
The foreign tax credits and net operating losses are available for utilization
in future years. In some tax jurisdictions the carry-forward period is limited
to as little as five years; in others it is unlimited.

As a result of the allocation of purchase accounting (principally
goodwill) to foreign subsidiaries, the book basis in the net assets of the
foreign subsidiaries exceeds the related U.S. tax basis in the subsidiaries
stock. Such investments are considered permanent in duration and accordingly,
no deferred taxes have been provided on such differences, which are
significant. The Company considers the earnings of some of its foreign
subsidiaries to be permanently reinvested and as such no additional U.S. tax
cost has been provided on approximately $41 million of earnings at December 31,
2003. If the Company chose to repatriate these earnings, no additional tax
cost would be incurred.

Cash taxes paid were $41 million, $115 million and $105 million in 2003,
2002 and 2001, respectively.

In 2002, the Company concluded negotiations with The State Finance
Administration for North Rhine-Westphalia, Germany concerning certain tax
issues covering the years 1984 through 1994. On January 15, 2002, the Company
settled all issues for those years by making a cash payment of approximately
$55 million plus $30 million previously deposited in escrow. Since the Company
previously had made provision for those issues, the settlement had no impact on
results of operations.

The company recognized a reduction in the tax provision of $26.7 million
in the fourth quarter of 2003 that reduced the effective income tax rate for
2003 to 26.2%. This was principally the result of resolution on German tax
audits for the years 1995 through 1998, and the approval of research and
development tax credit claims in the U.S.

NOTE 7. Accounts Receivable Securitization Agreements

To reduce its borrowing cost, in May and September 2002 the Company
established accounts receivable financing facilities in Europe and the U.S.
with major international banks. As part of these facilities, the Company
formed wholly owned, special-purpose entities (in Europe, the ESPE; in the
U.S., the USSPE; collectively, the SPEs) for the sole purpose of buying
and selling receivables generated by the Company. Under these facilities the
Company irrevocably and without recourse, transfers all eligible accounts
receivable to the SPEs which in turn, sell them, or undivided ownership
interests in them, to conduits administered by the banks. The assets of the
SPEs are not available to pay the claims of the Company or any of its
subsidiaries. The Company retains a subordinated interest in the receivables
sold of approximately 15% for ESPE and 45% for USSPE. The conduits obtain
the funds to purchase the interests in the receivables, other than the
retained interest, by selling commercial paper to third-party investors.
Advances from the conduits to the SPEs are limited to approximately $491
million

56



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##### 



(250 million, or approximately $316 million at December 31, 2003 exchange
rates under the European facility, and $175 million under the U.S. facility).
The Company retains responsibilities for the collection and administration
of receivables subject to these facilities. These facilities have a life of
three years, are subject to annual renewals and, for the European facility,
the maintenance of specified debt-rating levels, and for the U.S. facility,
the maintenance of certain financial covenants. The Company is currently in
compliance with these covenants.

The receivables sold are removed from the balance sheet since they meet
the applicable criteria of Statement of Financial Accounting Standards No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The Companys retained interest is recorded
at fair value in other current assets in the Companys Consolidated Balance
Sheet. To the extent that the cash received and value of the retained
interest is less than the net book value of the receivables sold, losses are
recognized at the time of the sale. Those losses amounted to $41.7 million
and $21.5 million for the years ended December 31, 2003 and 2002. The
receivables represented by the retained interest are exposed to the risk of
loss for any uncollectible amounts in the pool of receivables sold under this
arrangement.

On August 31, 2002, the Company terminated its activities in American
Standard Financial Services, a financial services partnership with Transamerica
Commercial Finance Corporation that had previously provided receivables
financing in the U.S., and bought back $256 million of trade receivables. The
majority of these receivables were sold to the USSPE.

Following is a summary of receivables subject to the financing facilities:

|                                                 |  |                   |       |                   |  |       |       |      |  |       |       |       |  |   |       |  |  |   |       |  |  |   |       | 
|------------------------------------------------ |  | ----------------- | ----- | ----------------- |  | ----- | ----- | ---- |  | ----- | ----- | ----- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                                 |  | December 31, 2003 |       | December 31, 2002
|                                                 |  |                   |       |                  
|(Dollars in millions)                            |  | ESPE              |       | USSPE             |  | Total |       | ESPE |  | USSPE |       | Total
|                                                 |  |                   |       |                   |  |       |       |      |  |       |       |      
|Outstanding balances of receivables
sold to SPEs |  | $                 | 406.0 |                   |  | $     | 225.3 |      |  | $     | 631.3 |       |  | $ | 230.7 |  |  | $ | 206.7 |  |  | $ | 437.4 | 
|Net retained interest                            |  | $                 | 65.6  |                   |  | $     | 97.7  |      |  | $     | 163.3 |       |  | $ | 38.2  |  |  | $ | 81.3  |  |  | $ | 119.5 | 
|Advances from conduits                           |  | $                 | 313.7 |                   |  | $     | 126.5 |      |  | $     | 440.2 |       |  | $ | 250.8 |  |  | $ | 125.5 |  |  | $ | 376.3 | 

The advances from conduits include amounts due to the conduits under the
European and U.S. accounts receivable facilities for collections of receivables
under the servicing agreement. The increase in advances from conduits was
comprised of a $47 million foreign exchange translation effect and $16 million
growth in the amount of receivables financed.

Following is a summary of cash flows received or paid on the initial
receivables transactions when the ESPE and USSPE arrangements were established
in 2002:

|                                                        |  |      |       |       |  |       |        |   |  |   |        |  
|------------------------------------------------------- |  | ---- | ----- | ----- |  | ----- | ------ | - |  | - | ------ | -
|(Dollars in millions)                                   |  | ESPE |       | USSPE |  | Total
|                                                        |  |      |       |       |  |      
|Cash flows from initial sale of receivables             |  | $    | 224.6 |       |  | $     | 154.9  |   |  | $ | 379.5  |  
|Less the effect of termination of
previous arrangements |  |      | (42.5 | )     |  |       | (255.6 | ) |  |   | (298.1 | )
|                                                        |  |      |       |       |  |       |        |   |  |   |        |  
|Proceeds from initial sale of receivables, net          |  | $    | 182.1 |       |  | $     | (100.7 | ) |  | $ | 81.4   |  
|                                                        |  |      |       |       |  |       |        |   |  |   |        |  

As of December 31, 2003 and 2002, the interest rates on amounts
outstanding under the European facility were 2.51% and 3.30%, and under the
U.S. facility were 1.07% and 1.39%, respectively.

57



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##### 



NOTE 8. Inventories

The components of inventories, which are carried principally on a last-in,
first-out (LIFO) basis, are as follows:

|                      |  |                         |       |      |  |   |       | 
|--------------------- |  | ----------------------- | ----- | ---- |  | - | ----- | 
|                      |  | Year Ended December 31,
|                      |  |                        
|(Dollars in millions) |  | 2003                    |       | 2002
|                      |  |                         |       |     
|Finished products     |  | $                       | 570.9 |      |  | $ | 486.1 | 
|Products in process   |  |                         | 181.4 |      |  |   | 138.1 | 
|Raw materials         |  |                         | 157.6 |      |  |   | 146.5 | 
|                      |  |                         |       |      |  |   |       | 
|Inventories at cost   |  | $                       | 909.9 |      |  | $ | 770.7 | 
|                      |  |                         |       |      |  |   |       | 

The current replacement cost of inventories approximates the LIFO carrying
cost in both years.

NOTE 9. Facilities

The components of facilities, at cost, are as follows:

|                               |  |                         |         |      |  |   |         | 
|------------------------------ |  | ----------------------- | ------- | ---- |  | - | ------- | 
|                               |  | Year Ended December 31,
|                               |  |                        
|(Dollars in millions)          |  | 2003                    |         | 2002
|                               |  |                         |         |     
|Land                           |  | $                       | 81.3    |      |  | $ | 78.3    | 
|Buildings                      |  |                         | 640.0   |      |  |   | 624.8   | 
|Machinery and equipment        |  |                         | 1,656.8 |      |  |   | 1,411.3 | 
|Improvements in progress       |  |                         | 100.8   |      |  |   | 88.9    | 
|                               |  |                         |         |      |  |   |         | 
|Gross facilities               |  |                         | 2,478.9 |      |  |   | 2,203.3 | 
|Less: accumulated depreciation |  |                         | 963.5   |      |  |   | 773.2   | 
|                               |  |                         |         |      |  |   |         | 
|Net facilities                 |  | $                       | 1,515.4 |      |  | $ | 1,430.1 | 
|                               |  |                         |         |      |  |   |         | 

NOTE 10. Debt

The Company has one primary bank credit agreement. That agreement
provides the Company and certain subsidiaries (the Borrowers) with a senior,
unsecured, five-year $1 billion multi-currency revolving credit facility that
expires in November 2006. The Company did not renew a related 364-day, U.S.
dollar revolving credit facility of $150 million when it expired on November 4,
2003, because amounts available under the five-year facility and other sources
of financing available were considered sufficient for Company needs. The
Company also has a Euro-denominated, 364-day bank credit agreement of
approximately $50 million (at December 31, 2003 exchange rates) that expires on
October 31, 2004, and that was fully utilized as of December 31, 2003. Debt
outstanding under that agreement was classified as long-term debt in the
balance sheet as of December 31, 2003 and 2002, because the Company has the
ability and the intent to renew it or to refinance it with borrowings under the
five-year facility. In addition, the Company has other non-U.S. lines of
credit for $20 million.

Debt securities (Senior Notes) sold under a 1998 Shelf Registration are
issued by American Standard Inc. and unconditionally guaranteed by American
Standard Companies Inc.

Short-termShort-term borrowings are available under credit facilities and
overdraft lines. At December 31, 2003, 2002 and 2001, the Company had $50
million, $36 million and $59 million, respectively, of such foreign short-term
debt outstanding at average interest rates of 8.3%, 8.5% and 6.6% per annum,
respectively. The Company also had an additional $247 million of unused
overdraft facilities as of December 31, 2003. The banks may revoke these
facilities at any time.

Average short-term borrowings for 2003, 2002 and 2001 were $99 million,
$74 million and $85 million, respectively, at weighted-average interest rates
of 6.5%, 6.4% and 7.60%, respectively.

Long-termThe aggregate borrowings of up to $1 billion available under
the primary bank credit agreement can be used for general corporate purposes,
of which up to $250 million may be used for issuing letters of credit and up to
$125 million for same-day, short-term borrowings. Each loan outstanding under
this agreement is due at the end of each interest period (a maximum
of 12 months). The Company may, however, concurrently borrow equivalent amounts
subject to compliance with certain conditions contained in the agreement. All
borrowings under the credit agreement are therefore classified as long-term.

58



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##### 



The Company pays a facilities fee of .225% per annum on the five-year
facility (whether available funds are borrowed or not), and borrowings
thereunder bear interest generally at the London Interbank Offered Rate
(LIBOR) plus 1.025% per annum. These LIBOR spreads are subject to adjustment
should the Companys debt rating change. The Company also pays 1.025% per
annum plus issuance fees for letters of credit.

At December 31, 2003, there were $210 million of borrowings outstanding
under the five-year facility. Remaining availability under that facility at
December 31, 2003, after reduction for $122 million of letters of credit usage
was $668 million. There was also $11 million available under foreign lines of
credit after reduction for $9 million letters of credit usage.

In
January 2003, a European subsidiary of the Company issued 30
million ($38 million at December 31, 2003 exchange rates) of 7.59% Guaranteed
Senior Bonds due 2013 in a private placement as part of some changes in the
financial structure and organization of its European subsidiaries. The bonds
are guaranteed by the Company. The proceeds were used to repay borrowings
under bank credit agreements.

The amounts of long-term debt maturing in years 2004 through 2008 are $2
million, $213 million, $569 million, $1 million, and $335 million,
respectively, with $509 million maturing thereafter.

Long-term debt is recorded at face amount, net of unamortized discount and
the fair value of interest-rate swaps, and debt denominated in foreign
currencies is reported at its U.S. dollar equivalent as follows:

|                                          |  |                         |         |      |  |   |         | 
|----------------------------------------- |  | ----------------------- | ------- | ---- |  | - | ------- | 
|                                          |  | Year Ended December 31,
|                                          |  |                        
|(Dollars in millions)                     |  | 2003                    |         | 2002
|                                          |  |                         |         |     
|Five-year credit agreement expiring 2006  |  | $                       | 210.0   |      |  | $ | 482.1   | 
|364-day Euro-denominated credit agreement |  |                         | 50.5    |      |  |   | 41.7    | 
|7 1/8% senior notes due 2003              |  |                         |        |      |  |   | 125.0   | 
|7 3/8% senior notes due 2005              |  |                         | 210.4   |      |  |   | 211.9   | 
|7.125% Euro senior notes due 2006         |  |                         | 307.6   |      |  |   | 253.6   | 
|7 3/8% senior notes due 2008              |  |                         | 334.6   |      |  |   | 339.8   | 
|8.25% senior notes due 2009               |  |                         | 97.4    |      |  |   | 97.4    | 
|8.25% Sterling senior notes due 2009      |  |                         | 106.3   |      |  |   | 95.1    | 
|7 5/8% senior notes due 2010              |  |                         | 260.8   |      |  |   | 260.6   | 
|7.59% Euro senior bonds due 2013          |  |                         | 37.9    |      |  |   |        | 
|Other long-term debt                      |  |                         | 13.8    |      |  |   | 15.7    | 
|                                          |  |                         |         |      |  |   |         | 
|                                          |  |                         | 1,629.3 |      |  |   | 1,922.9 | 
|Less current maturities                   |  |                         | 2.5     |      |  |   | 4.5     | 
|                                          |  |                         |         |      |  |   |         | 
|Total long-term debt                      |  | $                       | 1,626.8 |      |  | $ | 1,918.4 | 
|                                          |  |                         |         |      |  |   |         | 

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The U.S. Dollar equivalent of borrowings outstanding under all bank credit
agreements at December 31, 2003 and 2002, and the effective weighted-average
interest rates were:

|                                                                |  |                         |       |      |  |   |       | 
|--------------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | - | ----- | 
|                                                                |  | Year Ended December 31,
|                                                                |  |                        
|(Dollars in millions)                                           |  | 2003                    |       | 2002
|                                                                |  |                         |       |     
|Loans at U.S. dollar equivalent at 2.65% in
2003; 2.61% in 2002 |  | $                       | 260.5 |      |  | $ | 523.7 | 

None
of the Senior Notes outstanding as of December 31, 2003, are
redeemable by the Company prior to maturity. The Company redeemed its 7 1/8%
Senior Notes on their due date, February 15, 2003, for $129.5 million,
including accrued interest, with borrowings under its bank credit agreements.

On January 8, 2002, the company redeemed all of the 9 1/4% Sinking Fund
Debentures, at a redemption price of 102.313% of the face amount of the bonds
plus unpaid interest up to the redemption date. The total redemption cost of
$38.7 million, including accrued interest of $0.4 million, was paid with
lower-cost borrowings under the Companys bank credit agreements and a loss of
$1.3 million was recognized.

During the second half of 2001 the Company entered interest rate swaps
that effectively convert fixed-rate debt to variable-rate debt on $225 million
of the 7 3/8% Senior Notes due 2008 and $75 million of the 7 3/8% Senior Notes
due 2005. The maturity date of the interest rate swaps coincides with the
maturity date of the underlying debt. Under these swaps, the Company pays a
specified variable interest rate and receives the fixed rate applicable to the
underlying debt. The interest income/expense on the swaps is accrued as earned
and recorded as a reduction/increase of the interest expense accrued on the
fixed-rate debt. The interest rate swaps are designated as fair-value hedges
of the underlying debt. The fair value of the hedges amounted to $19 million
and $26 million as of December 31, 2003 and 2002, respectively, and is recorded
in other long-term assets with a corresponding increase in the debt obligation.
The change in fair values of the hedge instrument and the debt are recorded as
equal and offsetting unrealized gains and losses. As of December 31, 2003, the
average effective interest rate on the $300 million of Senior Notes to which
the swaps apply was approximately 3.2%. See Note 12 for additional information
on the interest rate swaps.

Interest costs capitalized as part of the cost of constructing facilities
for the years ended December 31, 2003, 2002 and 2001, were $0.9 million, $2.6
million and $4.8 million, respectively. Cash interest paid in those years on
all outstanding indebtedness amounted to $114 million, $125 million and $169
million, respectively.

The Company, American Standard Inc., American Standard International Inc.
and certain of their domestic subsidiaries guarantee obligations under the
primary bank credit agreement. In addition, significant foreign subsidiaries
guarantee obligations of certain foreign borrowers under the bank credit
agreement.

The primary bank credit agreement contains various covenants that limit,
among other things, indebtedness, liens, sale and leaseback transactions,
subsidiary indebtedness including preferred stock, mergers, consolidations,
dissolutions and asset sales, investments or acquisitions, dividends and
redemptions of capital stock, loans and advances, and certain other business
activities. The covenants also require the Company to meet certain financial
tests: ratio of consolidated debt to EBITDA (Earnings before Interest, Taxes,
Depreciation and Amortization), and consolidated free cash flow to interest
expense. The Company is currently in compliance with the covenants contained in
the credit agreement.

NOTE 11. Capital Stock

The Companys Certificate of Incorporation authorizes the Company to issue
up to 200,000,000 shares of common stock, par value $.01 per share and
2,000,000 shares of preferred stock, par value $.01 per share, of which the
Board of Directors designated 900,000 shares as a new series of Junior
Participating Cumulative Preferred Stock. Each outstanding share of common
stock has associated with it one right to purchase a specified amount of Junior
Participating Cumulative Preferred Stock at a stipulated price in certain
circumstances relating to changes in the ownership of the common stock of the
Company.

On February 5, 2004, the Board of Directors approved a three-for-one stock
split, subject to shareholder approval of an amendment to the Companys charter
to increase the authorized shares of common stock at the Annual Meeting on May
4, 2004.

The Companys Board of Directors has approved plans to purchase shares of
the Companys common stock

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to offset the dilutive effect of issuing shares of common stock pursuant to the
Companys stock option plan and other incentive and benefit plans funded with
shares of stock. As of December 31, 2003, the unexpended authorization was
$313 million. The Company purchased 2,001,800 shares in 2003 for $152 million,
2,075,200 shares in 2002 for $141 million, 1,921,050 shares in 2001 for $117
million and 6,152,950 shares in prior years for $227 million. The Company
plans to increase its purchases of shares in 2004 under this program to about
$250 million. Purchases of treasury shares are reported in the Consolidated
Statement of Cash Flows on the basis of when the transactions are settled and
therefore, shares purchased near the end of December each year are reflected as
payments in the following year.

In 2002 shareholders approved the Omnibus Incentive Plan (the 2002
Omnibus Plan), effective January 1, 2002, under which awards may be granted to
employees and non-employee directors in the form of stock options, restricted
stock, restricted stock units, stock appreciation rights (SARs) and certain
other incentive awards. The maximum number of shares or units that may be
issued under the 2002 Omnibus Plan is 5,500,000, of which no more than 825,000
may be used for awards other than stock options or SARs. The total of stock
options and SARs that may be granted to any individual annually may not exceed
1,500,000 shares, and the number of restricted stock and restricted unit awards
to any individual annually may not exceed 150,000 shares or units. At December
31, 2003, options to purchase a total of 1,307,911 shares were outstanding and
there were 4,186,237 shares available for grant under the 2002 Omnibus Plan.
The shares to be issued under the 2002 Omnibus Plan may be newly issued shares
or treasury shares. The Company also has a 1995 Stock Incentive Plan (the
1995 Stock Plan) under which similar awards were granted. At December 31,
2003, options to purchase a total of 4,712,329 shares were outstanding under
the 1995 Stock Plan. The shares to be issued under the 1995 Stock Plan to
satisfy outstanding options are expected to be from available treasury shares.
No further awards will be made under the 1995 Stock Plan. Stock option awards
granted under the 2002 Omnibus Plan and the 1995 Stock Plan generally vest
ratably over three years on the anniversary date of the awards and are
exercisable generally over a period of ten years. On February 4, 2004, awards
in the form of options to purchase 786,225 shares were granted under the 2002
Omnibus Plan.

A summary of stock option activity and related information for 2001, 2002
and 2003 follows:

|                              |           |      |           |            |           |          |       |            |  |           |   |       |  | 
|----------------------------- | --------- | ---- | --------- | ---------- | --------- | -------- | ----- | ---------- |  | --------- | - | ----- |  | 
|                              |           |      |           |            |           |          |       | Weighted-  |  | Weighted-
|                              |           |      |           | Shares     |           | Average  |       | Average   
|                              |           |      |           | Underlying |           | Exercise |       | Fair Value
|                              |           |      |           | Options    |           | Price    |       | Of Grants 
|                              |           |      |           |            |           |          |       |           
|Outstanding December 31, 2000 |           |      | 8,263,469 |            |           | $        | 33.06 |            |  |           |   |      
|                              | Granted   |      |           | 1,538,350  |           |          |       | 57.14      |  |           | $ | 19.76 | 
|                              | Exercised |      |           | (3,612,289 | )         |          |       | 28.51      |  |           |   |       | 
|                              | Forfeited |      |           | (271,115   | )         |          |       | 44.55      |  |           |   |       | 
|                              |           |      |           |            |           |          |       |            |  |           |   |      
|Outstanding December 31, 2001 |           |      | 5,918,415 |            |           |          | 41.64 |            |  |           |   |      
|                              | Granted   |      |           | 2,269,150  |           |          |       | 60.48      |  |           | $ | 18.24 | 
|                              | Exercised |      |           | (1,651,551 | )         |          |       | 35.24      |  |           |   |       | 
|                              | Forfeited |      |           | (190,979   | )         |          |       | 50.21      |  |           |   |       | 
|                              |           |      |           |            |           |          |       |            |  |           |   |      
|Outstanding December 31, 2002 |           |      | 6,345,035 |            |           |          | 49.82 |            |  |           |   |      
|                              | Granted   |      |           | 988,905    |           |          |       | 69.96      |  |           | $ | 21.44 | 
|                              | Exercised |      |           | (1,254,403 | )         |          |       | 43.42      |  |           |   |       | 
|                              | Forfeited |      |           | (59,297    | )         |          |       | 38.34      |  |           |   |       | 
|                              |           |      |           |            |           |          |       |            |  |           |   |      
|Outstanding December 31, 2003 |           |      | 6,020,240 |            |           | $        | 54.41 |            |  |           |   |      
|                              |           |      |           |            |           |          |       |            |  |           |   |      
|Exercisable at end of year:   |           |      |           |            |           |          |       |            |  |           |   |      
|                              |           | 2001 |           |            | 3,200,295 |          |       |            |  |           |   |       |  | 
|                              |           | 2002 |           |            | 2,889,010 |          |       |            |  |           |   |       |  | 
|                              |           | 2003 |           |            | 2,806,962 |          |       |            |  |           |   |       |  | 

61



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The weighted average fair value of stock option grants was estimated at
the date of grant using the Black-Scholes option-pricing model. For the
assumptions used in determining the fair value, see Note 2, Accounting
PoliciesStock-Based Compensation.

Following is a summary of options outstanding and exercisable by price
range as of December 31, 2003:

|               |  |                     |           |                     |  |           |        |          |  |              |           |           |  |           |       |  |  |  |     | 
|-------------- |  | ------------------- | --------- | ------------------- |  | --------- | ------ | -------- |  | ------------ | --------- | --------- |  | --------- | ----- |  |  |  | --- | 
|               |  | Options Outstanding |           | Options Exercisable |  |           |        |         
|               |  |                     |           |                     |  | Weighted-
|               |  |                     |           |                     |  | Weighted- |        |          |  |              |           | Weighted- |  | Average  
|               |  |                     |           |                     |  | Average   |        |          |  |              |           | Average   |  | Remaining
|               |  | Number of           |           | Exercise            |  | Number of |        | Exercise |  | Contractual 
|Price range    |  | Options             |           | Price               |  | Options   |        | Price    |  | Life (Years)
|               |  |                     |           |                     |  |           |        |          |  |             
|$20.00$30.00  |  |                     | 64,587    |                     |  | $         | 20.00  |          |  |              | 64,587    |           |  | $         | 20.00 |  |  |  | 1.0 | 
|$30.01$45.00  |  |                     | 1,802,354 |                     |  |           | 38.38  |          |  |              | 1,802,354 |           |  |           | 38.38 |  |  |  | 5.5 | 
|$45.01$60.00  |  |                     | 2,967,159 |                     |  |           | 58.50  |          |  |              | 892,401   |           |  |           | 57.08 |  |  |  | 7.8 | 
|$60.01$75.00  |  |                     | 1,078,406 |                     |  |           | 68.09  |          |  |              | 35,456    |           |  |           | 67.97 |  |  |  | 8.9 | 
|$75.01$90.00  |  |                     | 70,434    |                     |  |           | 77.69  |          |  |              | 12,164    |           |  |           | 75.54 |  |  |  | 9.0 | 
|$90.01$105.00 |  |                     | 37,300    |                     |  |           | 100.33 |          |  |              |          |           |  |           |      |  |  |  | 9.9 | 
|               |  |                     |           |                     |  |           |        |          |  |              |           |           |  |           |       |  |  |  |     | 
|               |  |                     | 6,020,240 |                     |  | $         | 54.41  |          |  |              | 2,806,962 |           |  | $         | 44.44 |  |  |  | 7.2 | 
|               |  |                     |           |                     |  |           |        |          |  |              |           |           |  |           |       |  |  |  |     | 

On January 1, 2000, the Chief Executive Officer of the Company was granted
an award of 250,000 shares of restricted stock under the 1995 Stock Plan. Such
shares vest in three equal annual installments beginning January 1, 2003.
Unearned compensation equal to the fair market value of the shares at the date
of grant was recorded as a component of stockholders equity and is being
amortized as a charge to compensation expense based upon the vesting schedule,
beginning on January 1, 2000 and ending December 31, 2004. As of December 31,
2003, the unamortized balance of unearned compensation was $0.7 million.

The Company has elected to follow Accounting Principles Board Opinion No.
25 and related Interpretations in accounting for stock options and accordingly
has recognized no compensation expense for stock issued under its stock option
plans. See Note 2, Accounting PoliciesStock-Based Compensation for
information on compensation expense that would have been recorded had the
Company adopted Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, and its effect on net income and net income per
share.

In 1997, shareholders approved the establishment of the Employee Stock
Purchase Plan commencing January 1, 1998. Upon enrollment, employees purchase
shares of the Companys common stock at the end of each calendar quarter,
through payroll deductions, at a discount of 15% from the market price, as
quoted on the New York Stock Exchange on the last trading day of each calendar
quarter. Annual purchases are limited to a maximum of $21,250 per employee.
Shares purchased under the plan are deposited with a custodian and must be held
for one year before they may be sold. The Company funds the plan as soon as
practicable after the close of each quarter with either treasury shares or
newly issued shares, at the Companys discretion. Employees purchased 114,141
shares in 2003, 123,869 shares in 2002 and 149,487 shares in 2001 under this
plan. In 2002, shareholders authorized an additional 500,000 shares for
issuance under this plan.

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Following is a summary of shares issued or reacquired by the Company for
the years ended December 31, 2003, 2002 and 2001:

|                           |                                              |  |                                  |           |        |  |             |            |            |  |            |            |  
|-------------------------- | -------------------------------------------- |  | -------------------------------- | --------- | ------ |  | ----------- | ---------- | ---------- |  | ---------- | ---------- | -
|                           |                                              |  | Number of Shares of Common Stock
|                           |                                              |  |                                 
|                           |                                              |  |                                  |           |        |  | Treasury    |            | Net Shares
|                           |                                              |  | Total Shares                     |           | Shares |  | Outstanding
|                           |                                              |  |                                  |           |        |  |            
|Balance, December 31, 2000 |                                              |  | 80,840,687                       |           |        |  | (11,308,113 | )          |            |  | 69,532,574 |           
|                           | Shares issued upon exercise of stock options |  |                                  | 3,029,838 |        |  |             | 465,608    |            |  |            | 3,495,446  |  
|                           | Stock purchased for treasury                 |  |                                  |           |        |  |             | (1,921,050 | )          |  |            | (1,921,050 | )
|                           | Shares issued to ESOP                        |  |                                  |           |        |  |             | 917,325    |            |  |            | 917,325    |  
|                           | Shares issued to ESPP                        |  |                                  | 499       |        |  |             | 148,988    |            |  |            | 149,487    |  
|                           | Other shares issued or (reacquired), net     |  |                                  |           |        |  |             | (99,938    | )          |  |            | (99,938    | )
|                           |                                              |  |                                  |           |        |  |             |            |            |  |            |           
|Balance, December 31, 2001 |                                              |  | 83,871,024                       |           |        |  | (11,797,180 | )          |            |  | 72,073,844 |           
|                           | Shares issued upon exercise of stock options |  |                                  |           |        |  |             | 1,620,985  |            |  |            | 1,620,985  |  
|                           | Stock purchased for treasury                 |  |                                  |           |        |  |             | (2,075,200 | )          |  |            | (2,075,200 | )
|                           | Shares issued to ESOP                        |  |                                  |           |        |  |             | 764,897    |            |  |            | 764,897    |  
|                           | Shares issued to ESPP                        |  |                                  | 448       |        |  |             | 123,421    |            |  |            | 123,869    |  
|                           | Other shares issued or (reacquired), net     |  |                                  | 43,868    |        |  |             | 61,473     |            |  |            | 105,341    |  
|                           |                                              |  |                                  |           |        |  |             |            |            |  |            |           
|Balance, December 31, 2002 |                                              |  | 83,915,340                       |           |        |  | (11,301,604 | )          |            |  | 72,613,736 |           
|                           | Shares issued upon exercise of stock options |  |                                  | 3,350     |        |  |             | 1,247,566  |            |  |            | 1,250,916  |  
|                           | Stock purchased for treasury                 |  |                                  |           |        |  |             | (2,001,800 | )          |  |            | (2,001,800 | )
|                           | Shares issued to ESOP                        |  |                                  |           |        |  |             | 767,193    |            |  |            | 767,193    |  
|                           | Shares issued to ESPP                        |  |                                  | 504       |        |  |             | 113,637    |            |  |            | 114,141    |  
|                           | Other shares issued or (reacquired), net     |  |                                  |           |        |  |             | (105,860   | )          |  |            | (105,860   | )
|                           |                                              |  |                                  |           |        |  |             |            |            |  |            |           
|Balance, December 31, 2003 |                                              |  | 83,919,194                       |           |        |  | (11,280,868 | )          |            |  | 72,638,326 |           
|                           |                                              |  |                                  |           |        |  |             |            |            |  |            |           

NOTE 12. Financial Instruments

From time to time, the Company enters into transactions to manage its
financial market risk, including commodity price, foreign exchange and interest
rate risk. These transactions involve off-balance sheet contracts and financial
instruments with financial risk. To minimize the risk of counter-party
nonperformance, such agreements are made only through major financial
institutions with significant experience in such financial instruments. Such
agreements hedge only specific transactions or commitments.

To manage the balance between floating interest rate debt and fixed
interest rate debt, the Company has entered into interest rate swaps that
effectively convert fixed-rate debt to variable-rate debt. The maturity date
of these swap contracts coincides with the maturity date of the underlying
debt. Under these interest rate swaps, the Company pays a specified variable
interest rate and receives the fixed rate applicable to the underlying debt.
The interest rate swaps are designated as fair-value hedges of the underlying
debt. The fair value of the hedges is recorded in other long-term assets or
liabilities with a corresponding increase or decrease in the debt obligation.
The change in fair values of the hedge instrument and the debt are recorded as
equal and offsetting unrealized gains and losses. The existing fair value
hedges are 100% effective and therefore there is no effect on current earnings
from hedge ineffectiveness.

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To minimize the risk of fluctuations in the market price of major raw
material commodities, such as copper and aluminum used in the manufacturing
process, the Company at times enters commodity-forward contracts to effectively
fix the cost of the commodity. Maturity dates of the contracts are scheduled to
coincide with market purchases of the commodity. Changes in the fair value of
commodity-derivative instruments qualifying as cash flow hedges are reported in
accumulated other comprehensive income with a corresponding increase or
decrease in other assets. Cash proceeds or payments between the Company and
the counter-party at maturity of the contracts are recognized as an adjustment
to the cost of the commodity purchased, to the extent the hedge is effective.
The Company generally does not enter commodity hedges extending beyond eighteen
months.

Since the Company sells certain finished products in currencies different
than the currency of the subsidiary that manufactured the products, the Company
is exposed to foreign currency risk on such transactions. The Company hedges
some of this risk by entering foreign-currency-forward contracts that
effectively fix the transaction cost. Changes in the fair value of
foreign-currency-derivative instruments qualifying as cash flow hedges are
reported in accumulated other comprehensive income. Cash settlement proceeds
or payments upon maturity of the contracts are included in the price of the
transaction hedged, to the extent the hedge is effective. The gains or losses
on these hedges are reclassified to the income statement when the underlying
hedged items are recorded in income. The Company generally does not enter
currency hedges extending beyond one year.

To convert Pounds Sterling financing under the European accounts
receivable securitization program to U.S. dollar equivalent financing, the
Company enters into currency-forward contracts that effectively fix the
transaction costs in U.S. dollars. These forward contracts are defined as
speculative and accordingly, changes in the market value of the contracts are
recorded in other income or expense as incurred, with a corresponding increase
or decrease in other assets. The recorded gains or losses are essentially
offset by foreign exchange gains or losses on the Companys
Sterling-denominated debt. Similar currency-forward contracts on Euro
financing of receivables was discontinued in the third quarter of 2003.

The notional amount and estimated fair value of interest rate swaps and
hedging contracts at December 31, 2003 and 2002 are as follows:

|                                                                         |  |          |       |       |  |          |      |       |  |   |       |  |  |   |      |  
|------------------------------------------------------------------------ |  | -------- | ----- | ----- |  | -------- | ---- | ----- |  | - | ----- |  |  | - | ---- | -
|                                                                         |  | 2003     |       | 2002 
|                                                                         |  |          |       |      
|                                                                         |  | Notional |       | Fair  |  | Notional |      | Fair 
|(Dollars in millions)                                                    |  | Value    |       | Value |  | Value    |      | Value
|                                                                         |  |          |       |       |  |          |      |      
|Interest rate swaps                                                      |  | $        | 300.0 |       |  | $        | 18.7 |       |  | $ | 300.0 |  |  | $ | 25.7 |  
|Commodity-forward contracts                                              |  |          | 56.9  |       |  |          | 9.7  |       |  |   | 64.9  |  |  |   | (2.7 | )
|Foreign-currency-forward contracts                                       |  |          |      |       |  |          |     |       |  |   | 5.4   |  |  |   | .4   |  
|Foreign-currency-forward contracts
related to receivables securitization |  |          | 58.2  |       |  |          | 3.2  |       |  |   | 241.1 |  |  |   | 11.1 |  

The estimated fair value and carrying amounts of other financial
instruments were:

|                                     |  |                   |     |                   |  |          |     |       |  |   |     |  |  |   |     | 
|------------------------------------ |  | ----------------- | --- | ----------------- |  | -------- | --- | ----- |  | - | --- |  |  | - | --- | 
|                                     |  | December 31, 2003 |     | December 31, 2002
|                                     |  |                   |     |                  
|                                     |  | Carrying          |     | Fair              |  | Carrying |     | Fair 
|(Dollars in millions)                |  | Value             |     | Value             |  | Value    |     | Value
|                                     |  |                   |     |                   |  |          |     |      
|Credit agreement loans               |  | $                 | 210 |                   |  | $        | 210 |       |  | $ | 524 |  |  | $ | 524 | 
|7 3/8% senior notes due 2005         |  |                   | 210 |                   |  |          | 220 |       |  |   | 212 |  |  |   | 220 | 
|7.125% Euro senior notes due 2006    |  |                   | 308 |                   |  |          | 328 |       |  |   | 254 |  |  |   | 254 | 
|7 3/8% senior notes due 2008         |  |                   | 335 |                   |  |          | 366 |       |  |   | 340 |  |  |   | 355 | 
|8.25% senior notes due 2009          |  |                   | 97  |                   |  |          | 111 |       |  |   | 97  |  |  |   | 104 | 
|8.25% Sterling senior notes due 2009 |  |                   | 106 |                   |  |          | 106 |       |  |   | 95  |  |  |   | 93  | 
|7 5/8% senior notes due 2010         |  |                   | 261 |                   |  |          | 292 |       |  |   | 261 |  |  |   | 277 | 
|7.59% Euro senior bonds due 2013     |  |                   | 38  |                   |  |          | 38  |       |  |   |    |  |  |   |    | 
|Other debt obligations               |  |                   | 14  |                   |  |          | 14  |       |  |   | 16  |  |  |   | 16  | 

The fair values presented above are estimates as of December 31, 2003 and
are not necessarily indicative of amounts for which the Company could settle
such instruments currently or indicative of the intent or ability of the
Company to dispose of or liquidate them.

The fair values of the Companys credit agreement loans were estimated by
the Company to approximate their carrying value since the loans bear interest
at floating rates and have terms representative of current market conditions.
The fair values of senior notes were based on indicative market quotes obtained
from a major securities

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dealer. The fair values of other debt obligations are not significant and were
estimated by the Company to approximate their carrying value.

NOTE 13. Warranties, Guarantees, Commitments and Contingencies

Products sold by the Company are covered by a basic limited warranty with
terms and conditions that vary depending upon the product and country in which
it was sold. The limited warranty covers the equipment, parts and labor (in
certain cases) necessary to satisfy the warranty obligation for a period
ranging from one to ten years generally, and for the lifetime of certain bath
and kitchen faucets. The Company estimates the costs that may be incurred
under its warranty obligations and records a liability in the amount of such
costs at the time product revenue is recognized. Factors that affect the
Companys warranty liability include the number of units sold, historical and
anticipated rates of warranty claims, and cost per claim. At least once a
quarter the Company assesses the adequacy of its recorded warranty liabilities
and adjusts the amounts as necessary. Costs to satisfy warranty claims are
charged as incurred to the accrued warranty liability.

The Company also sells a variety of extended warranty contracts for up to
ten years on certain air conditioning products. Revenues from the sales of
extended warranties are deferred and amortized on a straight-line basis over
the terms of the contracts or based upon historical experience. Actual costs
to satisfy claims on extended warranty contracts are charged to cost of sales
as incurred and were $35 million, $31 million and $25 million for 2003, 2002
and 2001, respectively. Total warranty expense was $181 million, $154 million
and $115 million for 2003, 2002 and 2001, respectively.

Following is a summary of changes in the Companys product warranty
liability for the three years ended December 31, 2003:

|                                                                                                                |  |                         |        |      |  |      |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                |  | Year Ended December 31,
|                                                                                                                |  |                        
|(Dollars in millions)                                                                                           |  | 2003                    |        | 2002 |  | 2001
|                                                                                                                |  |                         |        |      |  |     
|Balance of basic warranty costs accrued and deferred
income on extended warranty contracts, beginning of year   |  | $                       | 315.9  |      |  | $    | 299.9  |   |  | $ | 297.0  |  
|Warranty costs accrued                                                                                          |  |                         | 138.5  |      |  |      | 117.4  |   |  |   | 97.5   |  
|Deferred income on extended warranty contracts sold                                                             |  |                         | 64.4   |      |  |      | 50.7   |   |  |   | 59.7   |  
|Warranty claims settled                                                                                         |  |                         | (123.6 | )    |  |      | (115.1 | ) |  |   | (106.5 | )
|Amortization of deferred income
on extended warranty contracts                                                  |  |                         | (46.7  | )    |  |      | (42.9  | ) |  |   | (40.1  | )
|Increases (decreases) in warranty estimates made in prior
years, including foreign exchange translation effects |  |                         | 7.5    |      |  |      | 5.9    |   |  |   | (7.7   | )
|                                                                                                                |  |                         |        |      |  |      |        |   |  |   |        |  
|Balance of basic warranty costs accrued and deferred
income on extended warranty contracts, end of year         |  |                         | 356.0  |      |  |      | 315.9  |   |  |   | 299.9  |  
|Current portion included in current liabilities                                                                 |  |                         | (153.1 | )    |  |      | (118.0 | ) |  |   | (109.4 | )
|                                                                                                                |  |                         |        |      |  |      |        |   |  |   |        |  
|Long-term warranty liability                                                                                    |  | $                       | 202.9  |      |  | $    | 197.9  |   |  | $ | 190.5  |  
|                                                                                                                |  |                         |        |      |  |      |        |   |  |   |        |  

Future minimum rental commitments under all non-cancelable leases with
original terms in excess of one year in effect at December 31, 2003, are: $132
million in 2004; $104 million in 2005; $87 million in 2006; $74 million in
2007; $58 million in 2008; and $115 million thereafter, a total of $570
million. Net rental expense for all operating leases was $165 million, $148
million and $140 million for the years ended December 31, 2003, 2002, and 2001,
respectively.

The Company and certain of its subsidiaries are parties to a number of
pending legal and tax proceedings. The Company is also subject to federal,
state and local environmental laws and regulations and is involved in
environmental proceedings concerning the investigation and remediation of
various sites, including certain facilities in the process of being closed. In
those instances where it is probable as a result of such proceedings that the
Company will incur costs that can be reasonably determined, the Company has
recorded a liability. The Company believes that these legal, tax and
environmental proceedings will not have a materially adverse effect on its
consolidated financial condition, cash flows or results of operations.

65



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##### 



In October 1999, in Haynes Trane Service Agency, Inc. and Frederick M.
Haynes v. American Standard, Inc., d/b/a The Trane Company, in the United
States District Court for the District of Colorado, verdicts were returned
against the Company for a total of $18 million on the claim that it wrongfully
terminated distribution agreements. On August 28, 2002, the appellate court
ruled in favor of the Company and vacated the $18 million judgment. The
appellate court also reinstated the Companys counterclaims including fraud,
and remanded to the trial court limited portions of Haynes initial claims.

Over the years, the Company has been named as a defendant in numerous
lawsuits alleging various asbestos-related personal injury claims arising
primarily from sales of low-risk-profile products, such as boilers and railroad
brake shoes. The Company believes it has ample insurance and has never had an
unfavorable court judgment.

In these asbestos-related lawsuits, the Company is usually named as one of
a large group of defendants, often in excess of one hundred companies. Many of
these lawsuits involve multiple claimants, do not allege a connection between
any Company product and the claimed injury or disease, and/or do not contain
any allegations regarding the type of claimed injury or disease incurred. As a
result, numerous lawsuits have been placed and may remain on inactive or
deferred dockets, which some jurisdictions have established.

Through December 31, 2003, there have been 139,733 claims filed against
the Company. At year-end 2003, there were 116,282 pending claims, compared
with 96,541 and 52,211 at the end of 2002 and 2001, respectively. Since
receipt of its first asbestos claim more than fifteen years ago through
December 31, 2003, the Company has resolved 23,451 claims, and $36 million in
settlement payments have been made, for an average payment per claim of $1,535.
These settlement payments have been paid or reimbursed or are expected to be
reimbursed by insurance.

The Company has recorded an obligation of $69 million, which represents
the Companys estimated payments to claimants associated with the 116,282
pending asbestos claims. It also has recorded a related asset of $47 million,
which represents the probable recoveries from insurance companies for such
payments to claimants. The amount of the estimated obligations is based on the
claims resolved, the assessment of claims pending, the status of ongoing
litigation, defense and settlement strategies, and an assessment of other
entities responsibilities for the claims. The amount of the probable
recoveries is based on an analysis of insurance coverage, the insurers
financial strength and insurance payments made to date.

Additional developments may occur that could affect the Companys estimate
of asbestos liabilities and recoveries, such as the nature of future claims,
the average payment to claimants and the amount of insurance recovery. No
liability has been recorded for unknown asbestos claims. However, the Company
has substantial insurance coverage for future claims. The Company believes that it is not reasonably possible
that a net loss material to the liquidity and financial condition of the
Company has been incurred.

The Company has commitments and performance guarantees, including energy
savings guarantees totaling $37 million extending from 2004 to 2021, under
long-term service and maintenance contracts related to its air conditioning
equipment and system controls. Through 2003 the Company has experienced no net
losses under such arrangements and considers the probability of losses to be
unlikely.

The Company fully and unconditionally guarantees the payment obligations
under all the Companys Senior Notes that were issued by its wholly owned
subsidiary American Standard Inc. See Note 15 of Notes to Financial
Statements. The Company also guarantees other debt obligations issued by other
subsidiaries, including obligations under a $50 million Euro-denominated credit
facility and $38 million of Euro-denominated Senior Bonds. See Note 10 of
Notes to Financial Statements. The Company also guarantees debt of third
parties in the amount of $4 million as of December 31, 2003.

66



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##### 






NOTE 14. Segments

American Standard has three business segments: Air Conditioning Systems
and Services, Bath and Kitchen and Vehicle Control Systems.

Air Conditioning Systems and Services designs and produces commercial and
residential air conditioning systems and equipment for both domestic and export
sales. It also provides control systems, aftermarket service and parts for its
products, and performance contracting for the installation and maintenance of
heating, ventilation and air conditioning systems. The Companys air
conditioning segment is organized and managed as two operating divisions: TCS,
a global business, and RS, a North American regional business. TCS
manufactures and distributes, on a global basis, commercial applied and
commercial unitary equipment, services and parts and services for commercial
and large residential applications. TCS also distributes residential products
outside North America. RS manufactures primarily residential products, and
distributes both commercial unitary and residential products in North America.
RS brings focus and emphasis to a separate North American distribution channel
through which both commercial unitary and residential products are sold. Since
TCS and RS both sell residential and commercial unitary products, they are not
organized on a purely product-line basis. Approximately 15% of RS sales are
for commercial applications. Since TCS and RS overlap in their commercial and
residential products and have similar economic characteristics, we believe that
aggregation of TCS and RS into a single reportable segment is the most
meaningful way to report them. Therefore, in accordance with the aggregation
criteria of Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information, for segment reporting
purposes TCS and RS are aggregated into a single reportable segment called Air
Conditioning Systems and Services.

The Bath and Kitchen segment designs and produces bathroom and kitchen
fixtures and fittings on a global basis. Its products are marketed through
retail and wholesale sales channels for residential and commercial markets.

Vehicle Control Systems designs and manufactures braking and control
systems for the worldwide commercial vehicle industry. Its largest-selling
products are braking control systems and related electronic and other control
systems. These include antilock and electronic braking systems (ABS and
EBS, respectively), automated transmission controls and suspension control
systems for heavy and medium-size trucks, buses, and trailers. WABCO also
sells suspension control systems to manufacturers of luxury cars and sport
utility vehicles.

67



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##### 



In addition to the segment data in the following table, see also the
five-year summary in Item 6, Selected Financial Data and Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

Segment Data

|                                                      |                                                     |                      |       |                        |       |      |       |       |       |   |       |       |       | 
|----------------------------------------------------- | --------------------------------------------------- | -------------------- | ----- | ---------------------- | ----- | ---- | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                                                      |                                                     |                      |       | Year Ended December 31
|                                                      |                                                     |                      |       |                       
|(Dollars in millions)                                 |                                                     | 2003                 |       | 2002                   |       | 2001
|                                                      |                                                     |                      |       |                        |       |     
|Sales:                                                |                                                     |                      |       |                        |       |      |       |       |       |   |       |      
|                                                      | Air Conditioning Systems and Services               |                      | $     | 4,975                  |       |      | $     | 4,744 |       |   | $     | 4,692 |      
|                                                      | Bath and Kitchen                                    |                      |       | 2,235                  |       |      |       | 1,994 |       |   |       | 1,813 |      
|                                                      | Vehicle Control Systems                             |                      |       | 1,358                  |       |      |       | 1,057 |       |   |       | 960   |      
|                                                      |                                                     |                      |       |                        |       |      |       |       |       |   |       |      
|                                                      |                                                     | $                    | 8,568 |                        |       | $    | 7,795 |       |       | $ | 7,465 |      
|                                                      |                                                     |                      |       |                        |       |      |       |       |       |   |       |      
|Segment income:                                       |                                                     |                      |       |                        |       |      |       |       |       |   |       |      
|                                                      | Air Conditioning Systems and Services               |                      | $     | 522                    |       |      | $     | 537   |       |   | $     | 515   |      
|                                                      | Bath and Kitchen                                    |                      |       | 139                    |       |      |       | 155   |       |   |       | 148   |      
|                                                      | Vehicle Control Systems                             |                      |       | 177                    |       |      |       | 139   |       |   |       | 124   |      
|                                                      |                                                     |                      |       |                        |       |      |       |       |       |   |       |      
|                                                      |                                                     |                      | 838   |                        |       |      | 831   |       |       |   | 787   |      
|Equity in net income of unconsolidated joint
ventures |                                                     |                      | 26    |                        |       |      | 27    |       |       |   | 19    |      
|Interest expense                                      |                                                     |                      | (117  | )                      |       |      | (129  | )     |       |   | (169  | )    
|Corporate and other expenses                          |                                                     |                      | (198  | )                      |       |      | (173  | )     |       |   | (161  | )    
|                                                      |                                                     |                      |       |                        |       |      |       |       |       |   |       |      
|Income from continuing operations before
income taxes |                                                     | $                    | 549   |                        |       | $    | 556   |       |       | $ | 476   |      
|                                                      |                                                     |                      |       |                        |       |      |       |       |       |   |       |      
|SalesGeographic distribution(a):                     |                                                     |                      |       |                        |       |      |       |       |       |   |       |      
|                                                      | United States                                       |                      | $     | 4,513                  |       |      | $     | 4,412 |       |   | $     | 4,253 |      
|                                                      | Europe (countries below are included in this total) |                      |       | 2,664                  |       |      |       | 2,168 |       |   |       | 2,014 |      
|                                                      |                                                     | Germany              |       |                        | 708   |      |       |       | 542   |   |       |       | 520   | 
|                                                      |                                                     | U.K.                 |       |                        | 511   |      |       |       | 472   |   |       |       | 433   | 
|                                                      |                                                     | France               |       |                        | 482   |      |       |       | 417   |   |       |       | 419   | 
|                                                      |                                                     | Italy                |       |                        | 380   |      |       |       | 312   |   |       |       | 300   | 
|                                                      | Other                                               |                      |       | 1,391                  |       |      |       | 1,215 |       |   |       | 1,198 |      
|                                                      |                                                     |                      |       |                        |       |      |       |       |       |   |       |      
|                                                      |                                                     | Total sales          |       | $                      | 8,568 |      |       | $     | 7,795 |   |       | $     | 7,465 | 
|                                                      |                                                     |                      |       |                        |       |      |       |       |       |   |       |      
|Segment incomeGeographic distribution:               |                                                     |                      |       |                        |       |      |       |       |       |   |       |      
|                                                      | United States                                       |                      | $     | 445                    |       |      | $     | 559   |       |   | $     | 515   |      
|                                                      | Europe                                              |                      |       | 253                    |       |      |       | 193   |       |   |       | 173   |      
|                                                      | Other                                               |                      |       | 140                    |       |      |       | 79    |       |   |       | 99    |      
|                                                      |                                                     |                      |       |                        |       |      |       |       |       |   |       |      
|                                                      |                                                     | Total segment income |       | $                      | 838   |      |       | $     | 831   |   |       | $     | 787   | 
|                                                      |                                                     |                      |       |                        |       |      |       |       |       |   |       |      

(a)  Revenues from external customers are classified by country of
origin.

68



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Segment Data (continued)

|                             |                                                     |                           |     |                   |       |      |     |       |       |  |     |       |       | 
|---------------------------- | --------------------------------------------------- | ------------------------- | --- | ----------------- | ----- | ---- | --- | ----- | ----- |  | --- | ----- | ----- | 
|                             |                                                     |                           |     | As of December 31
|                             |                                                     |                           |     |                  
|(Dollars in millions)        |                                                     | 2003                      |     | 2002              |       | 2001
|                             |                                                     |                           |     |                   |       |     
|Assets                       |                                                     |                           |     |                   |       |      |     |       |       |  |     |      
|                             | Air Conditioning Systems and Services               |                           | $   | 2,389             |       |      | $   | 2,206 |       |  | $   | 2,177 |      
|                             | Bath and Kitchen                                    |                           |     | 2,099             |       |      |     | 1,833 |       |  |     | 1,694 |      
|                             | Vehicle Control Systems                             |                           |     | 906               |       |      |     | 702   |       |  |     | 590   |      
|                             |                                                     |                           |     |                   |       |      |     |       |       |  |     |      
|                             |                                                     | Total identifiable assets |     | $                 | 5,394 |      |     | $     | 4,741 |  |     | $     | 4,461 | 
|                             |                                                     |                           |     |                   |       |      |     |       |       |  |     |      
|Geographic distribution:     |                                                     |                           |     |                   |       |      |     |       |       |  |     |      
|                             | United States                                       |                           | $   | 2,101             |       |      | $   | 1,950 |       |  | $   | 1,809 |      
|                             | Europe (countries below are included in this total) |                           |     | 2,401             |       |      |     | 1,931 |       |  |     | 1,774 |      
|                             |                                                     | Germany                   |     |                   | 586   |      |     |       | 489   |  |     |       | 412   | 
|                             |                                                     | U.K.                      |     |                   | 361   |      |     |       | 317   |  |     |       | 279   | 
|                             |                                                     | France                    |     |                   | 326   |      |     |       | 320   |  |     |       | 268   | 
|                             |                                                     | Italy                     |     |                   | 374   |      |     |       | 237   |  |     |       | 170   | 
|                             | Other                                               |                           |     | 892               |       |      |     | 860   |       |  |     | 878   |      
|                             |                                                     |                           |     |                   |       |      |     |       |       |  |     |      
|                             |                                                     | Total identifiable assets |     |                   | 5,394 |      |     |       | 4,741 |  |     |       | 4,461 | 
|Cash and cash equivalents    |                                                     |                           | 112 |                   |       |      | 97  |       |       |  | 82  |      
|Prepaid charges              |                                                     |                           | 21  |                   |       |      | 27  |       |       |  | 32  |      
|Corporate assets             |                                                     |                           | 352 |                   |       |      | 279 |       |       |  | 256 |      
|                             |                                                     |                           |     |                   |       |      |     |       |       |  |     |      
|                             |                                                     | Total assets              |     | $                 | 5,879 |      |     | $     | 5,144 |  |     | $     | 4,831 | 
|                             |                                                     |                           |     |                   |       |      |     |       |       |  |     |      
|Goodwill included in assets: |                                                     |                           |     |                   |       |      |     |       |       |  |     |      
|                             | Air Conditioning Systems and Services               |                           | $   | 222               |       |      | $   | 214   |       |  | $   | 202   |      
|                             | Bath and Kitchen                                    |                           |     | 586               |       |      |     | 509   |       |  |     | 484   |      
|                             | Vehicle Control Systems                             |                           |     | 332               |       |      |     | 290   |       |  |     | 243   |      
|                             |                                                     |                           |     |                   |       |      |     |       |       |  |     |      
|                             |                                                     | Total goodwill            |     | $                 | 1,140 |      |     | $     | 1,013 |  |     | $     | 929   | 
|                             |                                                     |                           |     |                   |       |      |     |       |       |  |     |      

|                                                                   |                                       |                                     |   |                        |     |      |   |     |     |  |   |     |     | 
|------------------------------------------------------------------ | ------------------------------------- | ----------------------------------- | - | ---------------------- | --- | ---- | - | --- | --- |  | - | --- | --- | 
|                                                                   |                                       |                                     |   | Year Ended December 31
|                                                                   |                                       |                                     |   |                       
|(Dollars in millions)                                              |                                       | 2003                                |   | 2002                   |     | 2001
|                                                                   |                                       |                                     |   |                        |     |     
|Capital expenditures, including investments
and computer software: |                                       |                                     |   |                        |     |      |   |     |     |  |   |    
|                                                                   | Air Conditioning Systems and Services |                                     | $ | 90                     |     |      | $ | 109 |     |  | $ | 120 |    
|                                                                   | Bath and Kitchen                      |                                     |   | 101                    |     |      |   | 77  |     |  |   | 88  |    
|                                                                   | Vehicle Control Systems               |                                     |   | 45                     |     |      |   | 46  |     |  |   | 45  |    
|                                                                   | Corporate                             |                                     |   | 4                      |     |      |   | 3   |     |  |   | 6   |    
|                                                                   |                                       |                                     |   |                        |     |      |   |     |     |  |   |    
|                                                                   |                                       | Total capital expenditures          |   | $                      | 240 |      |   | $   | 235 |  |   | $   | 259 | 
|                                                                   |                                       |                                     |   |                        |     |      |   |     |     |  |   |    
|Depreciation and amortization:                                     |                                       |                                     |   |                        |     |      |   |     |     |  |   |    
|                                                                   | Air Conditioning Systems and Services |                                     | $ | 85                     |     |      | $ | 80  |     |  | $ | 82  |    
|                                                                   | Bath and Kitchen                      |                                     |   | 94                     |     |      |   | 82  |     |  |   | 89  |    
|                                                                   | Vehicle Control Systems               |                                     |   | 58                     |     |      |   | 46  |     |  |   | 57  |    
|                                                                   | Corporate                             |                                     |   | 10                     |     |      |   | 5   |     |  |   | 4   |    
|                                                                   |                                       |                                     |   |                        |     |      |   |     |     |  |   |    
|                                                                   |                                       | Total depreciation and amortization |   | $                      | 247 |      |   | $   | 213 |  |   | $   | 232 | 
|                                                                   |                                       |                                     |   |                        |     |      |   |     |     |  |   |    

69



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##### 



NOTE 15. Supplemental Consolidating Condensed Financial Information

All of the Companys Senior Notes were issued by its 100%-owned
subsidiary, American Standard Inc. (ASI). American Standard Companies Inc.
(the Parent Company) fully and unconditionally guarantees the payment
obligations under these securities (the Companys Public Debt). In lieu of
providing separate audited financial statements for ASI, the Company has
included the accompanying audited consolidating condensed financial
information. Management believes that separate financial statements of ASI are
not material to investors. The following supplemental financial information
sets forth, on an unconsolidated basis, statements of income and statements of
cash flows for the years ended December 31, 2003, 2002 and 2001, and balance
sheets as of December 31, 2003 and 2002 for the Parent Company, ASI, and the
subsidiaries of the Parent Company which are not subsidiaries of ASI (the
Other Subsidiaries). None of the Other Subsidiaries guarantees the Public
Debt of ASI. The equity method of accounting is used to reflect investments of
the Parent Company in ASI and Other Subsidiaries.

CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2003

|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |         |         | 
|----------------------------------------------------------------------------------------------------------- | -------------------------------------- | -------------- | ----- | ------ |  | ------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ----- | ------ | ------ | ------ | -------- | ------- | ------- | ------- | 
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         | Other   |         |       |        |        |        | Consoli-
|                                                                                                            |                                        |                |       | Parent |  |        |         |         |         | Subsid- |         | Elimin- |         | dated
|(Dollars in millions)                                                                                       |                                        | Company        |       | ASI    |  | iaries |         | ations  |         | Total  
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |        
|Sales                                                                                                       |                                        |                |       |        |  | $      | 4,583.7 |         |         | $       | 4,453.7 |         |         | $     | (469.8 | )      |        | $        | 8,567.6 |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|Costs and expenses:                                                                                         |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|                                                                                                            | Cost of sales                          |                |       |        |  |        |         | 3,545.0 |         |         |         | 3,452.6 |         |       |        | (469.8 | )      |          |         | 6,527.8 |        
|                                                                                                            | Selling and administrative expenses    |                |       |        |  |        |         | 754.8   |         |         |         | 608.2   |         |       |        |        |        |          |         | 1,363.0 |        
|                                                                                                            | Other expense                          |                |       |        |  |        |         | 3.5     |         |         |         | 7.1     |         |       |        |        |        |          |         | 10.6    |        
|                                                                                                            | Interest expense                       |                |       |        |  |        |         | 105.4   |         |         |         | 11.6    |         |       |        |        |        |          |         | 117.0   |        
|                                                                                                            | Intercompany interest expense (income) |                |       |        |  |        |         | 2.3     |         |         |         | (2.3    | )       |       |        |        |        |          |         |        |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|                                                                                                            |                                        | Total expenses |       |        |  |        |         |         | 4,411.0 |         |         |         | 4,077.2 |       |        |        | (469.8 | )        |         |         | 8,018.4 | 
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|Income from continuing operations before income taxes
and equity in net income of consolidated subsidiaries |                                        |                |       |        |  |        | 172.7   |         |         |         | 376.5   |         |         |       |       |        |        |          | 549.2   |        
|Income taxes                                                                                                |                                        |                |       |        |  |        | (2.1    | )       |         |         | 146.1   |         |         |       |        |        |        |          | 144.0   |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|Income from continuing operations before equity
in net income of consolidated subsidiaries                  |                                        |                |       |        |  |        | 174.8   |         |         |         | 230.4   |         |         |       |       |        |        |          | 405.2   |        
|Equity in net income of consolidated subsidiaries                                                           |                                        | $              | 405.2 |        |  |        |        |         |         |         |        |         |         |       | (405.2 | )      |        |          |        |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|Net income                                                                                                  |                                        | $              | 405.2 |        |  | $      | 174.8   |         |         | $       | 230.4   |         |         | $     | (405.2 | )      |        | $        | 405.2   |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        

70



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##### 



NOTE 15. Supplemental Consolidating Condensed Financial Information (continued)

CONSOLIDATING CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2003

|                              |                                      |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |         |         | 
|----------------------------- | ------------------------------------ | ---------------------------------------------------- | - | ------- | ------- | ------ | - | ------- | -------- | ------- | - | ------- | ------- | ----- | - | -------- | -------- | -------- | - | ------- | ------- | 
|                              |                                      |                                                      |   |         |         |        |   |         |          |         |   | Other   |         |       |   |          |          | Consoli-
|                              |                                      |                                                      |   | Parent  |         |        |   |         |          | Subsid- |   | Elimin- |         | dated
|(Dollars in millions)         |                                      | Company                                              |   | ASI     |         | iaries |   | ations  |          | Total  
|                              |                                      |                                                      |   |         |         |        |   |         |          |        
|ASSETS                        |                                      |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |        
|Current assets:               |                                      |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |        
|                              | Cash and cash equivalents            |                                                      | $ | .1      |         |        | $ | (70.4   | )        |         | $ | 182.0   |         |       |   |          |          |          | $ | 111.7   |        
|                              | Accounts receivable, net             |                                                      |   |        |         |        |   | 481.7   |          |         |   | 541.1   |         |       |   |          |          |          |   | 1,022.8 |        
|                              | Inventories                          |                                                      |   |         |         |        |   | 422.6   |          |         |   | 487.3   |         |       |   |          |          |          |   | 909.9   |        
|                              | Other current assets                 |                                                      |   |         |         |        |   | 256.5   |          |         |   | 189.8   |         |       |   |          |          |          |   | 446.3   |        
|                              |                                      |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |        
|                              |                                      | Total current assets                                 |   |         | .1      |        |   |         | 1,090.4  |         |   |         | 1,400.2 |       |   |          |          |          |   |         | 2,490.7 | 
|                              | Facilities, net                      |                                                      |   |         |         |        |   | 582.1   |          |         |   | 933.3   |         |       |   |          |          |          |   | 1,515.4 |        
|                              | Goodwill, net                        |                                                      |   |         |         |        |   | 137.2   |          |         |   | 1,003.2 |         |       |   |          |          |          |   | 1,140.4 |        
|                              | Investment in subsidiaries           |                                                      |   | 1,441.1 |         |        |   |        |          |         |   |        |         |       | $ | (1,441.1 | )        |          |   |        |        
|                              | Other assets                         |                                                      |   |         |         |        |   | 510.6   |          |         |   | 221.6   |         |       |   |          |          |          |   | 732.2   |        
|                              |                                      |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |        
|                              |                                      | Total assets                                         |   | $       | 1,441.2 |        |   | $       | 2,320.3  |         |   | $       | 3,558.3 |       |   | $        | (1,441.1 | )        |   | $       | 5,878.7 | 
|                              |                                      |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |        
|LIABILITIES AND SHAREHOLDERS |                                      |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |        
|                              | (DEFICIT) EQUITY                     |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |         |        
|Current liabilities:          |                                      |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |        
|                              | Loans payable to banks               |                                                      |   |         |         |        | $ |        |          |         | $ | 49.8    |         |       |   |          |          |          | $ | 49.8    |        
|                              | Current maturities of long-term debt |                                                      |   |         |         |        |   | 1.5     |          |         |   | 1.0     |         |       |   |          |          |          |   | 2.5     |        
|                              | Other current liabilities            |                                                      |   |         |         |        |   | 863.4   |          |         |   | 1,117.8 |         |       |   |          |          |          |   | 1,981.2 |        
|                              |                                      |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |        
|                              |                                      | Total current liabilities                            |   |         |         |        |   |         | 864.9    |         |   |         | 1,168.6 |       |   |          |          |          |   |         | 2,033.5 | 
|                              | Long-term debt                       |                                                      |   |         |         |        |   | 1,489.2 |          |         |   | 137.6   |         |       |   |          |          |          |   | 1,626.8 |        
|                              | Reserve for post-retirement benefits |                                                      |   |         |         |        |   | 326.4   |          |         |   | 331.0   |         |       |   |          |          |          |   | 657.4   |        
|                              | Intercompany accounts, net           |                                                      | $ | 727.4   |         |        |   | 251.4   |          |         |   | (978.8  | )       |       |   |          |          |          |   |        |        
|                              | Other long-term liabilities          |                                                      |   |         |         |        |   | 481.5   |          |         |   | 365.7   |         |       |   |          |          |          |   | 847.2   |        
|                              |                                      |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |        
|                              |                                      | Total liabilities                                    |   |         | 727.4   |        |   |         | 3,413.4  |         |   |         | 1,024.1 |       |   | $        |         |          |   |         | 5,164.9 | 
|                              |                                      |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |        
|                              |                                      | Total shareholders equity (deficit)                 |   |         | 713.8   |        |   |         | (1,093.1 | )       |   |         | 2,534.2 |       |   |          | (1,441.1 | )        |   |         | 713.8   | 
|                              |                                      |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |        
|                              |                                      | Total liabilities and shareholders equity (deficit) |   | $       | 1,441.2 |        |   | $       | 2,320.3  |         |   | $       | 3,558.3 |       |   | $        | (1,441.1 | )        |   | $       | 5,878.7 | 
|                              |                                      |                                                      |   |         |         |        |   |         |          |         |   |         |         |       |   |          |          |          |   |        

71



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##### 



NOTE 15. Supplemental Consolidating Condensed Financial Information (continued)

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 2003

|                                                             |                       |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |          |        |       |        |  
|------------------------------------------------------------ | --------------------- | ----------------------------------------------------------------------- | ----------------------------------------------------------- | --------------------------- | ------ | ------ | ------ | ------ | ------ | ----- | ------ | ------- | ------ | ------- | ------ | ----- | ------ | ----- | ------ | -------- | ------ | ----- | ------ | -
|                                                             |                       |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        | Other   |        |       |        |       |        | Consoli-
|                                                             |                       |                                                                         |                                                             |                             |        | Parent |        |        |        |       |        | Subsid- |        | Elimin- |        | dated
|(Dollars in millions)                                        |                       | Company                                                                 |                                                             | ASI                         |        | iaries |        | ations |        | Total
|                                                             |                       |                                                                         |                                                             |                             |        |        |        |        |        |      
|Cash provided (used) by:                                     |                       |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |         
|                                                             | Operating activities: |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |          |       
|                                                             |                       | Net income                                                              |                                                             | $                           | 405.2  |        |        | $      | 174.8  |       |        | $       | 230.4  |         |        | $     | (405.2 | )     |        | $        | 405.2  |      
|                                                             |                       | Adjustments to reconcile net income
to net cash provided by operations: |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |          |        |      
|                                                             |                       |                                                                         | Depreciation and amortization                               |                             |        |        |        |        |        | 95.6  |        |         |        | 151.2   |        |       |        |       |        |          |        | 246.8 |       
|                                                             |                       |                                                                         | Equity in earnings of affiliates, net
of dividends received |                             |        |        |        |        |        | (6.7  | )      |         |        | (7.6    | )      |       |        |       |        |          |        | (14.3 | )     
|                                                             |                       |                                                                         | Non-cash stock compensation                                 |                             |        |        |        |        |        | 60.4  |        |         |        |         |        |       |        |       |        |          |        | 60.4  |       
|                                                             |                       |                                                                         | Deferred income taxes                                       |                             |        |        |        |        |        | 10.1  |        |         |        | 21.4    |        |       |        |       |        |          |        | 31.5  |       
|                                                             |                       |                                                                         | Gain on sale of property, plant and equipment               |                             |        |        |        |        |        | .8    |        |         |        | (8.7    | )      |       |        |       |        |          |        | (7.9  | )     
|                                                             |                       |                                                                         | Equity in net income of subsidiary                          |                             |        | (405.2 | )      |        |        |       |        |         |        |         |        |       |        | 405.2 |        |          |        |      |       
|                                                             |                       |                                                                         | Changes in assets and liabilities:                          |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |          |        |       |       
|                                                             |                       |                                                                         |                                                             | Accounts receivable         |        |        |        |        |        |       | (28.8  | )       |        |         | (57.5  | )     |        |       |        |          |        |       | (86.3  | )
|                                                             |                       |                                                                         |                                                             | Inventories                 |        |        |        |        |        |       | (68.7  | )       |        |         | (7.8   | )     |        |       |        |          |        |       | (76.5  | )
|                                                             |                       |                                                                         |                                                             | Accounts payable            |        |        |        |        |        |       | 25.5   |         |        |         | 7.9    |       |        |       |        |          |        |       | 33.4   |  
|                                                             |                       |                                                                         |                                                             | Other accrued liabilities   |        |        |        |        |        |       | (5.6   | )       |        |         | 193.8  |       |        |       |        |          |        |       | 188.2  |  
|                                                             |                       |                                                                         |                                                             | Post-retirement benefits    |        |        |        |        |        |       | (7.1   | )       |        |         | (2.3   | )     |        |       |        |          |        |       | (9.4   | )
|                                                             |                       |                                                                         |                                                             | Other long-term liabilities |        |        |        |        |        |       | (27.6  | )       |        |         | 40.5   |       |        |       |        |          |        |       | 12.9   |  
|                                                             |                       |                                                                         |                                                             | Other assets                |        |        |        |        |        |       | 95.7   |         |        |         | (228.5 | )     |        |       |        |          |        |       | (132.8 | )
|                                                             |                       |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |         
|Net cash provided by operating activities                    |                       |                                                                         |                                                            |                             |        |        | 318.4  |        |        |       | 332.8  |         |        |         |       |       |        |       | 651.2  |         
|                                                             |                       |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |         
|Investing activities:                                        |                       |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |         
|                                                             |                       | Purchase of property, plant and equipment                               |                                                             |                             |        |        |        |        | (66.7  | )     |        |         | (104.0 | )       |        |       |        |       |        |          | (170.7 | )    
|                                                             |                       | Investments in affiliated companies                                     |                                                             |                             |        |        |        |        |        |       |        |         | (25.0  | )       |        |       |        |       |        |          | (25.0  | )    
|                                                             |                       | Investments in computer software                                        |                                                             |                             |        |        |        |        | (23.2  | )     |        |         | (21.7  | )       |        |       |        |       |        |          | (44.9  | )    
|                                                             |                       | Proceeds from the disposal of property/equipment                        |                                                             |                             |        |        |        |        | 6.0    |       |        |         | 17.2   |         |        |       |        |       |        |          | 23.2   |      
|                                                             |                       |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |         
|Net cash used by investing activities                        |                       |                                                                         |                                                            |                             |        |        | (83.9  | )      |        |       | (133.5 | )       |        |         |       |       |        |       | (217.4 | )       
|                                                             |                       |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |         
|Financing activities:                                        |                       |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |         
|                                                             |                       | Proceeds from issuance of long-term debt                                |                                                             |                             |        |        |        |        |        |       |        |         | 33.0   |         |        |       |        |       |        |          | 33.0   |      
|                                                             |                       | Repayments of long-term debt                                            |                                                             |                             |        |        |        |        | (126.0 | )     |        |         | (3.6   | )       |        |       |        |       |        |          | (129.6 | )    
|                                                             |                       | Net change in revolving credit facility                                 |                                                             |                             |        |        |        |        | (308.0 | )     |        |         | 31.6   |         |        |       |        |       |        |          | (276.4 | )    
|                                                             |                       | Net change in other short-term debt                                     |                                                             |                             |        |        |        |        |        |       |        |         | 1.8    |         |        |       |        |       |        |          | 1.8    |      
|                                                             |                       | Purchases of treasury stock                                             |                                                             |                             | (149.5 | )      |        |        |        |       |        |         |        |         |        |       |        |       |        |          | (149.5 | )    
|                                                             |                       | Net change in intercompany accounts                                     |                                                             |                             | 87.7   |        |        |        | 102.9  |       |        |         | (190.6 | )       |        |       |        |       |        |          |       |      
|                                                             |                       | Proceeds from exercise of stock options                                 |                                                             |                             | 54.9   |        |        |        |        |       |        |         |        |         |        |       |        |       |        |          | 54.9   |      
|                                                             |                       | Proceeds from foreign exchange forward contracts                        |                                                             |                             |        |        |        |        | 38.2   |       |        |         |        |         |        |       |        |       |        |          | 38.2   |      
|                                                             |                       | Other common stock issued or reacquired, net                            |                                                             |                             | 7.0    |        |        |        | .5     |       |        |         |        |         |        |       |        |       |        |          | 7.5    |      
|                                                             |                       |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |         
|Net cash used by financing activities                        |                       |                                                                         | .1                                                          |                             |        |        | (292.4 | )      |        |       | (127.8 | )       |        |         |       |       |        |       | (420.1 | )       
|Effect of exchange rate changes on
cash and cash equivalents |                       |                                                                         |                                                             |                             |        |        |        |        |        |       | 1.4    |         |        |         |        |       |        |       | 1.4    |         
|                                                             |                       |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |         
|Net increase (decrease) in cash and cash equivalents         |                       |                                                                         | .1                                                          |                             |        |        | (57.9  | )      |        |       | 72.9   |         |        |         |       |       |        |       | 15.1   |         
|Cash and cash equivalents at beginning of year               |                       |                                                                         |                                                             |                             |        |        | (22.9  | )      |        |       | 119.5  |         |        |         |        |       |        |       | 96.6   |         
|                                                             |                       |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |         
|Cash and cash equivalents at end of year                     |                       | $                                                                       | .1                                                          |                             |        | $      | (80.8  | )      |        | $     | 192.4  |         |        | $       |       |       |        | $     | 111.7  |         
|                                                             |                       |                                                                         |                                                             |                             |        |        |        |        |        |       |        |         |        |         |        |       |        |       |        |         

72



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##### 



NOTE 15. Supplemental Consolidating Condensed Financial Information (continued)

CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2002

|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |         |         | 
|----------------------------------------------------------------------------------------------------------- | -------------------------------------- | -------------- | ----- | ------ |  | ------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ----- | ------ | ------ | ------ | -------- | ------- | ------- | ------- | 
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         | Other   |         |       |        |        |        | Consoli-
|                                                                                                            |                                        |                |       | Parent |  |        |         |         |         | Subsid- |         | Elimin- |         | dated
|(Dollars in millions)                                                                                       |                                        | Company        |       | ASI    |  | iaries |         | ations  |         | Total  
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |        
|Sales                                                                                                       |                                        |                |       |        |  | $      | 4,457.1 |         |         | $       | 3,654.2 |         |         | $     | (315.9 | )      |        | $        | 7,795.4 |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|Costs and expenses:                                                                                         |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|                                                                                                            | Cost of sales                          |                |       |        |  |        |         | 3,452.7 |         |         |         | 2,776.1 |         |       |        | (315.9 | )      |          |         | 5,912.9 |        
|                                                                                                            | Selling and administrative expenses    |                |       |        |  |        |         | 637.9   |         |         |         | 552.6   |         |       |        |        |        |          |         | 1,190.5 |        
|                                                                                                            | Other expense                          |                |       |        |  |        |         | 10.6    |         |         |         | (3.8    | )       |       |        |        |        |          |         | 6.8     |        
|                                                                                                            | Interest expense                       |                |       |        |  |        |         | 119.9   |         |         |         | 9.1     |         |       |        |        |        |          |         | 129.0   |        
|                                                                                                            | Intercompany interest expense (income) |                |       |        |  |        |         | (.6     | )       |         |         | .6      |         |       |        |        |        |          |         |        |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|                                                                                                            |                                        | Total expenses |       |        |  |        |         |         | 4,220.5 |         |         |         | 3,334.6 |       |        |        | (315.9 | )        |         |         | 7,239.2 | 
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|Income from continuing operations before income taxes
and equity in net income of consolidated subsidiaries |                                        |                |       |        |  |        | 236.6   |         |         |         | 319.6   |         |         |       |       |        |        |          | 556.2   |        
|Income taxes                                                                                                |                                        |                |       |        |  |        | 72.1    |         |         |         | 113.1   |         |         |       |        |        |        |          | 185.2   |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|Income from continuing operations before equity
in net income of consolidated subsidiaries                  |                                        |                |       |        |  |        | 164.5   |         |         |         | 206.5   |         |         |       |       |        |        |          | 371.0   |        
|Equity in net income of consolidated subsidiaries                                                           |                                        | $              | 371.0 |        |  |        |        |         |         |         |        |         |         |       | (371.0 | )      |        |          |        |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|Net income                                                                                                  |                                        | $              | 371.0 |        |  | $      | 164.5   |         |         | $       | 206.5   |         |         | $     | (371.0 | )      |        | $        | 371.0   |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        

CONSOLIDATING CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2002

|                                               |                                      |                                                      |   |        |       |        |   |         |          |         |   |         |         |       |   |        |        |          |   |         |         | 
|---------------------------------------------- | ------------------------------------ | ---------------------------------------------------- | - | ------ | ----- | ------ | - | ------- | -------- | ------- | - | ------- | ------- | ----- | - | ------ | ------ | -------- | - | ------- | ------- | 
|                                               |                                      |                                                      |   |        |       |        |   |         |          |         |   | Other   |         |       |   |        |        | Consoli-
|                                               |                                      |                                                      |   | Parent |       |        |   |         |          | Subsid- |   | Elimin- |         | dated
|(Dollars in millions)                          |                                      | Company                                              |   | ASI    |       | iaries |   | ations  |          | Total  
|                                               |                                      |                                                      |   |        |       |        |   |         |          |        
|ASSETS                                         |                                      |                                                      |   |        |       |        |   |         |          |         |   |         |         |       |   |        |        |          |   |        
|Current assets:                                |                                      |                                                      |   |        |       |        |   |         |          |         |   |         |         |       |   |        |        |          |   |        
|                                               | Cash and cash equivalents            |                                                      |   |        |       |        | $ | (22.9   | )        |         | $ | 119.5   |         |       |   |        |        |          | $ | 96.6    |        
|                                               | Accounts receivable, net             |                                                      |   |        |       |        |   | 453.3   |          |         |   | 428.1   |         |       |   |        |        |          |   | 881.4   |        
|                                               | Inventories                          |                                                      |   |        |       |        |   | 353.9   |          |         |   | 416.8   |         |       |   |        |        |          |   | 770.7   |        
|                                               | Other current assets                 |                                                      |   |        |       |        |   | 178.9   |          |         |   | 86.8    |         |       |   |        |        |          |   | 265.7   |        
|                                               |                                      |                                                      |   |        |       |        |   |         |          |         |   |         |         |       |   |        |        |          |   |        
|                                               |                                      | Total current assets                                 |   |        |       |        |   |         | 963.2    |         |   |         | 1,051.2 |       |   |        |        |          |   |         | 2,014.4 | 
|                                               | Facilities, net                      |                                                      |   |        |       |        |   | 575.2   |          |         |   | 854.9   |         |       |   |        |        |          |   | 1,430.1 |        
|                                               | Goodwill, net                        |                                                      |   |        |       |        |   | 133.0   |          |         |   | 879.8   |         |       |   |        |        |          |   | 1,012.8 |        
|                                               | Investment in subsidiaries           |                                                      | $ | 860.2  |       |        |   |        |          |         |   |        |         |       | $ | (860.2 | )      |          |   |        |        
|                                               | Other assets                         |                                                      |   |        |       |        |   | 624.2   |          |         |   | 62.3    |         |       |   |        |        |          |   | 686.5   |        
|                                               |                                      |                                                      |   |        |       |        |   |         |          |         |   |         |         |       |   |        |        |          |   |        
|                                               |                                      | Total assets                                         |   | $      | 860.2 |        |   | $       | 2,295.6  |         |   | $       | 2,848.2 |       |   | $      | (860.2 | )        |   | $       | 5,143.8 | 
|                                               |                                      |                                                      |   |        |       |        |   |         |          |         |   |         |         |       |   |        |        |          |   |        
|LIABILITIES AND SHAREHOLDERS
(DEFICIT) EQUITY |                                      |                                                      |   |        |       |        |   |         |          |         |   |         |         |       |   |        |        |          |   |        
|Current liabilities:                           |                                      |                                                      |   |        |       |        |   |         |          |         |   |         |         |       |   |        |        |          |   |        
|                                               | Loans payable to banks               |                                                      |   |        |       |        |   |         |          |         | $ | 36.3    |         |       |   |        |        |          | $ | 36.3    |        
|                                               | Current maturities of long-term debt |                                                      |   |        |       |        | $ | 2.4     |          |         |   | 2.1     |         |       |   |        |        |          |   | 4.5     |        
|                                               | Other current liabilities            |                                                      |   |        |       |        |   | 836.4   |          |         |   | 788.4   |         |       |   |        |        |          |   | 1,624.8 |        
|                                               |                                      |                                                      |   |        |       |        |   |         |          |         |   |         |         |       |   |        |        |          |   |        
|                                               |                                      | Total current liabilities                            |   |        |       |        |   |         | 838.8    |         |   |         | 826.8   |       |   |        |        |          |   |         | 1,665.6 | 
|                                               | Long-term debt                       |                                                      |   |        |       |        |   | 1,864.2 |          |         |   | 54.2    |         |       |   |        |        |          |   | 1,918.4 |        
|                                               | Reserve for post-retirement benefits |                                                      |   |        |       |        |   | 347.0   |          |         |   | 276.3   |         |       |   |        |        |          |   | 623.3   |        
|                                               | Intercompany accounts, net           |                                                      | $ | 630.4  |       |        |   | 232.0   |          |         |   | (862.4  | )       |       |   |        |        |          |   |        |        
|                                               | Other long-term liabilities          |                                                      |   |        |       |        |   | 400.3   |          |         |   | 306.4   |         |       |   |        |        |          |   | 706.7   |        
|                                               |                                      |                                                      |   |        |       |        |   |         |          |         |   |         |         |       |   |        |        |          |   |        
|                                               |                                      | Total liabilities                                    |   |        | 630.4 |        |   |         | 3,682.3  |         |   |         | 601.3   |       |   | $      |       |          |   |         | 4,914.0 | 
|                                               |                                      |                                                      |   |        |       |        |   |         |          |         |   |         |         |       |   |        |        |          |   |        
|                                               |                                      | Total shareholders equity (deficit)                 |   |        | 229.8 |        |   |         | (1,386.7 | )       |   |         | 2,246.9 |       |   |        | (860.2 | )        |   |         | 229.8   | 
|                                               |                                      |                                                      |   |        |       |        |   |         |          |         |   |         |         |       |   |        |        |          |   |        
|                                               |                                      | Total liabilities and shareholders equity (deficit) |   | $      | 860.2 |        |   | $       | 2,295.6  |         |   | $       | 2,848.2 |       |   | $      | (860.2 | )        |   | $       | 5,143.8 | 
|                                               |                                      |                                                      |   |        |       |        |   |         |          |         |   |         |         |       |   |        |        |          |   |        

73



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##### 



NOTE 15. Supplemental Consolidating Condensed Financial Information (continued)

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 2002

|                                                                                           |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |          |        |   |       |  
|------------------------------------------------------------------------------------------ | --------------------- | ----------------------------------------------------------------------- | --- | ----------------------------------------------------------- | ------ | ------ | ------ | ------ | ------ | ----- | ------ | ------- | ------ | ------- | ------ | ----- | ------ | - | ------ | -------- | ------ | - | ----- | -
|                                                                                           |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        | Other   |        |       |        |   |        | Consoli-
|                                                                                           |                       |                                                                         |     |                                                             |        | Parent |        |        |        |       |        | Subsid- |        | Elimin- |        | dated
|(Dollars in millions)                                                                      |                       | Company                                                                 |     | ASI                                                         |        | iaries |        | ations |        | Total
|                                                                                           |                       |                                                                         |     |                                                             |        |        |        |        |        |      
|Cash provided (used) by:                                                                   |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |         
|                                                                                           | Operating activities: |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |          |       
|                                                                                           |                       | Net income                                                              |     | $                                                           | 371.0  |        |        | $      | 164.5  |       |        | $       | 206.5  |         |        | $     | (371.0 | ) |        | $        | 371.0  |  
|                                                                                           |                       | Adjustments to reconcile net income
to net cash provided by operations: |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |          |        |  
|                                                                                           |                       |                                                                         |     | Depreciation and amortization                               |        |        |        |        |        |       | 87.6   |         |        |         | 125.1  |       |        |   |        |          |        |   | 212.7 |  
|                                                                                           |                       |                                                                         |     | Equity in earnings of affiliates, net
of dividends received |        |        |        |        |        |       | (8.4   | )       |        |         | (5.1   | )     |        |   |        |          |        |   | (13.5 | )
|                                                                                           |                       |                                                                         |     | Non-cash stock compensation                                 |        |        |        |        |        |       | 55.4   |         |        |         |        |       |        |   |        |          |        |   | 55.4  |  
|                                                                                           |                       |                                                                         |     | Deferred income taxes                                       |        |        |        |        |        |       | 77.6   |         |        |         | (10.4  | )     |        |   |        |          |        |   | 67.2  |  
|                                                                                           |                       |                                                                         |     | Gain on sale of property, plant and equipment               |        |        |        |        |        |       |        |         |        |         | (3.3   | )     |        |   |        |          |        |   | (3.3  | )
|                                                                                           |                       |                                                                         |     | Equity in net income of subsidiary                          |        |        | (371.0 | )      |        |       |        |         |        |         |        |       |        |   | 371.0  |          |        |   |      |  
|                                                                                           |                       |                                                                         |     | Changes in assets and liabilities:                          |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |          |        |   |       |  
|                                                                                           |                       |                                                                         |     | Accounts receivable                                         |        |        | .5     |        |        |       | 46.5   |         |        |         | (99.6  | )     |        |   |        |          |        |   | (52.6 | )
|                                                                                           |                       |                                                                         |     | Inventories                                                 |        |        |        |        |        |       | (43.5  | )       |        |         | (45.8  | )     |        |   |        |          |        |   | (89.3 | )
|                                                                                           |                       |                                                                         |     | Accounts payable                                            |        |        |        |        |        |       | (40.3  | )       |        |         | 3.5    |       |        |   |        |          |        |   | (36.8 | )
|                                                                                           |                       |                                                                         |     | Other accrued liabilities                                   |        |        |        |        |        |       | 145.4  |         |        |         | (159.3 | )     |        |   |        |          |        |   | (13.9 | )
|                                                                                           |                       |                                                                         |     | Post-retirement benefits                                    |        |        |        |        |        |       | (17.9  | )       |        |         | 1.3    |       |        |   |        |          |        |   | (16.6 | )
|                                                                                           |                       |                                                                         |     | Other long-term liabilities                                 |        |        |        |        |        |       | 59.8   |         |        |         | (50.3  | )     |        |   |        |          |        |   | 9.5   |  
|                                                                                           |                       |                                                                         |     | Other assets                                                |        |        |        |        |        |       | (162.6 | )       |        |         | 215.0  |       |        |   |        |          |        |   | 52.4  |  
|                                                                                           |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |         
|Net cash provided by operating activities before
proceeds from initial sale of receivables |                       |                                                                         | .5  |                                                             |        |        | 364.1  |        |        |       | 177.6  |         |        |         |       |       |        |   | 542.2  |         
|                                                                                           |                       | Proceeds from initial sale of receivables, net                          |     |                                                             |        |        |        |        | (100.7 | )     |        |         | 182.1  |         |        |       |        |   |        |          | 81.4   |  
|                                                                                           |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |         
|Net cash provided by operating activities                                                  |                       |                                                                         | .5  |                                                             |        |        | 263.4  |        |        |       | 359.7  |         |        |         |       |       |        |   | 623.6  |         
|                                                                                           |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |         
|Investing activities:                                                                      |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |         
|                                                                                           |                       | Purchase of property, plant and equipment                               |     |                                                             |        |        |        |        | (70.1  | )     |        |         | (95.0  | )       |        |       |        |   |        |          | (165.1 | )
|                                                                                           |                       | Investments in affiliated companies                                     |     |                                                             |        |        |        |        | (22.0  | )     |        |         | (1.6   | )       |        |       |        |   |        |          | (23.6  | )
|                                                                                           |                       | Investments in computer software                                        |     |                                                             |        |        |        |        | (24.6  | )     |        |         | (22.3  | )       |        |       |        |   |        |          | (46.9  | )
|                                                                                           |                       | Proceeds from dissolution of receivables financing
joint venture        |     |                                                             |        |        |        |        | 25.8   |       |        |         |        |         |        |       |        |   |        |          | 25.8   |  
|                                                                                           |                       | Proceeds from the disposal of property/equipment                        |     |                                                             |        |        |        |        | 6.6    |       |        |         | 14.8   |         |        |       |        |   |        |          | 21.4   |  
|                                                                                           |                       | Other                                                                   |     |                                                             |        |        |        |        | (1.1   | )     |        |         |        |         |        |       |        |   |        |          | (1.1   | )
|                                                                                           |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |         
|Net cash used by investing activities                                                      |                       |                                                                         |    |                                                             |        |        | (85.4  | )      |        |       | (104.1 | )       |        |         |       |       |        |   | (189.5 | )       
|                                                                                           |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |         
|Financing activities:                                                                      |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |         
|                                                                                           |                       | Repayments of long-term debt                                            |     |                                                             |        |        |        |        | (40.8  | )     |        |         | (2.8   | )       |        |       |        |   |        |          | (43.6  | )
|                                                                                           |                       | Net change in revolving credit facility                                 |     |                                                             |        |        |        |        | (313.0 | )     |        |         | 40.7   |         |        |       |        |   |        |          | (272.3 | )
|                                                                                           |                       | Net change in other short-term debt                                     |     |                                                             |        |        |        |        | (.1    | )     |        |         | (24.4  | )       |        |       |        |   |        |          | (24.5  | )
|                                                                                           |                       | Purchases of treasury stock                                             |     |                                                             | (141.1 | )      |        |        |        |       |        |         |        |         |        |       |        |   |        |          | (141.1 | )
|                                                                                           |                       | Net change in intercompany accounts                                     |     |                                                             | 77.2   |        |        |        | 155.5  |       |        |         | (232.7 | )       |        |       |        |   |        |          |       |  
|                                                                                           |                       | Proceeds from exercise of stock options                                 |     |                                                             | 56.1   |        |        |        |        |       |        |         |        |         |        |       |        |   |        |          | 56.1   |  
|                                                                                           |                       | Financing costs and other                                               |     |                                                             | 7.3    |        |        |        | (5.6   | )     |        |         | 3.7    |         |        |       |        |   |        |          | 5.4    |  
|                                                                                           |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |         
|Net cash used by financing activities                                                      |                       |                                                                         | (.5 | )                                                           |        |        | (204.0 | )      |        |       | (215.5 | )       |        |         |       |       |        |   | (420.0 | )       
|Effect of exchange rate changes on
cash and cash equivalents                               |                       |                                                                         |     |                                                             |        |        |        |        |        |       | .4     |         |        |         |        |       |        |   | .4     |         
|                                                                                           |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |         
|Net increase (decrease) in cash and cash equivalents                                       |                       |                                                                         |    |                                                             |        |        | (26.0  | )      |        |       | 40.5   |         |        |         |       |       |        |   | 14.5   |         
|Cash and cash equivalents at beginning of year                                             |                       |                                                                         |     |                                                             |        |        | 3.1    |        |        |       | 79.0   |         |        |         |       |       |        |   | 82.1   |         
|                                                                                           |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |         
|Cash and cash equivalents at end of year                                                   |                       | $                                                                       |    |                                                             |        | $      | (22.9  | )      |        | $     | 119.5  |         |        | $       |       |       |        | $ | 96.6   |         
|                                                                                           |                       |                                                                         |     |                                                             |        |        |        |        |        |       |        |         |        |         |        |       |        |   |        |         

74



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##### 



NOTE 15. Supplemental Consolidating Condensed Financial Information (continued)

CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001

|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |         |         | 
|----------------------------------------------------------------------------------------------------------- | -------------------------------------- | -------------- | ----- | ------ |  | ------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ----- | ------ | ------ | ------ | -------- | ------- | ------- | ------- | 
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         | Other   |         |       |        |        |        | Consoli-
|                                                                                                            |                                        |                |       | Parent |  |        |         |         |         | Subsid- |         | Elimin- |         | dated
|(Dollars in millions)                                                                                       |                                        | Company        |       | ASI    |  | iaries |         | ations  |         | Total  
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |        
|Sales                                                                                                       |                                        |                |       |        |  | $      | 4,319.3 |         |         | $       | 3,384.4 |         |         | $     | (238.4 | )      |        | $        | 7,465.3 |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|Costs and expenses:                                                                                         |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|                                                                                                            | Cost of sales                          |                |       |        |  |        |         | 3,289.5 |         |         |         | 2,566.4 |         |       |        | (238.4 | )      |          |         | 5,617.5 |        
|                                                                                                            | Selling and administrative expenses    |                |       |        |  |        |         | 643.1   |         |         |         | 551.0   |         |       |        |        |        |          |         | 1,194.1 |        
|                                                                                                            | Other expense                          |                |       |        |  |        |         | 6.3     |         |         |         | 2.4     |         |       |        |        |        |          |         | 8.7     |        
|                                                                                                            | Interest expense                       |                |       |        |  |        |         | 140.9   |         |         |         | 27.8    |         |       |        |        |        |          |         | 168.7   |        
|                                                                                                            | Intercompany interest expense (income) |                |       |        |  |        |         | 14.7    |         |         |         | (14.7   | )       |       |        |        |        |          |         |        |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|                                                                                                            |                                        | Total expenses |       |        |  |        |         |         | 4,094.5 |         |         |         | 3,132.9 |       |        |        | (238.4 | )        |         |         | 6,989.0 | 
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|Income from continuing operations before income taxes
and equity in net income of consolidated subsidiaries |                                        |                |       |        |  |        | 224.8   |         |         |         | 251.5   |         |         |       |       |        |        |          | 476.3   |        
|Income taxes                                                                                                |                                        |                |       |        |  |        | 89.0    |         |         |         | 92.3    |         |         |       |        |        |        |          | 181.3   |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|Income from continuing operations before equity
in net income of consolidated subsidiaries                  |                                        |                |       |        |  |        | 135.8   |         |         |         | 159.2   |         |         |       |       |        |        |          | 295.0   |        
|Equity in net income of consolidated subsidiaries                                                           |                                        | $              | 295.0 |        |  |        |        |         |         |         |        |         |         |       | (295.0 | )      |        |          |        |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        
|Net income                                                                                                  |                                        | $              | 295.0 |        |  | $      | 135.8   |         |         | $       | 159.2   |         |         | $     | (295.0 | )      |        | $        | 295.0   |        
|                                                                                                            |                                        |                |       |        |  |        |         |         |         |         |         |         |         |       |        |        |        |          |         |        

75



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##### 



NOTE 15. Supplemental Consolidating Condensed Financial Information (continued)

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 2001

|                                                             |                       |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |          |        |       |       |  
|------------------------------------------------------------ | --------------------- | ----------------------------------------------------------------------- | -------------------------------------------------------------- | --------------------------- | ------ | ------ | ------ | ------ | ------ | ----- | ------ | ------- | ------ | ------- | ----- | ----- | ------ | ----- | ------ | -------- | ------ | ----- | ----- | -
|                                                             |                       |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        | Other   |       |       |        |       |        | Consoli-
|                                                             |                       |                                                                         |                                                                |                             |        | Parent |        |        |        |       |        | Subsid- |        | Elimin- |       | dated
|(Dollars in millions)                                        |                       | Company                                                                 |                                                                | ASI                         |        | iaries |        | ations |        | Total
|                                                             |                       |                                                                         |                                                                |                             |        |        |        |        |        |      
|Cash provided (used) by:                                     |                       |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |         
|                                                             | Operating activities: |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |          |       
|                                                             |                       | Net income                                                              |                                                                | $                           | 295.0  |        |        | $      | 135.8  |       |        | $       | 159.2  |         |       | $     | (295.0 | )     |        | $        | 295.0  |      
|                                                             |                       | Adjustments to reconcile net income
to net cash provided by operations: |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |          |        |      
|                                                             |                       |                                                                         | Restructuring and asset impairment
charges accrued (paid), net |                             |        |        |        |        |        | (13.6 | )      |         |        | (36.7   | )     |       |        |       |        |          |        | (50.3 | )    
|                                                             |                       |                                                                         | Depreciation and amortization                                  |                             |        |        |        |        |        | 100.8 |        |         |        | 131.5   |       |       |        |       |        |          |        | 232.3 |      
|                                                             |                       |                                                                         | Non-cash stock compensation                                    |                             |        |        |        |        |        | 60.1  |        |         |        |         |       |       |        |       |        |          |        | 60.1  |      
|                                                             |                       |                                                                         | Job elimination expenses accrued but unpaid                    |                             |        |        |        |        |        | 17.8  |        |         |        | 28.7    |       |       |        |       |        |          |        | 46.5  |      
|                                                             |                       |                                                                         | Deferred income taxes                                          |                             |        |        |        |        |        | 25.3  |        |         |        | 18.4    |       |       |        |       |        |          |        | 43.7  |      
|                                                             |                       |                                                                         | Equity in net income of subsidiary                             |                             |        | (295.0 | )      |        |        |       |        |         |        |         |       |       |        | 295.0 |        |          |        |      |      
|                                                             |                       |                                                                         | Changes in assets and liabilities:                             |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |          |        |       |      
|                                                             |                       |                                                                         |                                                                | Accounts receivable         |        |        | .6     |        |        |       | 27.4   |         |        |         | (20.7 | )     |        |       |        |          |        |       | 7.3   |  
|                                                             |                       |                                                                         |                                                                | Inventories                 |        |        |        |        |        |       | 17.0   |         |        |         | (74.9 | )     |        |       |        |          |        |       | (57.9 | )
|                                                             |                       |                                                                         |                                                                | Accounts payable            |        |        | (.4    | )      |        |       | (30.2  | )       |        |         | (18.5 | )     |        |       |        |          |        |       | (49.1 | )
|                                                             |                       |                                                                         |                                                                | Other accrued liabilities   |        |        |        |        |        |       | (32.3  | )       |        |         | 28.5  |       |        |       |        |          |        |       | (3.8  | )
|                                                             |                       |                                                                         |                                                                | Post-retirement benefits    |        |        |        |        |        |       | 8.6    |         |        |         | .3    |       |        |       |        |          |        |       | 8.9   |  
|                                                             |                       |                                                                         |                                                                | Other long-term liabilities |        |        |        |        |        |       | (18.4  | )       |        |         | 25.1  |       |        |       |        |          |        |       | 6.7   |  
|                                                             |                       |                                                                         |                                                                | Other assets                |        |        |        |        |        |       | (5.1   | )       |        |         | (38.5 | )     |        |       |        |          |        |       | (43.6 | )
|                                                             |                       |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |         
|Net cash provided by operating activities                    |                       |                                                                         | .2                                                             |                             |        |        | 293.2  |        |        |       | 202.4  |         |        |         |      |       |        |       | 495.8  |         
|                                                             |                       |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |         
|Investing activities:                                        |                       |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |         
|                                                             |                       | Purchase of property, plant and equipment                               |                                                                |                             |        |        |        |        | (91.1  | )     |        |         | (75.4  | )       |       |       |        |       |        |          | (166.5 | )    
|                                                             |                       | Investments in affiliated companies                                     |                                                                |                             |        |        |        |        | (.4    | )     |        |         | (36.5  | )       |       |       |        |       |        |          | (36.9  | )    
|                                                             |                       | Investments in computer software                                        |                                                                |                             |        |        |        |        | (29.4  | )     |        |         | (28.9  | )       |       |       |        |       |        |          | (58.3  | )    
|                                                             |                       | Proceeds from sale and leasebacks                                       |                                                                |                             |        |        |        |        | 21.0   |       |        |         | 5.6    |         |       |       |        |       |        |          | 26.6   |      
|                                                             |                       | Proceeds from the disposal of property/equipment                        |                                                                |                             |        |        |        |        | 6.5    |       |        |         | 4.9    |         |       |       |        |       |        |          | 11.4   |      
|                                                             |                       | Other                                                                   |                                                                |                             |        |        |        |        | 6.4    |       |        |         | 2.9    |         |       |       |        |       |        |          | 9.3    |      
|                                                             |                       |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |         
|Net cash used by investing activities                        |                       |                                                                         |                                                               |                             |        |        | (87.0  | )      |        |       | (127.4 | )       |        |         |      |       |        |       | (214.4 | )       
|                                                             |                       |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |         
|Financing activities:                                        |                       |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |         
|                                                             |                       | Repayments of long-term debt                                            |                                                                |                             |        |        |        |        | (25.0  | )     |        |         | (2.7   | )       |       |       |        |       |        |          | (27.7  | )    
|                                                             |                       | Net change in revolving credit facility                                 |                                                                |                             |        |        |        |        | 286.3  |       |        |         | (465.3 | )       |       |       |        |       |        |          | (179.0 | )    
|                                                             |                       | Net change in other short-term debt                                     |                                                                |                             |        |        |        |        | .1     |       |        |         | (24.1  | )       |       |       |        |       |        |          | (24.0  | )    
|                                                             |                       | Purchases of treasury stock                                             |                                                                |                             | (116.5 | )      |        |        |        |       |        |         |        |         |       |       |        |       |        |          | (116.5 | )    
|                                                             |                       | Purchase of warrants                                                    |                                                                |                             | (35.2  | )      |        |        |        |       |        |         |        |         |       |       |        |       |        |          | (35.2  | )    
|                                                             |                       | Net change in intercompany accounts                                     |                                                                |                             | 47.4   |        |        |        | (479.0 | )     |        |         | 431.6  |         |       |       |        |       |        |          |       |      
|                                                             |                       | Proceeds from exercise of stock options                                 |                                                                |                             | 96.9   |        |        |        |        |       |        |         |        |         |       |       |        |       |        |          | 96.9   |      
|                                                             |                       | Financing costs and other                                               |                                                                |                             | 7.1    |        |        |        | (4.4   | )     |        |         |        |         |       |       |        |       |        |          | 2.7    |      
|                                                             |                       |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |         
|Net cash used by financing activities                        |                       |                                                                         | (.3                                                            | )                           |        |        | (222.0 | )      |        |       | (60.5  | )       |        |         |      |       |        |       | (282.8 | )       
|Effect of exchange rate changes on
cash and cash equivalents |                       |                                                                         |                                                                |                             |        |        |        |        |        |       | (1.9   | )       |        |         |       |       |        |       | (1.9   | )       
|                                                             |                       |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |         
|Net increase (decrease) in cash and cash equivalents         |                       |                                                                         | (.1                                                            | )                           |        |        | (15.8  | )      |        |       | 12.6   |         |        |         |      |       |        |       | (3.3   | )       
|Cash and cash equivalents at beginning of year               |                       |                                                                         | .1                                                             |                             |        |        | 18.9   |        |        |       | 66.4   |         |        |         |      |       |        |       | 85.4   |         
|                                                             |                       |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |         
|Cash and cash equivalents at end of year                     |                       | $                                                                       |                                                               |                             |        | $      | 3.1    |        |        | $     | 79.0   |         |        | $       |      |       |        | $     | 82.1   |         
|                                                             |                       |                                                                         |                                                                |                             |        |        |        |        |        |       |        |         |        |         |       |       |        |       |        |         

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Quarterly Data (Unaudited)

Year 2003

|                                             |         |       |         |        |  |       |         |            |  |   |         |        |  |   |         |        | 
|-------------------------------------------- | ------- | ----- | ------- | ------ |  | ----- | ------- | ---------- |  | - | ------- | ------ |  | - | ------- | ------ | 
|(Dollars in millions, except per share data) |         | First |         | Second |  | Third |         | Fourth (a)
|                                             |         |       |         |        |  |       |         |           
|Sales                                        |         | $     | 1,950.6 |        |  | $     | 2,265.0 |            |  | $ | 2,234.4 |        |  | $ | 2,117.7 |       
|Cost of sales                                |         |       | 1,485.8 |        |  |       | 1,700.7 |            |  |   | 1,683.6 |        |  |   | 1,657.7 |       
|Income before income taxes                   |         |       | 92.5    |        |  |       | 194.0   |            |  |   | 177.6   |        |  |   | 85.1    |       
|Income taxes                                 |         |       | 28.7    |        |  |       | 60.1    |            |  |   | 55.1    |        |  |   | .2      |       
|                                             |         |       |         |        |  |       |         |            |  |   |         |        |  |   |         |       
|Net income                                   |         | $     | 63.8    |        |  | $     | 133.9   |            |  | $ | 122.5   |        |  | $ | 84.9    |       
|                                             |         |       |         |        |  |       |         |            |  |   |         |        |  |   |         |       
|Net income per common share:                 |         |       |         |        |  |       |         |            |  |   |         |        |  |   |         |       
|                                             | Basic   |       | $       | .88    |  |       | $       | 1.86       |  |   | $       | 1.69   |  |   | $       | 1.17   | 
|                                             | Diluted |       | $       | .87    |  |       | $       | 1.83       |  |   | $       | 1.66   |  |   | $       | 1.14   | 
|Average number of common shares (thousands): |         |       |         |        |  |       |         |            |  |   |         |        |  |   |         |       
|                                             | Basic   |       |         | 72,142 |  |       |         | 71,873     |  |   |         | 72,344 |  |   |         | 72,714 | 
|                                             | Diluted |       |         | 73,379 |  |       |         | 73,208     |  |   |         | 73,779 |  |   |         | 74,492 | 
|Range of prices on common stock:             |         |       |         |        |  |       |         |            |  |   |         |        |  |   |         |       
|                                             | High    |       | $       | 72.18  |  |       | $       | 79.55      |  |   | $       | 85.12  |  |   | $       | 102.00 | 
|                                             | Low     |       | $       | 63.83  |  |       | $       | 68.20      |  |   | $       | 72.08  |  |   | $       | 84.50  | 

Year 2002

|                                             |         |       |         |        |  |       |         |        |  |   |         |        |  |   |         |        | 
|-------------------------------------------- | ------- | ----- | ------- | ------ |  | ----- | ------- | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|(Dollars in millions, except per share data) |         | First |         | Second |  | Third |         | Fourth
|                                             |         |       |         |        |  |       |         |       
|Sales                                        |         | $     | 1,761.9 |        |  | $     | 2,086.5 |        |  | $ | 2,070.1 |        |  | $ | 1,876.9 |       
|Cost of sales                                |         |       | 1,352.7 |        |  |       | 1,557.0 |        |  |   | 1,564.4 |        |  |   | 1,439.0 |       
|Income before income taxes                   |         |       | 85.5    |        |  |       | 189.0   |        |  |   | 171.0   |        |  |   | 110.7   |       
|Income taxes                                 |         |       | 28.5    |        |  |       | 62.9    |        |  |   | 56.9    |        |  |   | 36.9    |       
|                                             |         |       |         |        |  |       |         |        |  |   |         |        |  |   |         |       
|Net income                                   |         | $     | 57.0    |        |  | $     | 126.1   |        |  | $ | 114.1   |        |  | $ | 73.8    |       
|                                             |         |       |         |        |  |       |         |        |  |   |         |        |  |   |         |       
|Net income per common share:                 |         |       |         |        |  |       |         |        |  |   |         |        |  |   |         |       
|                                             | Basic   |       | $       | .79    |  |       | $       | 1.74   |  |   | $       | 1.58   |  |   | $       | 1.02   | 
|                                             | Diluted |       | $       | .78    |  |       | $       | 1.71   |  |   | $       | 1.55   |  |   | $       | 1.01   | 
|Average number of common shares (thousands): |         |       |         |        |  |       |         |        |  |   |         |        |  |   |         |       
|                                             | Basic   |       |         | 72,233 |  |       |         | 72,450 |  |   |         | 72,267 |  |   |         | 72,448 | 
|                                             | Diluted |       |         | 73,476 |  |       |         | 73,935 |  |   |         | 73,516 |  |   |         | 73,641 | 
|Range of prices on common stock:             |         |       |         |        |  |       |         |        |  |   |         |        |  |   |         |       
|                                             | High    |       | $       | 71.20  |  |       | $       | 79.00  |  |   | $       | 76.67  |  |   | $       | 76.00  | 
|                                             | Low     |       | $       | 58.20  |  |       | $       | 69.40  |  |   | $       | 61.24  |  |   | $       | 58.89  | 

(a) The fourth quarter of 2003 includes expenses of $38.9 million ($27.3
million net of taxes, or $.37 per diluted share) related to the elimination of
870 jobs, comprised of $8.4 million for Air Conditioning Systems and Services,
$20.8 million for Bath and Kitchen and $9.7 million for Vehicle Control
Systems. Income taxes include a tax benefit of $11.6 million related to those
expenses. Income taxes in the fourth quarter of 2003 also includes a $26.7
million benefit ($.36 per diluted share) principally because of the resolution
of a German tax audit and approval of claims for research and development tax
credits in the U.S.

The sum of each line for the four quarters does not necessarily equal the
amount reported for the full year because of rounding and, for per share
amounts, because of the effect of averaging the shares used in the calculation.

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

None.




ITEM 9A. CONTROLS AND PROCEDURES

The Company has established a Disclosure Controls Committee that assists
the Chief Executive Officer and Chief Financial Officer in their evaluation of
the Companys disclosure controls and procedures. Our Chief Executive Officer
and Chief Financial Officer have concluded, based on their evaluation as of the
end of the period covered by this report, that our disclosure controls and
procedures, as defined in the Securities Exchange Act of 1934, Rule 13a-15(e),
are effective to ensure that information required to be disclosed in the
reports that the Company files or submits under the Securities Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms. There have been
no significant changes in our internal controls over financial reporting or in
other factors that could significantly affect these controls subsequent to the
date of the previously mentioned evaluation.

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PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to instruction G(3) to Form 10-K, the information required by
Item 10 with respect to the Directors of the Company set forth under the
heading Directors in the Companys definitive proxy statement to be filed
within 120 days following the end of the fiscal year covered by this report is
incorporated herein by reference.

The information required by Item 10 with respect to the Executive Officers
of the Company has been included in Part I of this Form 10-K (as Item 4A) in
reliance on Instruction G(3) of Form 10-K and Instruction 3 to Item 401(b) of
Regulation S-K.

Pursuant to instruction G(3) to Form 10-K, information concerning the
independence of our Audit Committee and audit committee financial expert
disclosure set forth under the heading Audit Committee Financial Expert in
the Companys definitive proxy statement to be filed within 120 days following
the end of the fiscal year covered by this report is incorporated herein by
reference.

Pursuant to instruction G(3) to Form 10-K, information concerning
compliance with Section 16(a) of the Securities Act of 1933 by officers and
directors of the Company set forth under the heading entitled Section 16(a)
Beneficial Ownership Reporting Compliance in the Companys definitive proxy
statement to be filed within 120 days following the end of the fiscal year
covered by this report is incorporated herein by reference.

Information regarding our Code of Conduct and Ethics set forth under the
caption Code of Conduct and Ethics in Item 1 of Part I of this Form 10-K is
incorporated herein by reference.




ITEM 11. EXECUTIVE COMPENSATION

Pursuant to Instruction G(3) to Form 10-K, information concerning
executive compensation and related matters set forth under the headings
entitled, Directors Fees and Other Arrangements, Executive Compensation
and Compensation Committee Interlocks and Insider Participation in the
Companys definitive proxy statement to be filed within 120 days following the
end of the fiscal year covered by this report is incorporated herein by
reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Common Stock Ownership of Officers, Directors and Significant Shareholders

Pursuant to Instruction G(3) to Form 10-K, information concerning shares
of common stock of the Company beneficially owned by management and others set
forth under the heading entitled Common Stock Ownership of Officers, Directors
and Significant Shareholders in the Companys definitive proxy statement to be
filed within 120 days following the end of the fiscal year covered by this
report is incorporated herein by reference.

Equity Compensation Plan Information

The following table sets forth certain information regarding the Companys
equity compensation plans as of December 31, 2003:

|                                                           |       |                     |                            |                     |                      |                          |                           |  |  |  |                      |           | 
|---------------------------------------------------------- | ----- | ------------------- | -------------------------- | ------------------- | -------------------- | ------------------------ | ------------------------- |  |  |  | -------------------- | --------- | 
|                                                           |       |                     |                            |                     |                      |                          |                           |  |  |  | (c)                 
|                                                           |       |                     |                            |                     |                      |                          |                           |  |  |  | Number of securities
|                                                           |       |                     | (a)                        |                     | (b)                  |                          | remaining available for  
|                                                           |       |                     | Number of securities to be |                     | Weighted-average     |                          | future issuance under    
|                                                           |       |                     | issued upon exercise of    |                     | exercise price of    |                          | equity compensation plans
|                                                           |       |                     | outstanding options,       |                     | outstanding options, |                          | (excluding securities    
|Plan category                                              |       | warrants and rights |                            | warrants and rights |                      | reflected in column (a))
|                                                           |       |                     |                            |                     |                      |                         
|Equity compensation
plans approved by
security holders     |       |                     | 2,231,572                  | (1)                 |                      | $                        | 57.67                     |  |  |  | 4,645,651            | (2)      
|Equity compensation
plans not approved
by security holders |       |                     | 3,947,323                  | (3)                 |                      | $                        | 52.27                     |  |  |  | 1,021,410            | (4)      
|                                                           |       |                     |                            |                     |                      |                          |                           |  |  |  |                      |          
|                                                           | Total |                     |                            | 6,178,895           |                      |                          |                           |  |  |  |                      | 5,667,061 | 

(1)  Includes options to purchase 923,661 shares of Company stock under the
shareholder-approved 1995 American Standard Companies Inc. Stock Incentive Plan
(the 1995 Stock Incentive Plan); also includes options to purchase 1,307,911
shares under the shareholder-approved 2002 American Standard Companies Inc.
Omnibus Incentive Plan (the 2002 Omnibus Plan) which replaced the 1995 Stock
Incentive Plan.

(2)  Includes 4,186,237 shares available for issuance under the 2002 Omnibus
Plan. In addition to options, warrants or rights, the 2002 Omnibus Plan also
provides for not more than 825,000 awards that may be issued in the form of
restricted stock or restricted units. Also includes 459,414 shares available
for issuance under the American Standard Companies Inc. Employee Stock Purchase
Plan.

(3)  Includes options to purchase 3,788,668 shares under the 1995 Stock
Incentive Plan; 11,956 share equivalents credited to participants accounts
under the American Standard Companies Inc. Deferred Compensation Plan (the
Deferred Compensation Plan); and 146,699 share equivalents credited to
participants accounts under the American Standard Inc. Supplemental Savings
Plan (the Supplemental Savings Plan). Descriptions of the material features
of the 1995 Stock Incentive Plan, the Deferred Compensation Plan and the
Supplemental Savings Plan appear below.

(4)  Includes 988,044 shares remaining available for issuance under the Deferred
Compensation Plan; and 33,366 shares remaining available for issuance under the
American Standard Companies Inc. Supplemental Compensation for Outside
Directors (the Directors Plan). A description of the material features of
the Directors Plan appears below.

1995 Stock Incentive Plan

The 1995 Stock Incentive Plan was approved by the Companys shareholders
in 1995, with 7,604,475

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shares authorized for issuance under the Plan. Under the 1995 Stock
Incentive Plan, awards may be granted to officers and other key executives and
employees, in the form of incentive or non-qualified stock options, stock
appreciation rights, restricted stock and restricted units. Non-employee
directors are eligible to receive awards other than incentive stock options.
The exercise price of an option may not be less than the fair market value of
the underlying stock on the date of grant and no option may have a term of more
than ten years. Options awarded under the Plan generally vest ratably over
three years. In the event of a change of control of the Company, any
outstanding stock options will become immediately exercisable and may be cashed
out at the discretion of the participant, and the restricted period will lapse
as to any outstanding restricted stock or restricted units.

The Board of Directors of the Company subsequently approved 6.9 million
additional shares for issuance under the Plan. The authorization of additional
shares under the Plan did not require the approval of shareholders and was not
submitted for their approval. In February 2002, the Board of Directors of the
Company authorized the 2002 Omnibus Plan as a replacement for the 1995 Stock
Incentive Plan and submitted the 2002 Omnibus Plan to shareholders for their
approval. With the approval of the 2002 Omnibus Plan by shareholders in May
2002, no further awards will be issued under the 1995 Stock Incentive Plan,
which expired on May 2, 2002 except with respect to awards outstanding on such
date.

Deferred Compensation Plan

The Deferred Compensation Plan is an unfunded plan under which certain
executive employees may defer receipt of all or part of long-term incentive
awards and annual incentive awards and portions of base salary and commissions.
Non-employee directors are also eligible to defer annual retainer and meeting
fees. Participants may choose to invest their deferrals into either share
equivalents of Company stock or an interest-bearing cash account. Should the
participant choose to defer into share equivalents, allocations to the share
account are based on the fair market value of the shares on the date the
deferred compensation would otherwise have been paid, without a discount of any
kind. At the time of the deferral, the participant chooses the date and form of
distribution which can begin upon termination of employment, up to three years
after termination of employment, or in a given year while still employed.
Amounts deferred may be distributed earlier than scheduled upon the occurrence
of certain triggering events. In the event of a change of control of the
Company, all obligations under the Plan must be fully funded by the Company.

Supplemental Savings Plan

The Supplemental Savings Plan is an unfunded plan for the benefit of those
ESOP, Savings Plan and Pension Plan participants, other than executive
officers, whose ESOP, Savings-Plan and Pension-Plan-eligible compensation
exceeds the limits of Section 401(a)(17) of the Internal Revenue Code.
Participants in the ESOP and Savings Plan are credited annually with share
equivalents of American Standard stock in an amount that is meant to roughly
compensate them for employer contributions to the Employee Stock Ownership and
Savings Plan(s) which are lost due to the limits of Section 401(a)(17).
Participants in the Pension Plan are credited annually with cash in an amount
intended to compensate them for employer contributions to the Pension Plan
which are lost due to the limits of Section 401(a)(17). The cash contributions
earn interest at the same rate used to credit cash balances in the Pension
Plan. In determining contributions credited under the Supplemental Savings
Plan, only compensation up to $235,000 is considered. In order to receive a
Plan allocation for a given year, participants must be employed with the
Company on December 31 of such year. For participants who are hired on or after
January 1, 2004, there is a three year vesting requirement under the Plan. Upon
termination of employment participants receive a distribution from the Plan, in
shares with respect to their vested share account balances and in cash with
respect to their vested cash account balances. The Plan is designed as a
parallel excess plan within the meaning of the New York Stock Exchange rules
regarding shareholder approval of equity compensation plans. Shares are
available for issuance under the Plan as needed in connection with the
operation of the ESOP and the Savings Plan.

Directors Plan

The Directors Plan is intended to promote an equity interest in the
Company by its non-employee directors. Under the terms of the Directors Plan,
each non-employee director, upon initial election to the Board, is allocated
$100,000 worth of Company stock, based on the fair market value of the stock on
the date immediately preceding the directors election to the board, which is
deposited in a grantors trust for the benefit of the director. An additional
grant of 500 shares is made to each non-employee directors account annually on
the day before the annual shareholders meeting. These shares are distributed to
the directors upon their leaving their position as director. Shares allocated
to a directors account are voted by the trustee as instructed by each
director. In the event of change

81



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of control of the Company, the directors are entitled to an immediate
distribution of their plan assets from the trust, which, at their option, can
be in either shares or the cash value of the shares.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to Instruction G(3) to Form 10-K, information concerning certain
relationships and related party transactions set forth under the heading
entitled, Certain Relationships and Related Party Transactions in the
Companys definitive proxy statement to be filed within 120 days following the
end of the fiscal year covered by this report is incorporated herein by
reference.




ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Pursuant to Instruction G(3) to Form 10-K, information concerning
principal accounting fees and services set forth under the heading entitled,
Audit and Non-Audit Fees in the Companys definitive proxy statement to be
filed within 120 days following the end of the fiscal year covered by this
report is incorporated herein by reference.

82



---



##### 






PART IV




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

(a) 1. and 2. Financial statements and financial statement schedules



| |  |  | The financial statements and financial statement schedules listed in
the Index to Financial Statements and Financial Statement Schedules on
the following page are incorporated herein by reference.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3.     Exhibits



| |  |  | The exhibits to this Report are listed on the accompanying index to
exhibits and are incorporated herein by reference or are filed as part
of this Annual Report on Form 10-K.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(b) Reports on Form 8-K



| |  |  | During the quarter ended December 31, 2003, the Company filed a
Current Report on Form 8-K dated October 15, 2003, and furnishing
information under Items 9 and 12. This Form 8-K contained, as an
exhibit, a press release pertaining to the financial results of the
Company for the quarter ended September 30, 2003.     
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During the quarter ended March 31, 2004, the Company filed a Current
Report on Form 8-K dated January 26, 2004, and furnishing information
under Items 9 and 12. This Form 8-K contained, as an exhibit, a
press release pertaining to the financial results of the Company for
the quarter and year ended December 31, 2003.

83



---



##### 



INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
COVERED BY
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS

|                                                                                |                                                          |                                                          |    |           |    | 
|------------------------------------------------------------------------------- | -------------------------------------------------------- | -------------------------------------------------------- | -- | --------- | -- | 
|                                                                                |                                                          |                                                          |    | Page No. 
|                                                                                |                                                          |                                                          |    |          
|1. Financial Statements:                                                        |                                                          |                                                          |    |          
|                                                                                | Consolidated Balance Sheet at December 31, 2003 and 2002 |                                                          |    | 44        |   
|                                                                                | Years ended December 31, 2003, 2002 and 2001:            |                                                          |    |           |   
|                                                                                |                                                          | Consolidated Statement of Income                         |    |           | 43 | 
|                                                                                |                                                          | Consolidated Statement of Cash Flows                     |    |           | 45 | 
|                                                                                |                                                          | Consolidated Statement of Shareholders Equity (Deficit) |    |           | 46 | 
|                                                                                | Notes to Financial Statements                            |                                                          |    | 47        |   
|                                                                                | Segment Data                                             |                                                          |    | 19, 67-69 |   
|                                                                                | Quarterly Data (Unaudited)                               |                                                          |    | 77        |   
|                                                                                | Report of Independent Auditors                           |                                                          |    | 42        |   
|2. Report of Independent Auditors on Financial Statement Schedules              |                                                          |                                                          | 90 |          
|3. Financial statement schedules, years ended December 31, 2003, 2002, and 2001 |                                                          |                                                          |    |          
|                                                                                | I      Condensed Financial Information of Registrant     |                                                          |    | 91        |   
|                                                                                | II     Valuation and Qualifying Accounts                 |                                                          |    | 94        |   

All other schedules have been omitted because the information is not applicable
or is not material or because the information required is included in the
financial statements or the notes thereto.

84



---



##### 



AMERICAN STANDARD COMPANIES INC.

INDEX TO EXHIBITS

(Item 15(a)3 - Exhibits Required by Item 601
of Regulation S-K and Additional Exhibits)

(The Commission File Number of American Standard Companies Inc. (formerly ASI
Holding Corporation), the Registrant (sometimes hereinafter referred to as
Holding), and for all Exhibits incorporated by reference, is 1-11415, except
those Exhibits incorporated by reference in filings made by American Standard
Inc. (the Company) the Commission File Number of which is 33-64450. Prior to
filing its Registration Statement on Form S-2 on November 10, 1994, Holdings
Commission File Number was 33-23070.)

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 |  | Restated Certificate of Incorporation of Holding; previously filed as
Exhibit 3(i) in Holdings Form 10-Q for the quarter ended September 30,
1998, and herein incorporated by reference.                                                                                                                                                                                                                                                                                                                                             
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|3.2 |  | Amended and Restated By-laws of Holding; previously filed as Exhibit
(3)(ii) in Holdings Form 10K for the fiscal year ended December 31,
1999, and herein incorporated by reference.                                                                                                                                                                                                                                                                                                                                                
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.1 |  | Form of Common Stock Certificate previously filed as Exhibit (4)(i)
to Holding's Form 10-K for the fiscal year ended December 31, 2002
and herein incorporated by reference.                                                                                                                                                                                                                                                                                                                                                          
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.2 |  | Company, Trustee, including the form of 9-1/4% Sinking Fund Debenture Due
2016 issued pursuant thereto on December 9, 1986, in the aggregate
principal amount of $150,000,000; previously filed as Exhibit 4(iii) to
the Companys Form 10-K for the fiscal year ended December 31, 1986, and
herein incorporated by reference.                                                                                                                                                                                                       
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.3 |  | Instrument of Resignation, Appointment and Acceptance, dated as of April
25, 1988 among the Company, Manufacturers Hanover Trust Company (the
Resigning Trustee) and Wilmington Trust Company (the Successor
Trustee) relating to resignation of the Resigning Trustee and appointment
of the Successor Trustee, under the Indenture referred to in Exhibit (4)
(ii) above; previously filed as Exhibit (4) (ii) to Registration Statement
No. 33-64450 of the Company, filed June 16, 1993, and herein incorporated
by reference.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.4 |  | First Supplemental Indenture, dated as of February 1, 2000 among the
Company, Holding and Wilmington Trust Company, as Trustee, previously
filed as Exhibit (4)(iv) in Holdings Form 10-K for the fiscal year ended
December 31, 1999, and herein incorporated by reference.                                                                                                                                                                                                                                                         
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.5 |  | Form of Senior Debt Indenture dated as of January 15, 1998 among the
Company, Holding and The Bank of New York; filed as Exhibit (4) (i) to
Amendment No. 1 to Registration Statement No. 333-32627 filed September
19, 1997, and herein incorporated by reference.                                                                                                                                                                                                                                                                   
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.6 |  | Indenture dated as of January 15, 1998 among the Company, Holding and The
Bank of New York, Trustee; previously filed as Exhibit 4.1 in Holdings
Form 10- Q for the quarter ended September 30, 1998, and herein
incorporated by reference.                                                                                                                                                                                                                                                                                          
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.7 |  | First Supplemental Indenture dated as of January 15, 1998 between the
Company, Holding and The Bank of New York, relating to the Companys
7.375% Senior Notes due 2008, guaranteed by Holding; previously filed as
Exhibit (4)(xi) in Holdings Form 10-K for the fiscal year ended December
31, 1997, and herein incorporated by reference.                                                                                                                                                                                         
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.8 |  | Second Supplemental Indenture dated as of February 13, 1998 between the
Company, Holding and The Bank of New York relating to the Companys 7-1/8%
Senior Notes due 2003 and 7-5/8% Senior Notes due 2010, guaranteed by
Holding; previously filed as Exhibit (4)(xii) in Holdings Form 10-K for
the fiscal year ended December 31, 1997, and herein incorporated by
reference.                                                                                                                                                      
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.9 |  | Third Supplemental Indenture dated as of April 13, 1998 to the Indenture
dated as of January 15, 1998 among the Company, Holding and The Bank of
New York relating to the 7-3/8% Senior Notes due 2005;                                                                                                                                                                                                                                                                                                                               

85



---



##### 



|      |  |                                                                                                                                                                                                                                                                                                                                                 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  | previously filed as Exhibit 4.2 in Holdings Form 10-Q for the quarter
ended September 30, 1998, and herein incorporated by reference.                                                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|4.10  |  | Fourth Supplemental Indenture dated as of May 28, 1999 to the Indenture
dated as of January 15, 1998 among the Company, Holding and The Bank of
New York relating to the 8.25% Senior Notes due; previously filed as
Exhibit (4)(x) in Holdings Form 10-K for the fiscal year ended December
31, 1999, and herein incorporated by reference.   
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|4.11  |  | Fifth Supplemental Indenture dated as of May 28, 1999 to the Indenture
dated as of May 28, 1999 among the Company, Holding and The Bank of New
York relating to the 8.25% Senior Notes due 2009; previously filed as
Exhibit (4)(xi) in Holdings Form 10-K for the fiscal year ended December
31, 1999, and herein incorporated by reference.  
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|4.12  |  | Sixth Supplemental Indenture dated as of May 28, 1999 to the Indenture
dated as of May 28, 1999 among the Company, Holding and The Bank of New
York relating to the 7.125% Senior Notes due 2006; previously filed as
Exhibit (4)(xii) in Holdings Form 10-K for the fiscal year ended December
31, 1999, and herein incorporated by reference.
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|4.13  |  | Rights Agreement, dated as of January 5, 1995, between Holding and
Citibank N.A. as Rights Agent; previously filed as Exhibit (4) (xxv) to
Holdings Form 10-K for the fiscal year ended December 31, 1994, and
herein incorporated by reference.                                                                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|4.14  |  | Amendment No. 1 to Rights Agreement, dated as of January 13, 2003 between
American Standard Companies Inc. and The Bank of New York, as Rights
Agent; previously filed as Exhibit (1)(a) in Holdings Form 8-A/A
(Amendment No. 2) filed on August 20 2003, and herein incorporated by
reference.                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|4.15  |  | Amendment No. 2 to Rights Agreement dated as of February 6, 2003, between
American Standard Companies Inc. and The Bank of New York, as Rights
Agent, previously filed as Exhibit (1)(b) in Holdings Form 8-A/A
(Amendment No. 2) filed on August 20, 2003 and herein incorporated by
reference.                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|4.16  |  | Amendment No. 3 to Rights Agreement dated August 20, 2003, between
American Standard Companies Inc. and The Bank of New York, as Rights
Agent, previously filed as Exhibit (1)(b) in Holdings Form 8-A/A
(Amendment No. 2) filed on August 20, 2003 and herein incorporated by
reference.                                                      
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|10.1* |  | Amended and Restated Employment Agreement of Frederic M. Poses dated as
of February 7, 2002; previously filed as Exhibit (10)(iii) in Holdings
Form 10-K for the fiscal year ended December 31, 2001, and herein
incorporated by reference.                                                                                                    
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|10.2* |  | Employment Agreement of J. Paul McGrath dated December 17, 1999;
previously filed as Exhibit (10)(iii) to Holdings Form 10-K for the
fiscal year ended December 31, 2000, and herein incorporated by reference.                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|10.3* |  | Employment Agreement of G. Peter DAloia dated December 3, 1999;
previously filed as Exhibit (10)(iv) to Holdings Form 10-K for the fiscal
year ended December 31, 2000, and herein incorporated by reference.                                                                                                                                 
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|10.4* |  | Employment Agreement of Lawrence B. Costello dated May 1, 2000;
previously filed as Exhibit (10)(vi) in Holdings Form 10-K for the fiscal
year ended December 31, 2001, and herein incorporated by reference.                                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|10.5* |  | Employment Agreement of Marc Olivié dated March 2, 2001 and revised
March 19, 2001; previously filed as Exhibit (10)(vii) in Holdings Form
10-K for the fiscal year ended December 31, 2001, and herein incorporated
by reference.                                                                                                             
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|10.6* |  | Separation Letter between Marc Olivié and American Standard Companies
Inc. dated January 13, 2004, filed herewith.                                                                                                                                                                                                                              
|      |  |                                                                                                                                                                                                                                                                                                                                                 
|10.7* |  | The American Standard Companies Inc. Employee Stock Purchase Plan,
amended and restated as of July 1, 2002; previously filed as Exhibit
(10)(viii) to Holdings Form 10-K for the fiscal year ended December 31,
2002 and herein incorporated by reference.                                                                                     

86



---



##### 



|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8*  |  | American Standard Companies Inc. Long-Term Incentive Compensation Plan,
as amended and restated as of May 3, 2001; previously filed as Exhibit
(10)(x) in Holdings Form 10-K for the fiscal year ended December 31,
2001, and herein incorporated by reference.                                                                                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.9*  |  | Trust Agreement for American Standard Companies Inc. Long-Term Incentive
Compensation Plan and American Standard Companies Inc. Supplemental
Incentive Compensation Plan (As Amended and Restated in its Entirety As of
July 10, 2003), filed herewith.                                                                                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.10* |  | American Standard Inc. Executive Supplemental Retirement Benefit
Program, Restated to include all amendments through July 10, 2003, filed
herewith.                                                                                                                                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.11* |  | American Standard Companies Inc. Supplemental Compensation Plan for
Outside Directors (as amended and restated effective February 5, 2004),
filed herewith.                                                                                                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.12* |  | Trust Agreement for the American Standard Companies Inc. Supplemental
Compensation Plan for Outside Directors, Amended and Restated as of
October 2, 2003, filed herewith.                                                                                                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.13* |  | American Standard Companies Inc. Corporate Officer Severance Plan
(Amended and Restated as of July 10, 2003), filed herewith.                                                                                                                                                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.14* |  | American Standard Companies Inc. Deferred Compensation Plan (As Amended
and Restated as of January 1, 2004), filed herewith.                                                                                                                                                                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.15* |  | American Standard Companies Inc. Stock Incentive Plan, as amended
through December 7, 2000; previously filed as Exhibit (10)(xiv) to
Holdings Form 10 K for the year ended December 31, 2000, and herein
incorporated by reference.                                                                                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.16* |  | Addendum to Stock Incentive Plan referred to in Exhibit (10) (xvi) above
to comply with local regulations in the United Kingdom with respect to
options granted in that country; previously filed as Exhibit (10)(xii) in
Holdings Form 10-K for the fiscal year ended December 31, 1999, and
herein incorporated by reference.                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.17* |  | Addendum to Stock Incentive Plan referred to in Exhibit (10) (xvi) above
to comply with local regulations in France with respect to options granted
in that country; previously filed as Exhibit (10)(xiii) in Holdings Form
10-K for the fiscal year ended December 31, 1999, and herein incorporated
by reference.                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.18* |  | Second Addendum for French Participants to Stock Incentive Plan referred to in governing options
granted to participants in France on or after May 16, 2001,
previously filed as Exhibit (10)(xix) to Holdings Form 10-K for the fiscal year ended
December 31, 2002 and herein incorporated by
reference.                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.19* |  | American Standard Companies Inc. 2002 Omnibus Incentive Plan; previously
filed as Exhibit (10) in Holdings Form 10-Q for the quarter ended March
31, 2002, and herein incorporated by reference.                                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.20* |  | Addendum to the 2002 Omnibus Incentive Plan governing options granted
to participants in France, previously filed as Exhibit (10)(xxi) to
Holdings Form 10-K for the fiscal year ended December 31,
2002 and herein incorporated by reference.                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.21* |  | American Standard Inc. Supplemental Savings Plan (As Amended and
Restated as of January 1, 2004), filed herewith.                                                                                                                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.22  |  | Form of Indemnification Agreement; previously filed as Exhibit (10)
(xxi) in Amendment No. 3 to Registration Statement No. 33-56409, filed
January 5, 1995, and herein incorporated by reference.                                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.23  |  | Share Purchase Agreement dated February 2,1999 among Blue Circle
Industries PLC; Blue Circle Bathrooms Limited; Blue Circle Home Products
BV; Blue Circle Home Products Beteiligungs-GmbH and Ideal Standard
Limited; Ideal Standard S.r.l.; WABCO Standard GmbH and U.S. Plumbing
Products Inc.; Ideal Standard IBV Limited; WABCO Standard Export Inc.;
previously filed as Exhibit 2 in Holdings Form 8-K, dated December 22,
1998, filed February 12, 1999, and herein incorporated by reference.

87



---



##### 



|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.24 |  | Five-Year Credit Agreement, dated as of November 6, 2001, among Holding,
the Company, American Standard International Inc., certain subsidiaries of
Holding and the financial institutions listed therein, The Chase Manhattan
Bank, as Administrative Agent, Issuing Bank and Swingline Lender; Chase
Manhattan International Limited, as London Agent and Italian Agent; Bank
of America, N.A., Citibank, N.A. and Deutsche Bank AG as Syndication
Agents; The Industrial Bank of Japan Trust Company and Lloyds TSB Bank PLC
as Documentation Agents; and JP Morgan as Advisor, Lead Arranger and Book
Manager; previously filed as Exhibit (10)(i) to Holdings Form 10-Q for
the quarter ended September 30, 2001, and herein incorporated by
reference.
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.25 |  | First Amendment dated as of November 5, 2002, to the Five-Year Credit
Agreement, dated as of November 6, 2001, among Holding, the Company,
American Standard International Inc., the Borrowing Subsidiaries from time
to time party thereto and the Lenders from time to time party thereto;
JPMorgan Chase Bank, as Administrative Agent, as Issuing Bank and as
Swingline Lender; and J. P. Morgan Europe Limited, as London Agent and as
Belgian Agent; previously filed as Exhibit (10)(i) in Holdings Form 10 Q
for the quarter ended September 30, 2002, and herein incorporated by
reference.                                                                                                                                                       
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.26 |  | Amendment and Restatement Agreement dated as of November 5, 2002, in
respect of the 364-Day Credit Agreement, among Holding, the Company,
American Standard International Inc., the Borrowing Subsidiaries party
thereto, the Lenders party thereto, JP Morgan Chase Bank, as
Administrative Agent and Swingline Lender; Bank of America, N.A.,
Citibank, N.A. and Lloyds TSB Bank PLC as Syndication Agents; ABN AMRO
Bank N.V., Barclays Bank PLC, and Societe Generale, as Co-Syndication
Agents; and J. P. Morgan Securities Inc. as Lead Arranger and Sole
Bookrunner; previously filed as Exhibit (10)(ii) in Holdings Form 10-Q
for the quarter ended September 30, 2002, and herein incorporated by
reference.                                      
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|12    |  | Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|21    |  | Listing of Holdings subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|23    |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|24.1  |  | Power of Attorney for Frederic M. Poses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|24.2  |  | Power of Attorney (Steven E. Anderson, Jared L. Cohon, Steven F.
Goldstone, Edward E. Hagenlocker, Ruth Ann Marshall, James F. Hardymon,
and Roger W. Parsons).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|31.1  |  | Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|31.2  |  | Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|32.1  |  | Certification of the Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|32.2  |  | Certification of the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|* | Management compensatory plan or arrangement.
|- | --------------------------------------------

88



---



##### 






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.

| |  |                                     
| |  | ------------------------------------
| |  | AMERICAN STANDARD COMPANIES INC.    
| |  |                                     
| |  | By: /s/ FREDERIC M. POSES           
| |  |                                     
| |  | (Frederic M. Poses)                 
| |  | CHAIRMAN AND CHIEF EXECUTIVE OFFICER

March 3, 2004

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

|                        |  |                                                  
|----------------------- |  | -------------------------------------------------
|/s/ FREDERIC M. POSES   |  |                                                  
|                        |  |                                                  
|(Frederic M. Poses)     |  | Chairman and Chief Executive Officer; Director   
|                        |  | (Principal Executive Officer)                    
|                        |  |                                                  
|/s/ G. PETER DALOIA    |  |                                                  
|                        |  |                                                  
|(G. Peter DAloia)      |  | Senior Vice President and Chief Financial Officer
|                        |  | (Principal Financial Officer)                    
|                        |  |                                                  
|/s/ RICHARD S. PARADISE |  |                                                  
|                        |  |                                                  
|(Richard S. Paradise)   |  | Vice President and Controller                    
|                        |  | (Principal Accounting Officer)                   
|                        |  |                                                  
|*                       |  |                                                  
|                        |  |                                                  
|(Steven E. Anderson)    |  | Director                                         
|                        |  |                                                  
|*                       |  |                                                  
|                        |  |                                                  
|(Jared L. Cohon)        |  | Director                                         
|                        |  |                                                  
|*                       |  |                                                  
|                        |  |                                                  
|(Steven F. Goldstone)   |  | Director                                         
|                        |  |                                                  
|*                       |  |                                                  
|                        |  |                                                  
|(Edward E. Hagenlocker) |  | Director                                         
|                        |  |                                                  
|*                       |  |                                                  
|                        |  |                                                  
|(James F. Hardymon)     |  | Director                                         
|                        |  |                                                  
|*                       |  |                                                  
|                        |  |                                                  
|(Ruth Ann Marshall)     |  | Director                                         
|                        |  |                                                  
|*                       |  |                                                  
|                        |  |                                                  
|(Roger W. Parsons)      |  | Director                                         

|                        |                  |  | 
|----------------------- | ---------------- |  | 
|                        |                  |  | 
|*By /s/ J. PAUL MCGRATH |                  | 
|                        |                  | 
|                        | J. Paul McGrath  |  | 
|                        | Attorney-in-fact |  | 

89



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##### 






REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES

We have audited the consolidated financial statements of American Standard
Companies Inc. as of December 31, 2003 and 2002, and for each of the three
years in the period ended December 31, 2003, and have issued our report thereon
dated January 23, 2004. Our audits also included the financial statement
schedules listed in Item 15(a). These schedules are the responsibility of the
Companys management. Our responsibility is to express an opinion based on our
audits.

In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

|                   |  |                      
|------------------ |  | ---------------------
|                   |  | -s- Ernst & Young LLP
|New York, New York |  |                      
|January 23, 2004   |  |                      

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SCHEDULE ICONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF INCOME (Parent Company Separately)
(Dollars in millions)

|                                     |  |                         |       |      |  |      |       |  |  |   |       | 
|------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                     |  | Year Ended December 31,
|                                     |  |                        
|                                     |  | 2003                    |       | 2002 |  | 2001
|                                     |  |                         |       |      |  |     
|Equity in net income of subsidiaries |  | $                       | 405.2 |      |  | $    | 371.0 |  |  | $ | 295.0 | 
|                                     |  |                         |       |      |  |      |       |  |  |   |       | 
|Net income                           |  | $                       | 405.2 |      |  | $    | 371.0 |  |  | $ | 295.0 | 
|                                     |  |                         |       |      |  |      |       |  |  |   |       | 

See notes to financial statements.

BALANCE SHEET (Parent Company Separately)
(Dollars in millions)

|                                                             |                                                                              |                                            |                      |        |              |   |        |        |       |  | 
|------------------------------------------------------------ | ---------------------------------------------------------------------------- | ------------------------------------------ | -------------------- | ------ | ------------ | - | ------ | ------ | ----- |  | 
|                                                             |                                                                              |                                            |                      |        | December 31,
|                                                             |                                                                              |                                            |                      |        |             
|                                                             |                                                                              |                                            |                      |        | 2003         |   | 2002  
|                                                             |                                                                              |                                            |                      |        |              |   |       
|                                                             |                                                                              |                                            | ASSETS               |        |              |   |        |        |       |  | 
|Cash                                                         |                                                                              | $                                          | .1                   |        |              |   |        |       
|Investment in subsidiaries                                   |                                                                              |                                            | 1,441.1              |        |              | $ | 860.2  |       
|                                                             |                                                                              |                                            |                      |        |              |   |        |       
|                                                             |                                                                              | Total assets                               |                      | $      | 1,441.2      |   |        | $      | 860.2 | 
|                                                             |                                                                              |                                            |                      |        |              |   |        |       
|                                                             |                                                                              |                                            | LIABILITIES          |        |              |   |        |        |       |  | 
|Loans payable to subsidiaries                                |                                                                              | $                                          | 727.4                |        |              | $ | 630.4  |       
|                                                             |                                                                              |                                            | SHAREHOLDERS EQUITY |        |              |   |        |        |       |  | 
|Common stock, $.01 par value, 200,000,000 shares authorized: |                                                                              |                                            |                      |        |              |   |        |       
|                                                             | issued and outstanding, 72,638,326 shares in
2003; 72,613,736 shares in 2002 |                                            |                      | .7     |              |   |        | .7     |      
|Capital surplus                                              |                                                                              |                                            | 755.5                |        |              |   | 724.4  |       
|Unearned compensation                                        |                                                                              |                                            | (.7                  | )      |              |   | (2.3   | )     
|Treasury stock                                               |                                                                              |                                            | (584.3               | )      |              |   | (534.6 | )     
|Retained earnings                                            |                                                                              |                                            | 833.2                |        |              |   | 428.0  |       
|Accumulated other comprehensive income:                      |                                                                              |                                            |                      |        |              |   |        |       
|                                                             | Foreign currency translation effects                                         |                                            |                      | (204.5 | )            |   |        | (309.2 | )    
|                                                             | Deferred loss on hedge contracts, net of tax                                 |                                            |                      | 7.1    |              |   |        | (2.0   | )    
|                                                             | Minimum pension liability adjustment, net of tax                             |                                            |                      | (93.2  | )            |   |        | (75.2  | )    
|                                                             |                                                                              |                                            |                      |        |              |   |        |       
|                                                             |                                                                              | Total shareholders equity                 |                      |        | 713.8        |   |        |        | 229.8 | 
|                                                             |                                                                              |                                            |                      |        |              |   |        |       
|                                                             |                                                                              | Total liabilities and shareholders equity |                      | $      | 1,441.2      |   |        | $      | 860.2 | 
|                                                             |                                                                              |                                            |                      |        |              |   |        |       

See notes to financial statements.

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##### 



SCHEDULE ICONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)

STATEMENT OF CASH FLOWS (Parent Company Separately)
(Dollars in millions)

|                                                 |                                         |                                                                                   |                                      |                               |   |                         |     |        |   |        |     |        |   |        |     |  
|------------------------------------------------ | --------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------ | ----------------------------- | - | ----------------------- | --- | ------ | - | ------ | --- | ------ | - | ------ | --- | -
|                                                 |                                         |                                                                                   |                                      |                               |   | Year Ended December 31,
|                                                 |                                         |                                                                                   |                                      |                               |   |                        
|                                                 |                                         |                                                                                   |                                      |                               |   | 2003                    |     | 2002   |   | 2001  
|                                                 |                                         |                                                                                   |                                      |                               |   |                         |     |        |   |       
|Cash flows from operating activities:            |                                         |                                                                                   |                                      |                               |   |                         |     |        |   |        |     |       
|                                                 | Net income                              |                                                                                   | $                                    | 405.2                         |   |                         | $   | 371.0  |   |        | $   | 295.0  |  
|                                                 |                                         | Adjustments to reconcile net income to
net cash provided by operating activities: |                                      |                               |   |                         |     |        |   |        |     |        |   |       
|                                                 |                                         |                                                                                   | Equity in net income of subsidiaries |                               |   | (405.2                  | )   |        |   | (371.0 | )   |        |   | (295.0 | )  
|                                                 |                                         |                                                                                   | Changes in:                          |                               |   |                         |     |        |   |        |     |        |   |        |    
|                                                 |                                         |                                                                                   |                                      | Accounts receivable           |   |                         |     |        |   |        | .5  |        |   |        | .6  |  
|                                                 |                                         |                                                                                   |                                      | Accounts payable and accruals |   |                         |     |        |   |        |    |        |   |        | (.4 | )
|                                                 |                                         |                                                                                   |                                      |                               |   |                         |     |        |   |        |     |       
|Net cash flow from operating activities          |                                         |                                                                                   |                                     |                               |   |                         | .5  |        |   |        | .2  |       
|                                                 |                                         |                                                                                   |                                      |                               |   |                         |     |        |   |        |     |       
|Cash provided (used) by
investing activities:    |                                         |                                                                                   |                                      |                               |   |                         |     |        |   |        |     |       
|                                                 | Investment in subsidiaries              |                                                                                   |                                      |                              |   |                         |     |       |   |        |     |       |  
|                                                 |                                         |                                                                                   |                                      |                               |   |                         |     |        |   |        |     |       
|Net cash provided (used) by
investing activities |                                         |                                                                                   |                                     |                               |   |                         |    |        |   |        |    |       
|                                                 |                                         |                                                                                   |                                      |                               |   |                         |     |        |   |        |     |       
|Cash provided (used) by financing activities:    |                                         |                                                                                   |                                      |                               |   |                         |     |        |   |        |     |       
|                                                 | Purchases of treasury stock             |                                                                                   |                                      | (149.5                        | ) |                         |     | (141.1 | ) |        |     | (116.5 | )
|                                                 | Purchase of warrants                    |                                                                                   |                                      |                              |   |                         |     |       |   |        |     | (35.2  | )
|                                                 | Proceeds from exercise of stock options |                                                                                   |                                      | 54.9                          |   |                         |     | 56.1   |   |        |     | 96.9   |  
|                                                 | Loan from subsidiary                    |                                                                                   |                                      | 87.7                          |   |                         |     | 77.2   |   |        |     | 47.4   |  
|                                                 | Other                                   |                                                                                   |                                      | 7.0                           |   |                         |     | 7.3    |   |        |     | 7.1    |  
|                                                 |                                         |                                                                                   |                                      |                               |   |                         |     |        |   |        |     |       
|Net cash provided (used) by
financing activities |                                         |                                                                                   | .1                                   |                               |   |                         | (.5 | )      |   |        | (.3 | )     
|                                                 |                                         |                                                                                   |                                      |                               |   |                         |     |        |   |        |     |       
|Net change in cash and cash equivalents          |                                         |                                                                                   | .1                                   |                               |   |                         |    |        |   |        | (.1 | )     
|Cash and cash equivalents beginning of year      |                                         |                                                                                   |                                     |                               |   |                         |    |        |   |        | .1  |       
|                                                 |                                         |                                                                                   |                                      |                               |   |                         |     |        |   |        |     |       
|Cash and cash equivalents end of year            |                                         | $                                                                                 | .1                                   |                               |   | $                       |    |        |   | $      |    |       
|                                                 |                                         |                                                                                   |                                      |                               |   |                         |     |        |   |        |     |       

See notes to financial statements.

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##### 



SCHEDULE ICONDENSED FINANCIAL INFORMATION
OF REGISTRANT(Continued)

NOTES TO FINANCIAL STATEMENTS (Parent Company Separately)



|(A) |  | The notes to the consolidated financial statements of American Standard
Companies Inc. (the Parent Company) are an integral part of these
condensed financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(B) |  | The Parent Company owns 100% of the outstanding shares of common stock
American Standard Inc. and 100% of the shares of common stock of American
Standard International Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(C) |  | The Companys Board of Directors has approved plans to purchase shares of
the Companys common stock to offset the dilutive effect of issuing shares
of common stock pursuant to the Companys stock option plan and other
incentive and benefit plans funded with shares of stock. As of December
31, 2003, the unexpended authorization was $313 million. The Company
purchased 2,001,800 shares in 2003 for $152 million, 2,075,200 shares in
2002 for $141 million, 1,921,050 shares in 2001 for $117 million and
6,152,950 shares in prior years for $227 million. The Company plans to
increase its purchases of shares in 2004 under this program to about $250
million.

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##### 






SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands)

|                              |                                            |           |           |        |            |            |   |         |  |         |       |         |             |  |          |         |         |  |         |       |   |  |   |        | 
|----------------------------- | ------------------------------------------ | --------- | --------- | ------ | ---------- | ---------- | - | ------- |  | ------- | ----- | ------- | ----------- |  | -------- | ------- | ------- |  | ------- | ----- | - |  | - | ------ | 
|                              |                                            |           |           |        |            |            |   |         |  |         |       |         |             |  |          |         |         |  | Foreign |       |   |  |  
|                              |                                            |           | Balance   |        | Additions  |            |   |         |  |         |       |         |             |  | Currency |         | Balance
|                              |                                            |           | Beginning |        | Charged to |            |   |         |  |         | Other |         | Translation |  | End of  
|Description                   |                                            | of Period |           | Income |            | Deductions |   | Changes |  | Effects |       | Period 
|                              |                                            |           |           |        |            |            |   |         |  |         |       |        
|2003:                         |                                            |           |           |        |            |            |   |         |  |         |       |         |             |  |          |         |         |  |         |       |   |  |   |       
|Reserve deducted from assets: |                                            |           |           |        |            |            |   |         |  |         |       |         |             |  |          |         |         |  |         |       |   |  |   |       
|                              | Allowance for doubtful
accounts receivable |           | $         | 38,112 |            |            | $ | 25,709  |  |         | $     | (18,420 | )(A)        |  | $        | (1,814  | )       |  | $       | 1,721 |   |  | $ | 45,308 | 
|                              |                                            |           |           |        |            |            |   |         |  |         |       |         |             |  |          |         |         |  |         |       |   |  |   |       
|2002:                         |                                            |           |           |        |            |            |   |         |  |         |       |         |             |  |          |         |         |  |         |       |   |  |   |       
|Reserve deducted from assets: |                                            |           |           |        |            |            |   |         |  |         |       |         |             |  |          |         |         |  |         |       |   |  |   |       
|                              | Allowance for doubtful
accounts receivable |           | $         | 35,446 |            |            | $ | 22,524  |  |         | $     | (8,627  | )(A)        |  | $        | (12,434 | )       |  | $       | 1,203 |   |  | $ | 38,112 | 
|                              |                                            |           |           |        |            |            |   |         |  |         |       |         |             |  |          |         |         |  |         |       |   |  |   |       
|2001:                         |                                            |           |           |        |            |            |   |         |  |         |       |         |             |  |          |         |         |  |         |       |   |  |   |       
|Reserve deducted from assets: |                                            |           |           |        |            |            |   |         |  |         |       |         |             |  |          |         |         |  |         |       |   |  |   |       
|                              | Allowance for doubtful
accounts receivable |           | $         | 36,741 |            |            | $ | 17,700  |  |         | $     | (15,804 | )(A)        |  | $        | (2,200  | )       |  | $       | (991  | ) |  | $ | 35,446 | 
|                              |                                            |           |           |        |            |            |   |         |  |         |       |         |             |  |          |         |         |  |         |       |   |  |   |       



|(A) |  | Accounts charged off.
|--- |  | ---------------------

94