FEDDERS CORP /DE - 10-K Annual Report

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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED AUGUST 31, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-8831

FEDDERS CORPORATION
(Exact name of Registrant as specified in its charter)

DELAWARE 22-2572390
(State of Incorporation) (I.R.S. Employer
Identification No.)
505 MARTINSVILLE ROAD, 07938-0813
LIBERTY CORNER, NJ (Zip Code)
(Address of Principal Executive Offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(908) 604-8686

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

TITLE OF EACH CLASS

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 and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

As of the close of business on November 20, 2003, there were outstanding
27,911,879 shares of the Registrant's Common Stock and 2,493,061 shares of its
Class B Stock. The approximate aggregate market value (based upon the closing
price on the New York Stock Exchange) of these shares held by non-affiliates of
the Registrant as of February 28, 2003 was $88,080,931. (The value of a share of
Common Stock is used as the value for a share of Class B Stock as there is no
established market for Class B Stock and it is convertible into Common Stock on
a share-for-share basis.)

DOCUMENTS INCORPORATED BY REFERENCE

The Company's Proxy Statement filed in connection with the Annual Meeting
of Stockholders to be held April 27, 2004 is incorporated by reference in Part
III of this Form 10-K.
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FEDDERS CORPORATION

FORM 10-K ANNUAL REPORT
SEPTEMBER 1, 2002 TO AUGUST 31, 2003

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

(a) GENERAL DEVELOPMENT OF BUSINESS

Fedders Corporation (the "Company" or the "Registrant") is a leading global
manufacturer and marketer of air treatment products, including air conditioners,
air cleaners, gas furnaces, dehumidifiers and humidifiers, and thermal
technology products. The Company was established more than 100 years ago and has
been in the indoor air treatment business for more than 50 years.

The Company has been actively pursuing strategic acquisitions and alliances
and new product introductions to support continued growth in new and existing
markets. During fiscal year 2003, highlights of this program were as follows:

- In January 2003, the Company entered into a manufacturing joint venture
with Suning Appliance Group, the largest retailer of split-type air
conditioners in China.

- Sales operations in China and India commenced for commercial and
industrial air cleaners and air conditioners.

- New, ducted central air conditioners made in China were introduced to
global markets.

Unless otherwise indicated, all references herein to the "Company" or the
"Registrant" include Fedders Corporation and its principal operating
subsidiaries.

(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The Company has two reportable industry segments: Heating, Ventilation, Air
Conditioning and Refrigeration ("HVACR") and Engineered Products. See Note 8 of
the Notes to Consolidated Financial Statements at page F-16 herein.

(c) NARRATIVE DESCRIPTION OF BUSINESS

The Company manufactures and sells, worldwide, a wide variety of air
treatment products, including air conditioners, air cleaners, gas furnaces,
humidifiers and dehumidifiers, and thermal technology products.

With its expanding product line, the Company serves the unique air
treatment demands of various key markets including the residential,
commercial/industrial, communications, medical/biotechnology, and consumer
markets.

HVACR

PRODUCTS

The HVACR segment designs, manufactures and distributes window, residential
split system condensing units and air handlers, gas furnaces, multi-split
systems, through-the-wall, portable and packaged unit air conditioners,
residential humidifiers, dehumidifiers and air cleaners.

MARKETS

The Company's HVACR products are sold, primarily by the Company's salaried
sales force, through a variety of sales channels, including global retailers,
national retailers, regional retailers, wholesale distributors, catalog supply
houses, private label and original equipment manufacturers, and on the Internet.

PRODUCTION

The Company currently manufactures air conditioners in Effingham, Illinois;
Longview, Texas; Ningbo, Shanghai and Nanjing, China; Dadra, India; and Manila,
Philippines gas furnaces in Ningbo, China and rotary compressors in Xi'an,
China.

SOURCES AND AVAILABILITY OF RAW MATERIALS

The principal raw materials used for production are steel, copper and
aluminum, which the Company obtains from domestic and foreign suppliers. The
Company also purchases certain components used in its

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products from other manufacturers including thermostats, compressors, motors and
electrical controls. The Company endeavors to obtain the lowest possible cost in
its purchases of raw materials and components, which must meet specified quality
standards, through an active global sourcing program.

ENGINEERED PRODUCTS

PRODUCTS

The Engineered Products segment designs, manufactures and distributes media
filters, electronic filters, humidifiers, dust collectors, fan filter units and
solid-state thermoelectric heat pump modules.

MARKETS

The Company's Engineered Products are sold through manufacturers'
representatives, distributors and direct sales to OEMs, retailers and end-users.

PRODUCTION

The Company produces electronic and media air cleaners and humidification
systems in Sanford, North Carolina. HEPA/ULPA air cleaner products are produced
in Albuquerque, New Mexico. The Company manufactures residential, commercial and
industrial air cleaner products in Suzhou, China. Thermoelectric modules are
produced in Lawrence Township, New Jersey and Quanzhou, China.

SOURCES AND AVAILABILITY OF RAW MATERIALS

The principal raw materials used for production are steel, aluminum, filter
paper and ceramics, which the Company obtains from domestic and foreign
suppliers. The Company also purchases certain components used in its products,
such as motors and electrical controls, from other manufacturers. The Company
endeavors to obtain the lowest possible cost in its purchases of raw materials
and components, which must meet specified quality standards, through an active
global sourcing program.

SEASONALITY OF BUSINESS

The Company is succeeding with its strategy to diversify sales and earnings
and has changed its fiscal year to the calendar year, effective with the next
fiscal year. However, results of operations and financial condition are
currently principally dependent on the manufacture and sale of room air
conditioners, the demand for which is highly seasonal in North American markets.
Seasonally low volume sales are not sufficient to offset fixed costs, resulting
in operating losses at certain times of the year. In addition, the Company's
working capital needs are seasonal, with the greatest utilization of lines of
credit occurring early in the calendar year. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition," at pages 10 through
15 herein.

See also the discussion under "Working Capital Practices."

WORKING CAPITAL PRACTICES

The Company regularly reviews working capital with a view to maintaining
the lowest level consistent with requirements of anticipated levels of
operation. Sales currently peak in the period from March through June.
Production is weighted towards the selling season, accordingly, the greatest use
of credit lines occurs early in the calendar year. Cash balances peak in August.

Information with respect to the Company's warranty and defective return
policy is provided in Note 1 of the Notes to Consolidated Financial Statements
at page F-5 herein.

See also the information entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition" at pages 10 through 15 herein.

BACKLOG

The Company's recently completed August 31, 2003 fiscal year coincides with
the end of the North American air conditioner sales cycle. Backlog at this time
of year is insignificant.

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QUALITY ASSURANCE

One of the key elements of the Company's strategy is a commitment to a
single worldwide standard of quality. All of the Company's manufacturing
facilities globally have earned (or are in the process of obtaining) the highest
level of certification, ISO 9001, for their quality management systems under the
International Standards Organization. The ISO 9000 program is an internationally
recognized benchmark of quality management systems within a production facility.
The same level of quality will be required at all of the Company's manufacturing
facilities.

PATENTS, TRADEMARKS, LICENSES AND CONCESSIONS HELD

The Company owns a number of trademarks and licenses the name MAYTAG from
Maytag Corporation for use on air conditioners and dehumidifiers. While the
Company believes that its trademarks, such as FEDDERS, EMERSON QUIET KOOL,
AIRTEMP, MELCOR, TRION, SUN, KOPPEL, EUBANK, POLENZ and MAC-10, and the
trademark MAYTAG, are well known and enhance the marketing of its products, the
Company does not consider the successful conduct of its business to be dependent
upon such trademarks. The Company aggressively protects its trademark and
intellectual property rights worldwide.

COMPETITION

All of the markets in which the Company does business are very competitive.
Many of the Company's competitors are larger and have greater resources than the
Company. The Company competes principally on the basis of technology, quality,
price, a broad product line and its ability to deliver product and service to
its customers on a just-in-time basis.

RESEARCH AND DEVELOPMENT

The Company's product development activities include ongoing research and
development programs to redesign existing products, reduce manufacturing cost,
increase product efficiencies and create new products. In fiscal 2003, 2002 and
2001, the Company spent approximately $9.5 million, $8.9 million and $9.1
million, respectively, on research and development. Research and development
expenditures are included within selling, general and administrative expense and
are expensed as incurred.

ENVIRONMENTAL PROTECTION

The Company's operations are subject to various United States (federal and
state) and foreign environmental statutes and regulations, including laws and
regulations dealing with storage, treatment, discharge and disposal of hazardous
materials, substances and wastes and that affect the production of chemical
refrigerants used in the operation of some of the Company's products. The
refrigerant used in room air conditioners is an HCFC that is to be phased out of
use in new products on January 1, 2010 in the United States. Chemical producers
are currently developing environmentally acceptable alternative refrigerants for
use in room air conditioners that are expected to be available in advance of any
now-proposed phase-out deadlines for the current refrigerant. Modifications to
the design of the Company's products may be necessary in order to utilize
alternative refrigerants. The cost of the substitution of alternative
refrigerants is not currently expected to have a material adverse impact on the
Company.

The Company believes it is currently in material compliance with applicable
environmental laws and regulations. The Company did not make capital
expenditures on environmental matters during the fiscal year ended August 31,
2003 that are material to its total capital expenditures, earnings and
competitive position and does not anticipate making material capital
expenditures on such items in the fiscal year ending December 31, 2004.

EMPLOYEES

The Company has approximately 2,870 employees worldwide. The Company
considers its relations with its employees to be generally satisfactory.

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FOREIGN OPERATIONS

Foreign operations are subject to the risks inherent in such activities,
such as foreign regulations, unsettled political conditions and exchange rate
fluctuations. Through certain subsidiary companies, the Company has operations
in a number of countries, including China, India, Germany, the United Kingdom
and the Philippines. Of our thirteen manufacturing facilities, six are in China.

The Company's foreign operations, at times, may be adversely affected by
changes in government policies such as changes in laws and regulations (or the
interpretation thereof), restrictions on imports and exports and sources of
supply, duties or tariffs, the introduction of measures to control inflation,
changes in the rate or method of taxation, the imposition of restrictions on
currency conversion and remittances abroad and the expropriation of private
enterprise. In addition, policy concerns particular to the United States with
respect to a country in which the Company has operations could adversely affect
the Company's operations in that country.

The Company monitors its operations with a view to minimizing the impact on
its foreign investments and overall business that could arise as a result of the
risks inherent in maintaining operations in foreign countries as described
above.

See Note 1 of the Notes to Consolidated Financial Statements at page F-5
herein.

ITEM 2. PROPERTIES

The Company owns or leases the following primary facilities:

The Effingham, Illinois facility is subject to a mortgage securing a $3.5
million, 1% promissory note payable over the next five years to the State of
Illinois. The Sanford, North Carolina and the Lawrence Township, New Jersey
facility are each subject to a mortgage securing repayment of economic
development bonds and the Longview, Texas and Vienna, Georgia facilities are
each subject to a mortgage securing bank

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loans. The Company believes that productive capacity at its major manufacturing
facilities is adequate to meet production needs in the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

Not applicable.

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

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

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(1) Son of Sal Giordano, Jr.

BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS

Mr. Sal Giordano, Jr. has been Chief Executive Officer of the Company for
more than five years.

Mr. Bruno was elected Vice President, Taxes in December 2000. Previously,
he was Director, Taxes for more than five years.

Mr. Carr was elected Senior Vice President, Human Resources in June 2002.
Previously, he was Vice President, Human Resources and Administration with
Otsuka America Pharmaceutical, Inc. from August 2000 and, prior thereto, Vice
President, Human Resources -- Intercontinental Region with Wyeth Global
Pharmaceuticals, Inc. from August 1996.

Ms. DiGiovanni was elected to her present position in October 1998.
Previously she was Assistant Treasurer of the Company from 1989.

Mr. Edwards was elected to his present position in June 2000. He has been
General Counsel of the Company for more than five years.

Mr. Erbs was elected to his present position in June 2003. Prior thereto,
he was Group Vice President, International and Unitary Products from June 2002
and Senior Vice President, International from March 2001. Previously, he was
Senior Vice President, Technology and Vice President, Technology of the Company
from August 1999. Prior to his joining the Company in February 1999, Mr. Erbs
was with Carrier Corporation for many years, serving in a variety of engineering
management positions.

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Mr. Essex was elected Vice President, International in June 2003.
Previously, he was Senior Vice President, International from January 2003 and
Vice President, Sales, International from July 2001. Prior thereto, Mr. Essex
held senior sales and marketing positions with Frigidaire Home Products.

Mr. Etter was elected President in June 2000. Previously, he was Senior
Vice President of the Company and Chairman and Chief Executive Officer of
Fedders Air Conditioning from May 1, 1999. He served as Vice President of Global
Purchasing for the Company from December 1997 to May 1999 and, prior thereto,
Vice President, Purchasing of Fedders North America.

Mr. Michael Giordano was elected Executive Vice President, Finance and
Administration and Chief Financial Officer in June 2000. Prior thereto, he was
Vice President, Finance and Chief Financial Officer of the Company from July 1,
1999. Previously, Mr. Giordano served as Senior Vice President of Fedders
International, Inc. from 1998.

Mr. Hansen was elected to his present position in June 2000. Previously he
was Senior Vice President and Secretary from August 1996.

Mr. Ho was elected Vice President, Engineered Products in June 2003.
Previously, he was General Manager of the Company's Trion Inc. subsidiary from
March 2003. Prior thereto, he was Vice President, Engineering -- FIAQ from
September 2002 and Director, Engineering -- Trion since prior to 1998.

Ms. Katz was elected Vice President, Strategic Planning in June 2000 and
added Corporate Marketing in July 2003. Previously, she held the position of
Vice President, Communications and Planning for more than five years.

Mr. Laurent has been Executive Vice President, Acquisitions and Alliances
since January 1999. Previously, he was Executive Vice President, Finance and
Administration of the Company.

PART II

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

The Company's Common Stock is listed on the New York Stock Exchange. There
is no established public trading market for the Company's Class B Stock, as
there are restrictions on its transfer. As of October 31, 2003, there were 3,106
holders of Common Stock and 15 holders of Class B Stock. For information with
respect to the Company's Common Stock and Class B Stock, see Note 9 of the Notes
to Consolidated Financial Statements on pages F-18 through F-20.

PRICE RANGE OF COMMON AND CLASS A STOCK

For information regarding the high and low sale prices of the Company's
Common and formerly outstanding Class A Stock for each of the quarters in the
past two fiscal years, see Fedders Corporation Quarterly Financial Data
(unaudited) on page F-36.

DIVIDENDS PAID ON COMMON, CLASS A AND CLASS B STOCK

For information regarding the dividends paid by the Company on its Common,
Class B and formerly outstanding Class A Stock in the past five fiscal years,
see Selected Financial Data on page 8.

EQUITY COMPENSATION PLAN INFORMATION

All stock option plans, as approved by the stockholders, provide for the
granting to employees and officers of incentive stock options (as defined under
current tax laws) and non-qualified stock options. All of the plans provide for
the granting of non-qualified stock options to directors who are not employees.
Stock options granted prior to June 1, 2002 are exercisable one year after the
date of grant. Stock options granted subsequent to June 1, 2002 vest over a
four-year period. Options, if not exercised, will expire five years from the
date of grant. Certain options are only exercisable at the end of five years
unless a sales target is achieved prior thereto.

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ITEM 6. SELECTED FINANCIAL DATA(1)

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(1) The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
and the consolidated financial statements and the notes thereto.

(2) Fiscal 2001 results include $8,947 of asset impairment, employee severance
and other restructuring charges, $4,031 of one-time inventory charges, a
$7,583 deferred compensation charge relating to the retirement of an officer
of the Company, an additional $2,283 of other non-recurring inventory
write-offs, $1,364 of operating losses incurred at the Tennessee and
Maryland facilities subsequent to the announcement that production at these
facilities would cease, a $726 non-cash charge for the re-pricing of a
majority of unexercised stock options and $716 of other one-time charges.

(3) In 2003, the Company recorded a transitional goodwill impairment charge of
$11.9 million as a cumulative effect of a change in accounting principle.
See Note 1 to the Notes to Consolidated Financial Statements.

(4) On May 16, 2003, the Company's Board of Directors authorized the
distribution of transferable rights to the Company's Common and Class B
stockholders. Stockholders received one right for every ten shares of Common
Stock and Class B Stock they held as of July 1, 2003. Each transferable
right represented the right to purchase one share of the Company's Series A
Cumulative Preferred Stock at the subscription price of $23.70, until the
expiration date of August 12, 2003. At the expiration of the offering on
August 12, 2003, 262,316 rights had been subscribed.

(5) In October 2002, the Company's Board of Directors approved a plan pursuant
to which a new class of cumulative preferred stock would be offered to
stockholders in exchange for up to 15,000,000 shares of the Company's Common
Stock, with 0.14 shares of Series A Cumulative Preferred Stock being offered
in exchange for every share of Common Stock. The Series A Cumulative
Preferred Stock receives a cumulative annual dividend of $2.15 and has a
liquidation preference of $25.00 plus the amount of any accrued and unpaid
dividends. The holders of the Series A Cumulative Preferred Stock has no
right to vote, except in limited circumstances. The exchange of 2,315,750
shares of Common Stock for 323,947 shares of Series A Cumulative Preferred
Stock was completed on December 27, 2002.

On February 14, 2003, the Company announced an offer to exchange shares of
Series A Cumulative Preferred Stock for up to 12,500,000 shares of the
Company's Common Stock, with 0.14 shares of Preferred Stock being offered in
exchange for every share of Common Stock. The exchange of 633,082 shares of
Common Stock for 88,276 shares of Series A Cumulative Preferred Stock was
completed on March 18, 2003.

(6) On March 26, 2002, the Company's stockholders approved a recapitalization
plan (the "Plan") which became effective the same day. Under the Plan the
holder of each share of Common Stock received 1.1 shares of new Common
Stock, the holder of each share of Class A Stock received 1 share of new
Common Stock and the holder of each share of Class B Stock received 1.1
shares of new Class B Stock.

(7) In August 1999, a subsidiary of the Company issued $50,000 of 9 3/8% Senior
Subordinated Notes, proceeds of which were utilized, in part, to replenish
cash used to acquire Trion.

(8) During fiscal 2001, the Company repurchased 2,998,000 shares of old Common
and Class A Stock at an average price of $4.39 per share for a total of
$13,169, excluding commissions. During fiscal 2000, the Company repurchased
2,768,000 shares of old Common and Class A Stock at an average price of
$4.87 per share for a total of $13,484, excluding commissions. During fiscal
1999, the Company repurchased 2,601,000 shares of old Common and Class A
Stock at an average price of $5.08 per share for a total of $13,215,
excluding commissions.

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(9) In accordance with SFAS No. 142, beginning September 1, 2002, the Company no
longer amortizes goodwill. Goodwill amortization expense was $3.0 million,
$2.7 million, $2.7 million, and $2.4 million in fiscal years 2002, 2001,
2000 and 1999, respectively. See Note 1 to the Notes to Consolidated
Financial Statements.

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

The following is management's discussion and analysis of certain
significant factors which affected the Company's financial position and
operating results during the periods included in the accompanying consolidated
financial statements.

OPERATING RESULTS AS A PERCENT OF NET SALES

NET (LOSS) INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE

RESULTS OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2003 (FISCAL 2003), THE YEAR
ENDED AUGUST 31, 2002 (FISCAL 2002) AND THE YEAR ENDED AUGUST 31, 2001 (FISCAL
2001)

THE COMPANY'S RESULTS OF OPERATIONS ARE PRESENTED IN TWO REPORTABLE
SEGMENTS: (1) HEATING, VENTILATION, AIR CONDITIONING, AND REFRIGERATION (HVACR),
AND (2) ENGINEERED PRODUCTS. THE HVACR SEGMENT COMPRISES THE COMPANY'S HEATING,
VENTILATION, AIR CONDITIONING AND REFRIGERATION SYSTEMS OPERATIONS. THE
ENGINEERED PRODUCTS SEGMENT COMPRISES THE COMPANY'S COMMERCIAL AND INDUSTRIAL
AIR CLEANING, HUMIDIFICATION AND THERMOELECTRIC PRODUCTS OPERATIONS.

ON AUGUST 26, 2003, THE BOARD OF DIRECTORS OF THE COMPANY DECIDED TO CHANGE
THE COMPANY'S FISCAL YEAR END FROM AUGUST 31 TO DECEMBER 31. THE COMPANY INTENDS
TO FILE A TRANSITION REPORT ON FORM 10-Q TO COVER THE TRANSITION PERIOD OF
SEPTEMBER 1, 2003 TO DECEMBER 31, 2003.

Net sales for fiscal 2003 totaled $421.7 million, an increase of 12.8% from
sales of $373.7 million in fiscal 2002. The sales increase in fiscal 2003
reflects a $49.5 million, or 14.9%, increase in sales in the HVACR segment to
$382.2 million compared to $332.7 million in fiscal 2002. Sales in the HVACR
segment increased in all major global markets despite a general decline in
pricing. In the Engineered Products segment, sales were $39.5 million in fiscal
2003 compared to $41.0 million in fiscal 2002. The 3.6% sales decline was due to
continued weak demand in the capital equipment market for commercial and
industrial air cleaners.

Net sales for fiscal 2002 of $373.7 million, declined by approximately 7.9%
compared to sales of $405.7 million in fiscal 2001. Sales declined in all
segments due to the weak global economic environment. In the HVACR segment,
sales of $332.7 million reflected a decline of 7.6% compared to $360.0 million
in fiscal

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2001, due to weak market conditions following two previous cool summers in the
North American market which reduced demand for room air conditioners, weakness
in demand for cooling products in the wireless telecom capital equipment market
and general weakness in international markets, particularly in Europe, as well
as continued global deflationary pressures which resulted in a decline in
pricing. In the Engineered Products segment sales of $41.0 million declined by
approximately 10.4% compared to $45.7 million in fiscal 2001. The decline was
primarily the result of a decrease in sales of fan filter units used in
cleanroom applications due to the weak semi-conductor capital equipment market.

Gross profit improved to $92.9 million in fiscal 2003 from $83.0 million in
fiscal 2002. The gross profit percentage was 22.0% of net sales in fiscal 2003
as compared to 22.2% in fiscal 2002. The decline reflects continued deflationary
effects on pricing, overhead absorption variances at Engineered Products
production facilities due to lower production and sales and to higher
manufacturing engineering costs related to the movement of additional
high-volume production to Asia and start-up expenses related to supporting the
introduction of new products globally.

In fiscal 2002, the gross profit percentage for the fiscal year improved to
22.2% of net sales from 16.9% in fiscal 2001. The increase reflects improvements
in the Company's cost structure following the restructuring implemented at the
end of fiscal 2001, which resulted in the transfer of a majority of the
production of room air conditioners and all dehumidifiers and compressors from
North America to China.

Selling, general and administrative expenses for fiscal 2003 were $61.9
million, or 14.7% of net sales, as compared to $63.1 million, or 16.9% of net
sales, in fiscal 2002. The decrease was primarily due to the elimination of
goodwill amortization expense. Selling, general and administrative expenses for
fiscal 2002 were $63.1 million, or 16.9% of net sales, compared to $74.8 million
or 18.4% of net sales, in fiscal 2001. The decline reflected continued cost
reduction efforts as the result of the integration of acquired companies. Fiscal
2001 expenses included a one-time compensation charge of $7.6 million.

Operating income increased 52.8% in fiscal 2003 to $31.1 million, or 7.4%
of net sales, compared to $20.3 million, or 5.4% of net sales, in fiscal 2002,
which included $3.0 million in goodwill amortization expense. The increase in
operating income reflects higher sales and improved operating leverage within
the HVACR segment. Operating income was $20.3 million for fiscal 2002, or 5.4%
of net sales, compared to an operating loss of $15.0 million in fiscal 2001,
which included $8.9 million in asset impairment, employee severance, and other
restructuring charges, a $7.6 million compensation charge, $4.0 million of
one-time inventory charges, $2.3 million of other non-recurring inventory
write-offs, $1.4 million of operating losses incurred at the Tennessee and
Maryland facilities subsequent to the announcement that production at these
facilities would cease, and $0.7 million of other one-time charges.

Net interest expense decreased in fiscal 2003 to $18.5 million, or 4.4% of
net sales, compared to $18.6 million, or 5.0% of net sales, in fiscal 2002 due
to lower borrowing costs on the Company's short-term lines of credit. Net
interest expense increased in fiscal 2002 to $18.6 million, or 5.0% of net
sales, compared to $17.8 million, or 4.4% of net sales, in fiscal 2001 due to
lower cash balances at the beginning of the fiscal year and cash used for
acquisitions during the year.

Upon adoption of SFAS No. 142, the Company was required to perform a
transitional goodwill impairment test. The transitional goodwill impairment test
was completed during the fourth quarter of fiscal year 2003. As a result, the
Company recognized a non-cash transitional goodwill impairment charge of $11.9
million in its Engineered Products segment, because the projected financial
performance of the Engineered Products segment was insufficient to support the
related goodwill. As required, the transitional goodwill impairment charge was
recorded as a cumulative effect of a change in accounting principle as of
September 1, 2002.

Net income in fiscal 2003 applicable to common stockholders before the
cumulative effect of a change in accounting principle was $8.2 million, or 27
cents diluted earnings per common share, compared to net income of $8.0 million,
or 25 cents diluted earnings per common share, in fiscal 2002. Net loss
applicable to common stockholders in fiscal 2003, including the $11.9 million
non-cash transitional goodwill impairment charge, was $3.7 million, or 12 cents
diluted loss per common share. In fiscal 2002, net income improved to $8.0
million, or 25 cents diluted earnings per common share, compared to a net loss
of $22.5 million, or 71 cents diluted loss per common share, in fiscal 2001. Net
income in fiscal 2002 benefited from a $6.0 million reduction in accrued

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tax liabilities. The reduction was due to reserves no longer required for
federal, state and foreign tax purposes primarily due to favorable audit results
and a change in estimate for foreign taxes.

LIQUIDITY AND CAPITAL RESOURCES

Working capital requirements of the Company are seasonal, with cash
balances peaking in the fourth fiscal quarter and the greatest utilization of
its lines of credit occurring early in the calendar year. The Company ended
fiscal 2003 with $60.9 million in cash and cash equivalents compared to $67.4
million at August 31, 2002. In August 2002, the Company received a federal tax
refund of $8.3 million due to recent changes in U.S. tax laws that allowed the
Company to extend the carry-back period for certain federal net operating losses
from 2 to 5 years.

Net cash provided by operations in fiscal 2003 amounted to $5.6 million
compared to $34.1 million in the prior year. Cash provided by operations
declined primarily as a result of increased finished goods inventories, offset
in part by an increase in accounts payable. Net inventories at the end of the
year were $78.9 million compared to $48.6 million at the end of the last fiscal
year. The increase in finished goods was the result of a build up of inventory
to support in-season sales due to the shift offshore of production of high
volume products and to support sales of new products globally.

In fiscal 2003 the company completed two exchange offers in which a new
class of cumulative preferred stock was offered to stockholders in exchange for
the Company's Common Stock. The exchange offers were intended to provide an
opportunity to stockholders interested in a security that will provide
significantly higher dividends than the Common Stock. The exchange of 2,315,750
shares of Common Stock for 323,947 shares of Series A Cumulative Preferred Stock
was completed on December 27, 2002, and the exchange of 633,082 shares of Common
Stock for 88,276 shares of Series A Cumulative Preferred Stock was completed on
March 18, 2003.

Subsequently, the Company distributed transferable rights to the Company's
Common and Class B stockholders enabling them to purchase the Series A
Cumulative Preferred Stock at a discount to market prices. The rights offering
was made to raise capital for possible future strategic acquisitions, to
decrease the use of debt for working capital, and for general corporate
purposes. As of the expiration of the offer on August 12, 2003, 262,316 rights
had been subscribed for gross proceeds to the Company of $6,167.

Net cash used in investing activities by the Company in fiscal 2003 was
$7.4 million versus $14.6 million in the prior year. Investments in acquisitions
and joint ventures for the year amounted to $1.3 million. In March 2003, the
Company entered into a joint venture with Nanjing Suning High & New Technology
Industrial Park Co., Ltd. to manufacture split-type air conditioners in China.
The Company has a 2/3 interest in the joint venture, Fedders Suning Nanjing Co.,
Ltd. Capital expenditures for the year were $7.3 million compared to $7.8
million in fiscal 2002, and were primarily related to investments in tooling,
machinery and equipment to support production in Asia.

Net cash used in financing activities in fiscal 2003 amounted to $4.7
million and consisted primarily of $4.1 million of cash dividends and repayments
of debt of $6.4 million offset by $6.2 million in proceeds from a rights
offering. Net cash used in financing activities in the prior year was $3.4
million and consisted primarily of $3.7 million of cash dividends.

In fiscal 2003, the Company's $100 million revolving credit facility was
utilized during the five-month period from January through May with a maximum
outstanding balance during the fiscal year of $41.8 million. The term of this
credit facility was extended to February 1, 2006. The Company also utilized
short-term borrowing facilities to support production in the Company's China
operations. There was a maximum outstanding balance of $26.7 million in China
during fiscal 2003.

12

The following summarizes Fedders' contractual cash obligations and
commercial commitments at August 31, 2003, and the effect such obligations are
expected to have on liquidity and cash flow in future periods.

From time to time, subsidiaries of the Company may guarantee the debt of
certain unconsolidated joint ventures, up to a maximum of the Company's
ownership percentage in the unconsolidated joint venture. The Company currently
holds no collateral for such guarantees, and has not recorded corresponding
obligations. The Company's subsidiaries would be obligated to perform in the
event the unconsolidated joint ventures fail to pay the principal and interest
on the loans or fail to comply with the terms of the loan agreement.

Management believes that the Company's cash, earnings and borrowing
capacity are adequate to meet the demands of its operations and its long-term
credit requirements.

EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible, long-lived
assets and the associated asset retirement costs. The adoption of this statement
in the first quarter of fiscal year 2003 did not have a material effect on the
Company's financial position, results of operations and its cash flows.

In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company adopted this statement
at the beginning of its fiscal year 2003. The adoption of this statement did not
have a material effect on the Company's financial position, results of
operations and its cash flows.

In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). This
statement addresses the recognition, measurement and reporting of costs that are
associated with exit and disposal activities. SFAS 146 is effective for the
Company for disposal activities initiated after December 31, 2002 and will be
applied prospectively.

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 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The interpretation also requires enhanced and additional
disclosures of guarantees in

13

interim and annual financial statements for periods ending after December 15,
2002. The Company adopted this statement in the second quarter of fiscal year
2003.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of FASB Statement No. 123 ("SFAS 123")." This statement
provides alternative methods of transition for a voluntary change to the fair-
value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements.
The Company adopted the disclosure requirements of this statement in the second
quarter of fiscal year 2003.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31, 2003
and became effective for all other transactions as of July 1, 2003. However, in
October 2003 the FASB permitted companies to defer the July 1, 2003 effective
date to December 31, 2003, in whole or in part, and indicated that it would
provide further clarification of this interpretation before December 31, 2003.
The Company has determined that it is not reasonably probable that it will be
required to consolidate or disclose information about a variable interest
entity.

In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." This statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. In addition, generally all provisions of this
statement should be applied prospectively. The adoption of this statement in the
fourth quarter of fiscal year 2003 did not have a material effect on the
Company's financial position, results of operations and its cash flows.

In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity" ("SFAS 150"). This statement changes the accounting
for certain financial instruments that issuers could account for as equity. SFAS
150 requires that those instruments be classified as liabilities in statements
of financial position. SFAS 150 also requires disclosures about alternative ways
of settling the instruments and the capital structure of entities, all of whose
shares are mandatorily redeemable. Most of the guidance in SFAS 150 is effective
for all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this statement in the fourth quarter of
fiscal year 2003 did not have a material effect on the Company's financial
position, results of operations and its cash flows.

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

ESTIMATES

In preparing financial statements in accordance with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts and disclosures of assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

DEFERRED TAX ASSETS

At August 31, 2003, the Company has foreign net operating loss
carry-forwards of approximately $1.3 million, for which the Company has recorded
a deferred tax asset. For the Company to realize the benefit of its deferred tax
asset, the Company must achieve future earnings prior to the expiration of its
net operating loss carry-forwards. The Company has established a valuation
allowance against the future tax benefit of a portion of its net operating loss
carry-forwards. The Company may need to further adjust that valuation allowance
if future earnings are, or are projected to be, significantly different from
current estimates. The

14

valuation allowance reflects the uncertainty associated with the realization of
deferred tax assets. The increase in the valuation reserve was due primarily to
foreign net operating losses.

IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL

The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
recoverability of the carrying amount of an asset or asset group should be
assessed. The Company assesses the carrying amount of the asset or asset group
by comparing the carrying amount to the estimate of cash inflows, net of
outflows. If the estimated net cash inflows are less than the asset carrying
amount, the asset is written down to fair value. Fair value is based upon quoted
market prices, if available. When quoted market prices are not available, the
Company estimates fair value based upon the selling prices of similar assets or
valuation techniques. The Company must estimate the net cash inflows to assess
an asset or asset group carrying amount and fair value. Estimates are based upon
internal budgets and forecasts. A change in the utilization of the assets or a
decision to exit certain product lines or manufacturing locations could impact
the Company's estimate of future cash flows. A decrease in estimated future cash
flows could reduce the fair values of long-lived assets, increasing the
likelihood of impairment, which could have a significant impact on the Company's
consolidated results of operations and financial position.

The Company is required to test goodwill for impairment at least annually
or between annual tests if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its carry
amount. The Company has elected to perform the annual tests for indications of
goodwill impairment as of September 30 of each year. The Company identifies
potential goodwill impairment by comparing the fair value of a reporting segment
with its carrying amount, including goodwill. The Company determines fair value
using a discounted cash flow and market-multiple approach. If the fair value of
a reporting segment exceeds its carrying amount, goodwill of the reporting
segment is not considered impaired. If the carrying amount of a segment exceeds
its fair value, the amount of goodwill impairment loss, if any, must be
measured. The Company measures the amount of goodwill impairment loss by
comparing the implied fair value of reporting segment goodwill with the carrying
amount of that goodwill. If the carrying amount of the reporting segment
goodwill exceeds the implied fair value of goodwill, an impairment loss is
recognized as an operating expense.

WARRANTY AND DEFECTIVE RETURNS

The Company's air conditioner products are covered by standard product
warranty plans that extend from 1 to 5 years. In addition, major retailers have
consumer return policies which allow consumers the ability to return product
that may be defective in lieu of field service. Upon return to the Company,
these units are inspected, repaired as required, reboxed and held for future
sale as factory reconditioned products. A portion of those units returned is not
repairable. At the time revenue is recognized, upon shipment, measurements of
those sales are reduced by estimates of the future costs associated with
fulfilling warranty obligations and for the expense associated with repairing or
scrapping defective returns.

The Company estimates warranty costs and defective returns utilizing
historical failure and defective return rates, which may or may not be
indicative of future rates. The estimate for warranty obligations and defective
returns is a critical accounting estimate for the HVACR segment.

Over the past 3 years, warranty and defective return costs represented
approximately 5.5% of sales for the HVACR segment. Each quarter, the estimate of
warranty and defective return obligations, including the assumptions about
estimated failure and return rates, is reevaluated.

The Company has discussed the development and selection of this critical
accounting estimate with the Audit Committee of its Board of Directors and the
Audit Committee has reviewed the Company's disclosure relating to it in this
MD&A.

RISK FACTORS

Foreign operations are subject to the risks inherent in such activities,
such as foreign regulations, unsettled political conditions and exchange rate
fluctuations.

15

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of the Company at August 31, 2003 and
2002, and for the years ended August 31, 2003, 2002 and 2001, the notes thereto
and the report of the Company's independent auditors thereon are included at
pages F-1 through F-38, herein.

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

None

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-14 (c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") as of the end of the period covered by this annual
report (the "Evaluation Date"). Based on such evaluation, such officers have
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures are effective in alerting them on a timely basis to material
information relating to the Company including its consolidated subsidiaries
required to be included in the Company's reports filed or submitted under the
Exchange Act.

(b) Changes in Internal Controls. During the Company's last fiscal
quarter, there have not been any significant changes in the Company's internal
controls over financial reporting or in other factors that have materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

For information with respect to the Company's directors, see the section
entitled "Election of Directors" in the Company's Proxy Statement, to be filed
in connection with the Company's Annual Meeting of Stockholders to be held on
April 27, 2004, which section is incorporated herein by reference. For
information with respect to the Company's executive officers, see Part I of this
Form 10-K.

The Company has adopted a code of ethics for its principal executive
officer and senior financial officers pursuant to Section 406 of the Sarbanes
Oxley Act. Copies of the code are available free of charge by writing to
Secretary, Fedders Corporation, 505 Martinsville Road, Liberty Corner, NJ 07938.

Identification of the members of the Audit Committee of the Board of
Directors as well as the Board of Directors' determination as to whether one or
more members is a financial expert is incorporated by reference to the Company's
Proxy Statement referred to above.

ITEM 11. EXECUTIVE COMPENSATION

See the section entitled "Executive Compensation" in the Company's Proxy
Statement, to be filed in connection with the Company's Annual Meeting of
Stockholders to be held on April 27, 2004, which section is incorporated herein
by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

See the sections entitled "Security Ownership of Directors and Officers"
and "Principal Stockholders" in the Company's Proxy Statement, to be filed in
connection with the Company's Annual Meeting of Stockholders to be held on April
27, 2004, which sections are incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See the section entitled "Election of Directors" in the Company's Proxy
Statement, to be filed in connection with the Company's Annual Meeting of
Stockholders to be held on April 27, 2004, which section is incorporated herein
by reference.

16

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

See the section entitled "Independent Public Accountants" in the Company's
Proxy Statement, to be filed in connection with the Company's Annual Meeting of
Stockholders to be held on April 27, 2004, which section is incorporated herein
by reference.

PART IV

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

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements

The following Consolidated Financial Statements of the Company and its
subsidiaries are included:

(a) 2. Financial Statement Schedule

Consolidated Schedule as of and for the years ended August
31, 2003, 2002 and 2001
II. Valuation and Qualifying Accounts...................... F-37

All other schedules have been omitted because of the absence of the
conditions under which they are required or because the required information is
included in the Consolidated Financial Statements or the notes thereto.

(a) 3. Exhibits

(3) (i) Restated Certificate of Incorporation of the Company filed
as Exhibit (A) to Annex (A) of the Company's Proxy
Statement/Prospectus dated January 9, 2002 and incorporated
herein by reference.
By-Laws of the Company, filed as Exhibit 3(ii) to the
(ii) Company's Annual Report on Form 10-K for the fiscal year
ended August 31, 2002 and incorporated herein by reference.
(4) (i) Registration Statement on Form S-4 filed with the Securities
and Exchange Commission on September 10, 1997 and
incorporated herein by reference.
Registration Statement on Form S-4 filed with the Securities
(ii) and Exchange Commission on January 24, 2000 and incorporated
herein by reference.
(10) (i) Stock Option Plan VIII, filed as Annex F to the Company's
Proxy Statement -- Prospectus dated May 10, 1996 and
incorporated herein by reference.
Employment Agreement between the Company and Sal Giordano,
(ii) Jr. effective December 14, 2001, filed as Exhibit 10 (ii) to
the Company's Annual Report on Form 10-K for the fiscal year
ended August 31, 2002 and incorporated herein by reference.
(21) Subsidiaries.
(23) Consent of Deloitte & Touche LLP.
(31) Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(32) Certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

(b) Reports on Form 8-K.

Current Report on Form 8-K dated October 14, 2003, reporting the Company's
year-end results for fiscal year 2003.

17

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.

FEDDERS CORPORATION

By /s/ MICHAEL GIORDANO
------------------------------------
Michael Giordano
Executive Vice President,
Finance and Administration
and Chief Financial Officer

November 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 and on the dates indicated.

18

FEDDERS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

See accompanying notes to the consolidated financial statements

F-1

FEDDERS CORPORATION

CONSOLIDATED BALANCE SHEETS

See accompanying notes to the consolidated financial statements

F-2

FEDDERS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to the consolidated financial statements
F-3

FEDDERS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See accompanying notes to the consolidated financial statements
F-4

FEDDERS CORPORATION

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

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fedders Corporation (the "Company") is a leading global manufacturer and
marketer of air treatment products, including air conditioners, air cleaners,
dehumidifiers, humidifiers, and thermal technology products.

FISCAL YEAR

On August 26, 2003, the Board of Directors of the Company decided to change
the Company's fiscal year end from August 31 to December 31. The Company intends
to file a transition report on Form 10-Q to cover the transition period of
September 1, 2003 to December 31, 2003.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and all of its wholly-owned and majority-owned subsidiaries and
joint ventures. Joint ventures which are not majority owned, but over which the
Company shares joint control, are accounted for by the equity method. All
significant intercompany accounts and transactions are eliminated in
consolidation.

REVENUE RECOGNITION

Sales are recorded consistent with their related shipping terms upon the
passing of the title and the risks and rewards of ownership to the customer. For
a majority of the Company's customers, title and the risks and rewards of
ownership pass at the time of shipment. However, certain of the Company's sales
are recorded at the time the products are delivered to the customers. Sales are
recorded net of a provision for sales allowances and warranties and defective
returns.

WARRANTY AND DEFECTIVE RETURN POLICY

The Company's policy is to accrue the estimated cost of warranty coverage
and defective returns at the time the sale is recorded.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of the Company's foreign subsidiaries are translated
at the rate of exchange in effect at the end of the period. Net sales and
expenses are translated at the average rate of exchange for the period.
Translation adjustments are reflected in other comprehensive loss as a separate
component of stockholders' equity.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of the first-in, first-out (FIFO) cost
or market. The Company reviews inventory periodically for slow-moving and
obsolete items. Write-downs are recorded in the period in which they are
identified. Inventories consist of the following at August 31:

F-5

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OTHER CURRENT ASSETS

Other current assets consist of the following at August 31:

PROPERTY, PLANT AND EQUIPMENT

Replacements, betterments and additions to property, plant and equipment
are capitalized at cost. Expenditures for maintenance and repairs are charged to
expense as incurred. Upon sale or retirement of property, plant and equipment,
the cost and related accumulated depreciation are removed from the respective
accounts and any gain or loss is reflected in cost of sales or selling, general
and administrative expense, as appropriate. Net property, plant and equipment
consist of the following at August 31:

The Company, using estimates based on reasonable assumptions and projections,
reviews for impairment of long-lived assets and certain identifiable intangibles
to be held and used whenever events or changes in circumstances indicate the
carrying amount of its assets might not be recoverable and appropriately records
any necessary adjustments. Depreciation is provided on the straight-line basis
over the estimated useful life of each asset as noted above. Depreciation
expense for the fiscal years ended August 31, 2003, 2002 and 2001 was $9,112,
$10,394 and $10,671, respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS

The Company records the excess purchase price of net tangible and
intangible assets acquired over their estimated fair value as goodwill. The
Company adopted the provisions of SFAS 142 as of September 1, 2002. Under SFAS
142, the Company is required to test goodwill for impairment at least annually.
The Company has elected to perform its annual test for indications of goodwill
impairment as of September 30 of each year. The Company identifies potential
goodwill impairment by comparing the fair value of a reporting segment with its
carrying amount, including goodwill. The Company determines fair value using a
discounted cash flow and market-multiple approach. If the fair value of a
reporting segment exceeds its carrying amount, goodwill of the reporting segment
is not considered impaired. If the carrying amount of a segment exceeds its fair
value, the amount of goodwill impairment loss, if any, must be measured. The
Company measures the amount of goodwill impairment loss by comparing the implied
fair value of reporting segment goodwill with the carrying amount of that
goodwill. If the carrying amount of the segment goodwill exceeds the implied
fair value of goodwill, an impairment loss is recognized as an operating
expense.

The Company completed the transitional goodwill impairment test during the
fourth quarter for fiscal 2003. The Company did not identify any impairment
within its HVACR reporting segment but has recognized a non-cash goodwill
impairment charge of $11.9 million within its Engineered Products reporting
segment. The projected financial performance of the Engineered Products
reporting segment was insufficient to support

F-6

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the related goodwill. As required, the transitional goodwill impairment charge
was recorded as a cumulative effect of a change in accounting principle as of
September 1, 2002.

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
the Company ceased amortization of goodwill as of September 1, 2002. The
following table presents the annual results of the Company on a comparable
basis:

Goodwill and other intangible assets consist of the following at August 31:

As of August 31, 2003 and 2002, the Company had goodwill of $70,133 reflected in
its HVACR reportable segment. As of August 31, 2003 and 2002, the Company had
goodwill of 8,497 and 20,403 in its Engineered Products reportable segments,
respectively. Other intangible assets primarily include a right associated with
a joint venture that is being amortized over 20 years. Amortization expense for
the fiscal years ended August 31, 2003, 2002 and 2001, is $181, $215 and $187,
respectively. Estimated amortization expense for other intangibles will be
approximately $120 for each of the next five years and $1,188 thereafter.

F-7

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OTHER ASSETS

Other assets consist of the following at August 31:

ACCRUED EXPENSES

Accrued expenses consist of the following at August 31:

INCOME TAXES

Deferred income taxes are provided to reflect the tax effects of temporary
differences between assets and liabilities for financial reporting purposes and
income tax purposes. Provisions are also made for U.S. income taxes on
undistributed earnings of foreign subsidiaries not considered to be indefinitely
reinvested (note 7).

SHIPPING AND HANDLING FEES AND COSTS

Costs associated with the handling and warehousing of finished goods are
charged to selling, general and administrative expense and amounted to $5,811,
$4,817 and $3,819 in 2003, 2002 and 2001, respectively.

RESEARCH AND DEVELOPMENT COSTS

All research and development costs are charged to selling, general and
administrative expense as incurred and amounted to $9,478, $8,896 and $9,086 in
2003, 2002 and 2001, respectively.

F-8

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK COMPENSATION

The Company accounts for stock options issued to its employees under the
recognition and measurement principles of APB Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted had an
exercise price equal to the market value of the underlying Common Stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair-value recognition
provisions of SFAS 123 to stock-based employee compensation.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

RISKS AND UNCERTAINTIES

Through certain subsidiary companies, the Company has operations in a
number of countries, including China, India, Germany, the United Kingdom and the
Philippines. Of our thirteen manufacturing facilities, six are in China.

The Company's foreign operations, at times, may be adversely affected by
changes in government policies such as changes in laws and regulations (or the
interpretation thereof), restrictions on imports and exports and sources of
supply, duties or tariffs, the introduction of measures to control inflation,
changes in the rate or method of taxation, the imposition of restrictions on
currency conversion and remittances abroad and the expropriation of private
enterprise. In addition, policy concerns particular to the United States with
respect to a country in which the Company has operations could adversely affect
the Company's operations in that country.

The Company monitors its operations with a view to minimizing the impact on
its foreign investments and overall business that could arise as a result of the
risks inherent in maintaining operations in foreign countries as described
above.

EARNINGS PER SHARE

Basic earnings (loss) per common share are computed by dividing net income
(loss) applicable to common stockholders by the weighted average number of
shares outstanding for the period. Diluted earnings (loss) per common share are
computed by adjusting outstanding shares assuming conversion of all potentially
dilutive stock options. In 2001, stock options were not included in the
computation of diluted (loss) per common share due to their anti-dilutive effect
given the net loss for the year. The number of anti-dilutive stock options
excluded from the computation of diluted (loss) per common share was

F-9

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

289,274 for 2001. The computation of basic earnings (loss) per common share and
diluted earnings (loss) per share is as follows:

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount for cash and cash equivalents, accounts receivable,
accounts payable, short term notes and accrued expenses approximates fair value
due to the short maturity of these instruments. At August 31, 2003 and 2002, the
fair value of long-term debt (including current portion), is estimated to be
$138,731 and $146,776, respectively, based on current market rates that could be
obtained by the Company for similar debt.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The nature of the Company's business activities necessarily involves the
management of various financial and market risks, including those related to
changes in foreign currency exchange rates. The Company's use of derivative
financial instruments is limited primarily to the use of forward foreign
currency exchange contracts to mitigate certain foreign currency exchange rate
risks relative to Canadian dollar receivables, Euro dollar payables, and
Philippine peso payables. Such contracts are not designated as hedges and any
changes in fair value are recognized in "Other income (expense)" in the current
period. The Company does not have any such contracts outstanding as of August
31, 2003 and 2002.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible, long-lived
assets and the associated asset retirement costs. The adoption of this statement
in the first quarter of fiscal year 2003 did not have a material effect on the
Company's financial position, results of operations and its cash flows.

In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company adopted this statement
at the beginning of its fiscal year 2003. The adoption of this statement did not
have a material effect on the Company's financial position, results of
operations and its cash flows.

In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). This
statement addresses the recognition, measurement and reporting of costs that are
associated with exit and disposal activities. SFAS 146 is effective for the
Company for disposal activities initiated after December 31, 2002 and will be
applied prospectively.

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 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement

F-10

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The interpretation also
requires enhanced and additional disclosures of guarantees in interim and annual
financial statements for periods ending after December 15, 2002. The Company
adopted this statement in the second quarter of fiscal year 2003.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of FASB Statement No. 123 ("SFAS 123")." This statement
provides alternative methods of transition for a voluntary change to the fair-
value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements.
The Company adopted the disclosure requirements of this statement in the second
quarter of fiscal year 2003.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31, 2003
and became effective for all other transactions as of July 1, 2003. However, in
October 2003 the FASB permitted companies to defer the July 1, 2003 effective
date to December 31, 2003, in whole or in part, and indicated that it would
provide further clarification of this interpretation before December 31, 2003.
The Company has determined that it is not reasonably probable that it will be
required to consolidate or disclose information about a variable interest
entity.

In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. In addition, generally all provisions of this
statement should be applied prospectively. The adoption of this statement in the
fourth quarter of fiscal year 2003 did not have a material effect on the
Company's financial position, results of operations and its cash flows.

In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity" ("SFAS 150"). This statement changes the accounting
for certain financial instruments that issuers could account for as equity. SFAS
150 requires that those instruments be classified as liabilities in statements
of financial position. SFAS 150 also requires disclosures about alternative ways
of settling the instruments and the capital structure of entities, all of whose
shares are mandatorily redeemable. Most of the guidance in SFAS 150 is effective
for all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this statement in the fourth quarter of
fiscal year 2003 did not have a material effect on the Company's financial
position, results of operations and its cash flows.

2. ASSET IMPAIRMENT, EMPLOYEE SEVERANCE AND OTHER RESTRUCTURING AND RELATED
CHARGES

In the fourth quarter of 2001, the Company announced a plan to restructure
its then existing operations, which included the transfer of a majority of the
Company's room air conditioner production, as well as all production of
dehumidifiers and compressors, from its Illinois, Tennessee and Maryland
facilities to facilities in China in order to lower costs and improve
profitability. The Company's plan resulted in charges for fixed-

F-11

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

asset impairments, employee severance costs, inventory write-downs and other
restructuring charges directly related to the restructuring plan, including
facility closing costs and lease termination costs. In conjunction with the
restructuring plan, the Company recorded $13,694 of charges in the fourth
quarter of 2001, of which $4,747 is recorded within cost of sales and $8,947 is
recorded within asset impairment, employee severance and other restructuring
(credits) charges. In fiscal year 2002, the Company recorded a restructuring
credit of $397 due to a change in estimate for accrued medical costs related to
terminated employees. In fiscal year 2003, the Company expended $408, primarily
for facility closing costs and recorded a restructuring credit of $115
associated with a gain on the disposal of certain fixed assets previously
impaired as part of the 2001 restructuring.

The following table displays the activity and balances of the restructuring
reserve account from August 31, 2001 to August 31, 2003:

The remaining balance of $1,277, which consists primarily of workforce reduction
and facility closing costs, is expected to be expended during fiscal 2004. The
final amounts will be settled upon the expiration period for workers'
compensation claims and completion of facility clean up and waste removal.

3. CONTINGENCIES

The Company is involved in litigation, both as plaintiff and defendant,
incidental to the conduct of its business. It is the opinion of management,
after consultation with counsel, that the outcome of such litigation will not
have a material adverse effect on its financial position, results of operations
and cash flows.

4. SHORT-TERM BORROWING

At August 31, 2003 and 2002, the Company had no short-term borrowing
outstanding under its $100,000 U.S. revolving credit facility with a commercial
finance company. Availability under the revolving credit facility is based on
accounts receivable and inventory and requires maintenance of certain financial
covenants. The Company is currently in compliance with the terms of these
covenants.

The maximum amount outstanding under the credit facility was $41,841 and
$62,726 during fiscal 2003 and 2002, respectively. The average amount
outstanding and average rate of interest charged on outstanding borrowings under
the credit facility were $8,440 and 3.89% in fiscal 2003. The credit facility is
collateralized by substantially all of the Company's assets and is in effect
until February 2006. The rate of interest on the facility is prime rate or LIBOR
plus 2%.

At August 31, 2003 and 2002, certain foreign subsidiaries had short-term
notes of $7,520 and $9,829, respectively, outstanding under loan agreements with
various banks. The current notes bear interest ranging from 3.15% to 12.38% and
expire no later than June 2004.

The Company utilized various short-term borrowing facilities to support
production in China. At August 31, 2003 and 2002, the outstanding balance under
these borrowing facilities was $7,000 and $9,473, respectively. The maximum
amount outstanding under these credit facilities was $26,726 and $11,451 during
fiscal 2003 and 2002, respectively. The average amount outstanding and average
rate of interest charged on outstanding borrowings under these credit facilities
were $19,578 and 5.64% in fiscal 2003.

F-12

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. LONG-TERM DEBT

Long-term debt consists of the following at August 31:

Aggregate amounts of long-term debt, excluding capital leases of $4,272,
maturing in each of the years ending August 31 are as follows:

Aggregate future minimum rental payments under capital leases are as
follows:

In August 1997, a subsidiary of the Company issued $100,000 principal
amount of 9 3/8% Senior Subordinated Notes due 2007. In August 1999, the same
subsidiary issued an additional $50,000 principal amount of 9 3/8% Senior
Subordinated Notes due 2007. The notes are guaranteed by the Company on a senior

F-13

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

subordinated basis. The notes may be redeemed by the subsidiary after August
2002 at a redemption price of 104.688% of principal amount. The provisions of
the notes limit, among other things, the payment of dividends by the subsidiary.

The loan from the State of Illinois has an interest rate of 1%, is to be
paid over the next five years, and is collateralized by a mortgage on the
Company's Illinois facility.

The Trion Industrial Revenue Bond is due in November 2011, bears interest
at a variable rate which fluctuates in accordance with the Bond Market
Association Index, and requires no principal payments until maturity. This bond
is collateralized by Trion's Sanford, North Carolina facility, including real
property and equipment.

The Fedders Koppel promissory note payable to a Philippines bank is to be
paid over the next two years, bears interest at PHIBOR plus 3%, and is
guaranteed by the Company.

The Eubank Manufacturing Enterprises, Inc. Industrial Revenue Bond has been
paid in October 2003. The bond is collateralized by certain real property and
equipment, is guaranteed by the Company, and bears interest at a variable rate
calculated as 75% of the sum of LIBOR plus 1.75.

The Eubank Manufacturing Enterprises, Inc. promissory note due to Flag Bank
is to be paid next year and has a variable rate of interest, payable at the
prime rate. The promissory note is collateralized by certain real property and
equipment.

The loan from the New Jersey Economic Development Corporation to Melcor
Corporation has an interest rate of 6.6%, is to be paid over the next seven
years and is collateralized by Melcor's facility and certain equipment.

In June 2003, Eubank Manufacturing Enterprises Inc. refinanced its mortgage
with Bank One and repaid the mortgage payable to Bank of America Leasing and
Capital. The new loan has an interest rate of 4.25%, is to be paid over the next
five years and is collateralized by a mortgage on Eubank's facility.

6. COMMITMENTS

The Company leases certain property and equipment under operating leases.
Most of these operating leases contain one of the following options: (a) the
Company may, at the end of the initial lease term, purchase the property at the
then fair market value or (b) the Company may renew its lease at the then fair
rental value for a period of one month to five years. The Company also has
contractual minimum payments under license agreements. Minimum payments for
operating leases having non-cancelable terms and contractual minimum payments
under the license agreements are as follows:

Total rent and licensing expense amounted to $8,556, $5,715 and $2,958 in
2003, 2002 and 2001, respectively.

F-14

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES

The provision (benefit) for income taxes consists of the following
components at August 31:

The exercise of stock options to acquire shares of the Company's stock
creates a compensation deduction for income tax purposes for which there is no
corresponding expense required for financial reporting purposes. The tax
benefits related to these deductions are reflected as a charge in lieu of income
taxes and a credit to additional paid-in capital. The Company elected to carry
back its 2001 and 2002 U.S. net operating losses.

Deferred tax assets and liabilities result from temporary differences
between assets and liabilities for financial reporting and income tax purposes,
and include the components related to acquired companies. The components are as
follows at August 31:

At August 31,2003, $7,654 of current deferred tax benefit was included in
current assets, $8,224 of long-term deferred benefit was included in non-current
asset, and $11,731 of deferred income tax liability was included in other
long-term liabilities.

F-15

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The difference between the United States statutory income tax rate and the
consolidated effective income tax rate is due to the following items at August
31:

At August 31, 2003, the Company has foreign net operating loss
carry-forwards of approximately $1,300. The valuation allowance reflects the
uncertainty associated with the realization of deferred tax assets. The increase
in the valuation reserve in 2002 was due primarily to foreign net operating
losses. During the fourth quarter of 2002, the Company recorded a tax benefit of
$6,048 to reflect favorable tax audit resolutions and the reduction in
world-wide tax exposures.

8. REPORTABLE SEGMENTS

The Company has two reportable segments: Heating, Ventilation, Air
Conditioning and Refrigeration ("HVACR") and Engineered Products. The Company's
reportable segments were determined based upon several factors, including the
nature of the products provided and markets served. Each reportable segment is
managed separately and includes various operating segments which have been
aggregated due to similar economic characteristics.

The HVACR segment designs, manufactures and distributes window, residential
split system condensing units and air handlers, gas furnaces, multi-split
systems, through-the-wall, portable and packaged unit air conditioners,
residential humidifiers, dehumidifiers and air cleaners. HVACR products are
distributed through a variety of sales channels including national retailers,
regional retailers, wholesale distributors, catalog supply houses, private
label/OEM, government direct and the Internet.

The Engineered Products segment designs, manufactures and distributes
commercial and industrial media filters, electronic filters, humidifiers, dust
collectors, fan filter units and solid-state thermoelectric heat pump modules.
These products are sold through manufacturers' representatives, distributors and
direct sales to end-users.

F-16

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SUMMARY OF BUSINESS BY SEGMENT:

SUMMARY OF NET SALES BY GEOGRAPHIC AREA(1)

F-17

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(1) "Other" includes the Company's net sales principally to Asia, Europe, Canada
and Mexico.

SUMMARY OF LONG-LIVED ASSETS BY GEOGRAPHIC AREA(2)

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

(2) "Other" includes long-lived assets located principally in Asia.

In 2003, two customers accounted for 48% of net sales; in 2002 and 2001,
two customers accounted for 49% of net sales.

It is not practical for the Company to report revenues for each product or
group of similar products. A majority of the Company's internal reports provide
detailed information by legal entity, but there is no one uniform customer or
product information management system.

9. CAPITAL STOCK

On May 16, 2003, the Company's Board of Directors authorized the
distribution of transferable rights to the Company's Common and Class B
stockholders. Stockholders received one right for every ten shares of Common
Stock and Class B Stock they held as of July 1, 2003. Each transferable right
represented the right to purchase one share of the Company's Series A Cumulative
Preferred Stock at the subscription price of $23.70, until the expiration date
of August 12, 2003. As of August 12, 2003, 262,316 rights had been subscribed.

In October 2002, the Company's Board of Directors approved a plan pursuant
to which a new class of cumulative Preferred Stock would be offered to
stockholders in exchange for up to 15,000,000 shares of the Company's Common
Stock, with 0.14 shares of Preferred Stock being offered in exchange for every
share of Common Stock. The Series A Cumulative Preferred Stock receives a
cumulative annual dividend of $2.15 and has a liquidation preference of $25.00
plus the amount of any accrued and unpaid dividends. The holders of the Series A
Cumulative Preferred Stock has no right to vote, except in limited
circumstances. The exchange of 2,315,750 shares of Common Stock for 323,947
shares of Series A Cumulative Preferred Stock was completed on December 27,
2002.

On February 14, 2003, the Company announced an exchange offer to exchange
shares of Series A Cumulative Preferred Stock for up to 12,500,000 shares of the
Company's Common Stock, with 0.14 shares of Preferred Stock being offered in
exchange for every share of Common Stock. The exchange of 633,082 shares of
Common Stock for 88,276 shares of Series A Cumulative Preferred Stock was
completed on March 18, 2003.

On March 26, 2002, the Company's stockholders approved a recapitalization
plan (the "Plan") which became effective the same day. Under the Plan, the
holder of each share of Common Stock received 1.1 shares of new Common Stock,
the holder of each share of Class A Stock received 1 share of new Common Stock
and the holder of each share of Class B Stock received 1.1 shares of new Class B
Stock. The par value of the new Common Stock and the new Class B Stock is $0.01,
while the par value of the old Common Stock and old Class B Stock was $1.00. The
new Common Stock and the new Class B Stock have alternating preferences with
respect to payments or distributions in the event of any dissolution,
liquidation or winding up of the Company. No such liquidation preference existed
previously. Each share of new Class B Stock shares equally with each share of
new Common Stock in payments of dividends while each share of old Class B Stock
received 90% of the dividends paid to each share of old Common Stock. The new
Class B Stock will automatically be converted into shares of new Common Stock if
the number of outstanding shares of new Class B Stock falls below 2.5% of the
aggregate number of issued and outstanding shares of new Common

F-18

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock and new Class B Stock. The old Class B Stock automatically converted into
shares of old Common Stock if the number of outstanding shares of old Class B
Stock fell below 5.0% of the aggregate number of issued and outstanding shares
of old Common Stock and old Class B Stock.

Series A Cumulative Preferred Stock (15,000,000 shares authorized): The
Series A Cumulative Preferred Stock receives a cumulative annual dividend of
$2.15 and has a liquidation preference of $25.00 plus the amount of any accrued
and unpaid dividends. The holders of the Series A Cumulative Preferred Stock has
no right to vote, except in limited circumstances.

New Common Stock (70,000,000 shares authorized): 3,741,757 shares of new
Common Stock were reserved for the exercise of stock options and 2,394,046
shares of new Common Stock were reserved for the conversion of shares of new
Class B Stock as of August 31, 2002.

Old Common Stock (80,000,000 shares authorized): During fiscal 2001,
1,932,800 shares were repurchased for $8,985. During fiscal 2000, 567,900 shares
were repurchased for $3,580. 3,747,157 shares of old Common Stock were reserved
for the exercise of stock options, 24,044,773 shares of old Common Stock were
reserved for the conversion of Class A Stock and 2,266,406 shares of old Common
Stock were reserved for the conversion of shares of old Class B Stock as of
August 31, 2001.

Class A Stock (60,000,000 shares authorized): During fiscal 2001,
1,065,600 shares were repurchased for $4,252. An additional 224,259 shares were
received by employees in connection with the exercise of stock options. During
fiscal 2000, 2,200,100 shares were repurchased for $9,904. An additional 154,071
shares were received by employees in connection with the exercise of stock
options. Class A Stock had rights, including dividend rights, substantially
identical to the old Common Stock, except that the Class A Stock was not
entitled to vote except to the extent provided under Delaware law. Class A Stock
was immediately convertible into old Common Stock on a share-for-share basis
upon conversion of all of the Class B Stock.

New Class B Stock (5,000,000 shares authorized): New Class B Stock is
immediately convertible into Common Stock on a share-for-share basis if the
number of outstanding shares of new Class B Stock falls below 2.5% of the
aggregate number of issued and outstanding shares of new Common Stock and new
Class B Stock. New Class B Stock has greater voting power, in certain
circumstances (ten-to-one in the election of directors), and has limited
transferability. New Class B Stock also votes separately, as a class, on certain
significant issues.

Old Class B Stock (7,500,000 shares authorized): Old Class B Stock was
immediately convertible into old Common Stock on a share-for-share basis if the
number of outstanding shares of old Class B Stock fell below 5.0% of the
aggregate number of issued and outstanding shares of old Common Stock and old
Class B Stock. Old Class B Stock had greater voting power, in certain
circumstances (ten-to-one in the election of directors), but received a lower
dividend, if declared, equal to 90% of the dividend on old Common Stock and had
limited transferability. Old Class B Stock also voted separately, as a class, on
certain significant issues.

F-19

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the number of shares outstanding by class of
stock:

10. STOCK OPTION PLANS

The stock option plan, as approved by the stockholders, provides for the
granting to employees and officers of incentive stock options (as defined under
current tax laws) and non-qualified stock options. The plan provides for the
granting of non-qualified stock options to directors who are not employees.
Stock options granted prior to June 1, 2002 are exercisable one year after the
date of grant. Stock options granted subsequent to June 1, 2002 vest over a
four-year period. Options, if not exercised, will expire five years from the
date of grant. Certain options are only exercisable at the end of five years
unless a sales target is achieved prior thereto.

In October 2000, the Company's Board of Directors approved the repricing of
a majority of unexercised stock options, reducing the exercise price to $3.625
per share, which was the fair market value of the Class A Stock on the date of
repricing. The Company recorded a non-cash charge of $726 due to the repricing
in fiscal 2001. In fiscal 2002, the Company recorded a $339 reduction to
compensation expense to reflect changes in the market price of the Company's
stock. In fiscal 2003, the Company recorded a non-cash charge of $147 to reflect
changes in the market price of the Company's stock.

The stock option plan summary and changes during each year are presented
below:

F-20

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(1) weighted average

Options exercisable at August 31, 2003 have an average exercise price of
$3.05. There were no stock options granted during fiscal 2003. The
weighted-average grant-date fair value of the stock options granted during 2002
and 2001 was $1.47 and $1.46, respectively. The fair value of each option
granted is estimated on the date of grant using the Binomial option pricing
model with the following weighted-average assumptions:

The following table summarizes information on stock options outstanding at
August 31, 2003:

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

(1) weighted average

11. PENSION PLANS AND OTHER COMPENSATION ARRANGEMENTS

The Company maintains a 401(k) defined contribution plan covering all U.S.
employees. Company matching contributions under the plan are based on the level
of individual participant contributions and amounted to $649, $1,064 and $1,496,
in 2003, 2002 and 2001, respectively.

In fiscal 2002, the Company entered into an employment agreement with an
officer that has a term that extends through September 2006. The agreement
provides for annual base and incentive compensation, a non-interest bearing,
uncollateralized loan, which the Company expects to collect in six yearly
installments over the six-year period following the officer's termination of
employment (see note 1), a retirement contribution that vests over the life of
the agreement and restricted stock, of which a portion vests in January 2004 and
a portion vests in January 2007. The Company is amortizing the retirement
contribution over the vesting period and the restricted stock, commencing on the
date of grant, over the remaining life of the agreement.

Due to the retirement of another officer in fiscal 2001, the Company
recorded additional compensation of $7,583 to selling, general and
administrative expense as a result of changes in the underlying estimate. This
change in estimate was due primarily to the timing of the executive's decision
to retire, since the compensation formula includes factors based upon prior
year's base salary and bonus. Therefore, the effects of this change in estimate
are not attributable to future periods. This officer or his beneficiary is
required to be paid a monthly benefit for 10 years, commencing upon his
retirement in fiscal 2001. The benefit is based upon his compensation in the
year prior to retirement, pursuant to an employment agreement entered into in
1993.

The Company provides a portion of health care and life insurance benefits
for certain retired employees who elect to participate in the Company's plan.
SFAS 106 requires accrual accounting for all post-retirement benefits other than
pensions. At August 31, 2003 and 2002, post-retirement benefits, although
immaterial, were fully accrued with no significant change between these dates.

F-21

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. ACQUISITIONS AND JOINT VENTURES

In March 2003, the Company entered into a joint venture with Nanjing Suning
High & New Technology Industrial Park Co., Ltd. to manufacture split-type air
conditioners in China. The Company has a 2/3 interest in the joint venture,
Fedders Suning Nanjing Co., Ltd. The joint venture is included within the HVACR
reportable segment. The Company's investment in the joint venture amounted to
$1.3 million. This joint venture is consolidated into the Company's financial
statements with Nanjing Suning's 1/3 interest accounted for as a minority
interest. This transaction was accounted for as a business combination

The Company completed the acquisition, in the first quarter of fiscal 2002,
of a wholly-owned air conditioning manufacturing operation in Shanghai, China,
now called Fedders Shanghai Co., Ltd. This subsidiary is included within the
HVACR reportable segment. This plant has fully replaced the production of room
air conditioners previously produced at the Company's Tennessee plant, which
ceased production as part of the 2001 restructuring plan. The purchase price of
$4.6 million was allocated based on the fair market value of the assets
acquired, which consisted primarily of inventory and fixed assets. The excess of
purchase price over the fair market value of the assets acquired was allocated
to goodwill ($0.6 million).

In November 2001, Melcor Corporation ("Melcor"), a subsidiary of the
Company, and Quanzhou Hua Yu Electrical Component Factory formed a joint
venture, Quanzhou Melcor Hua Yu Thermoelectric Company Ltd., to manufacture
thermoelectric modules in China. This joint venture is included within the
Engineered Products reportable segment. Melcor has a 65% interest in the joint
venture. The Company's investment in the joint venture amounted to $1.8 million.
This joint venture is consolidated into the Company's financial statements with
Quanzhou Hua Yu's 35% interest accounted for as a minority interest. This
transaction was accounted for as a business combination, which resulted in an
intangible asset of $1.2 million. This intangible asset is being amortized over
20 years, which represents the term of the joint venture agreement.

In October 2001, the Company entered into a joint venture with Voltas
Limited ("Voltas") to produce room air conditioners in India. Fedders and Voltas
each have a 50% interest in the joint venture, Universal Comfort Products Pvt.
Ltd, which produces room and ductless split system air conditioners. This joint
venture is included within the HVACR reportable segment. The Company's
investment in the joint venture amounted to $4.9 million. The Company reports
the results of the joint venture by the equity method of accounting.

In January 2002, Rotorex Company, Inc. ("Rotorex"), a subsidiary of the
Company, and Dong Fang Electromechanical, a subsidiary of China North Industries
Group Corporation, entered into an agreement to form a joint venture to
manufacture rotary compressors for air conditioners, in Xi'an, China. This joint
venture is included within the HVACR reportable segment. The Company's
investment in the joint venture amounted to $4.0 million. Rotorex has a 50%
interest in Xi'an Fedders Dong Fang Air Conditioner Compressor Co. Ltd. The
Company reports the results of the joint venture by the equity method of
accounting.

The Company's consolidated financial statements include the operating
results of the acquired businesses and joint ventures from the date of
acquisition or the commencement of the joint venture. On a pro forma basis, as
if the businesses had been acquired or the joint ventures entered into at the
beginning of the fiscal year, revenue, net income and earnings per share would
not differ materially from the amounts reported in the consolidated financial
statements for the fiscal year.

13. GUARANTEES

In November 2002, FASB Interpretation ("FIN") 45, "Guarantor's Accounting
And Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", was approved by the FASB. FIN 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The interpretation also requires enhanced and additional
disclosures of

F-22

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

guarantees in interim and annual financial statements for periods ending after
December 15, 2002. The Company adopted this statement in the second quarter of
fiscal year 2003.

PRODUCT WARRANTY

Certain of the Company's products are covered by standard product warranty
plans that extend from 1 to 5 years. In addition, major retailers have consumer
return policies which allow consumers to return product that may be defective in
lieu of field service. Upon return to the Company, these units are inspected,
repaired as required, reboxed and held for future sale as factory reconditioned
products. A portion of those units returned is not repairable. At the time
revenue is recognized, upon shipment, measurements of those sales are reduced by
estimates of the future costs associated with fulfilling warranty obligations
and for the expense associated with repairing or scrapping defective returns.

The Company uses historical failure and defective return rates, which may
or may not be indicative of future rates. Each quarter, the estimate of warranty
and defective return obligations including the assumptions about estimated
failure and return rates, is reevaluated.

The following table displays the activity and balances of the product
warranty liability from August 31, 2002 to August 31, 2003:

LOAN GUARANTEES

Guarantees of subsidiary debt by the Parent and subsidiaries consist of the
following at August 31, 2003:

(i) The Parent guarantees the obligations of Fedders North America,
Inc. ("FNA") under its 9 3/8% Senior Subordinated Notes due 2007 (the
"Notes"). This is a guarantee of payment of principal and interest on the
Notes that arose in connection with the issuance and sale of $150 million
in principal amount of the Notes. The Parent would be required to perform
under the guarantee in the event FNA failed to pay principal and interest
when due or to perform its obligations under the indenture pursuant to
which the Notes were issued.

(ii) The Parent and various subsidiaries guarantee the obligations of
certain subsidiaries under a $100 million working capital line of credit.
The line of credit bears interest at LIBOR plus 2% or the prime rate of
Wachovia Bank and expires in February 2006. The Parent and guarantor
subsidiaries would be required to perform under the guarantees in the event
that the borrowing subsidiaries failed to repay amounts borrowed under the
line of credit and interest and other charges associated therewith, or
failed to comply with the provisions of the credit agreement. There is no
outstanding loan balance at August 31, 2003.

(iii) The Parent guarantees the obligations of its subsidiary, Melcor
Corporation ("Melcor"), under a $1.3 million New Jersey Economic
Development Authority Economic Development Bond. The bond bears interest at
the rate of 6.6% per annum and matures in July 2010. The Parent would be
required to perform under the guaranty in the event that Melcor fails to
pay the principal of and interest on the bond or fails to comply with the
provisions of the bond agreement pursuant to which the bond was issued. The
outstanding loan balance at August 31, 2003 is $0.9 million.

F-23

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(iv) The Parent and Melcor Corporation guarantee the obligations of a
subsidiary, Eubank Manufacturing Enterprises, Inc. ("Eubank"), under an
equipment financing lease in the amount of $3.1 million. The lease bears
interest at the rate of 7.16% per annum and expires in December 2007. The
Parent and Melcor Corporation would be required to perform under the
guarantee in the event Eubank fails to pay rent when due or fails to comply
with the provisions of the lease agreement. The outstanding loan balance at
August 31, 2003 is $2.4 million.

(v) The Parent and a subsidiary, NYCOR North America, Inc., guarantee
the obligations of Eubank Manufacturing Enterprises, Inc., a subsidiary,
under a $2 million Development Authority of Dooly County, Georgia Economic
Development Bond. The bond bears interest at the floating rate of 75% of
the sum of LIBOR plus 1.75% per annum and matures in December 2008. The
Parent and NYCOR North America would be required to perform under the
guarantee in the event Eubank fails to pay the principal of and interest on
the bond, when due, or fails to comply with the provisions of the bond
agreement. The outstanding loan balance at August 31, 2003 is $1.5 million,
which was paid in October 2003.

(vi) The Parent guarantees the obligations of a subsidiary, Eubank
Manufacturing Enterprises, Inc., under a loan agreement providing for a
loan of $2.0 million. The loan bears interest at the prime rate of Flag
Bank and matures in February 2007. The Parent would be required to perform
under the guaranty in the event Eubank fails to pay the principal of and
interest on the loan or fails to comply with the provisions of the loan
agreement. The outstanding loan balance at August 31, 2003 is $0.6 million.

(vii) The Parent guarantees the obligations of a subsidiary, Fedders
Shanghai Co., Ltd. ("FSC") under a working capital line of credit totaling
$6 million. The line of credit bears interest at the rate of SIBOR + 1.5%
per annum and matures at various dates. The Parent would be obligated to
perform under the guarantee in the event that FSC fails to pay the
principal of and interest on the loan or fails to comply with the
provisions of the loan agreement. There is no outstanding loan balance at
August 31, 2003.

(viii) The Parent guarantees the obligations of a subsidiary, Polenz
GmbH ("Polenz"), under a Euro 6 million working capital line of credit. The
line of credit bears interest at the rate of LIBOR + 2.5% per annum and
matures June 2004. The Parent would be obligated to perform under the
guarantee in the event Polenz fails to pay the principal of and interest on
the loan or fails to comply with the provisions of the loan agreement.
There is no outstanding loan balance at August 31, 2003.

(ix) The Parent guarantees the obligations of a subsidiary, Fedders
Koppel, Inc. ("FK"), under a Ph peso 320 million term loan. The loan bears
interest at the rate of PHIBOR + 3% per annum and matures May 2005. The
Parent would be obligated to perform under the guarantee in the event that
FK fails to pay the principal of and interest on the loan or fails to
comply with the provisions of the loan agreement. The outstanding loan
balance at August 31, 2003 is $2.1 million.

The Company also provides loan guarantees to two joint ventures which are
not consolidated in the Company's financial statements:

(i) Fedders International, Inc., ("FI") a subsidiary of the Company,
guarantees up to 50% of the obligations of a 50%-owned joint venture,
Universal Comfort Products Pvt., Ltd., ("UCPL"), under a Rupees 230 million
term loan. The loan bears interest at the rate of State Bank Mid Term Loan
Rate and matures November 2006. FI would be obligated to perform under the
guaranty in the event UCPL fails to pay the principal of and interest on
the loan or fails to comply with the terms of the loan agreement. FI's
exposure under the guarantee at August 31, 2003 is approximately $2.4
million.

(ii) Fedders Indoor Air Quality (Suzhou) Co., Ltd., ("FIAQ"), a
subsidiary of the Company, guarantees up to RMB 5 million of the
obligations of Xi'an Fedders Dong Fang Air Conditioner Compressor Co.,
Ltd., ("FDF"), a 50%-owned joint venture of the Company, under a working
capital line of credit. The line of credit bears interest at rate set by
the People's Bank of China and matures in January 2004. FIAQ would be
obligated to perform its obligations under the guaranty in the event FDF

F-24

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

fails to pay the principal of and interest on the loan or fails to comply
with the provisions of the loan agreement. FIAQ's maximum exposure under
the guarantee is approximately $0.6 million as of August 31, 2003.

14. ASSETS HELD FOR SALE

In October 2001, FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company adopted this statement
at the beginning of its fiscal year 2003.

In connection with a restructuring of the Company's operations in 2001
(note 2), the Company ceased production at its Walkersville, Maryland facility,
part of the Company's HVACR reportable segment. In December 2002, the Company
began the process of actively marketing the sale of the Walkersville facility.
The sale is expected to be completed no later than December 2003. The Company
anticipates the selling price of the facility will exceed its net book value
after consideration of selling expenses associated with marketing the facility
for sale. A vacant property belonging to the Company in Ningbo, China is also
being marketed for sale and the sale is expected to be completed no later than
June 2004. At August 31, 2003, assets totaling $8,564, which consist of land,
land improvements, buildings, and building improvements have been classified as
"Assets Held for Sale" and are no longer being depreciated in accordance with
SFAS 144.

The following table presents the carrying amount, by asset class, of the
"Assets Held for Sale" at August 31:

15. SUBSEQUENT EVENTS

On October 21, 2003, the Company entered into a joint venture with Jiangsu
Xingrong Hi-Tech Company ("Xingrong") to design, produce and market heat
exchangers used in air conditioners. The Company and Xingrong each have a 50%
interest in the joint venture, Changzhou Fedders Xingrong Air Conditioner
Components Co., Ltd.

The Eubank Manufacturing Enterprises, Inc. Industrial Revenue Bond has been
paid in October 2003.

16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

Fedders North America, Inc. ("FNA") is a wholly-owned subsidiary of the
Company. FNA and the Company are the Issuer and the Guarantor, respectively, of
the Senior Subordinated Notes due 2007, of which $100,000 were issued in August
1997 and $50,000 were issued in August 1999 (note 5). The Company's guarantee is
full and unconditional. The following condensed consolidating financial
statements present separate information for FNA, the Company, and its
subsidiaries other than FNA, and should be read in conjunction with the
consolidated financial statements of the Company.

F-25

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

F-26

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

F-27

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

F-28

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEETS

F-29

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEETS

F-30

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

F-31

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

F-32

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

F-33

FEDDERS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INTERCOMPANY TRANSACTIONS

The historical condensed consolidating financial statements presented above
include the following transactions between FNA and the Company:

a) The Company charges corporate overhead to FNA essentially on a cost
basis allocated in proportion to sales. Such charges to FNA amounted to
$13,143, $11,483 and $12,409 for the years ended August 31, 2003, 2002 and
2001, respectively.

b) FNA's interest expense reflects actual interest charges on the
9 3/8% Senior Subordinated Notes due 2007, State of Illinois Promissory
Note, capital lease obligations, and a revolving line of credit.

c) FNA's depreciation and amortization for the years ended August 31,
2003, 2002 and 2001, amounted to $6,138, $10,584 and $11,003, respectively.
Capital expenditures for the years ended August 31, 2003, 2002 and 2001,
amounted to $3,066, $4,369 and $7,487, respectively.

d) The Company guarantees FNA's obligations under FNA's revolving
credit facility.

e) The Company's stock option plan includes FNA's employees.

f) In fiscal 2003, 2002 and 2001, FNA did not declare a dividend.

F-34

INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of Fedders Corporation:

We have audited the accompanying consolidated balance sheets of Fedders
Corporation and subsidiaries as of August 31, 2003 and 2002, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended August 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Fedders Corporation and
subsidiaries as of August 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.

As discussed in Note 1 to the financial statements, effective September 1,
2002, the Company changed its method of accounting for goodwill and intangible
assets upon adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."

/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
November 14, 2003

F-35

FEDDERS CORPORATION QUARTERLY FINANCIAL DATA

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

(a) The Company completed the transitional goodwill impairment test during the
fourth quarter for fiscal 2003 and recognized a non-cash impairment charge
of $11.9 million of goodwill impairment within its Engineered Products
reporting segment. As required, the transitional goodwill impairment charge
was recorded as a cumulative effect of a change in accounting principle as
of September 1, 2002.

(b) Quarterly earnings per share may not add to earnings per share for the year
due to rounding and changes in the number of weighted average shares
outstanding.

F-36

FEDDERS CORPORATION

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001

F-37

INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of Fedders Corporation:

We have audited the financial statements of Fedders Corporation and
subsidiaries as of August 31, 2003 and 2002, and for each of the three years in
the period ended August 31, 2003, and have issued our report thereon dated
November 14, 2003; such report is included elsewhere in this Form 10-K. Our
audits also included the financial statement schedule of Fedders Corporation and
subsidiaries for each of the three years in the period ended August 31, 2003,
listed in Item 15. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
November 14, 2003

F-38