Edgar Filing: ROYAL APPLIANCE MANUFACTURING CO

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 2002

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from to .
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Commission file number 0-19431
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ROYAL APPLIANCE MFG. CO.
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(Exact name of registrant as specified in its charter)

OHIO 34-1350353
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(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)

7005 COCHRAN ROAD, GLENWILLOW, OHIO 44139
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(Address of principal executive offices) Zip Code

(440) 996-2000

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(Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Common Shares, Without Par Value New York Stock Exchange
--------------------------------- ---------------------------------------------
(Title of Each Class) (Name of Each Exchange on which Registered)

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 (Sec. 229.405 of this chapter) 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 [ ].

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-1). Yes [ ] No [X].

The aggregate market value of the voting shares held by non-affiliates of
the Registrant, as reported on the New York Stock Exchange, based upon the
closing sale price of Registrant's Common Shares on March 21, 2003, was
$53,213,322. Common Shares held by each officer and director have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

The number of outstanding shares of the Registrant's common shares as of
March 21, 2003, was 12,861,052.

The Exhibit index appears on sequential page 55.

PART I

ITEM 1. BUSINESS

General

Royal Appliance Mfg. Co. ("Royal" or the "Company"), an Ohio corporation
with its corporate offices in the Cleveland, Ohio metropolitan area, develops,
assembles or sources and markets a full line of cleaning products for home and
some for commercial use, primarily in North America under the Dirt Devil(R) and
Royal(R) brand names. In 1984, the Company introduced the first in a line of
Dirt Devil floorcare products, which the Company believes has become one of the
largest selling lines of vacuum cleaners in the United States. The Company has
used the Dirt Devil brand name recognition to gain acceptance for other Dirt
Devil floorcare products. The Company continues to market certain metal vacuum
cleaners for home and commercial use under the Royal brand name.

On December 16, 2002, the Company entered into a definitive agreement
("agreement") for its acquisition by Techtronic Industries ("TTI"). The
agreement provides for Royal shareholders to receive $7.37 per share in cash,
for a total price of $105 million. Under the terms of the agreement, Royal will
be merged with a subsidiary of TTI which, following the completion of the
merger, will operate as a wholly owned, indirect subsidiary of TTI. The
transaction is expected to close on April 23, 2003. It is subject to, among
other things, the approval by the shareholders of both TTI and Royal. The
parties have received early termination of the Hart-Scot-Rodino waiting period.

During 2001, the Company's subsidiary, Privacy Technologies, Inc. ("Privacy
Technologies(TM)") introduced the TeleZapper(TM) - a telephone attachment that
helps block unwanted telemarketing calls and removes consumers' phone numbers
from the telemarketers' computerized dialing lists.

In July 2002, the Company acquired the North American rights to the home,
health and beauty line of products from Medisana AG, along with certain other
assets for approximately $800,000. Medisana home, health and beauty products
were offered in North America for the past three years through their North
American wholly-owned subsidiary Medisana USA.

The Company's business strategy is primarily focused on leveraging its
distribution channels and its well-known Dirt Devil brand, where applicable, to
new and innovative products both inside and outside the floorcare industry,
primarily in North America. The Company's product offering consists of name
brand consumer products in two business segments: Consumer Products - Floorcare
and Consumer Products - Other. The Company's goal is to expand the number,
visibility and volume of its products sold by retailers, as well as to increase
the number of major retailers carrying its products. The Company also seeks to
increase the sale of its products through independent floorcare dealers by
offering dealer-exclusive product lines and cooperative promotional programs.

The Company's marketing strategy is essential to its success. The Company
uses television, print, cooperative advertising and its Dirt Devil and Privacy
Technologies websites to build and maintain brand awareness and consumer demand,
as well as to gain shelf space for its product lines from major retailers.

Business Segments

Consumer Products - Floorcare: The Company's Consumer Products - Floorcare
business segment designs, assembles or sources, markets and distributes a full
line of plastic and metal vacuum cleaners. The Company's Dirt Devil vacuum
cleaners are intended for home use. The Company's metal vacuum cleaners are
intended for home and commercial use.

This business segment's primary retail product lines are sold under the
Dirt Devil name. The first Dirt Devil product, the Hand Vac, was introduced in
1984. The Dirt Devil line has since been expanded to include a full line of
upright vacuum cleaners at various price points, both with bags and bagless,
upright and hand held carpet and upholstery extractors, canister vacuum
cleaners, and a full line of corded and cordless hand held vacuum cleaners.

ITEM 1. BUSINESS (CONTINUED)

Business Segments (continued)

The Company has produced durable metal vacuum cleaners since the early
1900's. Currently, the Company markets a full line of metal upright and plastic
upright and canister vacuum cleaners under the Royal brand name for home and
commercial use exclusively through its network of independent dealers. The
Company also sells accessories, carpet and upholstery cleaning solutions,
attachments, refurbished cleaners and replacement parts for each of its product
lines.

In order to provide the retailers with distinct product alternatives, the
Company offers different Dirt Devil products in a variety of styles and colors
and with various features. Major retailers currently carrying some portion of
the Dirt Devil product line include Best Buy, Canadian Tire, Home Depot, Kmart,
Lowe's, Sam's Club, Sears, Target, and WalMart. The Company also sells its Dirt
Devil products through independent dealers, who primarily sell the metal line of
Royal vacuum cleaners.

CONSUMER PRODUCTS - OTHER: The Company's Consumer Products - Other segment
primarily represents business conducted by Privacy Technologies, Inc., Product
Launch Partners, Inc. and Medisana, Inc. This business segment designs, sources
and distributes consumer products outside of the Company's traditional floorcare
business. Currently, this segment is substantially comprised of the TeleZapper,
which was introduced in the second half 2001 by Privacy Technologies, Inc. The
TeleZapper is a telephone attachment that helps block unwanted telemarketing
calls and removes consumers' phone numbers from telemarketers' computerized
dialing lists. Major retailers currently offering the TeleZapper include Best
Buy, CVS, Kmart, RadioShack, Target, Walgreens and WalMart.

NET SALES BY BUSINESS SEGMENT: The following table sets forth the amounts
and percentages of the Company's net sales for the three years ended December
31, 2002 for the Company's two business segments.

(000's ommitted) 2002 % 2001 % 2000 %
------------- ------------- ------------- ------------- ------------ -------------

Consumer Products -
Floorcare $ 353,427 90.7% $ 399,388 94.8% $ 401,515 100.0%

Consumer Products -
Other 36,299 9.3% 21,923 5.2% - -
---------- ----- --------- ----- ---------- -----
$ 389,726 100.0% $ 421,311 100.0% $ 401,515 100.0%
========== ===== ========= ===== ========== =====

For further information on business segments, see Note 13 of the Notes to
the Consolidated Financial Statements.

NEW PRODUCTS

The Company introduces new products and enhances its existing products on a
regular basis for both the retail and dealer markets. In order to support its
product development efforts, the Company engages in research and development
activities, particularly with respect to new product engineering. The Company's
engineering and product development expenditures were approximately $6.8
million, $7.9 million, and $6.8 million in 2002, 2001 and 2000, respectively.

The Company has license and R&D agreements with third parties.
Additionally, the Company has licensing agreements with third parties, which
license the Dirt Devil brand name for certain other cleaning products in North
America and for use of the Dirt Devil brand name in other countries.

The Company has also created Product Launch Partners, Inc. in 2002. Product
Launch Partners, Inc. was established as a vehicle for inventors and start-up
consumer product companies to joint venture with the Company on new product
launch opportunities. As of the date of this report, no new products have been
commercialized through Product Launch Partners, Inc.

In addition to internally developing products, the Company may purchase
product tooling, license product designs and patents, and outsource product
assembly for products to be marketed under the Dirt Devil and Royal brand names
or through Privacy Technologies.

ITEM 1. BUSINESS (CONTINUED)

MARKETING AND CUSTOMERS

The Company markets its Dirt Devil and TeleZapper products primarily
through major retailers, including mass market retailers (e.g. WalMart, Target
and Kmart), electronic chains (e.g. Best Buy and RadioShack), warehouse clubs
(e.g. Sam's Club and B.J.'s Wholesale Club), home improvement centers (e.g. Home
Depot and Lowe's), and drug store chains (e.g. CVS and Walgreens). During 2002,
WalMart (including Sam's Club), Kmart and Target accounted for approximately
27.5%, 15.1%, and 15.0%, respectively, of the Company's net sales, compared to
approximately 31.1%, 14.3%, and 14.1%, respectively, of the Company's net sales
in 2001. These were the only customers who accounted for 10% or more of the
Company's net sales during such periods. During 2002 and 2001, the Company's net
sales in the aggregate to its five largest customers were 67.6% and 68.1%,
respectively, of total net sales. The loss of any of these customers or loss of
their shelf space could have a significant impact on the Company's operations.
The Company anticipates that the significant percentage of the Company's net
sales attributable to a limited number of major retail customers will continue.
The Company believes that its relations with its customers are good. The Company
sells most of its products to retailers through its internal sales staff.
Recently, several major retailers have experienced significant financial
difficulties and some, including Kmart, have filed for protection from creditors
under applicable bankruptcy laws. As of December 31, 2002, the net exposure
related to Kmart's pre-bankruptcy balance as well as other customer balances for
which management believes collection is doubtful was included in the calculation
of allowance for doubtful accounts. The Company sells its products to certain
customers that are in bankruptcy proceedings.

Since Dirt Devil and TeleZapper products are targeted to sell to the mass
market, the Company believes that brand name recognition is critical to the
success of these products. The Company provides advertising and promotional
support for its Dirt Devil and TeleZapper products through television and
cooperative advertising with retailers and believes that these promotional
activities, as well as those of its major customers, affect brand name awareness
and sales. The Company's cooperative advertising program is established based
upon planning ads and promotions with its mass market retail customers. Some of
the Company's advertising and promotional activities are tied to holidays and
also to specific promotional activities of retailers, and historically have been
higher during the Christmas shopping season. The Company's advertising and
promotional expenditures are not proportional to anticipated sales. In addition,
the Company has generated a small portion of its sales from consumer direct
orders, primarily for accessories and new product launches, through the
Company's toll-free number, websites and from direct response television
infomercials.

The Company devotes considerable attention to the design and appearance of
its products and their packaging in order to enhance their appeal to consumers
and to stand out among other brands on retailers' shelves. In order to increase
the presence of its Dirt Devil products in major retail outlets, the Company
provides retailers with distinct product alternatives by offering its Dirt Devil
product lines in a variety of styles and colors and with various features.

The Company also strives to meet the logistic and product merchandising
needs of its retailers. The Company endeavors to have sufficient quantities of
products in stock in order to process and fill orders in a timely manner. Since
orders are typically shipped within 10 days of the receipt of a purchase order,
the Company does not have a significant order backlog. The Company permits
cancellation of orders up to 72 hours prior to shipment.

The Company's line of metal vacuum cleaners is currently sold exclusively
through a network of independent vacuum cleaner dealers. As part of its effort
to support its independent dealer network, the Company has attempted to meet
independent dealers' needs for distinctive product offerings not available to
mass merchants. The Company's metal product lines are targeted at consumers and
commercial customers who are interested in purchasing more durable and higher
quality vacuum cleaners. The Company focuses its promotional activities with its
independent dealers on cooperative advertising.

Many of the Company's independent dealers also provide warranty service for
Royal and Dirt Devil products. This allows the consumer to have prompt access to
local service outlets and is an important component of the Company's efforts to
be responsive to consumers. The Company's products are generally sold with a one
to six-year limited warranty.

ITEM 1. BUSINESS (CONTINUED)

MARKETING AND CUSTOMERS (CONTINUED)

The Company has generally accepted over-the-counter product returns from
its retail customers reflecting the retailers' customer return policies.

Each of the Company's products has a toll-free number printed on it that
consumers may use to contact a Company customer service representative. Through
its customer service computer system, the Company can provide a prompt response
to consumer inquiries concerning the availability of its products and service
dealers in the consumer's vicinity.

COMPETITION

The Company's Consumer Products - Floorcare business segment's most
significant competitors are Hoover, Eureka and Bissell in the upright vacuum and
carpet shampooer markets and Black & Decker and Euro Pro in the hand-held
market. Many of these competitors and several others are subsidiaries or
divisions of companies that are more diversified and have greater financial
resources than the Company. The Company believes that the domestic vacuum
cleaner industry is a mature industry with modest annual growth in many of its
products but with a decline in certain other products. Competition is dependent
upon price, quality, extension of product lines, and advertising and promotion
expenditures. Additionally, competition is influenced by innovation in the
design of replacement models and by marketing and approaches to distribution.
The Company experiences extensive competition, including price pressure and
increased advertising by its competitors, in all product lines within the
Consumer Products - Floorcare segment. These trends are expected to continue
into 2003.

TRADEMARKS AND PATENTS

The Company holds numerous trademarks registered in the United States and
foreign countries for various products. The Company has registered trademarks in
the United States and a number of foreign countries for the Dirt Devil, Royal,
TeleZapper, and other names and logos, which are used in connection with the
sale of its vacuum cleaners, consumer electronics and other products and
accessory parts. The Company considers both the Dirt Devil and TeleZapper
trademarks to be of considerable value and critical to its business. No
challenges to its rights to the Dirt Devil trademark have arisen and the Company
has no reason to believe that any such challenges will arise in the future.
Recently, a lawsuit was filed against the Company asserting trademark
infringement by the Company through the use of the TeleZapper trademark. See
Item 3: Legal Proceedings for further details.

On December 11, 2002, the Company announced that it had entered into a
cross license agreement with Matsushita Home Appliances ("Panasonic") with
respect to certain patents and related intellectual property rights. Panasonic
has received a license to continue to manufacture and market bagless upright
vacuum cleaner products under the Royal bagless upright patent portfolio. Royal
received a license to continue to manufacture and market vacuum cleansers under
patents for certain Panasonic technology. The agreement will result in ongoing
positive cash payments to Royal beginning in the fourth quarter of 2002. The
Company has also entered into a license agreement with The Hoover Company. See
Item 3 - Legal Proceedings for further details.

The Company holds or licenses the use of numerous domestic and
international patents, including design patents and processes. The Company may
also license its trademarks and patents. The Company believes that its product
lines in the Consumer Products - Floorcare segment are generally not dependent
upon any single patent or group of patents. Within the Consumer Products - Other
segment, the primary product line, the TeleZapper, is dependent upon a limited
number of patents for that product.

SEASONALITY

The Company believes that a significant percentage of certain of its
products are given as gifts and therefore, sell in larger volumes during the
Christmas and other holiday shopping seasons. Because of the Company's continued
dependency on its major customers, the timing of purchases by these major
customers and the timing of new product introductions cause quarterly
fluctuations in the Company's net sales. As a consequence, results in prior
quarters are not necessarily indicative of future results of operations.

ITEM 1. BUSINESS (CONTINUED)

PRODUCTION

The production of the majority of the Company's products has been
outsourced to global third party contract manufacturers. The company continues
to assemble certain products in the Cleveland, Ohio metropolitan area. Unlike
many of its competitors, the Company does not manufacture component parts for
its products. Component parts for the Company's products are manufactured by
suppliers, frequently using molds and tooling owned by the Company and built to
its specifications. Since the Company's production operations are currently
limited to final assembly, it believes that its fixed costs are lower than many
of its competitors. The Company also believes that this approach and the use of
third party contract manufacturers has provided increased flexibility in the
introduction and modification of products.

The Company's engineering department is primarily responsible for the
design and testing of its products. The Company has computer-aided design
systems to assist its engineers in developing new products and modifying
existing products. The Company also retains outside design firms to assist its
engineers in designing new products. In addition to internally developing
products, the Company may purchase tooling, license intellectual property, or
otherwise sell products produced by others to the Company's specifications which
may be marketed under the Dirt Devil and Royal brand names or through Privacy
Technologies.

A majority of the raw materials purchased by the Company are component
parts, such as motors, bags, cords, and plastic parts, which are available from
multiple suppliers. The amount of time required by suppliers to fill orders
released by the Company varies from 1 to 3 months for sourced finished goods,
and days to several weeks for component parts. The Company does not believe that
it is dependent on any single source for any significant portion of its raw
material or component purchases. The Company believes that it has good
relationships with its suppliers and contract manufacturers and has not
experienced any significant raw material or component shortages.

EMPLOYEES

As of December 31, 2002, the Company employed approximately 550 full-time
employees, a reduction of approximately 120 from December 31, 2001. In addition,
the Company generally utilizes temporary personnel during the period when the
Company is responding to its peak selling season. During 2002, the peak
temporary personnel level reached approximately 300. The Company's employees are
not represented by any labor union. The Company considers its relations with its
employees to be good.

The Company has in effect a severance compensation plan that provides for a
severance payment to full-time employees, based on years of employment, if
within thirty-six months after a change-in-control of the Company (as is
anticipated to occur if the Techtronic Industries merger is approved by
shareholders) their employment is terminated for any reason other than death,
permanent disability, voluntary retirement or for cause. Executives who receive
payments pursuant to change-in-control and other employment arrangements will
not receive duplicative severance payments under the severance compensation
plan.

GOVERNMENTAL REGULATION

The Company's facilities are subject to numerous federal, state and local
laws and regulations designed to protect the environment from waste, emissions,
and from hazardous substances. The Company is also subject to the Federal
Occupational Safety and Health Act and other laws and regulations affecting the
safety and health of employees in its facilities. The Company is not a party to
any investigation or litigation by the Environmental Protection Agency or any
state environment agency. The Company believes that it is in compliance, in all
material respects, with applicable environmental and occupational safety
regulations.

ITEM 2. PROPERTIES

On December 31, 2002, the Company and its subsidiaries owned or leased the
material properties listed on the following table:

APPROXIMATE
SQUARE FOOTAGE LEASE EXPIRATIONS
LOCATION AND ADDRESS OWNED LEASED (EXCLUDING RENEWALS) FUNCTION
-------------------- ----- ------ -------------------- --------

7005 Cochran Road -- 458,000 07/15 Distribution Center & Corporate
Glenwillow, Ohio Headquarters

1340 East 289th Street 106,000 -- 11/11 Warehouse
Wickliffe, Ohio (1)

8120 Tyler Blvd. 300,000 -- N/A Assembly, Shipping, Warehouse
Mentor, Ohio and Refurb Operations

3951 East Earlstone -- 140,400 06/06 Distribution Center
Ontario, CA

(1) This leased property is reflected as owned because it contains a
bargain purchase option of $1. For further description, see Note 4 of
Notes to Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

The Hoover Company (Hoover) filed a lawsuit in federal court, in the
Northern District of Ohio (case #1:00cv 0347), against the Company on February
4, 2000, under the patent, trademark, and unfair competition laws of the United
States. The Complaint asserted that the Company's Dirt Devil Easy Steamer
infringed three utility patents and two design patents held by Hoover, and also
that the Easy Steamer design infringed the trade dress of Hoover's carpet
extractor products. The Court had dismissed charges of infringement against
Royal regarding one of the three utility patents, and found that the Dirt Devil
Easy Steamer infringed one claim of a second utility patent. The Company filed a
lawsuit in federal court, in the Northern District of Ohio (case #1:01cv 2775),
against The Hoover Company (Hoover) on December 10, 2001, under the patent,
trademark, and unfair competition laws of the United States. The Complaint
asserted that Hoover infringed certain patents relating to bagless technology
held by the Company. On October 17, 2002, the Company and Hoover reached a
settlement of all patent-related litigation described above. Hoover has granted
rights to the Company with regard to its existing carpet extractor patents. The
Company has granted rights to Hoover with regard to its existing bagless upright
vacuum cleaner patents. The settlement includes net cash payments to the Company
and resulted in a gain of $3,371,000 which was included in the caption
"Litigation Settlement" on the Consolidated Statement of Operations.

The Company filed a lawsuit in federal court, in the Northern District of
Ohio (case #1:02cv 0338), against Bissell Homecare, Inc. (Bissell) on February
22, 2002, under the patent, trademark, and unfair competition laws of the United
States. The Complaint asserts that Bissell infringes certain patents relating to
bagless technology held by the Company. The Company seeks damages, injunction on
future production, and legal fees.

Bissell Homecare, Inc. (Bissell) filed a lawsuit in federal court, in
Michigan (case #02cv71079), against the Company on March 20, 2002, under the
patent, trademark, and unfair competition laws of the United States. The
Complaint asserts that the Company's Dirt Devil Easy Steamer and Platinum Force
Extractor products infringe certain design and utility patents held by Bissell.
Bissell seeks damages, injunction on future production, and legal fees. On June
19, 2002, the Court transferred the case (now #1:02cv 1358) to the Northern
District of Ohio. The Company is vigorously defending the suit and believes it
is without merit. If Bissell were to prevail on all its claims, it could have a
material adverse effect on the consolidated financial position, results of
operations, or cash flows of the Company.

The Company filed a lawsuit in federal court, in the Northern District of
Ohio (case #1:02cv 1127), against White Consolidated, Ltd. (Eureka) on June 14,
2002, under the patent, trademark and unfair competition laws of the United
States. The Complaint asserts that Eureka infringes certain patents relating to
bagless technology held by the Company. The Company seeks damages, injunction on
future production, and legal fees.

ITEM 3. LEGAL PROCEEDINGS (CONTINUED)

The Company filed a lawsuit in federal court, in the Northern District of
Ohio against Euro-Pro Corporation and Sanyo North America Corporation (together
referred to as "Defendants") on November 15, 2002, under the patent, trademark
and unfair competition laws of the United States. The complaint asserts that
Defendants infringe certain patents relating to bagless technology held by the
Company. The Company seeks damages, injunction on future production and legal
fees.

Phone Zap, LLC ("Phone Zap") filed a lawsuit in United States District
Court, District of Columbia, against the Company and its subsidiary, Privacy
Technologies, Inc. on January 6, 2003, under the patent, trademark and unfair
competition laws of the United States. The complaint asserts trademark
infringement by the Company through the use of the Company's TeleZapper(R)
trademark. The Company is vigorously defending the suit and believes it is
without merit. If Phone Zap were to prevail on all its claims, it could have a
material adverse effect on the consolidated financial position, results of
operations, or cash flows of the Company.

The Company is involved in various other claims and litigation arising in
the normal course of business. The Company has product liability and general
liability insurance policies in amounts management believes to be reasonable.
There can be no assurance, however, that such insurance will be adequate to
cover all potential product or other liability claims against the Company. In
the opinion of management, the ultimate resolution of these actions will not
materially affect the consolidated financial position, results of operations, or
cash flows of the Company.

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

None

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's common shares are quoted on the New York Stock Exchange
(NYSE) under the symbol "RAM". The following table sets forth, for the periods
indicated, the high and low closing price for the Company's Common Shares as
reported by the New York Stock Exchange.

Year Ended December 31,
-----------------------
2002 2001
---- ----
High Low High Low
---- --- ---- ---
Quarters:
First $5.70 $4.65 $4.75 $3.85
Second $7.13 $5.40 $6.10 $3.15
Third $6.40 $3.90 $6.61 $3.57
Fourth $7.27 $3.55 $5.55 $4.00

The Company has not declared or paid any cash dividends and currently
intends not to pay any cash dividends in 2003. The Board of Directors intends to
retain earnings, if any, to support the operations and growth of the business.
The Company's current credit agreement permits the payment of cash dividends and
additional stock repurchases based on a defined formula up to $18,369 as of
December 31, 2002.

On March 21, 2003, there were approximately 800 shareholders of record of
the Company's Common Shares, as reported by National City Corporation, the
Company's Registrar and Transfer Agent, which maintains its corporate offices at
National City Center, Cleveland, Ohio 44101-0756.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data of the
Company. The selected Consolidated Statements of Operations and Consolidated
Balance Sheet data for each of the five years during the period ended December
31, 2002, are derived from the audited Consolidated Financial Statements of the
Company. Prior period amounts have been reclassified to conform to the 2002
presentation. The data presented below should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere herein.

Year Ended December 31,
---------------------------------------------------------

2002 2001 2000 1999 1998
---- ---- ---- ---- ----

Consolidated Statements of Operations: (Dollars in thousands, except per share amounts)

Net sales $389,726 $421,311 $401,515 $401,295 $278,014
Cost of sales 301,692 325,746 315,849 304,452 208,861
-------- -------- -------- -------- --------
Gross margin 88,034 95,565 85,666 96,843 69,153
Selling, general and administrative expenses 74,684 77,587 72,986 71,160 63,640
Charge for tooling obsolescence - - - 2,621 -
-------- -------- -------- -------- --------
Income from operations 13,350 17,978 12,680 23,062 5,513
Interest expense 1,545 2,688 3,805 1,730 1,745
Litigation settlement (3,371) - - - -
Receivable securitization expense 547 993 1,559 1,281 916
Other (Income) expense, net (280) (85) (148) (241) (1,280)
-------- -------- -------- -------- --------
Income before taxes 14,909 14,382 7,464 20,292 4,132
Income tax expense 5,344 5,058 1,525 7,610 1,606
-------- -------- -------- -------- --------
Net income $ 9,565 $ 9,324 $ 5,939 $ 12,682 $ 2,526
======== ======== ======== ======== ========

Basic Earnings per Share
Weighted average number of common
shares outstanding (in thousands) 12,983 13,731 15,083 18,155 21,368
Earnings per share $ .74 $ .68 $ .39 $ .70 $ .12

Diluted Earnings per Share
Weighted average number of common shares and
potential common shares outstanding
(in thousands) 13,877 14,297 15,574 18,371 21,562
Earnings per share $ .69 $ .65 $ .38 $ .69 $ .12

Consolidated Balance Sheet Data (at end
of period)
Working capital $ 43,238 $ 32,566 $ 39,885 $ 38,950 $ 30,240
Total assets 141,169 140,444 138,552 151,892 117,480
Long-term debt 29,828 33,978 48,537 34,704 18,426
Shareholders' equity 45,886 38,622 31,053 44,669 46,723

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's discussion and analysis of its financial position 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 of America. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates. Management believes that the critical accounting policies
and areas that require the most significant judgments and estimates to be used
in the preparation of the consolidated financial statements are revenue
recognition including customer based programs and incentives, allowance for
doubtful accounts, useful lives of tooling and other long lived assets and
accrued warranty and customer returns.

Revenue Recognition - The Company's revenue recognition policy is to record
sales upon shipment from the Company's distribution centers. Although a majority
of customers are shipped "FOB shipping point", the Company has a select number
of customers who use EDI for invoicing and are shipped "FOB destination".
Customers that have "FOB destination" terms are primarily the Company's large
retail customers. The Company's three distribution centers are strategically
located within a relatively close proximity to these large retail customers'
distribution centers. As a result, and in response to definitive just-in-time
delivery parameters mandated by the retailers' product placement programs,
shipments from the Company in transit and not received by the customer at
year-end are de minimis.

All sales are final upon shipment of product to the customer. The Company
records estimated reductions to net sales for customer programs and incentive
offerings including pricing arrangements, promotions and other volume based
incentives. If market conditions were to soften, the Company may take actions to
increase customer incentives, possibly resulting in a reduction of net sales and
gross margins at the time the incentive is offered.

The Company includes royalty income from various license agreements in net
sales. For the years ended December 31, 2002, 2001 and 2000, royalty income
totaled $3,687,000, $340,000 and $497,000, respectively.

Allowance for Doubtful Accounts - The Company maintains an allowance for
trade accounts receivable for which collection on specific customer accounts is
doubtful. In determining collectibility, management reviews available customer
financial statement information, credit rating reports as well as other external
documents and public filings. When it is deemed probable that a specific
customer account is uncollectible, that balance is included in the reserve
calculation. Actual results could differ from these estimates under different
assumptions.

Useful Lives of Tooling - The Company capitalizes the cost of tooling used
in the production of its products by third party suppliers and global contract
manufacturers. The tooling is depreciated on a straight-line basis over 2-3
years, based on the nature of the product and the estimated product life cycle.
The useful lives are reviewed on a quarterly basis by management and useful
lives may be shortened if needed. In determining whether or not shortening of
useful lives is required, management reviews sell-through data at retail,
forecast demands and the timeframe of new product introductions.

Accrued Warranty and Customer Returns - The Company's return policy is to
replace, repair or issue credit for product under warranty. Returns received
during the current period are expensed as received and a reserve is maintained
for future returns from current shipments. Management calculates the reserve
utilizing historical return rates by product family. These rates are reviewed
and adjusted periodically. Management utilizes judgment for estimating return
rates of new products and adjusts those estimates as actual results become
available.

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

(In thousands, except per share amounts)

The following table sets forth, for the years indicated, the percentages of
net sales of certain items in the Consolidated Statements of Operations and the
percentage change in such items as compared to the indicated prior year.

Year to Year
Year Ended December 31, Increases (Decreases)
----------------------- ---------------------
2002 2001 2000 2002 vs. 2001 2001 vs. 2000
---- ---- ---- ------------- -------------

Net sales 100.0% 100.0% 100.0% (7.5)% 4.9%
Cost of sales 77.4 77.3 78.7 (7.4) 3.1
----- ----- ----- ----- ----
Gross margin 22.6 22.7 21.3 (7.9) 11.5
Selling, general and administrative expenses 19.2 18.4 18.2 (3.7) 6.3
----- ----- ----- ----- ----
Income from operations 3.4 4.3 3.1 (25.7) 41.8
Interest expense 0.4 0.6 0.9 (42.5) (29.4)
Litigation settlement (0.9) - -
Receivable securitization 0.1 0.3 0.4 (44.9) (36.3)
Other (income) expense, net - - - 229.4 (42.6)
----- ----- ----- ----- ----
Income before income taxes 3.8% 3.4% 1.8% 3.7% 92.7%
===== ===== ===== ===== ====

2002 VS. 2001

Net sales for 2002 were $389,726, a decrease of 7.5% from 2001. The
decrease in sales for 2002 was primarily attributable to lower selling prices on
the Company's floor care products, including but not limited to its upright and
hand held vacuums and its upright and hand-held extractors, partially offset by
increased sales of the TeleZapper, royalty income related to license agreements
for the TeleZapper and bagless technology of approximately $3,100, and an
increase in unit sales of lower priced uprights. Overall, sales to the top 5
customers for 2002 (all of which are major retailers) accounted for
approximately 67.6% of net sales as compared to approximately 68.1% in 2001. The
Company believes that its dependence on sales to its largest customers will
continue. Recently, several major retailers have experienced significant
financial difficulties and some, including Kmart, have filed for protection from
creditors under applicable bankruptcy laws. As of December 31, 2002, the net
exposure related to Kmart's pre-bankruptcy balance as well as other customer
balances for which management believes collection is doubtful was included in
the calculation of allowance for doubtful accounts. The Company sells its
products to certain customers that are in bankruptcy proceedings.

Gross margin, as a percent of sales, decreased from 22.7% in 2001 to 22.6%
in 2002. The gross margin percentage was negatively affected in 2002 by the
continued competitive pressure resulting in lower selling prices and margins on
the Company's floor care products. The decrease in gross margins was offset by
the increase in margins related to the TeleZapper, lower product costs, an
adjustment to net sales of $1,400 for certain sales programs, as well as lower
returns on the Company's floor care products.

Selling, general and administrative expenses for 2002 were $74,684, a
decrease of $2,903 or 3.7%. As a percentage of sales, selling, general and
administrative expenses increased from 18.4% to 19.2%. The dollar decrease is
primarily attributable to a decrease in advertising and promotion costs of
approximately $3,250, reduction of the allowance for doubtful accounts of $1,250
and a reduction in engineering and product development expenditures of $1,075,
partially offset by increases in professional fees of approximately $1,425 due
to litigation, an increase of approximately $500 in depreciation expense on the
Company's information technology systems and an increase of approximately $550
in compensation expense associated with phantom stock plans.

Interest expense for 2002 was $1,545, a decrease of 42.5% from 2001. The
decrease in interest expense resulted from a lower effective borrowing rate
combined with lower levels of variable rate borrowings.

During 2002, the Company settled litigation with a competitor resulting in
a one-time gain of $3,371. See Note 5 to the Consolidated Financial Statements
for further details.

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

2002 VS. 2001 (CONTINUED)

Receivable securitization expense was $547, a decrease of 44.9% from 2001.
This expense reflects the cost of the Company's trade accounts receivable
securitization program. The decrease is a result of lower discount rates, which
is based on commercial paper rates plus program fees. See Note 3 to the
Consolidated Financial Statements for further details.

Other (income) expense, net principally reflects the income statement
impact of changes in foreign currency rates on the Company's Canadian dollar
transactions and early pay discounts on accounts payable transactions.

Due to the factors discussed above, the Company had income before income
taxes for 2002 of $14,909 as compared to $14,382 in 2001. The components of the
Company's effective income tax rate of 35.8% and 35.2% for 2002 and 2001,
respectively, are described in Note 6 of the Company's Consolidated Financial
Statements.

2001 VS. 2000

Net sales for 2001 were $421,311, an increase of 4.9% from 2000. The
increase in sales for 2001 was attributable to the shipments of the TeleZapper,
which was introduced during the third quarter of 2001. These sales increases
were partially offset by lower sales of certain product lines within the
Consumer Products - Floorcare segment including Dirt Devil canisters and stick
vacuums. Overall sales to the top 5 customers for 2001 (all of which are major
retailers) accounted for approximately 68.1% of net sales as compared with
approximately 66.1% in 2000.

Gross margin, as a percent of net sales, increased from 21.3% for 2000 to
22.7% in 2001. The gross margin percentage was positively affected in 2001
primarily by shipments of the TeleZapper. The increase was partially offset by
competitive pressure resulting in lower selling prices and margins on various
floorcare products.

Selling, general and administrative expenses for 2001 were $77,587, an
increase of 6.3% from 2000. Selling, general and administrative expenses
increased as a percentage of net sales from 18.2% in 2000 to 18.4% in 2001. The
dollar increase is primarily attributable to employee compensation and related
benefits of approximately $2,600, higher professional fees associated with
litigation of approximately $300 (see Note 5 of the Company's Consolidated
Financial Statements), bad debt expense of approximately $1,900 primarily
associated with the bankruptcy filing by Kmart, and expenses associated with
upgrades to the Company's information technology systems such as training,
equipment lease expense, software maintenance and depreciation expense of
approximately $1,600. These increases were partially offset by a reduction of
advertising expenses of approximately $3,100.

Interest expense for 2001 was $2,688, a decrease of 29.4% from 2000. The
decrease in interest expense resulted from a lower effective borrowing rate
combined with lower levels of variable rate borrowings to finance working
capital, share repurchases, and capital expenditures.

Receivable securitization expense was $993, a decrease of 36.3% from 2000.
The decrease during 2001 was a result of lower discount rates.

Due to the factors discussed above, the Company had income before income
taxes for 2001 of $14,382 as compared to income before income taxes for 2000 of
$7,464. The components of the Company's effective income tax expense rate of
35.2% and 20.4% for 2001 and 2000, respectively, are described in Note 6 of the
Company's Consolidated Financial Statements.

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

LIQUIDITY AND CAPITAL RESOURCES

The Company has used cash generated from operations to fund its working
capital needs, repay bank debt, fund capital expenditures and share repurchases.
Working capital was $43,238 at December 31, 2002, an increase of 32.8% over the
December 31, 2001 level. Current assets, exclusive of cash increased by $2,634
reflecting in part a $4,729 increase of accounts receivable, partially offset by
a $2,499 decrease of inventories. The increase in accounts receivable was
primarily due to the timing of sales to its largest customers. Current
liabilities decreased by $1,182 reflecting a $2,760 decrease in trade accounts
payable, which was consistent with the planned decrease in inventories, a $1,340
decrease of accrued salaries, benefits, and payroll taxes, a $802 decrease in
accrued other, partially offset by a $3,152 increase of accrued income taxes
attributable to the timing of tax payments on fourth quarter earnings, and a
$1,204 increase in accrued advertising and promotion.

In 2002, the Company utilized $6,400 of cash for capital expenditures,
including approximately $4,700 for tooling related to various products in the
Consumer Products - Floorcare segment, and approximately $800 for computer
equipment and software.

At December 31, 2002, the Company had a collateralized revolving credit
facility with availability of up to $70,000, including letters of credit, and a
maturity date of April 1, 2005. Under the agreement, pricing options of the
bank's base lending rate and LIBOR rate are based on a defined formula. In
addition, the Company pays a commitment fee based on a defined formula on the
unused portion of the facility. The revolving credit facility contains covenants
which require, among other things, the achievement of minimum net worth levels
and the maintenance of certain financial ratios. The Company was in compliance
with all applicable covenants as of December 31, 2002. The revolving credit
facility is collateralized by the assets of the Company. As long as the Company
remains in compliance with all covenants, the revolving credit facility permits
share repurchases and dividends based on a defined formula up to $18,369 as of
December 31, 2002. The Company's effective interest rate was 4.99%, 7.34% and
9.28% for 2002, 2001 and 2000 respectively. Letters of credit and standby
letters of credit outstanding at December 31, 2002 total $812.

The Company utilizes a $35,000 revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Pursuant to the terms of the
securitization program, the Company transfers certain trade accounts receivable,
on a revolving basis, to a wholly owned, bankruptcy-remote subsidiary of the
Company, Royal Appliance Receivables, Inc. ("RAR"), which is consolidated for
financial reporting purposes. In turn, RAR sells an undivided interest on a
revolving basis, of up to $35,000 in its accounts receivable to a special
purpose bank sponsored commercial paper conduit. The Company retains an interest
in the pool of trade receivables transferred to RAR which are not sold to the
commercial paper conduit. These receivables represent ineligible receivables,
which include but are not limited to receivables that are past due,
concentrations over limits with specific customers and certain reserve amounts.
The Company believes that the risk of loss associated with the unsold trade
accounts receivable is minimal because of the high credit quality of the
receivables that are included in the pool. During 2002 and 2001, the Company
sold approximately $142,000 and $153,000, respectively, in total new
securitization transactions. The loss recorded on these sales was $547, $993 and
$1,559 in 2002, 2001 and 2000, respectively, and has been classified as
receivable securitization expense in the accompanying Consolidated Statements of
Operations. The Company accounts for the portion of the receivables not sold as
trade receivables on the Consolidated Balance Sheets. The Company continues to
service the accounts receivable without being compensated by the bank sponsored
commercial paper conduit. The Company has recorded a servicing liability, based
on its estimate of adequate compensation for the services that are being
performed, of $56 and $62 as of December 31, 2002 and 2001, respectively. The
servicing liability is included within accrued liabilities - other on the
Consolidated Balance Sheets.

As of December 31, 2002, RAR sold $22,600 of undivided interests in
accounts receivable. The proceeds from those sales were reflected as a reduction
of accounts receivable on the Consolidated Balance Sheets and as operating cash
flows in the Consolidated Statements of Cash Flows. The sale proceeds were used
to pay down the Company's revolving credit facility. Additionally, the
securitization program contains covenants that the Company was in compliance
with as of December 31, 2002.

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

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

In February 2000, the Company's Board of Directors authorized a common
share repurchase program that enabled the Company to purchase, in the open
market and through negotiated transactions, up to an additional 4,250 of its
outstanding common shares. The Company completed the program repurchasing 3,289
shares for an aggregate purchase price of $20,065 in February 2001. In April
2001, the Company's Board of Directors authorized another common share
repurchase program that enabled the Company to purchase, in the open market and
through negotiated transactions, up to an additional 3,400 of its outstanding
common shares. The Company repurchased approximately 1,322 shares for an
aggregate purchase price of $6,900 under the program that expired in December
2002.

The following tables present total contractual obligations and other
commercial commitments of the Company as of December 31, 2002:

Payments Due by Year
------------------------------------------------------------------------
Contractual Obligations Total 2003 2004 - 2007 Thereafter
----------------------------------------- --------------- ---------------- ---------------- ----------------

Long-Term Debt - Revolver $ 28,000 $ - $ 28,000 $ -

Capital Lease Obligations 2,826 315 1,262 1,249

Operating Leases 26,473 3,422 9,428 13,623
-------- ------- -------- --------

Total Contractual Cash Obligations $ 57,299 $ 3,737 $ 38,690 $ 14,872
======== ======= ======== ========

Amount of Commitment Expiration Per Year
------------------------------------------------------
Other Commercial Commitments Total Amounts
Committed 2003 2004 - 2007 Thereafter
----------------------------------------- --------------- ---------------- ---------------- ----------------

Standby Letters of Credit $ 812 $ 500 $ - $ 312

Other Commercial Commitments 4,025 4,025 - -
-------- ------- -------- --------

Total Commercial Commitments $ 4,837 $ 4,525 $ - $ 312
======== ======= ======== ========

The Company believes that cash generated by operations along with its
revolving credit facilities will be sufficient to provide for the Company's
anticipated working capital and capital expenditure requirements for the next
twelve months.

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

QUARTERLY OPERATING RESULTS (UNAUDITED)

The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments that the
Company considers necessary for a fair presentation of such information for the
interim periods.

Three Months Ended
---------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2002 2002 2002 2002 2001 2001 2001 2001
---- ---- ---- ---- ---- ---- ---- ----

Net sales $ 117,467 $ 91,705 $ 89,390 $ 91,164 $ 127,236 $ 111,503 $ 79,512 $ 103,060
Gross margin 32,256 21,086 16,344 18,348 32,663 26,461 15,269 21,172
Net income (loss) 7,675 3,134 (1,329) 85 3,773 4,085 (708) 2,174
Net income (loss)
per share-diluted (a) $ 0.56 $ 0.23 $ (0.10) $ 0.01 $ 0.27 $ 0.29 $ (0.05) $ 0.15

(a) The sum of 2002 and 2001 quarterly net income (loss) per common share
does not equal annual net income per common share due to the change in
the weighted average number of common shares outstanding due to share
repurchases.

SEASONALITY

The Company believes that a significant percentage of certain of its
products are given as gifts and therefore sell in larger volumes during the
Christmas and other holiday shopping seasons. Because of the Company's continued
dependency on its major customers, the timing of purchases by these major
customers and the timing of new product introductions causes quarterly
fluctuations in the Company's net sales. As a consequence, results in prior
quarters are not necessarily indicative of future results of operations.

COMPETITION

The Company's Consumer Products - Floorcare business segment's most
significant competitors are Hoover, Eureka and Bissell in the upright vacuum and
carpet shampooer markets and, Black & Decker and Euro Pro in the hand-held
market. Many of these competitors and several others are subsidiaries or
divisions of companies that are more diversified and have greater financial
resources than the Company. The Company believes that the domestic vacuum
cleaner industry is a mature industry with modest annual growth in many of its
products but with a decline in certain other products. Competition is dependent
upon price, quality, extension of product lines, and advertising and promotion
expenditures. Additionally, competition is influenced by innovation in the
design of replacement models and by marketing and approaches to distribution.
The Company experiences extensive competition, including price pressure and
increased advertising by its competitors, in all product lines within the
Consumer Products - Floorcare segment. These trends are expected to continue
into 2003.

INFLATION

The Company does not believe that inflation by itself has had a material
effect on the Company's results of operations. However, as the Company
experiences price increases from its suppliers, which may include increases due
to inflation, retail pressures may prevent the Company from increasing its
prices.

ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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 intangibles continue to be amortized over their useful lives and
will be assessed for impairment under SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The adoption of SFAS No. 142 did
not impact the, results of operations, financial position or liquidity of the
Company.

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

ACCOUNTING STANDARDS (CONTINUED)

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires companies to record the fair
value of a liability for an asset retirement obligation in the period in which
it was incurred. The amount recorded as a liability will be capitalized by
increasing the carrying amount of the related long-lived asset, which is then
depreciated over its useful life. SFAS No. 143 became effective for the Company
on January 1, 2003. The Company does not expect the adoption of SFAS No. 143 to
have a material impact on its results of operations, financial position or
liquidity.

In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement superseded FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations". The Company adopted the provisions of this statement
effective January 1, 2002, at which time it had no affect on its results of
operations, financial position or liquidity.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", effective for exit or disposal
activities initiated after December 31, 2002. This Statement nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Under Issue No. 94-3, a liability for exit costs was recognized at the date of
the entity's commitment to an exit plan. This Statement also establishes that
fair value is the objective for initial measurement of the liability. The
Company does not expect the adoption of this Statement to have a material impact
on its results of operations, financial position or liquidity.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires certain
guarantees to be recorded at fair value. The initial recognition and measurement
provisions of FIN 45 are applicable, on a prospective basis, to guarantees
issued or modified after December 31, 2002. FIN 45 also requires a guarantor to
make new disclosures regarding guarantees. The disclosure requirements are
effective for financial statements ending after December 15, 2002. The Company
does not expect the disclosure to have a significant impact on its financials.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS 123, Accounting
For Stock-Based Compensation", effective for financial statements for fiscal
years ending after December 15, 2002. This Statement amends FAS No. 123, and
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. This
Statement also amends FAS No. 123 and requires disclosure about the effects on
reported net income with respect to the stock-based employee compensation.
Lastly, this Statement amends APB Opinion No. 28, and requires disclosure about
the effects of stock-based employee compensation in interim financial
information. See Note 8 in the Notes to Consolidated Financial Statements for
further details

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

FORWARD LOOKING STATEMENTS

Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. Potential risks and uncertainties
include, but are not limited to: approval of the merger agreement by the
shareholders of both Techtronic Industries and the Company, the financial
strength of the retail industry particularly in the major mass retail channel;
the impact of Kmart's recent bankruptcy filing on Royal's future sales and
earnings; the competitive pricing and aggressive product development environment
within the floor care industry; the impact of private-label programs by mass
retailers; the cost and effectiveness of planned advertising, marketing and
promotional campaigns; the success at retail and the continued acceptance by
consumers of the Company's new products, the dependence upon the Company's
ability to continue to successfully develop and introduce innovative products;
the uncertainty of the Company's global supply chain and suppliers to
continuously supply sourced finished goods and component parts; and general
business and economic conditions.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company sells a small portion of its products in various global
markets, primarily Canada. As a result, the Company's cash flow and earnings are
exposed to fluctuations in foreign currency exchange rates relating to receipts
from customers and payments to service providers in foreign currencies. As a
general policy, the Company has from time to time hedged certain foreign
currency commitments of future payments and receipts by purchasing foreign
currency-forward contracts. As of December 31, 2002, there were no such
contracts outstanding. The majority of the Company's receipts and expenditures
are contracted in U.S. dollars, and the Company does not consider the market
risk exposure relating to currency exchange to be material at this time.

If interest rates were to change by .25% on the Company's variable rate
debt, the impact on interest expense would be approximately $70.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of
Royal Appliance Mfg. Co.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of Royal
Appliance Mfg. Co. and its Subsidiaries (the "Company") at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Cleveland, Ohio
February 12, 2003

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)

December 31, December 31,
2002 2001
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents $ 10,277 $ 3,421
Trade accounts receivable, less allowance for doubtful accounts
of $1,500 and $3,000 at December 31, 2002 and 2001, respectively 37,448 35,446
Other receivables 3,407 680
Inventories 48,308 50,807
Deferred income taxes 4,096 4,549
Prepaid expenses and other 2,353 1,496
--------- ---------
Total current assets 105,889 96,399
--------- ---------

Property, plant and equipment, at cost:
Land 1,541 1,541
Buildings 7,777 7,777
Molds, tooling, and equipment 45,594 52,558
Furniture, office and computer equipment, and software 15,856 12,154
Assets under capital leases 3,171 3,171
Leasehold improvements and other 6,537 6,929
--------- ---------
80,476 84,130
Less accumulated depreciation and amortization (49,489) (46,556)
--------- ---------
30,987 37,574
--------- ---------

Computer software and tooling deposits 1,668 4,405
Other 2,625 2,066
--------- ---------

Total assets $ 141,169 $ 140,444
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 24,673 $ 27,433
Accrued liabilities:
Advertising and promotion 12,400 11,196
Salaries, benefits, and payroll taxes 5,918 7,258
Warranty and customer returns 9,300 9,950
Income taxes 4,522 1,370
Other 5,677 6,479
Current portions of capital lease obligations 161 147
--------- ---------
Total current liabilities 62,651 63,833
--------- ---------

Revolving credit agreement 28,000 32,000
Capitalized lease obligations, less current portion 1,828 1,978
--------- ---------
Total long-term debt 29,828 33,978
--------- ---------

Deferred income taxes 2,804 4,011
--------- ---------

Total liabilities 95,283 101,822
--------- ---------

Commitments and contingencies (Note 4 and 5) - -

Shareholders' equity:
Serial preferred shares; authorized - 1,000,000 shares;
none issued and outstanding - -
Common shares, at stated value; authorized - 101,000,000 shares;
issued 25,963,852 and 25,829,452 at December 31, 2002
and 2001, respectively 216 214
Additional paid-in capital 46,400 44,710
Note receivable for shares sold (543) (543)
Retained earnings 80,054 70,489
--------- ---------
126,127 114,870
Less treasury shares, at cost (13,102,800 and 12,365,700 shares
at December 31, 2002 and 2001, respectively) (80,241) (76,248)
--------- ---------
Total shareholders' equity 45,886 38,622
--------- ---------

Total liabilities and shareholders' equity $ 141,169 $ 140,444
========= =========

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

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2002 2001 2000
----------- ------------- -------------

Net sales $ 389,726 $ 421,311 $ 401,515

Cost of sales 301,692 325,746 315,849
--------- --------- ---------

Gross margin 88,034 95,565 85,666

Selling, general and administrative expenses 74,684 77,587 72,986
--------- --------- ---------

Income from operations 13,350 17,978 12,680

Interest expense 1,545 2,688 3,805
Litigation settlement (3,371) - -
Receivable securitization expense 547 993 1,559
Other (income) expense, net (280) (85) (148)
--------- --------- ---------

Income before income taxes 14,909 14,382 7,464

Income tax expense 5,344 5,058 1,525
--------- --------- ---------

Net income $ 9,565 $ 9,324 $ 5,939
========= ========= =========

BASIC

Weighted average number of common
shares outstanding (in thousands) 12,983 13,731 15,083

Earnings per share $ .74 $ .68 $ .39

DILUTED

Weighted average number of common shares and
potential common shares outstanding
(in thousands) 13,877 14,297 15,574

Earnings per share $ .69 $ .65 $ .38

The accompanying notes are an integral part of these financial statements

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Common Shares Additional
----------------------------- Paid-in Note
Number Amount Capital Receivable
------------- ------------- ------------- -----------

Balance at December 31, 1999 25,464,352 $ 212 $ 42,528 $ -
Compensatory effect of stock rights 361
Shares issued from stock option plan 44,800 149
Purchase of treasury shares
Net income
---------- ----- --------- -----

Balance at December 31, 2000 25,509,152 212 43,038 -

Compensatory effect of stock rights 586
Shares issued from stock option plan 320,300 2 1,086
Note Receivable for shares sold (543)
Purchase of treasury shares
Net income
---------- ----- --------- -----

Balance at December 31, 2001 25,829,452 214 44,710 (543)

Compensatory effect of stock rights 1,148
Shares issued from stock option plan 134,400 2 542
Purchase of treasury shares
Net income
---------- ----- --------- -----

Balance at December 31, 2002 25,963,852 $ 216 $ 46,400 $(543)
========== ===== ========= =====

Treasury Shares Total
Retained ------------------------------ Shareholders'
Earnings Number Amount Equity
----------- ------------- -------------- --------------

Balance at December 31, 1999 $ 55,226 8,491,000 $ (53,297) $ 44,669
Compensatory effect of stock rights 361
Shares issued from stock option plan 149
Purchase of treasury shares 3,289,500 (20,065) (20,065)
Net income 5,939 5,939
--------- ---------- --------- ---------

Balance at December 31, 2000 61,165 11,780,500 (73,362) 31,053

Compensatory effect of stock rights 586
Shares issued from stock option plan 1,088
Note Receivable for shares sold (543)
Purchase of treasury shares 585,200 (2,886) (2,886)
Net income 9,324 9,324
--------- ---------- --------- ---------

Balance at December 31, 2001 70,489 12,365,700 (76,248) 38,622

Compensatory effect of stock rights 1,148
Shares issued from stock option plan 544
Purchase of treasury shares 737,100 (3,993) (3,993)
Net income 9,565 9,565
--------- ---------- --------- ---------

Balance at December 31, 2002 $ 80,054 13,102,800 $ (80,241) $ 45,886
========= ========== ========== =========

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

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

2002 2001 2000
------------- ------------ -------------

Cash flows from operating activities:
Net income $ 9,565 $ 9,324 $ 5,939
--------- -------- -------
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 16,794 15,279 15,836
Compensatory effect of stock rights 1,148 586 361
Gain sale of property, plant and equipment, net - - (32)
Deferred income taxes (754) (382) 618
(Increase) decrease in assets:
Accounts receivable, net (4,729) 5,971 6,429
Inventories, net 2,499 (5,337) 4,991
Prepaid expenses and other (857) 77 108
Other (1,629) (1,509) (1,147)
Increase (decrease) in liabilities:
Trade accounts payable (2,760) 5,224 (1,700)
Accrued advertising and promotion 1,204 (1,907) (2,829)
Accrued salaries, benefits, and payroll taxes (1,340) 3,903 (4,650)
Accrued income taxes 3,152 1,681 (3,677)
Accrued warranty and customer returns (650) 150 (250)
Accrued other (802) 388 2,257
--------- -------- -------
Total adjustments 11,276 24,124 16,315
--------- -------- -------
Net cash from operating activities 20,841 33,448 22,254
--------- -------- -------

Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment, net (9,137) (10,244) (17,776)
Proceeds from sale of property, plant and equipment - - 32
Decrease (increase) in computer software and tooling deposits 2,737 (3,598) 4,370
--------- -------- -------
Net cash from investing activities (6,400) (13,842) (13,374)
--------- -------- -------

Cash flows from financing activities:
(Payments) proceeds on bank debt, net (4,000) (14,400) 15,829
Payments on notes payable - - (5,186)
Proceeds from exercise of stock options 544 545 149
Payments on capital lease obligations (136) (148) (330)
Purchase of treasury shares (3,993) (2,886) (20,065)
--------- -------- -------

Net cash from financing activities (7,585) (16,889) (9,603)
--------- -------- -------

Net increase (decrease) in cash and cash equivalents 6,856 2,717 (723)
--------- -------- -------

Cash and cash equivalents at beginning of year 3,421 704 1,427
--------- -------- -------

Cash and cash equivalents at end of year $ 10,277 $ 3,421 $ 704
========= ======== =======

Supplemental disclosure of cash flow information:
Cash payments for:
Interest $ 1,592 $ 2,611 $ 3,818
========= ======== =======
Income taxes, net of refunds $ 2,946 $ 3,759 $ 4,574
========= ======== =======

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

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. ACCOUNTING POLICIES:

DESCRIPTION OF BUSINESS - Royal Appliance Mfg. Co. ("Royal" or the
"Company"), an Ohio corporation with its corporate offices in the Cleveland,
Ohio metropolitan area, develops, assembles or sources and markets a full line
of cleaning products for home and some for commercial use, primarily in North
America under the Dirt Devil(R) and Royal(R) brand names. The Company has used
the Dirt Devil brand name recognition to gain acceptance for other Dirt Devil
floorcare products. The Company continues to market certain metal vacuum
cleaners for home and commercial use under the Royal brand name.

On December 16, 2002, the Company entered into a definitive agreement
("agreement") for its acquisition by Techtronic Industries ("TTI"). The
agreement provides for Royal shareholders to receive $7.37 per share in cash,
for a total price of $105 million. The agreement also provides for
change-in-control payments to be made to fourteen officers of the Company
aggregating $2.4 million. Under the terms of the agreement, Royal will be merged
with a subsidiary of TTI which, following the completion of the merger, will
operate as a wholly owned, indirect subsidiary of TTI. The transaction is
expected to close on April 23, 2003. It is subject to, among other things, the
approval by the shareholders of both TTI and Royal. The parties have received
early termination of the Hart-Scot-Rodino waiting period.

In July 2002, the Company acquired the North American rights to the home,
health and beauty line of products from Medisana AG, along with certain other
assets for approximately $800. Medisana home, health and beauty products were
offered in North America for the past three years through their North American
wholly-owned subsidiary Medisana USA.

The following is a summary of significant policies followed in the
preparation of the accompanying Consolidated Financial Statements.

BASIS OF PRESENTATION - The Consolidated Financial Statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
all intercompany accounts and transactions. The companies are hereinafter
referred to as "Royal" or the "Company".

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts and
related disclosures. Actual results could differ from those estimates.
Significant estimates include the allowance for doubtful accounts, the reserve
for returns and allowances, and depreciation and amortization, among others.

Certain prior year amounts have been reclassified to conform to the 2002
presentation.

Net income per common share is computed based on the weighted average
number of common shares outstanding for basic earnings per share and on the
weighted average number of common shares and, when not antidilutive, potential
common shares outstanding for diluted earnings per share.

The Company's revenue recognition policy is to record sales upon shipment
from the Company's distribution centers. Although a majority of customers are
shipped "FOB shipping point", the Company has a select number of customers who
use EDI for invoicing and are shipped "FOB destination".

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. ACCOUNTING POLICIES (CONTINUED):

Customers that have "FOB destination" terms are primarily the Company's
large retail customers. The Company's three distribution centers are
strategically located within a relatively close proximity to these large retail
customers' distribution centers. As a result, and in response to definitive
just-in-time delivery parameters mandated by the retailers' product placement
programs, shipments from the Company in transit and not received by the customer
at year-end are de minimis.

The Company includes royalty income from various license agreements in net
sales. For the three years ended December 31, 2002, royalty income totaled
$3,687, $340 and $497, respectively.

Shipping and handling costs are included in cost of sales.

International operations, primarily Canadian, are conducted in their local
currency. Assets and liabilities denominated in foreign currencies are
translated at current exchange rates, and income and expenses are translated
using weighted average exchange rates. The net effect of currency (gains) and
losses realized on these business transactions was $(145), $192 and $347 for the
years ended December 31, 2002, 2001 and 2000 respectively, and have been
classified as other (income) expense, net in the accompanying Consolidated
Statement of Operations.

The Company has used forward exchange contracts from time to time to reduce
fluctuations in foreign currency cash flows related to receivables denominated
in foreign currencies. The terms of the currency instruments are consistent with
the timing of the transactions being hedged. The purpose of the Company's
foreign currency management activity is to protect the Company from the risk
that the eventual cash flows from the foreign currency denominated transactions
may be adversely affected by changes in exchange rates. Gains and losses on
forward exchange contracts are deferred and recognized in income when the
related transactions being hedged are recognized. Such gains and losses are
generally reported on the same financial line as the hedged transaction. The
Company does not use derivative financial instruments for trading or speculative
purposes. There were no forward exchange contracts outstanding as of December
31, 2002 and 2001.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with maturity of three months or less when purchased to be cash
equivalents.

ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains an allowance for
trade accounts receivable for which collection on specific customer accounts is
doubtful. In determining collectibility, management reviews available customer
financial statement information, credit rating reports as well as other external
documents and public filings. When it is deemed probable that a specific
customer account is uncollectible, that balance is included in the reserve
calculation.

RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
expensed as incurred. Research and development costs totaled approximately
$6,834, $7,909 and $6,785 in 2002, 2001 and 2000, respectively.

ADVERTISING AND PROMOTION - Cost incurred for producing and communicating
advertising are expensed during the period aired, including costs incurred under
the Company's cooperative advertising program. Advertising and promotion costs
were $34,112, $37,372 and $40,446 for the years ended December 31, 2002, 2001
and 2000, respectively.

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. ACCOUNTING POLICIES (CONTINUED):

In fiscal 2001, the Emerging Issues Task Force ("EITF") issued EITF No.
00-14, "Accounting for Certain Sales Incentives," and EITF No. 00-25, "Vendor
Income Statement Characterization of Consideration to a Purchaser of the
Vendor's Products or Services" (both of which were clarified by EITF 01-09
"Accounting for Consideration Given by Vendor to a Customer"). These
pronouncements address the recognition, measurement and statement of operations
classification for certain sales incentives and are effective January 1, 2002.
The Company adopted these pronouncements in the first quarter of fiscal 2002 and
as a result certain items previously included in selling, general and
administrative expenses were reclassified as a reduction of net sales.
Additionally, prior period amounts were reclassified to conform to the new
requirements. The impact of these two issues resulted in a reduction of net
sales of $5,212, $7,114 and $6,708 for the years ended December 31, 2002, 2001
and 2000, respectively. These amounts, consisting principally of promotional
allowances to the Company's retail customers were previously recorded as
selling, general and administrative expenses; therefore, there was no impact to
net income for any period.

INVENTORIES - Inventories are stated at the lower of cost or market using
the first-in, first-out (FIFO) method.

Inventories at December 31, consisted of the following:

2002 2001
---------------- ----------------
Finished goods $ 40,942 $ 43,277
Work in process and component parts 7,366 7,530
------------ ------------
$ 48,308 $ 50,807
============ ============

PROPERTY, PLANT AND EQUIPMENT - The Company capitalizes, as additions to
property, plant and equipment, expenditures at cost for molds, tooling, land,
buildings, equipment, furniture, computer software, and leasehold improvements.
Expenditures for maintenance and repairs are charged to operating expense as
incurred. The asset and related accumulated depreciation or amortization
accounts are adjusted to reflect retirements and disposals and the resulting
gain or loss is included in the determination of net income.

Internal and external costs incurred to develop internal use computer
software during the application development stage are capitalized and amortized
on the straight line method over the estimated useful life of software.
Capitalized costs include payroll costs and related benefits, costs of related
hardware and consulting fees. During 2001, $185 of such internal costs was
capitalized.

Plant and equipment are depreciated over the estimated useful lives of the
respective classes of assets. Leasehold improvements and assets held under
capital leases are amortized over the shorter of useful lives or their
respective lease terms. Accumulated amortization on assets under capital leases
totaled $1,703 and $1,555 at December 31, 2002 and 2001, respectively.

Depreciation for financial reporting purposes is computed on the
straight-line method using the following depreciable lives:

Buildings.......................................................40 years
Building under capital lease ...................................20 years
Molds, tooling, and equipment ..................................2 - 5 years
Furniture, office and computer equipment, and software .........2 - 5 years
Vehicles .......................................................3 years
Internal use software ..........................................2 - 5 years

Accelerated methods as permitted by the applicable tax law are used for tax
reporting purpose.

Depreciation expense was $15,724, $14,477 and $15,396 in 2002, 2001 and
2000, respectively.

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. ACCOUNTING POLICIES (CONTINUED):

INTANGIBLE ASSETS - Intangible assets are included within other long-term
assets in the accompanying balance sheets and consist of patents and trademarks
and are amortized on a straight-line method over their legal or estimated useful
life. The Company does not have any intangibles with indefinite lives. The
Company evaluates the remaining useful life of intangible assets each reporting
period to determine whether events and circumstances warrant a revision to the
remaining period of amortization.

The following summarizes the gross carrying value and accumulated
amortization for each major category of intangible asset:

2002 2001
-------------------------------- ----------------------------------
Patents Trademarks Patents Trademarks
------------- -------------- --------------- ---------------

Gross carrying amount $ 2,813 $ 213 $ 2,334 $ 159
Accumulated amortization (1,237) (95) (659) (69)
------- ----- ------- -----

Net balances $ 1,576 $ 118 $ 1,675 $ 90
======= ===== ======= =====

Amortization expense for the above intangibles was $722, $441 and $208 in
2002, 2001, and 2000, respectively. The estimated amortization expense for
intangibles for the five years ending December 31, 2003 through 2007 is as
follows: 2003 - $762; 2004 - $514; 2005 - $230; 2006 - $139, and 2007 - $49.

IMPAIRMENT REVIEW POLICY FOR LONG LIVED ASSETS - The Company reviews for
impairment whenever events or changes in circumstances indicate that the
carrying amount of property, plant and equipment or amortizable intangible
assets may not be recoverable. If it is determined that an impairment loss has
occurred based on expected undiscounted future cash flows, the loss as measured
using discounted cash flows is recognized on the Consolidated Statement of
Operations.

PRODUCT WARRANTY COSTS AND SERVICE RETURNS - The Company's return policy is
to replace, repair or issue credit for product under warranty. Returns received
during the current period are expensed as received and a reserve is maintained
for future returns from current shipments. Management calculates the reserve
utilizing historical return rates by product family. These rates are reviewed
and adjusted periodically as actual results become available.

A reconciliation of warranty reserve activity is as follows for the years
ended December 31, 2002 and 2001:

2002 2001
----------- -------------
Balance at the beginning of year $ 9,950 $ 9,800
Provision for warranties issued 15,708 20,958
Net settlements made during the year (16,358) (20,808)
-------- --------
Balance at the end of the year $ 9,300 $ 9,950
======== ========

FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial instruments consist of a
revolving credit agreement that is carried at an amount which approximates fair
value.

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. ACCOUNTING POLICIES (CONTINUED):

STOCK-BASED COMPENSATION - At December 31, 2002, the Company has a
stock-based employee compensation plan comprised on non-qualified stock options
and stock rights, which is described more fully in Note 8. The Company accounts
for the stock options under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees". No stock-based employee compensation cost is reflected in net
income for the stock options, as all options are granted at an exercise price
equal to the market value of the underlying common stock on the date of grant.
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option-pricing model. Compensation expense is recognized over the
vesting period for the stock rights.

The Company adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". As permitted by SFAS No. 123, the
Company continues to measure compensation cost in accordance with Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations in
accounting for its plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under these plans consistent with the method of SFAS 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:

Year Ended December 31,
--------------------------------------------
2002 2001 2000
---- ---- ----

Net income (in thousands) As reported........ $ 9,565 $ 9,324 $ 5,939
Pro forma.......... $ 8,939 $ 9,091 $ 5,623

Basic earnings per share As reported........ $ .74 $ .68 $ .39
Pro forma.......... $ .69 $ .66 $ .37

Diluted earnings per share As reported........ $ .69 $ .65 $ .38
Pro forma.......... $ .64 $ .64 $ .36

The effect on net income and earnings per share is not expected to be
indicative of the effects on net income and earnings per share in future years.
Since the SFAS No. 123 method of accounting has not been applied to options
granted prior to 1995, the resulting pro forma compensation costs may not be
representative of those to be expected in future years. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:

Year Ended December 31,
-------------------------------------------
2002 2001 2000
---- ---- ----

Expected volatility............................ 34.0% 35.7% 36.6%
Risk-free interest rate........................ 3.35% 4.85% 5.12%
Expected life of options in years.............. 7 years 7 years 7 years
Expected dividend yield........................ 0% 0% 0%

During fiscal years 2002, 2001 and 2000 the weighted average grant-date
fair value of options granted was $2.33, $2.17 and $2.39 per share,
respectively.

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. ACCOUNTING POLICIES (CONTINUED):

NEW ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS 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 intangibles
continue to be amortized over their useful lives and will be assessed for
impairment under SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". The adoption of SFAS No. 142 did not impact the results of
operations, financial position or liquidity of the Company.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires certain
guarantees to be recorded at fair value. The initial recognition and measurement
provisions of FIN 45 are applicable, on a prospective basis, to guarantees
issued or modified after December 31, 2002. FIN 45 also requires a guarantor to
make new disclosures regarding guarantees. The disclosure provisions of FIN No.
45 are effective for periods ending after December 15, 2002. The recognition
provisions are effective on a prospective basis to guarantees issued or modified
after December 31, 2002. The Company has adopted the disclosure provisions of
FIN No. 45 in these financial statements and does not expect the adoption of the
recognition provisions of FIN No. 45 to have a material impact on its results of
operations, financial position or liquidity.

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2. CHANGES IN DEPRECIABLE LIVES AND CHARGES FOR TOOLING OBSOLESCENCE:

During 2002, 2001 and 2000, the Company shortened the useful lives of
tooling for certain product families due to declining sales volumes, reduced
product life cycles and the launch of replacement products. As a result of the
reduced useful lives for certain product families, the Company recorded
accelerated depreciation expense of $586, $191 and $1,788 during 2002, 2001 and
2000, respectively.

Also during 2000, the Company relocated its corporate headquarters. As a
result of the move, the remaining net book value of leasehold improvements
associated with the former corporate headquarters was amortized on an
accelerated basis from the date the decision was made to move through the actual
date of the move. Due to this event, accelerated depreciation expense of
approximately $1,200 was recorded in 2000.

3. FINANCING:

At December 31, 2002, the Company had a collateralized revolving credit
facility with availability of up to $70,000, including letters of credit, and a
maturity date of April 1, 2005. Under the agreement, pricing options of the
bank's base lending rate and LIBOR rate are based on a defined formula. In
addition, the Company pays a commitment fee based on a defined formula on the
unused portion of the facility. The revolving credit facility contains covenants
which require, among other things, the achievement of minimum net worth levels
and the maintenance of certain financial ratios. The Company was in compliance
with all applicable covenants as of December 31, 2002. The revolving credit
facility is collateralized by the assets of the Company. As long as the Company
remains in compliance with all covenants, the revolving credit facility permits
share repurchases and dividends based on a defined formula up to $18,369 as of
December 31, 2002. The Company's effective interest rate was 4.99%, 7.34% and
9.28% for 2002, 2001 and 2000, respectively. Letters of credit and standby
letters of credit outstanding at December 31, 2002 total $812.

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

4. LEASES:

Royal leases various facilities, equipment, computers, software and
vehicles under capital and operating lease agreements. Operating lease payments
totaled $3,912, $2,905 and $1,912 for the years ended December 31, 2002, 2001,
and 2000, respectively.

Minimum commitments under all capital and operating leases at December 31,
2002 are as follows:

Year Capital Operating
------- ------- ---------
2003 .........................................$ 315 $ 3,422
2004 ......................................... 317 3,102
2005 ......................................... 314 2,425
2006 ......................................... 318 2,098
2007 ......................................... 313 1,803
Thereafter ................................... 1,249 13,623
--------- --------
Total minimum lease payments ................. 2,826 $ 26,473
========

Less amount representing interest ............ 837
---------

Total present value of capital obligation .... 1,989
Less current portion ......................... 161
---------

Long-term obligation under capital leases.....$ 1,828
=========

5. COMMITMENTS AND CONTINGENCIES:

At December 31, 2002, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $1,950,
including commitments for television advertising through December 31, 2003.
Other contractual commitments for items in the normal course of business total
approximately $2,075.

The Company is self-insured with respect to workers' compensation benefits
in Ohio and carries excess workers' compensation insurance covering aggregate
claims exceeding $350 per occurrence. The excess workers' compensation insurance
covers up to $1,000 per claim. The Company has additional insurance in place to
cover claims greater than $1,000.

The Hoover Company (Hoover) filed a lawsuit in federal court, in the
Northern District of Ohio (case #1:00cv 0347), against the Company on February
4, 2000, under the patent, trademark, and unfair competition laws of the United
States. The Complaint asserted that the Company's Dirt Devil Easy Steamer
infringed three utility patents and two design patents held by Hoover, and also
that the Easy Steamer design infringed the trade dress of Hoover's carpet
extractor products. The Court had dismissed charges of infringement against
Royal regarding one of the three utility patents, and found that the Dirt Devil
Easy Steamer infringed one claim of a second utility patent. The Company filed a
lawsuit in federal court, in the Northern District of Ohio (case #1:01cv 2775),
against The Hoover Company (Hoover) on December 10, 2001, under the patent,
trademark, and unfair competition laws of the United States. The Complaint
asserted that Hoover infringed certain patents relating to bagless technology
held by the Company. On October 17, 2002, the Company and Hoover reached a
settlement of all patent-related litigation described above. Hoover has granted
rights to the Company with regard to its existing carpet extractor patents. The
Company has granted rights to Hoover with regard to its existing bagless upright
vacuum cleaner patents. The settlement includes net cash payments to the Company
and resulted in a gain of $3,371 which was included in the caption "Litigation
Settlement" on the Consolidated Statement of Operations.

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)

The Company filed a lawsuit in federal court, in the Northern District of
Ohio against Euro-Pro Corporation and Sanyo North America Corporation (together
referred to as "Defendants") on November 15, 2002, under the patent, trademark
and unfair competition laws of the United States. The complaint asserts that
Defendants infringed certain patents relating to bagless technology held by the
Company. The Company seeks damages, injunction on future production and legal
fees.

6. INCOME TAXES:

The income tax expense consisted of the following:

2002 2001 2000
-------- ------- -------
Current:
Federal $ 5,076 $ 4,888 $ 782
State and local 1,022 552 125
Deferred (754) (382) 618
-------- -------- ------
Total $ 5,344 $ 5,058 $ 1,525
======== ======= =======

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

6. INCOME TAXES: (CONTINUED)

Deferred income taxes reflect the impact, for financial statement reporting
purposes, of temporary differences between the financial statement carrying
amounts and the tax basis of assets and liabilities. At December 31, 2002 and
2001, the components of the net deferred tax asset were as follows:

2002 2001
------------ -------------

Deferred tax assets:
Warranty and customer returns $ 3,034 $ 3,881
Bad debt reserve 428 1,170
Inventory basis difference 437 636
Accrued vacation, compensation and benefits 1,171 866
State and local taxes 211 127
Accrued advertising - 98
Self insurance reserves 133 90
Deferred compensation plan 200 164

Deferred tax liabilities:
Basis difference in fixed and intangible assets (2,113) (4,566)
State and local taxes - (240)
Other (2,209) (1,688)
------- -------
Net deferred tax asset $ 1,292 $ 538
======= =======

The differences between income taxes at the statutory federal income tax
rate of 34% and those reported in the Consolidated Statements of Operations are
as follows:

Year Ended December 31,
--------------------------------------------------------------------------------
% of Pre-tax % of Pre-tax % of Pre-tax
2002 Income 2001 Income 2000 Income
------------- ------------ ------------- ------------ ------------ ------------

Tax expense at statutory rate $ 5,069 34.0% $ 4,890 34.0% $ 2,538 34.0%
Research & experimentation credit (300) (2.0) (400) (2.8) (1,130) (15.1)
State and local income taxes,
net of federal benefit 675 4.5 360 2.5 81 1.1
Federal surtax on income over $10 million 49 0.3 42 0.3 - -
Other, net (149) (1.0) 166 1.2 36 0.4
------- ---- ------- ---- ------- ----
$ 5,344 35.8% $ 5,058 35.2% $ 1,525 20.4%
======= ==== ======= ==== ======= ====

During 2000, the Company performed a detailed study of Research and
Experimentation ("R&E") expenses over the preceding three-year period. As a
result of this study, it was determined that additional expenditures qualify
under the current guidance. Based on revised calculations, the Company was
entitled to R & E credits of $462, $166 and $302 for the years ended 1999, 1998
and 1997, respectively. These Federal Income Tax refunds were received in 2001.
For the years ended December 31, 2002, 2001 and 2000, the R & E credit amounted
to $300, $400 and $200, respectively.

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

7. MAJOR CUSTOMERS:

Royal's three largest customers represented approximately 27.5%, 15.1%, and
15.0% of total net sales in 2002. The Company's three largest customers
represented approximately 31.1%, 14.3% and 14.1% in 2001 and 32.6%, 13.5% and
13.1% of total net sales in 2000. Additionally, a significant concentration of
Royal's business activity is with major domestic mass market retailers whose
ability to meet their financial obligations with Royal is dependent on economic
conditions germane to the retail industry. Due to the concentration in the
volume of sales with a limited number of customers, the loss of one or more of
these customers would have a material adverse effect on the consolidated
financial position, results of operations and cash flows of the Company. During
recent years, several major retailers have experienced significant financial
difficulties and some, including Kmart, have filed for protection from creditors
under applicable bankruptcy laws. As of December 31, 2002, the net exposure
related to Kmart's pre-bankruptcy balance as well as other customers' balances
for which management believes collection is doubtful was included in the
calculation of allowance for doubtful accounts. The Company sells its products
to certain customers that are in bankruptcy proceedings.

The Company provides credit, in the normal course of business, to the
retail industry which includes mass market retailers, warehouse clubs, and
independent dealers. The Company performs ongoing credit evaluations of its
customers and establishes appropriate allowances for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.

8. STOCK BASED PLANS:

Under the terms of the Company's stock option plans for employees, outside
directors and consultants, all outstanding options have been granted at prices
at least equal to the then current market value on the date of grant. Typically,
stock options granted become exercisable in cumulative 20% installments,
commencing one year from date of grant with full vesting occurring on the fifth
anniversary date, and expire in ten years. Certain stock options granted vest at
the end of five years ("5 year cliff vesting") and expire in six to ten years,
while certain other stock options granted vest 50% immediately with the
remaining 50% vesting ratably over the next twelve months. All stock options are
subject to earlier termination in certain events related to termination of
employment. Vesting may be accelerated in certain events relating to change of
the Company's ownership.

The following summarizes the changes in the number of Common Shares under
option:

2002 2001 2000
---- ---- ----

Options outstanding at beginning of the year 2,371 2,673 2,764
Options granted during the year 562 204 90
Options exercised during the year (134) (321) (45)
Options canceled during the year (817) (185) (136)
-------------- -------------- ---------------
Options outstanding at end of the year 1,982 2,371 2,673
============== ============== ===============
Options exercisable at end of the year 1,156 1,651 865

Option price range per share $2.50 to $6.38 $2.50 to $10.25 $2.50 to $10.25

The 1,156 exercisable options at December 31, 2002 are exercisable at an
average exercise price of $4.44. The Company's current option plans, which
provide for a total of 3,060 options, have 314 options remaining for future
grants at December 31, 2002. If the merger, as described in Note 1 is approved
by the shareholders of both companies, vesting will be accelerated and all
outstanding options will be exercised at closing.

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

8. STOCK BASED PLANS: (CONTINUED)

The Company has also established compensation plans under which stock
rights have been granted to certain key employees to receive Company stock upon
exercise. These rights typically become 60% vested on the third anniversary from
date of grant and an additional 20% vested for each subsequent year while
certain other rights vest ratably over 36 months, subject to earlier termination
in certain events related to termination of employment. Vesting may be
accelerated in certain events relating to change of the Company's ownership.
During 2002 and 2001, the Company awarded 334 and 116 stock rights under the
plans, respectively, with a weighted average fair value at the date of grant of
$4.79 and $4.25 per share for the years ended December 31, 2002 and 2001,
respectively. Compensation expense is calculated as the number of stock rights
granted multiplied by the closing stock price on the date of issue. The Company
amortizes unearned compensation to expense over the five-year vesting period.
Compensation expense related to these awards was $1,148, $586 and $361 for 2002,
2001 and 2000, respectively. At December 31, 2002, 43 total stock rights were
reserved for future issuance. If the merger, as described in Note 1 is approved
by the shareholders of both companies, vesting will be accelerated and all
outstanding stock rights will be exercised at closing.

9. SHAREHOLDER RIGHTS PLAN:

The Company has a Shareholder Rights Plan which provides that under certain
circumstances each Right will entitle the shareholder to purchase one
one-hundredth of a share of Series A Participating Preferred Stock at an
exercise price of $40. Upon the occurrence of certain other events, including if
a "Person" becomes the beneficial owner of more than 20% of the outstanding
Common Shares or an "Adverse Person" becomes the beneficial owner of 10% of the
outstanding Common Shares, the holder of a Right will have the right to receive,
upon exercise, Common Shares of the Company, or Common Stock of the acquirer,
having a value equal to two times the exercise price of the Right. The
Shareholder Rights Plan is designed to deter abusive market manipulation or
unfair takeover tactics and to prevent an acquirer from gaining control of the
Company without offering a fair price to all shareholders. The Rights expire on
November 2, 2003, unless redeemed prior to that date. The Rights can be redeemed
at a price of $.01 per Right. The Shareholder Rights Plan was amended in
December 2002 so as not to be triggered by the contemplated merger as described
further in Note 1.

10. BENEFIT PLANS:

The Company sponsors a 401(k) defined contribution plan which covers
substantially all of its employees who have satisfied the plan's eligibility
requirements. Participants may contribute to the plan by voluntarily reducing
their salary up to a maximum of 90% of qualified compensation subject to annual
I.R.S. limits. All contributions vest immediately. For each of the last three
years, the matching contribution was 100%, up to the first 3% of qualified
compensation, and 50% of the next 2% of such compensation. The Company has also
made discretionary contributions to the plan. The Company's provisions for
matching and discretionary contributions totaled approximately $1,171, $965 and
$1,017, for the years ended December 31, 2002, 2001 and 2000, respectively.
Voluntary after-tax contributions and certain rollover contributions are also
permitted.

The Company also sponsors a non-qualified deferred compensation plan which
permits key employees to annually elect (via individual contracts) to defer a
portion of their compensation on a pre-tax basis until retirement. The
retirement benefit to be provided is based on the amount of compensation
deferred, Company match and investment earnings. All contributions vest
immediately. Although the Plan is designed to be unfunded, the Company has
funded the deferred compensation liability with investments in marketable
securities, primarily stock mutual funds, which are classified as current
assets. The Company's provisions for matching and discretionary contributions
totaled approximately $54, $72, and $77 for the years ended December 31, 2002,
2001 and 2000, respectively. The deferred compensation liability which equals
the related assets recorded by the Company was $513 and $419 as of December 31,
2002 and 2001, respectively.

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

10. BENEFIT PLANS: (CONTINUED)

The Company recorded severance expense of $870, $130, and $670 for the
years ended December 31, 2002, 2001 and 2000, respectively, related to the
termination of certain employees. Substantially all severance expense was paid
during each respective period.

The Company does not offer any other post-retirement benefits, accordingly,
it is not subject to the provisions of SFAS No. 106, "Employers' Accounting for
Post Retirement Benefits Other Than Pensions."

11. SHARE REPURCHASE PROGRAM:

12. EARNINGS PER SHARE:

Basic earnings per share excludes dilution and is computed by dividing
income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share includes the dilution of potential common
shares.

2002 2001 2000
------- ------- -------

Net income $ 9,565 $ 9,324 $ 5,939
======= ======= =======

BASIC:
Common shares outstanding, net of treasury shares, beginning of year 13,464 13,729 16,973
Weighted average common shares issued during year 64 170 23
Weighted average treasury shares repurchased during year (545) (168) (1,913)
------ ------ ------

Weighted average common shares outstanding, net of
treasury shares, end of year 12,983 13,731 15,083
======= ======= ======

Net income per common share $ .74 $ .68 $ .39
======= ======= =======

DILUTED:
Common shares outstanding, net of treasury shares, beginning of year 13,464 13,729 16,973
Weighted average common shares issued during year 64 170 23
Weighted average potential common shares 894 566 491
Weighted average treasury shares repurchased during year (545) (168) (1,913)
------ ------ ------

Weighted average common shares outstanding, net of
treasury shares, end of year 13,877 14,297 15,574
======= ======= =======

Net income per common share $ .69 $ .65 $ .38
======= ======= =======

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

13. BUSINESS SEGMENT INFORMATION:

The Company has two reportable segments: Consumer Products - Floorcare and
Consumer Products - Other. The operations of the Consumer Products - Floorcare
segment includes the design, assembly or sourcing, marketing and distribution of
a full line of plastic and metal vacuum cleaners. The primary brand names
associated with this segment include Dirt Devil and Royal. These products are
sold primarily to major mass merchant retailers and independent dealers in North
America. The operations of the Consumer Products - Other segment represents
business conducted by Privacy Technologies, Inc., Medisana, Inc. and Product
Launch Partners, Inc., all of which are wholly owned subsidiaries of the
Company. Currently, the primary product line within this segment is the
TeleZapper, a telephone attachment that helps block unwanted telemarketing calls
and removes consumers' phone numbers from telemarketers' computerized dialing
lists. These products are sold primarily to major mass merchant retailers and
national electronic chains in North America.

The Company's reportable segments are distinguished by the nature of
products sold. The Company evaluates performance and allocates resources to
reportable segments primarily based on net sales and operating income. The
accounting policies of the reportable segments are the same as those described
in Note 1, the accounting policies footnote. The Company records its federal and
state tax assets and liabilities at corporate. There are no intersegment sales.

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

13. BUSINESS SEGMENT INFORMATION: (CONTINUED)

Financial information for the Company's reportable segments consisted of
the following:

Year ended December 31,
2002 2001 2000
-------- -------- --------
Net Sales

Consumer Products - Floorcare $353,427 $399,388 $401,515
Consumer Products - Other 36,299 21,923 --
-------- -------- --------
Consolidated Total $389,726 $421,311 $401,515
======== ======== ========
Income from Operations

Consumer Products - Floorcare $ 6,972 $ 15,882 $ 12,680
Consumer Products - Other 6,378 2,096 --
-------- -------- --------
Consolidated Total $ 13,350 $ 17,978 $ 12,680
======== ======== ========
Capital Expenditures

Consumer Products - Floorcare $ 5,006 $ 6,011 $ 7,298
Consumer Products - Other 78 74 --
-------- -------- --------
Total for Reportable Segments 5,084 6,085 7,298
Corporate 1,316 7,757 6,076
-------- -------- --------
Consolidated Total $ 6,400 $ 13,842 $ 13,374
======== ======== ========
Depreciation and Amortization

Consumer Products - Floorcare $ 11,465 $ 12,079 $ 13,046
Consumer Products - Other 498 208 --
-------- -------- --------
Total for Reportable Segments 11,963 12,287 13,046
Corporate 4,831 2,992 2,790
-------- -------- --------
Consolidated Total $ 16,794 $ 15,279 $ 15,836
======== ======== ========
Total Assets

Consumer Products - Floorcare $107,117 $114,376 $124,638
Consumer Products - Other 6,163 6,773 --
-------- -------- --------
Total for Reportable Segments 113,280 121,149 124,638
Corporate 27,889 19,295 13,914
-------- -------- --------
Consolidated Total $141,169 $140,444 $138,552
======== ======== ========

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

13. BUSINESS SEGMENT INFORMATION: (CONTINUED)

Financial information related to the Company's operations by geographic
location consisted of the following:

2002 2001 2000
-------- -------- --------
Revenues, net:
United States $370,895 $401,293 $383,264
All other Countries 18,831 20,018 18,251
-------- -------- --------
$389,726 $421,311 $401,515
======== ======== ========
Long lived assets, net:

United States $ 24,542 $ 32,527 $ 38,109
All other Countries 6,445 5,047 3,699
-------- -------- --------
$ 30,987 $ 37,574 $ 41,808
======== ======== ========

14. RELATED PARTY NOTE RECEIVABLE:

On April 2, 2001, the Company and its Chief Executive Officer (Officer)
entered into a Promissory Note Agreement in the principal amount of
approximately $543. The non-interest bearing note, which is included in the
equity section of the Consolidated Balance Sheets, was used by the Officer to
fund the exercise of stock options to purchase 167 common shares of the Company.
The promissory note is due and payable in full on April 2, 2008 or, if earlier,
within twelve months after the Officer's voluntary termination of employment
with the Company. The Officer simultaneously entered into a Stock Pledge
Agreement with the Company pledging the 167 common shares as security for the
Promissory Note. In accordance with the merger agreement that the Company has
entered into with Techtronic Industries, the $543 note will be paid in full at
closing (see Note 1 for further description of Merger Agreement with Techtronic
Industries).

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

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

BOARD OF DIRECTORS

The Board of Directors is divided into two classes, each of whose members
serve for a staggered two-year term. The Board is comprised of three Class I
Directors and three Class II Directors.

Director
Name of Director Age Principal Occupation Since
------------------------------ ------- ---------------------------------------------------------- ----------

Jack Kahl Jr. 62 Chief Executive Officer of Jack Kahl & Assoc., LLC 1995
Michael J. Merriman 46 Chief Executive Officer and President of the Company 1993
E. Patrick Nalley 83 Director of Invacare Corporation 1981
Joseph B. Richey II 65 President of Invacare Technologies 1994
John P. Rochon 51 Chairman of the Richmont Corporation 1995
R. Louis Schneeberger 48 Financial Advisor 1991

JACK KAHL JR. has served as a Director of the Company since September 1995.
Mr. Kahl was Chief Executive Officer of Manco, Inc., a manufacturer of pressure
sensitive tapes, home weatherization products and shipping supplies, from 1971
to 2000. He currently serves as CEO of Jack Kahl & Associates, LLC. Mr. Kahl is
also a Director of American Greetings Company and Acorn Products, Inc.

MICHAEL J. MERRIMAN has served as a Director of the Company since October
1993 and as Chief Executive Officer and President since 1995.

E. PATRICK NALLEY has served as a Director of the Company since the
Company's formation in 1981. In 1992, Mr. Nalley retired from his positions as
Executive Vice President of Sales and Assistant to the President of Invacare
Corporation, a provider of home health care medical equipment. Mr. Nalley also
serves as a Director of Invacare Corporation.

JOSEPH B. RICHEY II has served as a Director of the Company since July
1994. Since 1992, Mr. Richey has been President - Invacare Technologies and
Senior Vice President - Total Quality Management for Invacare Corp. Mr. Richey
is also a Director of Invacare Corporation, Steris Corporation and Unique
Mobility Inc.

JOHN P. ROCHON has served as a Director of the Company since September
1995. Mr. Rochon is Chairman of the Richmont Corporation, a merchant bank and
family office.

R. LOUIS SCHNEEBERGER has served as Chairman of the Board since July 1995
and as a Director of the Company since August 1991. Mr. Schneeberger has been
involved in several early stage technology companies since March 2000; Viztec,
Cardinal Commerce and Complient. Previously he served 13 years as Chief
Financial Officer, director, and earlier a partner in Olympic Steel, Inc., a
national steel service center. He also serves as a board member for several
private companies.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is certain information with respect to the named executive
officers of the Company.

NAME AGE POSITION AND OFFICES WITH THE COMPANY
---- --- -------------------------------------

Michael J. Merriman 46 President and Chief Executive Officer
Richard C. Farone 39 Executive Vice President - Sales, Marketing & Engineering
Richard G. Vasek 38 Chief Financial Officer, Vice President - Finance and Secretary
David M. Brickner 36 Vice President - Operations

The following is a brief account of the business experience during the past
five years of each such executive officer:

Michael J. Merriman was appointed Chief Executive Officer and President in
1995 and Director in October 1993.

Richard C. Farone has been Executive Vice President - Sales, Marketing &
Engineering since December 2000. Since 1987, he has served in several different
roles in the Company's marketing and new products areas, most recently as Vice
President - Product Development.

Richard G. Vasek was appointed Chief Financial Officer and Vice President -
Finance in September 1998, and Secretary in January 1996. From February 1992
until his appointment as Chief Financial Officer and Vice President - Finance he
served as the Company's Corporate Controller.

David M. Brickner has been Vice President -Operations since 2001. Prior to
that, he was Vice President - Manufacturing from December 1998 to 2001. Since
1988, he has served in several different roles in the Company's engineering,
purchasing, and sourced products areas.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Act of 1934, as amended, requires the
Company's officers and directors, and persons who own greater than 10% of the
Company's Common Stock, to file reports of ownership and changes in ownership to
the Securities and Exchange Commission. Officers, directors and more than 10%
shareholders are required by the SEC to furnish to the Company copies of all
Section 16(a) reports they file. Based solely upon a review of Forms 3 and 4 and
amendments thereto furnished to the Company during 2002 and Form 5 and
amendments thereto furnished to the Company with respect to 2002, or a written
representation from the reporting person that no Form 5 is required, all filings
required to be made by the Company's officers, directors and greater than 10%
shareholders were timely made.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

Each Director who is not an employee of the Company receives a director's
fee in the amount of $30,000 per annum for up to five meetings, and
reimbursement for out-of-pocket expenses incurred in connection with attending
such meetings. An additional $2,000 is paid for attending board meetings, if
any, in excess of five meetings in any one year and $2,000 is paid for
attendance at any committee meeting held on a day other than a day of a
Directors' meeting. Each non-employee Director received options to purchase
20,000 Common Shares upon joining the Board of Directors. In 1995, the
non-employee Directors were granted options for an additional 30,000 Common
Shares. In October 2001, two Directors were granted 20,000 options to replace
expiring options. In April 2002, the non employee Directors were each granted
5,000 stock rights. These rights become 60% vested on the third anniversary from
date of grant and an additional 20% vested for each subsequent year. If the
merger agreement, as described in Item 1 is approved by the shareholders of both
companies, vesting will be accelerated and all outstanding stock options and
stock rights will be exercised at closing.

ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)

EXECUTIVE OFFICER'S COMPENSATION

Shown below is information concerning the annual and long-term
compensation for services to the Company and its subsidiaries for the years
ended December 31, 2002, 2001, and 2000, of those persons (the "Named Executive
Officers") who served during 2002 as the Company's Chief Executive Officer and
the other three executive officers of the Company:

Long-Term Compensation
Annual Compensation Awards
---------------------------------- -----------------------------
Other Annual Securities Long-Term All Other
Salary Bonus Compensation Underlying Incentive Plan Compensation
Name & Principal Position Year ($) ($) ($) (1) Options/SAR (#) Payouts ($) ($) (2)
------------------------- ---- --- --- ------- --------------- ------------- -------

Michael J. Merriman 2002 400,000 406,539 0 305,000 0 33,714
Chief Executive Officer, 2001 400,000 435,339 0 0 0 16,917
President and Director 2000 400,000 0 0 120,000 0 33,230

Richard Farone 2002 200,000 163,482 0 100,000 0 15,120
Executive Vice President - 2001 195,834 170,503 0 5,000 0 9,043
Sales, Marketing & Engineering 2000 145,000 0 0 50,000 0 10,873

Richard G. Vasek 2002 185,000 151,221 0 100,000 0 13,587
Chief Financial Officer 2001 185,000 147,177 0 0 0 7,764
Vice President - Finance 2000 175,000 0 0 25,000 0 12,327

David M. Brickner 2002 160,000 130,786 0 100,000 0 12,650
Vice President - Manufacturies 2001 135,000 143,751 0 10,000 0 5,551
2000 128,500 0 0 15,000 0 5,240

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

(1) Perquisites provided to each of the Named Executive Officers, if any, do
not exceed the disclosure thresholds established under the Securities and
Exchange Commission rules and are not included in this total.

(2) The amounts show in this column represents payments made to the Company's
Defined Contribution Plans ("DCP") by the Company.

ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)

OPTION / SAR GRANTS IN 2002

Shown below is information on grants of options or stock rights pursuant
to the Company's compensation plans made in the year ended December 31, 2002, to
the Named Executive Officers which are listed in the Summary Compensation Table.

Individual Grants Potential Realizable Value
at Assumed Annual Rates
Number of Securities % of Total of Stock Price Appreciation
Underlying Options / SAR Options / SAR Exercise For Option Term (2)
Granted Granted to Employees Price Expiration ---------------------------
Name (#) (1) in Fiscal Year ($/Sh) Date 5% ($) 10% ($)
------------------- ------------------- ------------------- -------- ---------- ------------ ----------

Michael J. Merriman 175,000 19.5% $ 5.35 3/1/12 588,803 1,496,141
130,000 14.5% $ - 2/11/12 984,667 1,567,917

Richard C. Farone 75,000 8.4% $ 5.35 3/1/12 252,344 639,489
25,000 2.8% $ - 2/11/12 189,359 301,523

Richard G. Vasek 50,000 5.6% $ 5.35 3/1/12 168,229 426,326
50,000 5.6% $ - 2/11/12 378,718 603,045

David M. Brickner 50,000 5.6% $ 5.35 3/1/12 168,229 426,326
50,000 5.6% $ - 2/11/12 378,718 603,045

(1) The March options vest 20% on each anniversary of the grant date with full
vesting occurring on the fifth anniversary date, except for Mr. Merriman's
which vested 50% immediately with the remaining 50% vesting ratably over
twelve months, assuming the executive officer remains employed by the
Company. The February stock rights become 60% vested on the third
anniversary from the date of grant and 80% vested on the fourth anniversary
with full vesting occurring on the fifth anniversary date, except for Mr.
Merriman's which vest ratably over 36 months, assuming the executive
officer remains employed by the Company. The Options and Rights expire in
ten years from the date of grant, subject to earlier termination in certain
events related to termination of employment. The Plans provide that in the
event of a "change in control" of the Company, the Compensation Committee
can cause all outstanding stock rights to be immediately exercisable and
may accelerate the termination date of all such options. A "change in
control" generally means the occurrence of (I) the acquisition by a person
of 20% or more of the Company's Common Shares, (ii) the first purchase of
shares pursuant to an exchange or tender offer, or (iii) shareholder
approval of a merger in which the Company is not the surviving corporation
or pursuant to which the Company's shares are converted into cash. See also
"Change-in-Control Arrangements" herein.

(2) The dollar amounts set forth in these columns are the result of
calculations at the 5% and 10% rates set by the Securities and Exchange
Commission, and therefore are not intended to forecast possible future
appreciation, if any, of the Company's Common Stock price. Using these
rates, the total of potential realizable values for the named officers
represents less than 6% of the gain that would be realized by all
shareholders of the Company. Based on the number of shares outstanding and
the market price on the February and March grant dates, the aggregate gain
realized by the Company's shareholders assuming a 5% annual rate of stock
appreciation for the option term would be in excess of $39 million and $45
million, respectively; a 10% annual rate of stock appreciation would result
in a gain in excess of $100 million and $115 million, respectively.

ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)

AGGREGATED OPTION / SAR EXERCISES IN 2002 AND YEAR-END OPTION / SAR VALUES

Shown below is information with respect to the unexercised stock options
and stock rights to receive the Company's Common Shares under the plans held by
the Named Executive Officers at December 31, 2002.

Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money
Options / SAR at FY-End (#) Options / SAR at FY-End (#)(1)
Shares Acquired Value --------------------------- -----------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
--------------------- -------------- ---------- ------------ ------------ ------------ ------------

Michael J. Merriman - - 309,270 315,730 $ 889,147 $ 1,818,353
Richard C. Farone - - 95,707 206,333 270,722 818,459
Richard G. Vasek - - 107,300 178,000 314,884 763,060
David M. Brickner - - 55,000 135,000 151,725 668,950

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

(1) Calculated on the basis of the fair market value of the underlying
securities at December 31, 2002, minus the exercise price.

CHANGE-IN-CONTROL AND OTHER EMPLOYMENT ARRANGEMENTS

Michael J. Merriman, President and Chief Executive Officer, and the
Company entered into a new Employment Agreement effective as of March 14, 2002.
Under the Agreement, Mr. Merriman is entitled to a base salary of $400,000 per
year, and participates in the Company's annual management incentive plan
("MIP"). The term of the agreement is for one year, with automatic renewals
unless one party gives notice of its intent not to renew the agreement. In the
event of Mr. Merriman's termination without cause, termination due to death or
disability, termination for "good reason" (as defined in the agreement), or if
the Company gives notice of its intention not to renew the agreement
(collectively, a "Triggering Termination"), Mr. Merriman is entitled to
severance payments equal to: (a) three times the sum of his then current annual
base salary and the average annual bonus based on the prior three years (paid in
six semi-annual installments); (b) a prorated portion of his MIP award for the
year in which the termination occurs, if applicable; (c) a lump sum severance
payment determined annually by the Board (initially $1.5 million) , (d)
forgiveness of all amounts due from Mr. Merriman on his April 2001 $542,750 note
payable to the Company, and (e) continuation of his insurance and other employee
benefits for 36 months. If any of these payments or any other payments made by
the Company would precipitate an excise tax as a "parachute payment" under
Internal Revenue Code, Mr. Merriman shall be entitled to receive an amount equal
to the amount of those excise taxes plus a tax "gross-up" payment. If a
Triggering Termination occurs following a change-in-control (as defined in the
Agreement), Mr. Merriman's severance payments will be paid in a lump sum. The
Agreement also contains a covenant by Mr. Merriman not to compete with the
Company for up to 36 months following the termination of his employment. In the
event of a Triggering Termination, any and all unvested stock options and
phantom stock rights held by Mr. Merriman will fully vest.

In connection with the execution of the Merger Agreement with Techtronic
Industries discussed in Item 1 and assuming the Merger is consummated, Mr.
Merriman's employment agreement has been amended whereby Mr. Merriman has agreed
to repay all amounts due on his $542,750 note payable to the Company and forego
the other benefits provided in clauses (a) through (e) above in exchange for a
lump-sum payment of $742,000. Moreover, in the event Mr. Merriman is terminated
without "cause", as defined in his new employment agreement, after the Merger,
or terminates his employment for "good reason", as defined in his new employment
agreement, his severance shall be one-half the sum of his then-current base
salary and the average of his annual bonus for the prior three years. Under Mr.
Merriman's amended employment agreement, he is entitled to receive a stock
option for 2,000,000 shares of Techtronic in May 2003, following release of
Techtronic's earnings for fiscal 2002.

ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)

CHANGE-IN-CONTROL AND OTHER EMPLOYMENT ARRANGEMENTS (CONTINUED)

The Company has entered into Severance Agreements with the other three
Named Executive Officers that are designed to retain the executives and provide
for continuity of management in the event of any actual or threatened change in
the control of the Company. Each agreement only becomes operative upon a "Change
in Control" as defined in the Agreements. After a Change in Control, if, during
the three-year period commencing with the Change in Control, the executive's
employment is terminated for reasons other than "cause" (as defined in the
Agreement), death or disability, or the executive terminates his employment for
"good reason" (as defined in the Agreement), under their respective agreements,
the executive shall be entitled to receive a severance amount equal to three
times of his then base salary. The Company may make an additional payment to
reimburse such individuals for excise tax payments, if any, triggered by the
foregoing severance payments. All options and stock rights held by the
executives with respect to the Company's common stock will become immediately
exercisable upon the date of termination of employment and remain exercisable
for a period of up to three years.

In connection with the execution of the Merger Agreement, Messrs. Farone,
Vasek and Brickner agreed to amend their severance agreements. In exchange for
lump sum payments of $311,000, $289,000 and $251,000, respectively, Messrs.
Farone, Vasek and Brickner each agreed to new one-year employment contracts that
provide for severance payments in the event of their termination of employment
for reasons other than "cause" or for "good reason", as defined in their new
agreements. The severance payments equal one-half the sum of the then current
salary of the executive plus the average of the annual bonus for the prior three
years. Under their employment agreements, Messrs. Farone, Vasek and Brickner
each are entitled to receive stock options for 1,000,000 shares of Techtronic in
May 2003, following realease of Techtronic's earnings for fiscal 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth each person or entity who, pursuant to SEC
rules, had beneficial ownership of 5% or more of the Common Shares of the
Company on January 31, 2003, based upon information furnished to the Company:

NAME AND ADDRESS SHARES AND NATURE OF PERCENTAGE OF TOTAL
OF BENEFICIAL OWNERS BENEFICIAL OWNERSHIP SHARES
-------------------- -------------------- ------

Richmont Capital Partners I, L.P......................... 2,969,900 23.1%
2400 Dallas Parkway, Suite 230; Plano, Texas 75093

John P. Rochon........................................... 2,991,400 (1) 23.2%
2400 Dallas Parkway, Suite 230; Plano, Texas 75093

E. Patrick Nalley ...................................... 1,070,000 (2) 8.3%
7005 Cochran Road; Glenwillow, Ohio 44139

Dimensional Fund Advisors ............................... 925,900 (3) 7.2%
1299 Ocean Avenue; Santa Monica, CA 90401

Kestrel Investment Management Corporation ............... 709,000 (4) 5.5%
411 Borel Avenue; San Mateo, CA 94402

(1) Mr. Rochon is a general partner of Richmont Capital Partners I, L.P. Amount
includes 2,969,900 shares owned by Richmont Capital Partners I L.P., 1,500
shares individually owned by Mr. Rochon, and 20,000 shares which can be
acquired by the exercise of stock options.

(2) Amount includes 50,000 which can be acquired by the exercise of stock
options.

(3) Based on Schedule 13(G) dated February 3, 2003, filed with the Securities
and Exchange Commission.

(4) Based on Schedule 13(G) dated February 13, 2003, filed with the Securities
and Exchange Commission.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth the amount of the Company's Common Shares
beneficially owned by the Company's Directors, each of the named officers, and
all the Directors and Executive Officers as a group as of January 31, 2003.

PERCENT OF
NAME SHARES TOTAL
---- ------- ----------

Jack Kahl Jr. .......................................................... 140,000 (1) 1.1%
Michael J. Merriman .................................................... 675,982 (1) 5.1%
E. Patrick Nalley ...................................................... 1,070,000 (1)(2) 8.3%
Joseph B. Richey II .................................................... 250,000 (1) 1.9%
John P. Rochon ......................................................... 2,991,400 (1)(3) 23.2%
R. Louis Schneeberger................................................... 98,000 (1) *
Richard C. Farone ...................................................... 142,391 (1) 1.1
Richard G. Vasek ....................................................... 151,855 (1) 1.2
David M. Brickner....................................................... 81,762 (1) *
Directors and Executive Officers as a group (9 persons)................. 5,601,390 (4) 40.4 (4)

* Less than 1%

(1) Includes shares which can be acquired by the exercise of stock options on
or prior to sixty days following January 31, 2003 as follows: Mr. Kahl -
20,000; Mr. Merriman - 453,982; Mr. Nalley - 50,000; Mr. Richey - 50,000;
Mr. Rochon - 20,000; Mr. Schneeberger - 50,000; Mr. Farone - 139,707; Mr.
Vasek - 146,300; Mr. Brickner - 76,000.

(2) Includes 1,000,000 shares held of record by Mr. Nalley as Trustee.

(3) Includes 2,969,900 shares beneficially owned by Richmont Capital Partners
I, L.P. of which Mr. Rochon is a General Partner.

(4) Includes 1,005,989 shares exercisable within sixty days following January
31, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None

ITEM 14. CONTROL AND PROCEDURES

The Company maintains a system of controls and procedures designed to
provide reasonable assurance as to the reliability of the financial statements
and other disclosures included in this report, as well as to safeguard assets
from unauthorized use or disposition. The Company evaluated the effectiveness of
the design and operation of its disclosure controls and procedures under
supervision and with the participation of management, including the Company's
Chief Executive Officer and Chief Financial Officer, within 90 days prior to the
filing date of this report. Based upon that evaluation, the Company's Chief
Executive officer and Chief Financial officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in the Company's periodic
Securities and Exchange Commission filings. No significant changes were made to
the Company's internal controls or other factors that could significantly affect
these controls subsequent to the date of evaluation.

PART IV

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

PAGE
----

(a) (1) Financial Statements

Report of Independent Accountants 18

Consolidated Balance Sheets at December 31, 2002 and 2001 19

Consolidated Statements of Operations - Years Ended
December 31, 2002, 2001 and 2000 20

Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 2002, 2001 and 2000 21

Consolidated Statements of Cash Flows - Years Ended
December 31, 2002, 2001 and 2000 22

Notes to Consolidated Financial Statements 23 - 38

(2) Financial Statement Schedules

The following consolidated financial statement schedule of Royal
Appliance Mfg. Co. and Subsidiaries is included in Item 14(d):

Report of Independent Accountants on Financial Statement Schedule 53

Schedule II - Valuation and Qualifying Accounts 54

All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions, are
inapplicable, or the information has been included in the Notes
to Consolidated Financial Statements

(3) Exhibits

The exhibits filed herewith are set forth on the Index to
Exhibits filed as part of this report. 55 - 57

(b) Reports on Form 8-K

The following report on Form 8-K was filed during the quarter ended --
December 31, 2002:

On December 17, 2002, the Company filed a current report on Form
8-K which announced that it had entered into a definitive
agreement and plan of merger, dated December 16, 2002 to be
acquired by Techtronic Industries, for $7.37 per share in cash.

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, on this 26st day of March,
2003.

ROYAL APPLIANCE MFG. CO.
Registrant

By /s/ Michael J. Merriman
-----------------------------------------------------
Michael J. Merriman
Chief Executive Officer and President

Date March 26, 2003
-----------------------------------------------------

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated, as of the 26st day of March 2003.

Signature Title
--------- -----

/s/ Michael J. Merriman Chief Executive Officer, President
-------------------------------------- and Director (Principal
Michael J. Merriman Executive Officer)

/s/ Richard G. Vasek Chief Financial Officer and
-------------------------------------- Secretary (Principal Financial
Richard G. Vasek and Accounting Officer)

/s/ R. Louis Schneeberger * Chairman of the Board
--------------------------------------
R. Louis Schneeberger

/s/ Jack Kahl Jr.* Director
--------------------------------------
Jack Kahl Jr.

/s/ E. Patrick Nalley * Director
--------------------------------------
E. Patrick Nalley

/s/ J.B. Richey * Director
--------------------------------------
J.B. Richey

/s/ John P. Rochon * Director
--------------------------------------
John P. Rochon

* The undersigned, by signing his name hereto, does hereby sign this Form
10-K on behalf of Royal Appliance Mfg. Co., and the above named directors
and officers of Royal Appliance Mfg. Co., pursuant to a Power of Attorney
executed on behalf of Royal Appliance Mfg. Co. and each of such directors
and officers and which has been filed with the Securities and Exchange
Commission.

/s/ Michael J. Merriman
-------------------------------------------------------
Michael J. Merriman, Chief Executive Officer, President
and Director, and Attorney-in-Fact

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

I, Michael J. Merriman, the Chief Executive Officer and President of Royal
Appliance Mfg. Co. (the "Company"), certify that to the best of my knowledge,
based upon a review of the Annual Report on Form 10-K for the period ended
December 31, 2002 of the Company (the "Report"):

(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.

/s/ Michael J. Merriman

Michael J. Merriman,
Royal Appliance Mfg. Co.
Chief Executive Officer and President

March 26, 2003

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

I, Richard G. Vasek, Chief Financial Officer of Royal Appliance Mfg. Co. (the
"Company") certify that to the best of my knowledge, based upon a review of the
Annual Report on Form 10-K for the period ended December 31, 2002 of the Company
(the "Report"):

(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.

/s/ Richard G. Vasek

Richard G. Vasek
Royal Appliance Mfg. Co.
Chief Financial Officer

March 26, 2003

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 15 U.S.C. 78m(a) OR 78o(d)
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)

I, Michael J. Merriman, the Chief Executive Officer and President of Royal
Appliance Mfg. Co. (the "Company"), certify that:

(1) I have reviewed this annual report on Form 10-K of the Company;

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

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

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

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

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

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

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

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

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

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

/s/ Michael J. Merriman
-----------------------

Michael J. Merriman,
Royal Appliance Mfg. Co.
Chief Executive Officer and President

March 26, 2003

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 15 U.S.C. 78m(a) OR 78o(d)
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)

I, Richard G. Vasek, the Chief Financial Officer of Royal Appliance Mfg. Co.
(the "Company"), certify that:

(1) I have reviewed this annual report on Form 10-K of the Company;

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

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

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

/s/ Richard G. Vasek
--------------------

Richard G. Vasek,
Royal Appliance Mfg. Co.
Chief Financial Officer

March 26, 2003

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

To the Shareholders and Board of Directors of
Royal Appliance Mfg. Co.

Our audits of the consolidated financial statements referred to in our
report dated February 12, 2003, appearing on page 18 of the Form 10-K also
included an audit of the financial statement schedule listed as Schedule II of
this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP

Cleveland, Ohio
February 12, 2003

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

Schedule II - VALUATION AND QUALIFYING ACCOUNTS
For Years Ended December 31, 2002, 2001 and 2001
(Dollars in thousands)

Additions (Reductions)
Balance at Charged to Balance at
Beginning of Year Expenses and Costs Deductions End of Year
----------------- ------------------ ---------- -----------

Allowance for Doubtful Accounts:
--------------------------------

Year Ended
December 31, 2000 $ 900 $ 321 $ (79)(A) $ 1,300

Year Ended
December 31, 2001 $ 1,300 $ 2,118 $ 418 (A) $ 3,000

Year Ended
December 31, 2002 $ 3,000 $ (1,250)(D) $ 250 (A) $ 1,500

Inventory Reserve:
------------------

Year Ended
December 31, 2000 $ 2,328 $ 2,707 (B) $3,190 (C) $ 1,845

Year Ended
December 31, 2001 $ 1,845 $ 650 (B) $1,308 (C) $ 1,187

Year Ended
December 31, 2002 $ 1,187 $ 1,416 (B) $1,152 (C) $ 1,451

Note:
----

(A) Uncollectible accounts charged off, less recoveries.

(B) Reserve for product model changes.

(D) Reduction of allowance for doubtful accounts, primarily associated with
the Kmart pre-bankruptcy balance

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

Index to Exhibits
for Form 10-K

Exhibit Description
------- -----------

3(a) Articles of Incorporation, amended and restated May 4, 1992, filed as Exhibit 3.1 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, filed with the
Commission on August 13, 1992, and incorporated herein by reference.

3(b) Code of Regulations, amended and restated May 4, 1992, filed as Exhibit 3.2 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, filed with the Commission on
August 13, 1992, incorporated herein by reference.

3(c) Amendment to Amended and Restated Articles of Incorporation October 21, 1993, filed as an Exhibit
to Registrant's Form 8-K filed with the Commission on November 1, 1993, and incorporated herein
by reference.

4(a) Credit Agreement dated as of April 1, 2002, by and among the Registrant and various banks
including National City Bank as administrative agent, filed as Exhibit 4(a) to the Quarterly
Report on Form 10-Q for the Quarter ended March 31, 2002, incorporated herein by reference.

4(b) Receivables Purchase Agreement dated as of January 23, 2001, among Royal Appliance Receivables,
Inc., as Seller, the Registrant, Market Street Funding Corporation and PNC Bank, National
Association, filed as Exhibit 4(b) to the Annual Report on Form 10-K for the year ended December
31, 2000, incorporated herein by reference.

4(c) Amendment No. 1 to Receivables Purchase Agreement dated August 24, 2001, filed as Exhibit 4(c) to
the Annual Report on Form 10-K for the year ended December 31, 2001, incorporated herein by
reference.

4(d) Amended and Restated Receivables Purchase Agreement among Royal Appliance Receivables, Inc. as
Seller, Royal Appliance Mfg. Co. as Servicer and Fifth Third Bank as Issuer and as Administrator
dated January 16, 2003.

The Registrant agrees to furnish copies of certain of its other long-term debt to he Commission
upon request.

4(e) Shareholder Rights Agreement dated as of October 21, 1993, filed as an Exhibit to Registrant's
Form 8-K filed with the Commission on November 1, 1993, and incorporated herein by reference.

4(f) Amendment No 1 to Shareholder Rights Agreement, dated as of December 16, 2002, between Royal and
National City Bank, filed as Exhibit 4.1 to Form 8-K dated December 17, 2002, incorporated herein
by reference.

10(a) Royal Appliance Mfg. Co. 1991 Stock Option Plan for Outside Directors, filed as Exhibit 10.12 to
the Registrant's Registration Statement on Forms S-1, filed with the Commission on August 6,
1991, file number 33-41211 (the "Initial Registration Statement"), incorporated herein by
reference.

10(b) Royal Appliance Mfg. Co. Employees and Consultants Stock Option Plan, filed as Exhibit 10.13 to
the Initial Registration Statement, incorporated herein by reference.

10(c) Form of Indemnity Agreement for Directors and Officers of the Registrant, filed as Exhibit 10.38
to the Initial Registration Statement, incorporated herein by reference.

10(d) Form of Severance and Employment Arrangement between the Registrant and Mssrs. Farone, Vasek and
Brickner, filed as Exhibit 10(g) to the Annual Report on Form 10-K for the year ended December
31, 1994, incorporated herein by reference.

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

Index to Exhibits
for Form 10-K

Exhibit Description
------- -----------

10(e) Annual Management Incentive Plan Description. Filed as Exhibit 10(f) to the Annual Report on Form
10-K for the year ended December 31, 1993, incorporated herein by reference.

10(f) Royal Appliance Mfg. Co. Key Executive Long-Term Incentive Plan filed as Exhibit 10(f) to the
Annual Report on Form 10-K for the year ended December 31, 1995, incorporated herein by reference.

10(g) Separation Agreement between the Registrant and Mr. Moone dated March 6, 2002, filed as Exhibit
10(g) to the Annual Report on Form 10-K for the year ended December 31, 2001, incorporated herein
by reference.

10(h) Form of Amendment to Severance and Employment Agreement between the registrant and Mssrs. Farone,
Vasek and Brickner filed as Exhibit 10(h) to the Annual Report on Form 10-K for the year ended
December 31, 2000, incorporated herein by reference.

10(i) Employment Agreement dated March 14, 2002, between the Registrant and Mr. Merriman, filed as
Exhibit 10(i) to the Annual Report on Form 10K for the year ended December 31, 2001, incorporated
herein by reference.

10(j) Royal Appliance 401(k) Plus Plan, effective October 1, 1999 filed as Exhibit 10(i) to the Annual
Report on Form 10-K for the year ended December 31, 1999, incorporated herein by reference.

10(k) Royal Appliance Phantom Stock Plan, effective March 31, 2000, filed as Exhibit 10(k) of
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and incorporated
herein by reference.

10(l) Royal Appliance Phantom Stock Plan, effective December 15, 2000, filed as Exhibit 10(l) to the
Annual Report on Form 10-K for the year ended December 31, 2000, incorporated herein by reference.

10(m) Royal Appliance Phantom Stock Plan, dated April 23, 2001, filed as Exhibit 10(p) to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, incorporated herein by reference.

10(n) Lease dated October 15, 1996, as amended, with respect to Glenwillow, Ohio property filed as
Exhibit 10(l) of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
and incorporated herein by reference.

10(o) Promissory Note dated April 2, 2001, between Michael J. Merriman and the Registrant, filed as
Exhibit 10(n) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2001,
incorporated herein by reference.

10(p) Stock Pledge Agreement dated April 2, 2001, between Michael J. Merriman and the Registrant, filed
as Exhibit 10(o) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2001,
incorporated herein by reference.

10(q) Royal Appliance Phantom Stock Plan dated February 11, 2002, filed as Exhibit 10(q) to the
Quarterly Report on Form 10-Q for the Quarter ended June 30, 2002, incorporated herein by
reference.

10(r) Royal Appliance Phantom Stock Plan for Directors dated April 25, 2002, filed as Exhibit 10(r) to
the Quarterly Report on Form 10-Q for the Quarter ended June 30, 2002, incorporated herein by
reference.

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

Index to Exhibits
for Form 10-K

Exhibit Description
------- -----------

10(s) Agreement and Plan of Merger, dated as of December 16, 2002, among Royal, Techtronics Industries
Co., Inc., RAMC Holdings, Inc. and TIC Acquisition Corp., filed as Exhibit 2.1 to Form 8-K dated
December 17, 2002, incorporated herein by reference.

10(t) Amended and Restated Employment Agreement, dated December 16, 2002, between Michael J. Merriman
and Royal, filed as Exhibit 10.1 to Form 8-K dated December 17, 2002, incorporated herein by
reference.

10(u) Form of Employment Agreement, dated December 16, 2002, between Royal and Messrs. Richard Farone,
David Brickner and Richard Vasek, respectively, filed as Exhibit 10.2 to Form 8-K dated December
17, 2002, incorporated herein by reference.

10(v) Form of Amendment No. 1 to Amended and Restated Severance and Employment Agreement, filed as
Exhibit 10.3 to Form 8-K dated December 17, 2002, incorporated herein by reference.

10(w) Amendment No. 1 to Change in Control Severance Compensation Plan, filed as Exhibit 10.4 to Form
8-K dated December 17, 2002, incorporated herein by reference.

21 Subsidiaries of Registrant

23 Consent of PricewaterhouseCoopers LLP regarding S-8 Registration.

24 Powers of Attorney of the Registrant, Directors and Principal Financial Officer of the Registrant.

99.1 Form 11-K Annual Report for Royal Appliance 401(k) Retirement Savings Plan.

99.2 Consent of independent accountants