LENNOX INTERNATIONAL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 001-15149

LENNOX INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 42-0991521
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

2140 LAKE PARK BLVD.
RICHARDSON, TEXAS 75080
(Address of principal executive offices, including zip code)

(Registrant's telephone number, including area code): (972) 497-5000

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

Securities Registered Pursuant to Section 12(g) of the Act: NONE

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

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

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

As of March 1, 2003, there were 58,007,567 shares of the registrant's
Common Stock outstanding, and the aggregate market value of the Common Stock
held by non-affiliates of the registrant was $584,239,105 based on the closing
price of the Common Stock on the New York Stock Exchange Composite Transactions
on such date.*

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the 2003 annual meeting of stockholders (the "Proxy Statement") are
incorporated herein by reference into Part III of this Report. Such proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the registrant's fiscal year ended December 31, 2002.
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* Excludes the Common Stock held by the registrant's executive officers,
directors and stockholders whose ownership exceeds 5% of the Common Stock
outstanding at March 1, 2003. Exclusion of such shares should not be construed
to indicate that any such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the registrant
or that such person is controlled by or under common control with the
registrant.
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LENNOX INTERNATIONAL INC.

FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

INDEX

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PART I

ITEM 1. BUSINESS

THE COMPANY

Lennox International Inc. and its subsidiaries, ("LII" or the "Company") is
a leading global provider of climate control solutions. The Company designs,
manufactures and markets a broad range of products for the heating, ventilation,
air conditioning and refrigeration ("HVACR") markets. The Company's products and
services are sold under well-established brand names including "Lennox",
"Armstrong Air", "Ducane", "Bohn", "Larkin", "Advanced Distributor Products",
"Heatcraft", "Service Experts" and others. The Company has leveraged its
expertise to become an industry leader known for its product innovation, quality
and reliability. Historically, the Company has sold its "Lennox" brand of
residential heating and air conditioning products directly to a network of
installing dealers, which currently numbers approximately 7,000, making it one
of the largest wholesale distributors of these products in North America. In
September 1998, the Company initiated a program to acquire dealers or service
centers in metropolitan areas in the United States and Canada so that it can
provide heating and air conditioning products and services directly to
consumers. The Company greatly expanded this program with the acquisition of
Service Experts Inc. in January 2000.

Shown below are the Company's four business segments, the key products and
brand names within each segment and 2002 net sales by segment. Segment financial
data for the years 2000 through 2002, including financial information about
foreign and domestic operations, is included in Note 3 of the Notes to
Consolidated Financial Statements on pages 44 through 47 herein.

The Company was founded in 1895 in Marshalltown, Iowa when Dave Lennox, who
owned a machine repair business for the railroads, successfully developed and
patented a riveted steel coal-fired furnace which was substantially more durable
than the cast iron furnaces used at the time. By 1904, the manufacture of these
furnaces had grown into a significant business and was diverting the Lennox
Machine Shop from its core business. As a result, in 1904, a group of investors
headed by D.W. Norris bought the furnace business and named it the Lennox
Furnace Company. Over the years, D.W. Norris ensured that ownership of the
Company was distributed to succeeding generations of his family. The Company
believes that a significant portion of the

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Company's ownership currently is broadly distributed among approximately 110
descendants of or persons otherwise related to D.W. Norris. In 1991, the Company
reincorporated as a Delaware corporation. On August 3, 1999, the Company
completed the initial public offering of its common stock.

In January 2000, the Company completed the acquisition of Service Experts
Inc. in exchange for approximately 12.2 million shares of LII common stock and
the assumption of $175 million of debt, of which $163 million was concurrently
repaid.

In August 2002, LII formed joint ventures with Outokumpu Oyj of Finland
("Outokumpu"), with Outokumpu purchasing a fifty-five percent interest in LII's
heat transfer business segment for $55 million, with LII retaining a forty-five
percent ownership. As part of the agreement, a separate 50-50 technology
partnership was established to strengthen the leadership position in heat
transfer technology for both partners. After a period of three years, Outokumpu
Oyj will have the option to purchase the remaining forty-five percent interest
held by LII.

Forward Looking Statements

Various sections of this Annual Report on Form 10-K ("Form 10-K"),
including Business and Management's Discussion and Analysis of Financial
Condition and Results of Operations, contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are based
upon management's beliefs, as well as assumptions made by and information
currently available to management. All statements other than statements of
historical fact included in this Form 10-K constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
including but not limited to statements identified by the words "may", "will",
"should", "plan", "predict", "anticipate", "believe", "intend", "estimate" and
"expect" and similar expressions. Such statements reflect the current views of
LII with respect to future events, based on what it believes are reasonable
assumptions; however, such statements are subject to certain risks,
uncertainties and assumptions. In addition to the specific uncertainties
discussed elsewhere in this Form 10-K, the following risks and uncertainties may
affect the Company's performance and results of operations:

- the Company's business is affected by a number of economic factors
including the level of economic activity in the markets in which the
Company operates, and a decline in economic activity in its markets could
materially affect its financial condition and results of operations;

- the demand for the Company's products and services is strongly affected
by the weather, and cooler than normal summers depress the Company's
sales of replacement air conditioning and refrigeration products and
warmer than normal winters have the same effect on the Company's heating
products;

- the development, manufacture, sale and use of the Company's products
involve a risk of warranty and product liability claims, and such claims
could be material and have an adverse effect on its future profitability;

- the Company has completed approximately 110 acquisitions since the
beginning of 1998, and the success of the Company's business will depend
in part on its ability to integrate and operate the acquired businesses
profitably and to identify and implement opportunities for cost savings;

- as of December 31, 2002 the Company had $380 million of consolidated
indebtedness outstanding, and the Company's significant level of
indebtedness will have important consequences for its operations,
including that it will have to use a large portion of its consolidated
cash flow to pay principal and interest on its indebtedness and that it
may have difficulty borrowing money in the future for working capital,
capital expenditures, acquisitions or other purposes;

- there is currently an effort underway in the United States by several
companies to purchase independent distributors and dealers and
consolidate them into larger enterprises, and these larger enterprises
may be able to exert pressure on the Company to reduce its prices which
could have an adverse effect on its business and results of operations;

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- the Company operates in very competitive markets, and competitive factors
could cause the company to reduce its prices or lose market share, or
could negatively affect its cash flow;

- the Company's future success will depend upon its continued investment in
research and new product development and its ability to realize new
technological advances in the HVACR industry;

- increases in the prices of raw materials or components or problems in
their availability could depress the Company's sales or increase the
costs of its products;

- the Company faces a risk of work stoppage and other labor relations
matters because a significant percentage of its workforce is unionized,
and the results of future negotiations with the unions, including the
effect of any production interruptions or labor stoppages, could have an
adverse effect on the Company's future financial results; and

- the Company is subject to extensive and changing federal, state and local
laws and regulations designed to protect the environment, and these laws
and regulations could impose liability for remediation costs and civil or
criminal penalties for non-compliance.

Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may differ materially
from those in the forward-looking statements. The Company disclaims any
intention or obligation to update or review any forward-looking statements or
information, whether as a result of new information, future events or otherwise.

GROWTH STRATEGY

The Company's growth strategy is designed to capitalize on its competitive
strengths in order to expand its market share and profitability in the HVACR
markets. The key elements of this strategy include:

Exploit Global Refrigeration Opportunities

Worldwide demand for refrigeration products is increasing. The Company
believes that increasing international demand presents substantial
opportunities. An example is the increasing use of refrigeration products to
preserve perishables, including food products. Refrigeration products generally
have the same design and applications globally, and LII believes it can use its
domestic designs to efficiently expand internationally. To take advantage of
international opportunities, the Company has made investments in manufacturing
facilities in Europe, Latin America and Asia Pacific through acquisitions. The
Company's international refrigeration sales have grown from $136 million in 1996
to $364 million in 2002.

Improve Profitability of Service Experts

The acquisition of heating and air conditioning dealers or service centers
in the United States and Canada has enabled the Company to extend its
distribution directly to the consumer, thereby permitting it to participate in
the revenues and margins available at the retail level while strengthening and
protecting its brand equity. The Company believes that the retail sales and
service market represents a significant growth opportunity because this market
is large and highly fragmented. The retail sales and service market in the
United States is estimated to be comprised of over 30,000 contractors or dealer
service centers. The Company has assembled an experienced management team to
administer the dealer operations and the Company has developed a portfolio of
training programs, management procedures and goods and services that it believes
will enhance the quality, effectiveness and profitability of dealer operations.
The Company's current focus is on enhancing the integration and improving the
profitability of the existing Service Expert dealer network and no further
significant acquisitions are currently planned.

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Increase Heating and Cooling Market Share in North America

The Company also intends to increase its share of the residential and
commercial HVAC market in North America by:

- selectively expanding its "Lennox" independent dealer network;

- promoting the cross-selling of its "Aire-Flo" and other residential
heating and air conditioning brands to its existing network of "Lennox"
dealers as a second line; and

- expanding the geographic market for the "Armstrong Air", "Air-Ease" and
"Ducane" brands of residential heating and air conditioning products from
its traditional presence in the Northeast and Central United States to
the Southern and Western portions of the United States.

TECHNOLOGY, PRODUCT INNOVATION AND MANUFACTURING EFFICIENCY

An important part of LII's growth strategy is to continue to invest in
research and new product development. The Company has designated a number of its
facilities as "centers for excellence" that are responsible for the research and
development of core competencies vital to its success, such as advanced heat
transfer, air management, indoor air quality, and power generation.
Technological advances are disseminated from these "centers for excellence" to
all of LII's operating divisions. LII has embraced lean manufacturing principles
across its operations, accompanied by progress to achieve high sigma quality.

PRODUCTS & SERVICES

Residential Heating & Cooling

Heating and Air Conditioning Products. The Company manufactures and
markets a broad range of furnaces, heat pumps, air conditioners, packaged
heating and cooling systems and related products. These products are available
in a variety of product designs and efficiency levels at a range of price points
intended to provide a complete line of home comfort systems for both the
residential replacement and new construction markets. The Company markets these
products under multiple brand names. In addition, LII manufactures a complete
line of replacement parts. The Company believes that by maintaining a broad
product line with multiple brand names, it can address different market segments
and penetrate multiple distribution channels.

The Company's Advanced Distributor Products division builds evaporator
coils, unit heaters and air handlers under the "Advanced Distributor Products"
brand as well as the "Lennox", "Armstrong Air" and "Ducane" brands. This
division supplies the Company with components for its heating and air
conditioning products and produces evaporator coils to be used in connection
with competitors' heating and air conditioning products and as an alternative to
such competitors' brand name components. The Company started this business in
1993 and has been able to achieve an approximate 20% share of this market for
evaporator coils through the application of its technological and manufacturing
skills.

Hearth Products. The Company believes it is the only North American HVACR
manufacturer that also designs, manufactures and markets residential hearth
products. The Company's hearth products include prefabricated gas and wood
burning fireplaces, free standing pellet and gas stoves, fireplace inserts, gas
logs and accessories. Many of the fireplaces are built with a blower or fan
option and are efficient heat sources as well as attractive amenities to the
home. The Company currently markets its hearth products under the "Lennox",
"Superior", "Whitfield", "Earth Stove" and "Security Chimneys" brand names. The
Company believes that its strong brand names will assist in selling into this
market.

Commercial Heating & Cooling

The Company manufactures and sells commercial air conditioning equipment in
North America and Europe.

North America. In the North American commercial markets, the Company's air
conditioning equipment is used in applications such as low rise office
buildings, restaurants, retail and supermarket centers,

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churches and schools. The Company's product offerings for these applications
include rooftop units which range from two to 30 tons of cooling capacity and
split system/air handler combinations which range from two to 20 tons. In North
America, the Company sells unitary equipment as opposed to larger applied
systems. The Company believes that this product's success is attributable to its
efficiency, design flexibility, low life cycle cost, ease of service and
advanced control technology.

Europe. The Company manufactures and sells unitary products which range
from two to 30 tons and applied systems which range up to 500 tons. LII's
European products consist of chillers, air handlers, fan coils and large rooftop
units and serve medium rise buildings, shopping malls, other retail and
entertainment buildings, institutional applications and other field engineered
applications. LII manufactures its air conditioning products in several
locations throughout Europe and markets such products through various
distribution channels in Europe and the Middle East.

Service Experts

Through Company-owned dealers in the United States and Canada, the Company
provides installation, maintenance, repair and replacement services for heating
and air conditioning systems directly to both residential and light commercial
customers. Installation services include the installation of heating and air
conditioning systems in new construction and the replacement of existing
systems. Other services include preventative maintenance, emergency repairs and
the replacement of parts associated with heating and air conditioning systems.
The Company also sells a wide range of mechanical and electrical equipment,
parts and supplies in connection with these services.

Refrigeration

North America. The Company is one of the leading manufacturers of
commercial refrigeration products in North America. The Company's refrigeration
products include condensing units, unit coolers, fluid coolers, air cooled
condensers and air handlers. The Company's refrigeration products are sold for
cold storage applications to preserve food and other perishables. These products
are used by supermarkets, convenience stores, restaurants, warehouses and
distribution centers. As part of its sale of commercial refrigeration products,
the Company routinely provides application engineering for consulting engineers,
contractors and others.

International. LII manufactures and markets refrigeration products
including small chillers, unit coolers, air cooled condensers, fluid coolers and
refrigeration racks. These products are sold to distributors, installing
contractors and original equipment manufacturers. The Company has manufacturing
locations in Europe, Australia and Brazil.

The Company also owns 50% of a joint venture in Mexico that produces unit
coolers and condensing units of the same design and quality as those
manufactured by the Company in the United States. Since this venture produces a
smaller range of products, the product line is complemented with imports from
the United States which are sold through the joint venture's distribution
network. Sales are made in Mexico to wholesalers, installing contractors and
original equipment manufacturers. As production volumes increase, there exists
the potential to export some products from the joint venture into North America
and Latin America.

MARKETING AND DISTRIBUTION

The Company manages numerous distribution channels for its products and
services in order to better penetrate the HVACR market. Generally, the Company's
products and services are sold through a combination of distributors,
independent and company-owned dealers or service centers, wholesalers,
manufacturers' representatives, original equipment manufacturers and national
accounts. The Company deploys dedicated sales forces across all its business
segments and brands in a manner designed to maximize the ability of each sales
force to service its particular distribution channel. To maximize
enterprise-wide effectiveness, the Company has active cross-functional and
cross-organizational teams working on issues such as pricing and

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coordinated approaches to product design and national account customers with
interests cutting across business segments.

A principal example of the competitive strength of the Company's marketing
and distribution strategy is in the North American residential heating and air
conditioning market, in which it uses three distinctly different distribution
approaches -- the one-step distribution system, the two-step distribution system
and sales made directly to consumers through Company-owned dealers. The Company
markets and distributes its "Lennox" and "Aire-Flo" brands of heating and air
conditioning products directly to approximately 7,000 independent dealers that
install these products. The Company distributes its "Armstrong Air", "Air-Ease",
"Advanced Distributor Products", "Ducane" and "Magic-Pak" brands of residential
heating and air conditioning products through the traditional two-step
distribution process whereby it sells its products to distributors who, in turn,
sell the products to a local installing dealer. In addition, the Company
provides heating and air conditioning products and services directly to
consumers through Company-owned dealers. Accordingly, by using multiple brands
and distribution channels, the Company is able to better penetrate the North
American residential heating and air conditioning market.

Through the years, the "Lennox" brand has become synonymous with the "Dave
Lennox" image, which is utilized in national television and print advertising as
well as in numerous locally produced dealer ads, open houses and trade events
and is easily the best recognized advertising icon in the heating and air
conditioning industry.

MANUFACTURING

The Company operates 14 manufacturing facilities in the United States and
Canada and 12 outside the United States and Canada. In its facilities most
impacted by seasonal demand, the Company manufactures both heating and air
conditioning products to smooth seasonal production demands and maintain a
relatively stable labor force. The Company is generally able to hire temporary
employees to meet changes in demand.

PURCHASING

The Company relies on various suppliers to furnish the raw materials and
components used in the manufacture of its products. To maximize its buying
effectiveness in the marketplace, the Company utilizes a "purchasing council"
that consolidates purchases of its entire domestic requirements of particular
items across all business segments. The purchasing council generally
concentrates its purchases for a given material or component with one or two
suppliers, although the Company believes that there are alternative suppliers
for all of its key raw material and component needs. Compressors, motors and
controls constitute the Company's most significant component purchases, while
steel, copper and aluminum account for the bulk of the Company's raw material
purchases. The Company owns a 24.5% interest in a joint venture to manufacture
compressors in the one and one-half to seven horsepower range. This joint
venture, which began limited production in April 1998, now provides the Company
with a substantial portion of its compressor requirements in the residential air
conditioning market.

TECHNOLOGY AND RESEARCH AND DEVELOPMENT

The Company supports an extensive research and development program focusing
on the development of new products and improvements to its existing product
lines. The Company spent an aggregate of $38.2 million, $37.3 million and $36.5
million on research and development during 2002, 2001 and 2000, respectively.
The Company has a number of research and development facilities located around
the world, including a limited number of "centers for excellence" that are
responsible for the research and development of particular core competencies
vital to its business, such as advanced heat transfer, air management, indoor
air quality and power generation.

The Company uses advanced, commercially available computer-aided design,
computer-aided manufacturing, computational fluid dynamics and other
sophisticated software not only to streamline the design and manufacturing
processes, but also to give it the ability to run complex computer simulations
on a product

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design before a working prototype is created. The Company operates a full line
of metalworking equipment and advanced laboratories certified by applicable
industry associations.

PATENTS AND TRADEMARKS

The Company holds numerous patents that relate to the design and use of its
products. The Company considers these patents important, but no single patent is
material to the overall conduct of its business. The Company's policy is to
obtain and protect patents whenever such action would be beneficial to it. The
Company owns several trademarks that it considers important in the marketing of
its products, including Lennox(R), Heatcraft(R), CompleteHeat(R), Larkin(TM),
Climate Control(TM), Chandler Refrigeration(R), Bohn(R), Advanced Distributor
Products(TM), Armstrong Air(TM), Aire-Flo(R), Air-Ease(R), Concord(R),
Magic-Pak(R), Superior(R), Whitfield(R), Security Chimneys(TM), Janka(TM),
Ducane(TM) and Friga-Bohn(TM). These trademarks have no fixed expiration dates
and the Company believes its rights in these trademarks are adequately
protected.

COMPETITION

Substantially all of the markets in which the Company participates are
highly competitive. The most significant competitive factors facing the Company
are product reliability, product performance, service and price, with the
relative importance of these factors varying among its product lines. In
addition, the Company faces competition from independent dealers and dealers
owned by consolidators, utility companies and other consumer services providers.
The Company's competitors may have greater financial and marketing resources
than it has. Listed below are some of the companies that the Company views as
its main competitors in each segment the Company serves, with relevant brand
names, when different than the company name, shown in parentheses.

- Residential Heating & Cooling -- United Technologies Corporation
(Carrier, Bryant); Goodman Manufacturing Company (Janitrol, Amana);
American Standard Companies Inc. (Trane); York International Corporation;
Hon Industries, Inc. (Heatilator); and CFM Majestic, Inc. (Majestic).

- Commercial Heating & Cooling -- United Technologies Corporation
(Carrier); American Standard Companies Inc. (Trane); York International
Corporation; Daikin Industries, Ltd.; and McQuay International.

- Service Experts -- ServiceMaster (ARS); NorthWestern Corporation (Blue
Dot); Comfort Systems USA; and Encompass Services Corporation, Inc.

- Refrigeration -- United Technologies Corporation (Carrier); Tecumseh
Products Co.; Emerson Electric Co. (Copeland); and Ingersoll-Rand Company
(Hussmann).

EMPLOYEES

As of January 1, 2003, the Company employed approximately 18,000 employees,
approximately 3,900 of which were represented by unions. The number of hourly
workers the Company employs may vary in order to match its labor needs during
periods of fluctuating demand. The Company believes that its relationships with
its employees and with the unions representing some of its employees are
generally good and does not anticipate any material adverse consequences
resulting from negotiations to renew any collective bargaining agreements.

REGULATION

The Company's operations are subject to evolving and often increasingly
stringent federal, state, local and international laws and regulations
concerning the environment. Environmental laws that affect or could affect the
Company's domestic operations include, among others, the Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Occupational Safety
and Health Act, the National Environmental Policy Act, the Toxic Substances
Control Act, any regulations promulgated under these acts and various other
Federal, state and local laws and regulations governing environmental matters.
The Company believes it is in substantial
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compliance with such existing environmental laws and regulations. The Company's
non-United States operations are also subject to various environmental statutes
and regulations. Generally, these statutes and regulations impose operational
requirements that are similar to those imposed in the United States. The Company
believes it is in substantial compliance with applicable non-United States
environmental statutes and regulations.

Refrigerants. In the past decade, there has been increasing regulatory and
political pressure to phase out the use of certain ozone depleting substances,
including hydrochlorofluorocarbons, which are sometimes referred to as "HCFCs."
This development is of particular importance to the Company and its competitors
because of the common usage of HCFCs as refrigerants for air conditioning and
refrigeration equipment. As discussed below, the Company does not believe that
implementation of the phase-out schedule for HCFCs contained in the current
regulations will have a material adverse effect on its financial position or
results of operations. The Company does believe, however, that there will likely
be continued pressure by the international environmental community for the
United States and other countries to accelerate the phase-out schedule. The
Company has been an active participant in the ongoing international dialogue on
these issues and believes that it is well positioned to react to any changes in
the regulatory landscape.

In 1987, the United States became a signatory to an international agreement
titled the Montreal Protocol on Substances that Deplete the Ozone Layer. The
Montreal Protocol requires its signatories to phase out HCFCs on a predictable
and orderly basis. All countries in the developed world have become signatories
to the Montreal Protocol. The manner in which these countries implement the
Montreal Protocol and regulate HCFCs differs widely. The 1990 U.S. Clean Air Act
amendments implement the Montreal Protocol by establishing a program to limit
the production, importation and use of specified ozone depleting substances,
including HCFCs currently used as refrigerants by the Company and its
competitors. Under the Clean Air Act and implementing regulations, all HCFCs
must be phased out between 2010 and 2030. The Company believes that these
regulations, as currently in effect, will not have a material adverse effect on
its operations.

The Company, together with major chemical manufacturers, is reviewing and
addressing the potential impact of refrigerant regulations on its products. The
Company believes that the combination of products that presently utilize HCFCs
and new products utilizing alternative refrigerants being phased in will allow
us to offer a complete line of commercial and industrial products. Therefore,
the Company does not foresee any material adverse impact on its business or
competitive position as a result of the Montreal Protocol, the 1990 Clean Air
Act amendments or their implementing regulations. However, the Company believes
that the implementation of severe restrictions on the production, importation or
use of refrigerants the Company employs in larger quantities or acceleration of
the current phase-out schedule could have such an impact on the Company and its
competitors.

The Company is subject to appliance efficiency regulations promulgated
under the National Appliance Energy Conservation Act of 1987, as amended, and
various state regulations concerning the energy efficiency of its products. The
Company has developed, and is developing, products which comply with new
National Appliance Energy Conservation Act regulations and does not believe that
such regulations will have a material adverse effect on its business. The United
States Department of Energy began in 1998 its review of national standards for
comfort products covered under the National Appliance Energy Conservation Act.
It is anticipated that the National Appliance Energy Conservation Act
regulations requiring manufacturers to phase in new higher efficiency products
will not take effect prior to 2006. The Company believes it is well positioned
to comply with any new standards that may be promulgated by the Department of
Energy and does not foresee any adverse material impact from a National
Appliance Energy Conservation Act standard change.

Remediation Activity. In addition to affecting the Company's ongoing
operations, applicable environmental laws can impose obligations to remediate
hazardous substances at its properties, at properties formerly owned or operated
by the Company and at facilities to which it sent or sends waste for treatment
or disposal. The Company's former Grenada facility, now part of our Outokumpu
joint ventures, is subject to an administrative order issued by the Mississippi
Department of Environmental Quality under which the Company is conducting
groundwater remediation. The expenditures from this groundwater remediation are

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not expected to materially affect the Company's financial condition or results
of operations. The Company is aware of contamination at some of its other
facilities; however, the Company does not presently believe that any future
remediation costs at such facilities will be material.

The Company has received notices in the past that it is a potentially
responsible party along with other potentially responsible parties in Superfund
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act for cleanup of hazardous substances at certain sites to which the
potentially responsible parties are alleged to have sent waste. Based on the
facts presently known, the Company does not believe that environmental cleanup
costs associated with any Superfund sites where the Company has received notice
that it is a potentially responsible party will be material.

Service Center Operations. The heating and air conditioning dealers
acquired in the United States and Canada are subject to various federal, state
and local laws and regulations, including:

- permitting and licensing requirements applicable to service technicians
in their respective trades;

- building, heating, ventilation, air conditioning, plumbing and electrical
codes and zoning ordinances;

- laws and regulations relating to consumer protection, including laws and
regulations governing service contracts for residential services; and

- laws and regulations relating to worker safety and protection of the
environment.

A large number of state and local regulations governing the residential and
commercial maintenance services trades require various permits and licenses to
be held by individuals. In some cases, a required permit or license held by a
single individual may be sufficient to authorize specified activities for all of
the Company's service technicians who work in the geographic area covered by the
permit or license.

AVAILABLE INFORMATION

Our Internet address is www.lennoxinternational.com. We make available free
of charge through our Internet web site our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission.

9

EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company, their present positions and their
ages are as follows:

The following biographies describe the business experience of the Company's
executive officers:

John W. Norris, Jr. was elected Chairman of the Board of Directors of the
Company in 1991. He has served as a Director of the Company since 1966. After
joining the Company in 1960, Mr. Norris held a variety of key positions
including Vice President of Marketing, President of Lennox Industries (Canada)
Ltd., a subsidiary of the Company, and Corporate Senior Vice President. He
became President of the Company in 1977 and was appointed President and Chief
Executive Officer of the Company in 1980 and served through 2001. Mr. Norris is
on the Board of Directors of the Air-Conditioning & Refrigeration Institute of
which he was Chairman in 1986. He is also an active board member of the Gas
Appliance Manufacturers Association, where he was Chairman from 1980 to 1981. He
is the immediate past Chairman of The Nature Conservancy of Texas board of
trustees. He also serves as a Director of AmerUs Group Co., a life insurance and
annuity company.

Robert E. Schjerven was named Chief Executive Officer of the Company in
2001 and has served as a Director since that time. Prior to his election as
Chief Executive Officer of the Company, he served as Chief Operating Officer of
the Company in 2000 and as President and Chief Operating Officer of Lennox
Industries Inc., a subsidiary of the Company, from 1995 to 2000. He joined the
Company in 1986 as Vice President of Marketing and Engineering for Heatcraft
Inc., a subsidiary of the Company. From 1988 to 1991, he held the position of
Vice President and General Manager of Heatcraft. From 1991 to 1995, he served as
President and Chief Operating Officer of Armstrong Air Conditioning Inc., also a
subsidiary of the Company. Mr. Schjerven spent the first 20 years of his career
with The Trane Company, an international manufacturer and marketer of HVAC
systems, and McQuay-Perfex Inc.

Harry J. Ashenhurst, Ph.D. was named Executive Vice President and Chief
Administrative Officer in 2000. He joined the Company in 1989 as Vice President
of Human Resources. Dr. Ashenhurst was named Executive Vice President, Human
Resources for the Company in 1990 and in 1994 was appointed Executive Vice
President, Human Resources and Administration, assuming responsibility for the
Public Relations and Communications and Aviation departments. In 1998, he
assumed responsibility for Investor Relations and then in 2000, Dr. Ashenhurst
also assumed responsibility for corporate-wide Risk management, Safety and
Campus facilities.

Scott J. Boxer was named Executive Vice President of the Company and
President of Lennox Industries Inc., a subsidiary of the Company, in 2000. He
joined the Company in 1998 as Executive Vice President,

10

Lennox Global Ltd., a Lennox subsidiary, and President, European Operations.
Prior to joining the Company, Mr. Boxer spent 26 years with York International
Corporation, an HVACR manufacturer, in various roles, most recently as
President, Unitary Products Group Worldwide, where he reported directly to the
Chairman of that company and was responsible for directing that company's
residential and light commercial heating and air conditioning operations
worldwide. Mr. Boxer currently serves on the Executive Board of the Air-
Conditioning and Refrigeration Institute and on the Board of Trustee of North
American Technician Excellence and previously sat on the Board of Directors for
the Gas Appliance Manufacturers Association and the Air-Conditioning &
Refrigeration Institute.

Carl E. Edwards, Jr. was named Executive Vice President, Chief Legal
Officer and Secretary for the Company in 2000. He joined the Company in February
1992 as Vice President and General Counsel, became the Secretary of the Company
in April 1992, and was named Executive Vice President, General Counsel and
Secretary in December 1992. Prior to joining the Company, he was Vice President,
General Counsel and Secretary for Elcor Corporation. He also serves as a
Director and on the Audit and Compensation Committees of Kentucky Electric Steel
Inc.

Linda A. Goodspeed joined the Company and was named Executive Vice
President and Chief Technology Officer in 2001. She was most recently President
and Chief Operating Officer for Partminer, Inc., a leading global supplier of
electronic components and component information, as well as a provider of
inventory management services and enterprise solutions. Before coming to
Partminer, Ms. Goodspeed had served since 1999 as Product General Manager of
General Electric (GE) Appliances. She was one of three women corporate-wide at
GE to receive the 1998 GE Women's Achievement Award and also one of 12 women
selected to begin GE's corporate-wide Women's Group.

David L. Inman was named Vice President, Controller and Chief Accounting
Officer for the Company in 2001. Previously, he served as Vice President and
Group Controller of North American Distributed Products from 2000 to 2001. Mr.
Inman joined the Company in 1978. Since that time, he has held multiple
positions in accounting, internal audit and financial systems within the Company
including Controller of Armstrong Air Conditioning Inc., a Company subsidiary.

Robert J. McDonough was named Executive Vice President of the Company and
President, Worldwide Refrigeration and Global Operations in 2001. At that time
Mr. McDonough assumed the responsibility for World Wide Refrigeration, World
Wide Heat Transfer, and European, Latin American, and Asia Pacific operations.
Previously he held the position of Executive Vice president of Lennox Global
Ltd. and President of Worldwide Commercial Refrigeration and European and Latin
American Operations. He joined Heatcraft Inc., a Company subsidiary in 1990,
where he held the positions of Director of Sales and Marketing, Vice President
of Sales and Marketing, and Vice President and General Manager. Prior to his
career at Heatcraft, McDonough was employed with Larkin Coils, Inc. from 1982 to
1990 where he held engineering, product management, and sales management
positions.

Michael G. Schwartz was named Executive Vice President of the Company and
President, North American Distributed Products in 2000. Mr. Schwartz previously
served as President and Chief Operating Officer of Armstrong Air Conditioning
Inc., a subsidiary of the Company, from 1997 to 2000. He joined Heatcraft Inc.,
another subsidiary of the Company, in 1990 when the Company acquired Bohn Heat
Transfer Inc. and served as Director of Sales and Marketing, Original Equipment
Manufacturer Products. He also served as Vice President of Commercial Products
for Heatcraft from 1995 to 1997. Mr. Schwartz began his career with Bohn Heat
Transfer Inc. in 1981.

Richard A. Smith was named Executive Vice President and Chief Financial
Officer for the Company in 2001. Prior to that, Mr. Smith was Chief Financial
Officer and Chief Administrative Officer for Zonetrader.com, a leading provider
of full-service asset management solutions. Before joining Zonetrader.com, Mr.
Smith had served since 1990 as Vice President of Finance and Chief Financial
Officer for Arvin Industries, Inc. (now ArvinMeritor, Inc.), a leading global
manufacturer of automotive components. Mr. Smith began his career with Ralston
Purina Company, a pet food manufacturer, and later joined The May

11

Department Stores Company, serving first as Vice President and Treasurer and
later as Vice President and Controller of the company's Payless Shoe Source
division.

ITEM 2. PROPERTIES

REAL PROPERTY AND LEASES

The following chart lists the Company's major domestic and international
manufacturing, distribution and office facilities and whether such facilities
are owned or leased:

DOMESTIC FACILITIES

INTERNATIONAL FACILITIES

In addition to the properties described above and excluding dealer
facilities, the Company leases over 55 facilities in the United States for use
as sales offices and district warehouses and additional facilities worldwide for
use as sales and service offices and regional warehouses. The vast majority of
Company-owned service center facilities are leased and the remainder are owned.
The Company believes that its properties are in good condition and adequate for
its present requirements. The Company also believes that its principal plants
are generally adequate to meet its production needs.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in various claims and lawsuits incidental to its
business. In addition, the Company and its subsidiary Heatcraft Inc. have been
named in four lawsuits in connection with its former heat transfer operations.
The lawsuits allege personal injury resulting from alleged emissions of
trichloroethylene, dichloroethylene, and vinyl chloride and other unspecified
emissions from the South Plant in Grenada, Mississippi, previously owned by
Heatcraft Inc. It is not possible to predict with certainty the outcome of these
matters; however, based on present knowledge, management believes that it is
unlikely that resolution of these matters will result in a material liability
for the Company. As of December 31, 2002, no accrual has been made for these
matters.

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

There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 2002.

14

PART II

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

The Company's common stock is listed for trading on the New York Stock
Exchange under the symbol "LII." The high and low sales prices for the Company's
common stock for each quarterly period during 2002 and 2001 are set forth in
Note 15 of the Notes to Consolidated Financial Statements on page 62 herein.
During 2002 and 2001, the Company declared quarterly cash dividends as set forth
in Note 15 of the Notes to Consolidated Financial Statements on page 62 herein.
The quarterly dividend declared in December 2002 was paid on January 3, 2003.
The amount and timing of dividend payments are determined by the Company's Board
of Directors and subject to certain restrictions under the Company's credit
agreements. As of March 24, 2003, there were approximately 10,600 beneficial
holders of the Company's common stock.

EQUITY COMPENSATION PLANS INFORMATION

The following table provides information as of December 31, 2002 regarding
our shares of common stock that may be issued under our existing equity
compensation plans:

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

(a) Number of securities to be issued upon exercise of outstanding options,
warrants and rights.

(b) Weighted-average exercise price of outstanding options, warrants and rights.

(c) Number of securities remaining available for future issuance under equity
compensation plans, excluding securities reflected in column (a).

(1) Includes the following:

- 9,278,858 shares of common stock to be issued upon exercise of
outstanding stock options granted under the 1998 Incentive Plan and the
Non-employee Directors' Compensation and Deferral Plan; and

- 2,252,439 shares of common stock to be issued upon the vesting of
restricted stock units outstanding under the 1998 Incentive Plan and the
Non-employee Directors' Compensation and Deferral Plan.

Excludes 403,322 shares of common stock to be issued upon exercise of
outstanding options originally granted under the five equity compensation
plans adopted by Service Experts Inc. The options have a weighted average
exercise price of $26.51. The options were assumed by the Company in
connection with the acquisition of Service Experts in January 2000.

(2) Upon vesting, restricted stock units are settled for shares of common stock
on a one-for-one basis. Accordingly, the restricted stock units have been
excluded for purposes of computing the weighted-average exercise price.

(3) Includes 4,701,544 shares of common stock available for issuance under the
1998 Incentive Plan, 402,812 shares of common stock reserved for issuance
under the Non-employee Directors' Compensation and Deferral Plan and 567,881
shares of common stock reserved for issuance under the Employee Stock
Purchase Plan.

15

ITEM 6. SELECTED FINANCIAL DATA

The table below shows the selected financial data of the Company for the
five years ended December 31, 2002:

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

Note:

(1) Includes pre-tax restructuring charges of $7.8 million and pre-tax (gains)
losses and other expenses of ($7.9) million. 2002 also includes after-tax
goodwill impairment of $249.2 million as a result of the adoption of
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" and a favorable resolution of tax contingencies.
Excluding these items, Net Income is $56.7 million.

(2) Includes restructuring charges of $65.3 million, pre-tax. Excluding these
charges, Net Income is $9.5 million.

(3) Includes restructuring charges of $5.1 million, pre-tax. Excluding this
charge, Net Income is $61.9 million.

(4) As a result of adopting Emerging Issues Tax Force ("EITF") 01-9 in 2002, the
Company restated prior years Net Sales. EITF 01-9 addressed various issues
related to the income statement classification of certain promotional
payments. The adoption of EITF 01-9 reduced 2001, 2000, 1999 and 1998 Net
Sales by $6.0 million, $5.1 million, $4.2 million and $3.4 million,
respectively.

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

OVERVIEW

The Company participates in four reportable business segments of the HVACR
industry. The first reportable segment is residential heating and cooling, in
which LII manufactures and markets a full line of heating, air conditioning and
hearth products for the residential replacement and new construction markets in
the United States and Canada. The second reportable segment is commercial
heating and cooling, in which LII manufactures and sells primarily rooftop
products and related equipment for commercial applications. Combined, the
residential and commercial heating and cooling segments form LII's heating and
cooling business. The third reportable segment is Service Experts, which
includes sales and installation of, and maintenance and repair services for,
HVACR equipment by approximately 190 LII-owned service centers in

16

the United States and Canada. The fourth reportable segment is refrigeration,
which consists of unit coolers, condensing units and other commercial
refrigeration products.

During August 2002, LII formed joint ventures with Outokumpu Oyj of Finland
("Outokumpu"). Outokumpu purchased a 55 percent interest in the Company's former
heat transfer business segment in the U.S. and Europe for $55 million in cash
and notes, with LII retaining 45 percent ownership. The net after-tax gain on
the sale and the related expenses and charges was $6.4 million. LII accounts for
its remaining 45 percent ownership interest using the equity method of
accounting. The Company currently reports the historical results of operations
of its former heat transfer business segment in the "Corporate and other"
business segment. (For a more detailed discussion of this sale, see "Results of
Operations -- Year Ended December 31, 2002 Compared to Year Ended December 31,
2001 -- (Gains)Losses and Other Expenses.") LII's customers include
distributors, installing dealers, property owners, national accounts and
original equipment manufacturers. The demand for LII's products and services is
influenced by national and regional economic and demographic factors, such as
interest rates, the availability of financing, regional population and
employment trends, new construction, general economic conditions and consumer
confidence. In addition to economic cycles, demand for LII's products and
services is seasonal and dependent on the weather. Hotter than normal summers
generate strong demand for replacement air conditioning and refrigeration
products and colder than normal winters have the same effect on heating
products. Conversely, cooler than normal summers and warmer than normal winters
depress sales of HVACR products.

The principal components of cost of goods sold in LII's manufacturing
operations are component costs, raw materials, factory overhead, labor and
estimated costs of warranty expense. In LII's Service Experts segment, the
principal components of cost of goods sold are equipment, parts and supplies and
labor. The principal raw materials used in LII's manufacturing processes are
copper, aluminum and steel. In instances where LII is unable to pass on to its
customers increases in the costs of copper and aluminum, LII enters into forward
contracts for the purchase of those materials. LII attempts to minimize the risk
of price fluctuations in key components by entering into contracts, typically at
the beginning of the year, which generally provide for fixed prices for its
needs throughout the year. These hedging strategies enable LII to establish
product prices for the entire model year while minimizing the impact of price
increases of components and raw materials on its margins. Warranty expense is
estimated based on historical trends and other factors.

On January 21, 2000, LII completed the acquisition of Service Experts Inc.,
an HVAC company comprised of HVAC retail businesses across the United States,
for approximately $307.0 million, including 12.2 million shares of LII common
stock and the assumption of $175.0 million of debt. The acquisition added an
additional 120 service centers to the retail network. As these centers have been
integrated into the retail operation with the 104 centers acquired by LII since
September 1, 1998, operating performance has not reached expected levels.
Subsequently, restructuring plans which covered selling, closing or merging
under-performing Company-owned dealer service centers have reduced the total
number of company-owned service centers to approximately 190. As a result of
these changes and other improvements, Service Experts financial results have
improved significantly.

On January 1, 2002, LII adopted Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"), and recorded a
$285.7 million impairment of goodwill ($249.2 million, net of taxes). The
impairment charge relates primarily to the 1998 to 2000 acquisitions of LII's
Service Experts and hearth products operations, where lower than expected
operating results occurred. In order to provide meaningful comparisons, certain
financial information has been adjusted to reflect the discontinuation of
goodwill and trademark amortization for the years ended December 31, 2001 and
2000.

LII's fiscal year ends on December 31 of each year and its interim fiscal
quarters are each comprised of 13 weeks. For convenience, throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the 13 week periods comprising each fiscal quarter are denoted by
the last day of the calendar quarter.

17

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of net sales, LII's
statement of income data for the years ended December 31, 2002, 2001 and 2000.
LII's statement of income data has been reconciled for the years ended December
31, 2001 and 2000 to reflect the discontinuation of goodwill and trademark
amortization under SFAS No. 142:

The following table sets forth net sales by business segment and geographic
market (dollars in millions):

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

(1) Prior year net sales have been restated to conform with EITF Issue 01-9.

18

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

The Company has adopted Emerging Issues Task Force ("EITF") Issue 01-9,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products" ("EITF 01-9"), issued by the EITF in November 2001. EITF
01-9 addressed various issues related to the income statement classification of
certain promotional payments, including consideration from a vendor to a
reseller or another party that purchases the vendor's products. As a result of
adopting EITF 01-9 in 2002, the Company restated prior year net sales, cost of
goods sold and selling, general and administrative ("SG&A") expense. The
adoption of EITF 01-9 decreased net sales by $6.0 million, increased cost of
goods sold by $1.4 million and decreased SG&A expenses by $7.4 million for the
year ended December 31, 2001.

Net Sales

Net sales decreased $87.8 million, or 2.8%, to $3,025.8 million for the
year ended December 31, 2002 from $3,113.6 million for the comparable period a
year ago. Adjusted for the favorable impact of foreign currency translation, net
sales declined 3.2% compared to the same period last year. The sales decline was
attributable to lower sales in the Company's Service Experts and commercial
heating and cooling segments, the wind-down of the Company's engineering
business (see "Restructurings") and the absence of sales (September 2002 through
December 2002) from the Company's former heat transfer business segment, 55
percent of which was sold to Outokumpu during the third quarter of 2002. The
Company currently reports the historical results of operations of its former
heat transfer business segment in the "Corporate and other" business segment.

Net sales in the residential heating and cooling segment increased $54.0
million, or 4.5%, to $1,249.1 million for the year ended December 31, 2002 from
$1,195.1 million for the year ended December 31, 2001. Adjusted for the impact
of foreign currency translation, net sales increased 4.7%, or $55.9 million,
compared to 2001. The North American market for residential air conditioners,
heat pumps and gas furnaces increased industry wide through December 2002 as
compared to last year, due primarily to favorable weather during the cooling
season . Net sales of the Company's Lennox and Ducane branded products as well
as evaporator coils from its Advanced Distributor Products unit were
particularly strong for the twelve months ended December 31, 2002.

Net sales in the commercial heating and cooling segment decreased $27.6
million, or 5.9%, to $442.4 million for the year ended December 31, 2002
compared to the prior year. The sales decrease was 7.4% after adjusting for the
impact of foreign currency exchange. The decline was due primarily to lower
demand levels for commercial air conditioning equipment in North America as well
as the absence of sales from the Company's Australian commercial air
conditioning operations, which were exited during the second quarter of 2002.
North American industry shipments of unitary commercial HVAC equipment were down
in 2002 as compared to 2001. Lower demand for such equipment in Europe also
contributed to the sales decline.

Net sales in the Service Experts segment were $943.8 million for the year
ended December 31, 2002, a decrease of $58.8 million, or 5.9%, from $1,002.6
million for the year ended December 31, 2001. The sales decline was 5.6% after
adjusting for the impact of foreign currency exchange. On a same store basis,
after adjusting for sold or closed service centers in connection with a
restructuring program announced in 2001, net sales in the Service Experts
segment declined 3.5% in 2002 compared to 2001. As a result of this
restructuring program, the primary operating focus of this segment has been
improving operating efficiency through cost reduction programs, expense control
initiatives and reductions in personnel. Service Experts management is
developing numerous marketing and business development initiatives to address
the challenge of increasing net sales.

Refrigeration segment net sales increased $15.7 million, or 4.5%, to $363.8
million for the year ended December 31, 2002 compared to the prior year. After
adjusting for the impact of foreign currency exchange, the sales increase was
2.4%. A sustained strengthening order rate for commercial refrigeration
equipment in

19

the Company's domestic and Asia Pacific operations resulted in higher net sales
in 2002. In the U.S., LII improved market share in this segment in part due to
the successful launch of the Pro-Cubed package refrigeration units. Eleven new
product platforms were introduced in 2002, with approximately one-third of net
sales derived from products introduced in the past three years.

Corporate and other segment revenues declined $71.2 million, or 35.6%, to
$129.3 million for the year ended December 31, 2002 compared to the year ended
December 31, 2001. The "Corporate and other" segment net sales primarily
consists of the historical results of the Company's former heat transfer
segment, 55 percent of which was sold to Outokumpu in August 2002. As a result,
the sales decline was primarily attributable to the absence of sales from this
segment during the last four months of 2002.

Gross Profit

Gross profit was $951.7 million for the year ended December 31, 2002
compared to $914.4 million for the year ended December 31, 2001, an increase of
$37.3 million. Gross profit margin improved 2.1% to 31.5% for the year ended
December 31, 2002 from 29.4% for the comparable period in the prior year. Gross
profit margin in the Company's Service Experts segment improved 2.4% in 2002
compared to 2001 due primarily to direct labor personnel reductions and
increased productivity of existing direct labor personnel. Service Experts
direct labor personnel reductions were made in connection with a restructuring
program announced in 2001 as well as efforts to staff individual service centers
to match market demand. The gross profit margin improvement was also due to
factory efficiencies, particularly in the areas of labor utilization, purchasing
savings and lower overhead. LIFO (last in, first out) inventory liquidations did
not have a material impact on gross margins.

Selling, General and Administrative Expense

SG&A expenses were $826.2 million for the year ended December 31, 2002, a
decrease of $23.5 million, or 2.8%, from $849.7 million for the year ended
December 31, 2001. As a percentage of total revenues, SG&A expenses remained
flat at 27.3% for the years ended December 31, 2002 and 2001. SG&A expenses for
2001 included $18.6 million of goodwill and trademark amortization which has
been discontinued with the adoption of SFAS No. 142 on January 1, 2002. Bad debt
expense, which is driven largely by overall economic conditions, totaled $8.9
million and $15.8 million for the twelve month periods ended December 31, 2002
and 2001, respectively. The bad debt expense was higher in 2001 as it included
specific reserves for two customers totaling $4.2 million. The Company has no
significant concentration of credit risk among its diversified customer base.
Partially offsetting the favorable bad debt expense variance and absence of
goodwill and trademark amortization in 2002 were higher profit sharing and
incentive programs expenses, driven primarily by improved financial performance,
and higher insurance costs.

Restructurings

During 2001, the Company undertook separate restructuring initiatives of
its Service Experts operations and certain of its manufacturing and distribution
operations. During 2002, the Company undertook an additional restructuring
initiative of its non-core heat transfer engineering business. The three
initiatives are as follows:

1. Retail Restructuring Program

In the second quarter of 2001, the Company recorded a pre-tax
restructuring charge of $38.0 million ($25.6 million, net of tax), which
covered the selling, closing or merging of 38 company-owned dealer service
centers in the Company's Service Experts segment. The $38.0 million pre-tax
restructuring charge included inventory impairments of $3.4 million in cost
of goods sold. These centers were either under-performing financially,
located in geographical areas requiring disproportionate management effort
or focused on non-HVAC activities. The major actions of the plan consisted
of employee terminations, closure, sale or merger of retail centers and
completion of in-process commercial construction jobs. All actions under
the plan have been completed, with long-term lease and other exit cost
payments

20

continuing into 2003. The revenue and net operating loss of the service
centers sold, closed or merged as part of the Retail Restructuring Program
were $24.5 million and $3.9 million, respectively, for the year ended
December 31, 2001.

The $38.0 million pre-tax charge for the Retail Restructuring Program
consisted of $4.8 million of severance and benefit charges, $12.3 million
of other exit costs and $20.9 million of asset impairments. The asset
impairments in the restructuring charge included $6.6 million for
long-lived assets, principally property, plant and equipment used in the
operations of the closed service centers, $5.7 million in goodwill, $3.4
million for inventory write-downs and $5.2 million in accounts receivable.
The accounts receivable and inventory write-downs were recorded in
conjunction with the restructuring since the decisions to close the
operations directly impacted the net realizable value of the related
assets. The inventory write-downs totaling $3.4 million were included in
cost of goods sold.

Through December 2002, the Company has made cash payments of $15.4
million under this program. These payments included $2.9 million for
severance and benefit payments and $12.5 million for other exit costs
payments. The Company anticipates making future cash expenditures of
approximately $3.7 million for other exit costs which is anticipated to be
spent in 2003. The improvement in net operating income due to the
elimination of net operating losses of service centers sold, closed or
merged under this restructuring program was $3.9 million for the year ended
December 31, 2002.

2. Manufacturing and Distribution Restructuring Program

In the fourth quarter of 2001, the Company recorded pre-tax
restructuring charges totaling $35.2 million ($31.0 million, net of tax)
for severance and other exit costs that resulted from the Company's
decision to sell or abandon certain manufacturing and distribution
operations. The $35.2 million pre-tax restructuring charge included
inventory impairments of $4.4 million in cost of goods sold. The major
actions included in the plan were the closing of a domestic distribution
facility, the Company's Mexico sales office, manufacturing plants in
Canada, Australia and Europe and the disposal of other non-core heat
transfer businesses. All actions under the plan were completed by September
30, 2002, except for closing the domestic distribution facility, which will
be complete by May 2003, and the disposal of the non-core heat transfer
businesses, which will be completed in 2003. The revenue and net operating
loss of separately identifiable operations were $36.3 million and $2.3
million, respectively, for the year ended December 31, 2001.

The $35.2 million pre-tax charge for the Manufacturing and
Distribution Restructuring Program consisted of $6.0 million of severance
and benefit charges, $3.4 million of other exit costs and $25.8 million of
asset impairments. The asset impairments in the restructuring charge
included $3.7 million for property, plant and equipment written down to the
cash expected to be received upon sale or abandonment, if any, $10.9
million in goodwill, $4.4 million for inventory write-downs and $6.8
million in accounts receivable. The accounts receivable and inventory
write-downs were recorded in conjunction with the restructuring since the
decisions to close the operations directly impacted the net realizable
value of the related assets. The inventory write-downs of $4.4 million were
included in cost of goods sold.

Through December 2002, the Company has made cash payments of $10.0
million under this program. These payments included $7.7 million for
severance and benefit payments and $2.3 million for other exit cost
payments. The Company anticipates making future cash expenditures of
approximately $5.1 million under this program. The improvements in net
operating income were approximately $6.0 million for the year ended
December 31, 2002.

3. Engineering Business Restructuring Program

In the third quarter of 2002, the Company recorded a pre-tax
restructuring charge of $7.5 million ($5.2 million, net of tax) for
inventory impairments, severance and other exit costs that resulted from
the Company's decision to abandon a residual portion of the heat transfer
business that does not fit with the Company's strategic focus and was not
included in the joint ventures with Outokumpu formed during the

21

third quarter of 2002. The $7.5 million charge included $1.0 million
related to inventory write-downs which has been included in cost of goods
sold.

The $7.5 million pre-tax charge for the Engineering Business
Restructuring Program consisted of $3.7 million of severance and benefit
charges, $2.8 million for other exit costs and $1.0 million of inventory
impairment. The Company will continue to wind down this business through
2003 and anticipates an additional $1.0 million in related restructuring
charges. During the wind-down period, the Company estimates that the
operating losses from this business will be in the range of $2.5 million to
$3.5 million in 2003. Actual operating losses in 2002 from this business
totaled $6.9 million. Operating losses from this business are reported in
the "Corporate and other" business segment.

In summary, pre-tax restructuring charges for the year ended December 31,
2002 were $7.8 million. Of these charges, $1.3 million stemmed from the
Manufacturing and Distribution Restructuring Program and principally included
personnel termination charges in the Company's residential segment, the
relocation of production lines, net gains upon disposal of certain impaired
assets and restructuring income associated with the subleasing of vacated
corporate office lease space. The remaining $6.5 million of these charges
stemmed from the Engineering Business Restructuring Program and included
personnel termination charges and other exit costs in the Company's former heat
transfer business segment. Pre-tax restructuring charges for the year ended
December 31, 2001 were $73.2 million, of which $7.8 million was included in cost
of goods sold. $38.0 million of these charges stemmed from the Retail
Restructuring Program ($3.4 million in cost of goods sold) and $35.2 million
stemmed from the Manufacturing and Distribution Restructuring Program ($4.4
million in cost of goods sold).

(Gains) Losses and Other Expenses

During 2002, LII recognized two events aggregating in a net pre-tax gain of
$7.9 million. These events were related to narrowing LII's strategic focus on
its core businesses. These events are detailed as follows:

1. Sale of Heat Transfer Business

In August 2002, LII formed joint ventures with Outokumpu. Outokumpu
purchased a 55 percent interest in the Company's former heat transfer
business segment in the U.S. and Europe for $55 million in cash and notes,
with LII retaining 45 percent ownership. LII recognized a pre-tax gain on
the sale of $23.1 million, subject to post-closing balance sheet audit
adjustments. In conjunction with the sale, LII incurred $11.6 million of
other charges and expenses. Included in this amount are asset impairments
that reduced to zero the carrying value of non-core heat transfer assets
not included in the sale and that were identified for abandonment in the
third quarter of 2002. Additionally, this amount included a pension
curtailment in connection with U.S. based heat transfer employees,
indemnification of flood losses that occurred at a heat transfer
manufacturing facility in Prague, Czech Republic in August 2002 and other
related transaction expenses. The net after-tax gain on the sale was $6.4
million. LII accounts for its remaining 45 percent ownership using the
equity method of accounting.

2. Exit from Commercial HVAC Operations in Argentina

In August 2002, LII sold its 50% ownership interest in its Argentine
joint venture. Operationally, this joint venture was under-performing, in
large part due to recent volatile economic conditions in Argentina. The
Company recognized a pre-tax loss on the sale of $3.6 million. The tax
benefit recognized on the loss on sale was $2.4 million resulting in a net
after-tax loss of $1.2 million. The proceeds from the sale were immaterial.

Interest Expense, Net

Interest expense, net, for the year ended December 31, 2002 decreased $11.3
million, or 26.2%, from $43.1 million for the year ended December 31, 2001. The
lower interest expense resulted from lower debt levels. Strong cash flow
generation in 2002 allowed continued significant progress in paying down debt.
At the

22

end of December 2002, total debt of $379.9 million was $137.9 million lower than
total debt at December 2001.

Other

Other expense (income) was $(1.2) million for the year ended December 31,
2002 and $0.4 million for the year ended December 31, 2001. Other expense
(income) is primarily comprised of foreign currency exchange gains or losses,
which relate principally to the Company's operations in Canada, Australia and
Europe. Appreciation of Australia's and Europe's currencies was primarily
responsible for the overall change versus last year.

Provision for Income Taxes

The provision for income taxes was $35.9 million for the year ended
December 31, 2002 compared to a benefit from income taxes of $2.0 million for
the year ended December 31, 2001. Excluding the tax benefit resulting from
restructuring and other non-recurring items recognized in 2002 and in 2001, the
effective tax rate was 40.1% and 50.6% for the years ended December 31, 2002 and
December 31, 2001. This rate differs from the statutory federal rate of 35.0%
principally due to state and local taxes, non-deductible expenses, foreign
operating losses for which no tax benefits have been recognized and foreign
taxes at rates other than 35.0%, partially offset by favorable resolution of tax
contingencies.

Cumulative Effect of Accounting Change

The cumulative effect of accounting change represents an after-tax,
non-cash, goodwill impairment charge of $249.2 million for the year ended
December 31, 2002. This charge resulted from the adoption of SFAS No. 142 which
became effective January 1, 2002 and requires that goodwill and other intangible
assets with an indefinite useful life no longer be amortized as expenses of
operations but rather be tested for impairment upon adoption and at least
annually by applying a fair-value-based test. During the first quarter of 2002,
LII conducted such fair-value-based tests and recorded a pre-tax goodwill
impairment charge of $285.7 million. The charge primarily relates to the
Company's Service Experts and residential heating and cooling business segments.
The tax benefit of this charge was $36.5 million.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

The Company has adopted EITF 01-9, issued by the EITF in November 2001.
EITF 01-9 addressed various issues related to the income statement
classification of certain promotional payments, including consideration from a
vendor to a reseller or another party that purchases the vendor's products. As a
result of adopting EITF 01-9 in 2002, the Company restated prior years net
sales, cost of goods sold and SG&A expense. The adoption of EITF 01-9 decreased
net sales by $6.0 million, increased cost of goods sold by $1.4 million and
decreased SG&A expenses by $7.4 million for the year ended December 31, 2001.
For the year ended December 31, 2000, the adoption of EITF 01-9 decreased net
sales by $5.1 million, increased cost of goods sold by $0.5 million and
decreased SG&A expenses by $5.6 million.

Net Sales

Net sales decreased $128.6 million, or 4.0%, to $3,113.6 million for the
year ended December 31, 2001 from $3,242.2 million for the year ended December
31, 2000. Foreign currency translation was responsible for 31% of the decrease
in sales. The balance of the sales decrease was a result of the closure of
Service Experts centers and soft economic conditions.

Net sales in the residential heating and cooling segment were $1,195.1
million for the year ended December 31, 2001, a decrease of $21.6 million, or
1.8%, from $1,216.7 million for the year ended December 31, 2000. A weaker
economic climate in 2001, which accelerated after the events of September 11,
resulted in a drop in discretionary spending by consumers, who deferred
investment in new heating and cooling equipment.

23

Commercial heating and cooling segment net sales increased $0.8 million, or
0.2%, to $470.0 million for the year ended December 31, 2001 compared to the
year ended December 31, 2000. The sales increase was 1.3% after adjusting for
the impact of foreign currency exchange. Although market conditions continued to
soften in the fourth quarter of 2001, the Company's North American market share
grew as a result of strong performance from national accounts and commercial
sales districts. Europe experienced double digit commercial air conditioning
sales growth over the prior year after adjusting for foreign currency exchange
movements. The benefits of increased distribution, decreased product costs and
improved customer service through a unified European marketing strategy were
realized.

Net sales in the Service Experts segment were $1,002.6 million for the year
ended December 31, 2001, a decrease of $50.6 million from $1,053.2 million for
the year ended December 31, 2000. The decrease is attributable to dealer service
centers that were sold or closed during 2001 and by the economic issues
previously mentioned in the residential segment. On a same-store basis, (i.e.,
adjusted for service centers that were sold or closed), sales were up 0.4%.

Net sales in the refrigeration segment were $348.1 million for the year
ended December 31, 2001, a decrease of $29.1 million, or 7.7%, from $377.2
million for the year ended December 31, 2000. Over two-thirds of the sales
decline is a result of foreign currency exchange. Even though the North American
refrigeration market in which we participate was estimated to be approximately
15% below year 2000 levels, market share gains were made through targeted
account efforts and customer service levels provided.

Corporate and other segment revenues declined $27.3 million, or 12.0%, to
$200.5 million for the year ended December 31, 2001 compared to the year ended
December 31, 2000. The corporate and other segment primarily includes the
historical results of the Company's former heat transfer segment. The heat
transfer segment was the segment most affected by the economic downturn in 2001.
Heat transfer products were sold to customers in the recreational vehicle,
telecommunications, transport refrigeration and automotive industries. These
industries were impacted by the economic downturn to a greater degree than the
general business community.

Gross Profit

Gross profit was $914.4 million for the year ended December 31, 2001,
compared to $1,013.7 million for the year ended December 31, 2000, a decrease of
$99.3 million. Gross profit margin was 29.4% for the year ended December 31,
2001 and 31.3% for the year ended December 31, 2000. Over 55% of the decrease in
gross profit margin was in the Service Experts segment. Inefficient labor
utilization and a shift in product mix to lower margin new construction sales
were the reasons for the Service Experts segment margin decline. Additionally,
$3.4 million of inventory impairments in connection with the Company's Retail
Restructuring Program were included in cost of goods sold during 2001. The
remaining 45% of the decline in gross profit margin was primarily a result of
increased manufacturing overhead and product mix changes including a higher
ratio of lower margin parts and supplies. A new manufacturing facility in
Orangeburg, South Carolina, and the relocation of product lines from the
manufacturing facility in Bellevue, Ohio to the Orangeburg facility were the
principal reasons for the higher manufacturing overhead. Additionally, $4.4
million of inventory impairments in connection with the Company's Manufacturing
and Distribution Restructuring Program were included in cost of goods sold
during 2001.

Selling, General and Administrative Expense

SG&A expenses were $849.7 million for the year ended December 31, 2001, a
decrease of $0.3 million from $850.0 million for the year ended December 31,
2000. SG&A expenses represented 27.3% and 26.2% of total revenues for the twelve
months of 2001 and 2000, respectively. Nearly one month's additional expense
(approximately $11.0 million) was incurred in 2001 as a result of the
acquisition of Service Experts Inc., completed on January 21, 2000. Similarly,
an additional $1.5 million in expense resulted from a full twelve months of the
accounts receivable securitization program. Cost reduction programs, expense
control initiatives and reductions in personnel, primarily in the Service
Experts segment and the former heat transfer segment, helped offset the
increases from the Service Experts Inc. acquisition and asset securitization
program.

24

Restructurings

During 2001, the Company undertook separate restructuring initiatives of
its Service Experts operations and certain of its manufacturing and distribution
operations. In the second quarter of 2001, the Company recorded a pre-tax
restructuring charge of $38.0 million ($25.6 million, net of tax) which covered
the selling, closing or merging of 38 company-owned dealer service centers in
the Company's Service Experts segment. Inventory impairments of $3.4 million
were included in cost of goods sold. These centers were either under-performing
financially, located in geographic areas requiring disproportionate management
effort or focused on non-HVAC activities. The $38.0 million pre-tax charge for
the Retail Restructuring Program consisted of $4.8 million of severance and
benefit charges, $12.3 million of other exit costs and $20.9 million of asset
impairments.

In the fourth quarter of 2001, the Company recorded pre-tax restructuring
charges totaling $35.2 million ($31.0 million, net of tax) for severance and
other exit costs that resulted from the Company's decision to sell or abandon
certain manufacturing and distribution operations. Inventory impairments of $4.4
million were included in cost of goods sold. The $35.2 million pre-tax charge
for the Manufacturing and Distribution Restructuring Program consisted of $6.0
million of severance and benefit charges, $3.4 million of other exit costs and
$25.8 million of asset impairments. (For a more detailed discussion of the
Company's 2001 restructuring programs, see "Results of Operations -- Year Ended
December 31, 2002 Compared to Year Ended December 31, 2001 -- Restructurings.")
During 2000, the Company recorded a pre-tax restructuring charge of $5.1 million
which represented closure costs for its Mexico sales operation.

Interest Expense, Net

Interest expense, net, for the year ended December 31, 2001, decreased to
$43.1 million from $56.2 million for the year ended December 31, 2000. The
decreased interest expense was a result of decreased debt levels and lower
interest rates. At the end of December 2001, total debt was $518 million, $173
million lower than December 31, 2000.

Other

Other expense was $0.4 million for the year ended December 31, 2001, a $1.4
million decline from the same period a year ago. Other expense is primarily
comprised of currency exchange gains or losses, which relate principally to the
Company's operations in Canada, Australia, Europe and Brazil. Appreciation of
Canada's currency was primarily responsible for the overall improvement in 2001.

Provision for Income Taxes

The benefit from income taxes was $2.0 million for the year ended December
31, 2001 compared to a provision for income taxes of $41.9 million for the year
ended December 31, 2000. Excluding the tax benefit of $16.6 million as a result
of the restructuring charges recognized in 2001, the effective tax rate was
50.6% and 41.5% for the years ended December 31, 2001 and 2000, respectively.
This rate differs from the statutory federal rate of 35.0% principally due to
state and local taxes, non-deductible goodwill expenses, foreign operating
losses for which no tax benefits have been recognized and foreign taxes at rates
other than 35%.

LIQUIDITY AND CAPITAL RESOURCES

Lennox's working capital and capital expenditure requirements are generally
met through internally generated funds and bank lines of credit.

During 2002, LII generated $168 million of cash from operations compared to
$212 million in 2001 and $245 million in 2000. If the effects of asset
securitization were excluded, cash provided by operating activities would have
been $212 million, $199 million, and $115 million, respectively, in 2002, 2001
and 2000. Net cash provided by investing activities in 2002 includes $55 million
from the Outokumpu JV sales, acquiring a partner's remaining 14% interest in
Heatcraft do Brasil S.A., and proceeds from the sale of the net assets of a
distributor in the residential segment. Cash used to fund acquisitions in 2001
amounted to $19 million and this

25

consisted primarily of contingent payment considerations on prior Retail
acquisition and similar contingent consideration for the Kirby company
acquisition. Cash used in financing activities in 2002 reflects the Company's
issuance of $143.8 million of 6.25% convertible subordinated notes due 2009
offset by the use of these net proceeds, the cash from the Outokumpu transaction
and cash from operations to reduce its indebtedness under its revolving credit
facility.

As of December 31, 2002, $27.6 million of cash and cash equivalents were
restricted due to outstanding letters of credit.

Capital expenditures of $22.7 million and $17.4 million in 2002 and 2001,
respectively, were primarily for production equipment in the North American heat
transfer and residential products manufacturing plants.

At December 31, 2002, the Company had outstanding long-term debt
obligations totaling $371 million, which was down from $494 million at December
31, 2001. The amount outstanding at December 31, 2002 consisted primarily of
seven issues of notes with an aggregate principal outstanding of $365 million,
with interest rates ranging from 6.81% to 8.25% and with maturities ranging from
2003 to 2010. The Company has bank lines of credit aggregating $322 million, of
which $9 million was borrowed and outstanding, and $34 million was committed to
standby letters of credit at December 31, 2002. Of the remaining $279 million,
approximately $155 million was available for future borrowings after
consideration of covenant limitations. Included in the lines of credit is a
domestic facility in the amount of $270 million governed by agreements between
the Company and a syndicate of banks. The facility expires in August 2004. The
facility contains certain financial covenants and bears interest, at the
Company's option, at a rate equal to either (a) the greater of the bank's prime
rate or the federal fund's rate plus 0.5% or (b) the London Interbank Offered
Rate plus a margin equal to 0.5% to 2.25%, depending upon the ratio of total
funded debt to earnings before interest, taxes, depreciation and amortization
("EBITDA"). The Company pays a commitment fee, depending upon the ratio of total
funded debt to EBITDA, equal to 0.15% to 0.50% of the unused commitment. The
agreements provide restrictions on the Company's ability to incur additional
indebtedness, encumber its assets, sell its assets, or pay dividends.

Summarized below are LII's long-term payment obligations under its current
debt and lease contracts (amounts shown in thousands):

LII, in addition to the revolving and term loans described above, utilizes
two other types of financing in the course of funding its operations:

Trade accounts receivable are sold on a non-recourse basis to third
parties. The sales are reported as a reduction of the asset "Accounts and
notes receivable, net" in the Consolidated Balance Sheets. As of December
31, 2002 and December 31, 2001, LII had sold $99 million and $143 million,
respectively, of such accounts receivable. The receivables are sold at a
discount from face value, and this discount aggregated $4.0 million in 2002
and $6.8 million in 2001. The discount expense is shown as a component of
selling, general and administrative expense in the Consolidated Statements
of Income.

LII also leases real estate and machinery and equipment pursuant to
leases which properly are not capitalized on the balance sheet under
Generally Accepted Accounting Principles ("GAAP"), including high-turnover
equipment such as autos and service vehicles and short-lived equipment such
as personal computers. These operating leases generated rent expense of
approximately $69.1 million, $69.9 million and $67.3 million in the years
2002, 2001 and 2000, respectively. Included in these rent expense amounts
are $5.3 million for 2002 and $4.4 million for 2001 relating to leases
qualifying as operating leases for GAAP reporting, but considered financing
leases for income tax purposes. The Company has no

26

significant obligations to purchase the assets leased under these operating
leases and has not guaranteed residual values to the lessors.

LII's domestic revolving and term loans contain certain financial covenant
restrictions. As of December 31, 2002, LII was in compliance with all covenant
requirements and LII believes that cash flow from operations, as well as
available borrowings under its revolving credit facility and other sources of
funding, will be sufficient to fund its operations for the foreseeable future.
LII is currently reviewing its capital structure, and this review may include
modifying current sources of capital or obtaining alternative sources of capital
with a goal of providing additional financial flexibility to LII.

MARKET RISK

LII's results of operations can be affected by changes in exchange rates.
Net sales and expenses in currencies other than the United States dollar are
translated into United States dollars for financial reporting purposes based on
the average exchange rate for the period. During 2002, 2001 and 2000, net sales
from outside the United States represented 12.0%, 21.4% and 21.2%, respectively,
of total net sales. Historically, foreign currency transaction gains (losses)
have not had a material effect on LII's overall operations.

The Company enters into commodity futures contracts to stabilize prices
expected to be paid for raw materials and parts containing high copper and
aluminum content. These contracts are for quantities equal to, or less than,
quantities expected to be consumed in future production. As of December 31,
2002, LII was committed for 26.5 million pounds of aluminum and 22.7 million
pounds of copper under such arrangements. The net fair value of these contracts
was a liability of $1.3 million as of December 31, 2002. Accordingly, the
Company has recorded an unrealized loss of $0.8 million, net of tax benefit of
$0.5 million, in the Accumulated Other Comprehensive Loss component of
stockholders' equity.

On July 25, 2002, the Company announced anticipated product price increases
as a result of the tariff levied on steel as a result of U.S. Presidential
Proclamation 7529 issued March 5, 2002. This proclamation was issued in
connection with the U.S. International Trade Commission's investigation under
section 201 of the Trade Act of 1974 with respect to imports of certain steel
products. Although the intent of the proclamation targeted imported steel, the
market result was an increase in domestic steel product pricing as well. The
Company filed requests with the U.S. Department of Commerce in May 2002 seeking
to exclude from the safeguard tariffs those steel products most commonly used in
the Company's manufacturing processes as steel represents a significant amount
of the Company's purchased raw material. During the third quarter of 2002, the
U.S. Department of Commerce denied these requests. As a result, the Company
implemented product price increases during the fourth quarter of 2002. The
product price increases were, on average, within a range from 3% to 6% depending
on the steel content of a given product line. The product price increases also
differed from operating company to operating company. Actual realization of the
price increases could vary though, based on competitive pricing from other
companies in the HVACR industry.

INFLATION

Historically, inflation has not had a material effect on LII's results of
operations.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires the use of judgments and
estimates. The critical accounting policies are described below to provide a
better understanding of how the Company develops its judgments about future
events and related estimations and how they can impact the financial statements.
A critical accounting policy is one that requires the most difficult, subjective
or complex estimates and assessments and is fundamental to the results of
operations. The Company identified the most critical accounting policies to be:

- Estimation of warranty liabilities;

- Valuation of goodwill and intangible assets;

27

- Adequacy of allowance for doubtful accounts;

- Pension and Post-retirement benefit projections; and

- Estimates of self-insured risks.

This discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes beginning on page 32.

Product Warranties

A liability for estimated warranty expense is established by a charge
against operations at the time products are sold. The subsequent costs incurred
for warranty claims serve to reduce the product warranty liability. The Company
recorded warranty expense of $25.6 million, $27.2 million and $24.0 million for
the years ended December 31, 2002, 2001 and 2000, respectively.

The Company's estimate of future warranty costs is determined for each
product line. The number of units that are expected to be repaired or replaced
is determined by applying the estimated failure rate, which is generally based
on historical experience, to the number of units that have been sold and are
still under warranty. The estimated units to be repaired under warranty are
multiplied by the average cost (undiscounted) to repair or replace such products
to determine the Company's estimated future warranty cost. The Company's
estimated future warranty cost is subject to adjustment from time to time
depending on actual experience.

Total liabilities for estimated warranty expense are $63.4 million and
$61.9 million as of December 31, 2002 and 2001, respectively, and are included
in the following captions on the accompanying Consolidated Balance Sheets (in
thousands):

The changes in the carrying amount of the Company's total warranty
liabilities for the year ended December 31, 2002 are as follows (in thousands):

Total warranty liability at December 31, 2001............... $ 61,902
Payments made in 2002....................................... (24,124)
Changes resulting from issuance of new warranties........... 25,580
--------
Total warranty liability at December 31, 2002............... $ 63,358
========

The change in warranty liability that resulted from changes in estimated of
warranties issued prior to 2002 is not significant.

Goodwill and Other Intangible Assets

Goodwill and intangible assets acquired in a purchase business combination
and determined to have an indefinite useful life are not amortized, but instead
tested for impairment at least annually in accordance with the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142") as of January 1, 2002. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets".

28

In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the statement required the Company to perform an assessment of
whether there was an indication that goodwill was impaired as of the date of
adoption. To accomplish this, the Company was required to identify its reporting
units and determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible assets,
to those reporting units as of January 1, 2002. To the extent the carrying
amount of a reporting unit exceeded the fair value of the reporting unit, the
Company would be required to perform the second step of the transitional
impairment test, as this is an indication that the reporting unit goodwill may
be impaired. The second step was required for certain reporting units within the
residential heating and cooling, Service Experts and heat transfer reporting
segments where the results of various business operations acquired during 1998
to 2000 were lower than expected. In the second step, the Company compared the
implied fair value of the reporting units goodwill with the carrying amount of
the reporting unit goodwill, both of which were measured as of the date of
adoption. The implied fair value of goodwill was determined by allocating the
fair value of the reporting unit to all of the assets (recognized and
unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation, in accordance with Statement of Financial Accounting
Standards No. 141, "Business Combinations". The residual fair value after this
allocation was the implied fair value of the reporting units' goodwill and was
less than the carrying amount of these reporting units' goodwill by $285.7
million. Accordingly, the Company recorded a $285.7 million ($249.2 million, net
of tax) impairment charge upon adoption.

The goodwill impairment evaluation described above requires management to
make long range forecasts, determine the weighted average cost of capital and
estimate the fair value of assets (both recognized and unrecognized) for the
various reporting units. These forecasts and related factors are subject to
various risks and uncertainties described within this document. To the extent
these forecasts do not materialize and are adjusted downward in later periods,
additional impairments may be required.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is generally established during the
period in which receivables are recognized and is maintained at a level deemed
appropriate by management based on historical and other factors that affect
collectibility. Such factors include the historical trends of write-offs and
recovery of previously written-off accounts, the financial strength of the
customer and projected economic and market conditions. The evaluation of these
factors involves complex, subjective judgments. Thus, changes in these factors
or changes in economic circumstances may significantly impact the Consolidated
Financial Statements. See Note 2 in the Notes to Consolidated Financial
Statements.

Pensions and Post-retirement Benefits

The Company has domestic and foreign pension plans covering substantially
all employees. The Company makes annual contributions to the plans equal to or
greater than the statutory required minimum. The Company also maintains an
unfunded postretirement benefit plan which provides certain medical and life
insurance benefits to eligible employees. The pension plans are accounted for
under provisions of SFAS No. 87, "Employers' Accounting for Pensions." The
postretirement benefit plan is accounted for under the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other than Pensions."

The benefit plan assets and liabilities included in the Company's financial
statements and associated notes reflect management's assessment as to the long
range performance of its benefit plans. These assumptions are listed below:

29

The actual benefit plan returns for 2002 and 2001 have not matched the
previous assumptions. Management accordingly has lowered its 2003 estimate of
its expected return on plan assets.

Self-Insurance Expense

The Company self-insures for Worker's Compensation, Product Liability,
General Liability, Auto Liability and Physical Damage. On January 1, 2002, a
captive insurance company was formed for all the above risks subsequent to that
date.

The Company utilizes the services of a third party actuary to assist in the
determination of its self-insurance expense and liabilities. The expense and
liabilities were determined based on historical company claims information, as
well as industry factors and trends in the level of such claims and payments.

The Company's self insurance reserves, calculated on an undiscounted basis,
as of December 31, 2002, represent the best estimate of the future payments to
be made on losses reported and unreported for 2002 and prior years. The majority
of the Company's self-insured risks (excluding Auto and Physical Liability),
have relatively long payout patterns. The Company's accounting policy is to not
discount its self-insurance reserves. The Company maintains safety and
manufacturing programs that are designed to improve the safety and effectiveness
of its business processes, and as a result reduce the level and severity of its
various self-insurance risks.

The Company's reserve for self-insurance risks total $48.2 million and
$44.1 million at December 31, 2002 and 2001, respectively. Actual payments for
claims reserved at December 31, 2002 may vary depending on various factors
including the development and ultimate settlement of reported and unreported
claims.

RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), was issued in June 2001 and becomes
effective for the Company on January 1, 2003. The standard requires that legal
obligations associated with the retirement of tangible long-lived assets be
recorded at fair value when incurred. The Company does not believe that the
adoption of SFAS 143 will have a material effect on its financial position or
results of operations.

Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), also becomes
effective for the Company on January 1, 2003. SFAS 146 provides guidance on the
recognition and measurement of liabilities associated with exit or disposal
activities and requires that such liabilities be recognized when incurred. This
is effective for exit or disposal activities initiated on or after January 1,
2003 and does not impact recognition of costs under the Company's existing
programs. Adoption of this standard may impact the timing and recognition of
costs associated with future exit and disposal activities, depending upon the
nature of the actions initiated.

Financial Accounting Standards Board Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," was issued in November 2002. The
interpretation provides guidance on the guarantor's accounting and disclosure
requirements for guarantees, including indirect guarantees of indebtedness of
others. The Company has adopted the disclosure requirements of the
interpretation as of December 31, 2002. The accounting guidelines are applicable
to guarantees issued after December 31, 2002 and require that the Company record
a liability for the fair value of such guarantees in the balance sheet.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's financial statements.

30

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is included under Item 7 above.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF MANAGEMENT

The Company's management is responsible for the preparation and accuracy of
the financial statements. Management believes that the financial statements for
the three years ended December 31, 2002, have been prepared in conformity with
generally accepted accounting principles and set forth a fair presentation of
the financial condition and results of operations.

In meeting its responsibility for the reliability of the financial
statements, management relies on a system of internal accounting controls.
Management believes that the accounting systems and related controls that it
maintains are sufficient to provide reasonable assurance that financial records
are reliable for preparing financial statements and maintaining accountability
for assets. These systems and controls are tested and evaluated regularly by the
Company's internal auditors.

The Audit Committee of the Board of Directors, which is composed solely of
Directors who are independent of the Company, is responsible for monitoring the
Company's accounting and reporting practices. The Audit Committee meets
periodically with the Company's management, the internal auditors and the
independent accountants and monitors the accounting affairs of the Company. The
independent accountants have free access to the Audit Committee and the Board of
Directors to discuss internal accounting control, auditing and financial
reporting matters.

The independent public accountants are engaged to express an opinion on the
Company's consolidated financial statements. They have developed an overall
understanding of the Company's accounting and financial controls and have
conducted other tests as they consider necessary to support their opinion on the
financial statements. The opinion of the independent public accountants is based
on procedures which they believe to be sufficient to provide reasonable
assurance that the financial statements contain no material errors.

31

INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors of
Lennox International Inc.:

We have audited the consolidated financial statements of Lennox
International Inc. and subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. In connection with our audit of the consolidated financial
statements, we also have audited the accompanying financial statement schedule
as of and for the year ended December 31, 2002. These consolidated financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audit.
The consolidated financial statements and financial statement schedules of
Lennox International Inc. as of December 31, 2001 and for the years ended
December 31, 2001 and 2000 were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those financial
statements and financial statement schedules, before the revision described in
Note 2 (under the heading "Goodwill and Other Intangible Assets") to the
financial statements, in their report dated February 6, 2002.

We conducted our audit 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 audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lennox
International Inc. and subsidiaries as of December 31, 2002, and the results of
its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the financial statement schedule as of and for the year ended
December 31, 2002, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.

As discussed in Note 2 (under the heading "Goodwill and Other Intangible
Assets") to the consolidated financial statements, the Company changed its
method of accounting for goodwill and other intangible assets in 2002 to conform
to Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other
Intangible Assets.

As discussed above, the consolidated financial statements and financial
statement schedules of Lennox International Inc. as of December 31, 2001 and for
the years ended December 31, 2001 and 2000 were audited by other auditors who
have ceased operations. As described in Note 2, these financial statements have
been revised to include the transitional disclosures required by SFAS No. 142,
Goodwill and Other Intangible Assets. In our opinion, the disclosures for 2001
and 2000 in Note 2 are appropriate. However, we were not engaged to audit,
review, or apply any procedures to the 2001 and 2000 financial statements of
Lennox International Inc. other than with respect to such disclosures and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 and 2000 financial statements taken as a whole.

KPMG LLP

Dallas, Texas
February 4, 2003

32

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of
Lennox International Inc.:

We have audited the accompanying consolidated balance sheets of Lennox
International Inc. (a Delaware corporation) and Subsidiaries as of December 31,
2001 and 2000 and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lennox International Inc.
and Subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

ARTHUR ANDERSEN LLP(1)

Dallas, Texas,
February 6, 2002

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

(1) This report is a copy of the previously issued report covering fiscal years
2001 and 2000. The predecessor auditors have not reissued their report. The
consolidated financial statements as of December 31, 2001 and for each of
the years in the two-year period then ended have been revised to include the
transitional disclosures required by Statement of Financial Accounting
Standard No. 142, Goodwill and Other Intangible Assets (see Note 2 under the
heading "Goodwill and Other Intangible Assets"). The report of Arthur
Andersen LLP presented above does not extend to these changes.
33

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these consolidated financial
statements.
34

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these consolidated financial
statements.
35

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)

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

36

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.
37

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

1. NATURE OF OPERATIONS:

Lennox International Inc., a Delaware corporation, and subsidiaries (the
"Company" or "LII"), is a global designer, manufacturer and marketer of a broad
range of products for the heating, ventilation, air conditioning and
refrigeration ("HVACR") markets. The Company participates in four reportable
business segments of the HVACR industry. The first reportable segment is
residential heating and cooling, in which LII manufactures and markets a full
line of heating, air conditioning and hearth products for the residential
replacement and new construction markets in the United States and Canada. The
second reportable segment is commercial heating and cooling, in which LII
manufactures and sells rooftop products and related equipment for commercial
applications. Combined, the residential and commercial reportable business
segments form LII's heating and cooling business. The third reportable segment
is Service Experts, which includes sales and installation of, and maintenance
and repair services for, HVACR equipment by LII-owned service centers in the
United States and Canada. The fourth reportable segment is refrigeration, which
consists of unit coolers, condensing units and other commercial refrigeration
products. Prior to August 2002, the Company operated a heat transfer segment
that manufactured and sold evaporator and condenser coils, copper tubing and
related manufacturing equipment to original equipment manufacturers and other
specialty purchasers on a global basis. In August 2002, the Company formed joint
ventures with Outokumpu Oyj ("Outokumpu") of Finland by selling to Outokumpu a
55 percent interest in the Company's heat transfer businesses for approximately
$55 million in cash and notes. The Company accounts for its remaining 45 percent
interest using the equity method of accounting and includes such amounts in the
Corporate and other segment. See Note 3 for financial information regarding the
Company's reportable segments.

The Company sells its products and services to numerous types of customers,
including distributors, installing dealers, homeowners, national accounts and
OEMs.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Lennox
International Inc. and its subsidiaries. All intercompany transactions and
balances have been eliminated. Investments in affiliates in which the Company
does not exercise control and has a 20% or more voting interest are accounted
for using the equity method of accounting. Investments in which the Company owns
less than 20% are accounted for at historical cost.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid temporary investments with original
maturity dates of three months or less to be cash equivalents. Cash equivalents
of $76.4 million at December 31, 2002 consisted of overnight repurchase
agreements and of investment grade securities and are stated at cost, which
approximates fair value. The Company earned interest income of $2.0 million,
$1.9 million and $2.9 million for the years ended December 31, 2002, 2001 and
2000, respectively, which is included in interest expense, net in the
accompanying Consolidated Statements of Operations.

As of December 31, 2002, $27.6 million of cash and cash equivalents were
restricted due to outstanding letters of credit.

ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable have been shown net of an allowance for
doubtful accounts of $23.1 million and $28.4 million, and net of accounts
receivable sold under an ongoing asset securitization arrangement of $99.0
million and $143.1 million as of December 31, 2002 and 2001, respectively. In
addition,
38

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately $106.2 million of accounts receivable as reported in the
accompanying Consolidated Balance Sheets at December 31, 2002 represent retained
interests in securitized receivables that have restricted disposition rights per
the terms of the asset securitization agreement and would not be available to
satisfy obligations to creditors in the event of bankruptcy or receivership of
LII or its subsidiaries. The Company has no significant credit risk
concentration among its diversified customer base. The reduction in doubtful
accounts from December 31, 2001 is primarily due to a specific customer reserve
of $2.8 million that was written off in the second quarter of 2002.

INVENTORIES

Inventory costs include material, labor, depreciation and plant overhead.
Inventories of $94.8 million and $137.3 million in 2002 and 2001, respectively,
are valued at the lower of cost or market using the last-in, first-out (LIFO)
cost method. The remaining portion of the inventory is valued at the lower of
cost or market with cost being determined either on the first-in, first-out
(FIFO) basis or average cost.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost, net of accumulated
depreciation. Expenditures for renewals and betterments are capitalized and
expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is computed using the straight-line method over the following
estimated useful lives:

Buildings and improvements.................................. 10 to 39 years
Machinery and equipment..................................... 3 to 10 years

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of cost over fair value of assets of
businesses acquired. The Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
("SFAS No. 142") as of January 1, 2002. Goodwill and intangible assets acquired
in a purchase business combination and determined to have an indefinite useful
life are not amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for Impairment or Disposal of Long-Lived Assets."

In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement required the Company to perform an assessment of
whether there was an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company was required to identify its reporting
units and determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible assets,
to those reporting units as of January 1, 2002. To the extent the carrying
amount of a reporting unit exceeded the fair value of the reporting unit, the
Company would be required to perform the second step of the transitional
impairment test, as this is an indication that the reporting unit goodwill may
be impaired. The second step was required for certain reporting units within the
residential heating and cooling, Service Experts and heat transfer reporting
segments where the results of various business operations acquired during 1998
to 2000 were lower than expected. In the second step, the Company compared the
implied fair value of the reporting units goodwill with the carrying amount of
the reporting unit goodwill, both of which were measured as of the date of
adoption. The implied fair value of goodwill was determined by allocating the
fair value of the reporting unit to all of the assets (recognized and
unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation, in accordance with Statement of Financial Accounting
Standards No. 141, "Business Combinations." The residual fair value after this
allocation was the implied fair value of the reporting units' goodwill and was
less than the carrying amount of these reporting

39

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

units' goodwill by $285.7 million. Accordingly, the Company recorded a $285.7
million ($249.2 million, net of tax) impairment charge upon adoption.

The Company estimated reporting unit fair values using standard business
valuation techniques such as discounted cash flows and reference to comparable
business transactions. The discounted cash flows fair value estimates were based
on management's projected future cash flows and the estimated weighted average
cost of capital. The weighted average cost of capital was based on the risk free
interest rate and other factors such as equity risk premiums and the ratio of
total debt and equity capital.

The following reflects the Company's income (loss) before the cumulative
effect of accounting change and income (loss) adjusted to exclude goodwill
amortization for all periods presented (in thousands, except per share data):

40

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Prior to the adoption of SFAS No. 142, goodwill was being amortized on a
straight-line basis over periods generally ranging from thirty to forty years
and as of December 31, 2001, the accumulated amortization was $83.3 million. In
addition, the Company periodically reviewed long-lived assets and identifiable
intangibles for impairment as events or changes in circumstances indicated that
the carrying amount of such assets may not be recoverable. In order to assess
recoverability, the Company compared the estimated expected future cash flows
(undiscounted and without interest charges) identified with each long-lived
asset or related asset grouping to the carrying amount of such assets. For
purposes of such comparisons, portions of goodwill were attributed to related
long-lived assets and identifiable intangible assets based upon relative fair
values of such assets at acquisition. If the expected future cash flows did not
exceed the carrying value of the asset or assets being reviewed, an impairment
loss was recognized based on the excess of the carrying amount of the impaired
assets over their fair value. As a result of these periodic reviews, certain
assets, including goodwill, of an Australian subsidiary were adjusted in 2001.

SHIPPING AND HANDLING

Shipping and handling costs are included as part of Selling, General and
Administrative Expense in the accompanying Consolidated Statements of Operations
in the following amounts (in thousands):

PRODUCT WARRANTIES

A liability for estimated warranty expense is established by a charge
against operations at the time products are sold. The subsequent costs incurred
for warranty claims serve to reduce the product warranty liability. The Company
recorded warranty expense of $25.6 million, $27.2 million and $24.0 million for
the years ended December 31, 2002, 2001 and 2000, respectively.

The Company's estimate of future warranty costs is determined for each
product line. The number of units that are expected to be repaired or replaced
is determined by applying the estimated failure rate, which is generally based
on historical experience, to the number of units that have been sold and are
still under warranty. The estimated units to be repaired under warranty are
multiplied by the average cost (undiscounted) to repair or replace such products
to determine the Company's estimated future warranty cost. The Company's
estimated future warranty cost is subject to adjustment from time to time
depending on actual experience.

Total liabilities for estimated warranty expense are $63.4 million and
$61.9 million as of December 31, 2002 and 2001, respectively, and are included
in the following captions on the accompanying Consolidated Balance Sheets (in
thousands):

41

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The changes in the carrying amount of the Company's total warranty
liabilities for the year ended December 31, 2002 are as follows (in thousands):

Total warranty liability at December 31, 2001............... $ 61,902
Payments made in 2002....................................... (24,124)
Changes resulting from issuance of new warranties........... 25,580
--------
Total warranty liability at December 31, 2002............... $ 63,358
========

The change in warranty liability that results from changes in estimates of
warranties issued prior to 2002 is not significant.

INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

REVENUE RECOGNITION

Sales are recorded when products are shipped or when services are rendered.

STOCK COMPENSATION

The Company accounts for its stock based compensation under the recognition
and measurement principles of APB No. 25, "Accounting for Stock Issued to
Employees," and related interpretations ("APB 25") and has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS
No. 123"). Under APB 25, no stock-based compensation cost is reflected in net
income for grants of stock options to employees because the Company grants stock
options with an exercise price equal to the market value of the stock on the
date of grant. Had the Company used the fair value based accounting method for
stock compensation expense described by Statement of Financial Accounting
Standards ("SFAS No. 123"), the Company's diluted net income per common and
equivalent share are shown in the pro-forma amounts below (in thousands, except
per share data):

42

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred. The Company
expended approximately $38.2 million, $37.3 million and $36.5 million for the
years ended December 31, 2002, 2001 and 2000, respectively, for research and
product development activities. Research and development costs are included in
Selling, General and Administrative Expense on the accompanying Consolidated
Statements of Operations.

ADVERTISING

Production costs of commercials and programming are charged to operations
in the period first aired. The costs of other advertising, promotion and
marketing programs are charged to operations in the period incurred. Expense
relating to advertising, promotions and marketing programs was $73.4 million,
$78.4 million and $78.0 million for the years ended December 31, 2002, 2001 and
2000, respectively.

The Company adopted Emerging Issues Task Force ("EITF") Issue 01-9,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products" ("EITF 01-9"), issued by the EITF in November 2001. EITF
01-9 addressed various issues related to the income statement classification of
certain promotional payments, including consideration from a vendor to a
reseller or another party that purchases the vendor's products. As a result of
adopting EITF 01-9 in 2002, the Company restated prior year net sales, cost of
goods sold and selling, general and administrative expenses. The adoption of
EITF 01-9 reduced 2001 net sales by $6.0 million, increased cost of goods sold
by $1.4 million and decreased expenses by $7.4 million. Net sales for 2000
decreased by $5.1 million, cost of goods sold increased $0.5 million and
expenses decreased by $5.6 million.

TRANSLATION OF FOREIGN CURRENCIES

All assets and liabilities of foreign subsidiaries and joint ventures are
translated into United States dollars using rates of exchange in effect at the
balance sheet date. Revenues and expenses are translated at average exchange
rates during the respective years. The unrealized translation gains and losses
are accumulated in a separate component of stockholders' equity. Transaction
gains (losses) included in Other in the accompanying Consolidated Statements of
Operations were $1.2 million, $(0.4) million and $(1.8) million for the years
ended December 31, 2002, 2001 and 2000, respectively.

DERIVATIVES

Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). The impact of adopting SFAS No. 133 was not
significant. SFAS No. 133 requires that all derivative financial instruments be
recognized as either assets or liabilities in the balance sheet and carried at
fair value. Changes in fair value of these instruments are to be recognized
periodically in earnings or stockholders' equity depending on the intended use
of the instrument. Gains or losses on derivatives designated as fair value
hedges are recognized in earnings in the period of change. Gains or losses on
derivatives designated as cash flow hedges are initially reported as a component
of other comprehensive income and later classified into cost of goods sold in
the period in which the hedged item also affects earnings. The Company hedges
its exposure to the fluctuation on the prices paid for copper and aluminum
metals by purchasing futures contracts on these metals. Gains or losses
recognized on the closing of these contracts negate the losses or gains realized
through physical deliveries of these metals. Quantities covered by these
commodity futures contracts are for less than actual quantities expected to be
purchased. As of December 31, 2002, the Company had metals futures contracts
maturing at various dates to December 31, 2003, for which the fair value was a
liability of $1.3 million. These are hedges of forecasted transactions, and
under SFAS No. 133, such contracts are to be considered cash flow hedges.
Accordingly, the Company has recorded an unrealized loss of $0.8 million, net of
tax benefit of $0.5 million, in the Accumulated Other Comprehensive Loss
component of stockholders' equity. This
43

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

deferred loss will be reclassified into earnings as the commodity futures
contracts settle, all of which will happen within the next twelve months. Hedge
ineffectiveness was immaterial for 2002 and 2001.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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.

RECLASSIFICATIONS

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

3. REPORTABLE BUSINESS SEGMENTS:

The Company's basis of organization and the differences in the nature of
products or services (as more fully described in Note 1), were the factors used
in determining the Company's reportable segments. Financial information about
the Company's reportable business segments are as follows (in thousands):

44

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

45

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(a) In the third quarter of 2002, the Company formed joint ventures with
Outokumpu by selling to Outokumpu a 55 percent interest in the Company's
heat transfer business segment for approximately $55 million in cash and
notes. The Company accounts for its remaining 45% interest using the equity
method of accounting and includes such amounts in the Corporate and other
segment. The historical net sales, results of operations and total assets of
the Corporate and other segment have been restated to include the portions
of the heat transfer business segment that was sold to Outokumpu. The
historical net sales and results of operations of the heat transfer business
segment now presented in the Corporate and other segment were $129.3 million
and $(3.7) million for the year ended December 31, 2002, $200.5 million and
$(1.5) million for the year ended December 31, 2001, $227.8 million and
$14.6 million for the year ended December 31, 2000.

(b) During the second quarter of 2002, the Company changed its measure of
segment profit. Segment profit is based upon income from operations included
in the accompanying consolidated statement of operations except that it
excludes restructuring charges and other operating gains, losses and
expenses. All historical amounts have been restated to conform with the
current year presentation. Restructuring charges excluded from segment
profit generally consist of long-lived asset impairments, severance,
contract termination and other costs associated with exiting activities
within the segment and are considered non-recurring in nature. See Footnote
7 for the amounts and segments impacted by the Company's restructuring
charges.

(c) To facilitate comparisons, the reported segment profit amounts for the years
ended December 31, 2001 and 2000 have been adjusted to reflect the
discontinuation of goodwill and trademark amortization under Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets."

The following table sets forth certain financial information relating to
the Company's operations by geographic area based on the domicile of the
Company's operations (in thousands):

46

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. INVENTORIES:

Components of inventories are as follows (in thousands):

5. PROPERTY, PLANT AND EQUIPMENT:

Components of property, plant and equipment are as follows (in thousands):

6. ACQUISITIONS AND DIVESTITURES:

SERVICE EXPERTS INC.

On January 21, 2000, the Company acquired Service Experts Inc., a holding
company owning retail outlets for heating and air conditioning products and
services. The acquisition was accounted for under the purchase method of
accounting, under which approximately $154.6 million was allocated to the fair
value of the assets acquired, approximately $118.8 million was allocated to the
fair value of liabilities assumed and $271.5 million was allocated to goodwill.
The results of Service Experts Inc. have been fully consolidated with those of
the Company since the date of acquisition.

47

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2000 SERVICE CENTERS

In 2000, the Company acquired ten Retail Service Centers in the United
States and three Service Centers in Canada (the "2000 Service Centers") for a
total price of approximately $60.0 million in cash. In 2000, $85.4 million was
allocated to goodwill. The results of operations of the 2000 Service Centers
have been fully consolidated with those of the Company since the respective
dates of acquisition.

EUROPE

On April 5, 2000, the Company purchased the remaining 30% ownership in Ets.
Brancher S.A., the holding company owning the Company's interest in companies in
France. The Company paid $16.4 million for the interest and under the purchase
method of accounting recorded an elimination of minority interest of
approximately $12.0 million and additional goodwill of approximately $4.4
million.

The following table presents the unaudited pro forma results as if Service
Experts Inc., the 2000 Service Centers and the remaining ownership of Europe had
been acquired January 1, 2000 (in thousands, except per share data):

2001 SERVICE CENTERS

No additional Retail Service Centers were acquired in 2001; however,
contingent consideration of $8.1 million was paid to former owners of certain
centers. This amount was charged to goodwill.

OUTOKUMPU JOINT VENTURES

During August 2002, the Company completed the formation of joint ventures
with Outokumpu. Outokumpu purchased a 55 percent interest in the Company's
former heat transfer business segment in the U.S. and Europe for $55 million in
cash and notes, with the Company retaining 45 percent ownership. A pre-tax gain
of approximately $23.1 million (subject to post-closing balance sheet audit
adjustments) was recognized in conjunction with the sale and is included in the
(Gains) losses and other expenses line item in the accompanying consolidated
statement of operations. In conjunction with the sale, the Company incurred
$11.6 million of other charges and expenses. Included in this amount are asset
impairments that reduced to zero the carrying value of non-core heat transfer
assets not included in the sale and that were identified for abandonment in the
third quarter of 2002. Additionally, this amount includes transaction costs, a
pension curtailment in connection with U.S. based heat transfer employees and
indemnification of flood losses that occurred at a heat transfer manufacturing
facility in Europe in August 2002. After deducting these expenses, the Company
recognized a net pre-tax gain of $11.5 million ($6.4 million net of tax). The
Company is accounting for its remaining 45% ownership in the joint ventures
using the equity method of accounting.

FAIRCO, S.A.

In August 2002, the Company sold its 50% ownership interest in an Argentine
joint venture. The Company recognized a pre-tax loss on the sale of $3.6 million
($1.2 million net of tax). The proceeds from the sale were immaterial. The
Company's equity in earnings of Fairco S.A. was immaterial for all prior
periods.

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LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

HEATCRAFT DO BRASIL S.A.

In June 2002, the Company's Lennox Global Ltd. subsidiary purchased the
remaining 14% interest in Heatcraft do Brasil S.A., a Brazilian company that
manufactures primarily commercial refrigeration equipment, for approximately
$2.4 million.

HVAC DISTRIBUTOR

In June 2002 the Company sold the net assets of a heating, ventilation and
air conditioning ("HVAC") distributor for $4.2 million in cash and notes. The
sale resulted in a pre-tax loss of approximately $0.2 million. The revenues and
results of operations of the distributor were immaterial for all prior periods.

7. RESTRUCTURING CHARGES

During 2001, the Company undertook separate restructuring initiatives of
its Service Experts operations and certain of its manufacturing and distribution
operations. During 2002, the Company undertook an additional restructuring
initiative of its non-core heat transfer engineering business.

Retail Restructuring Program. In the second quarter of 2001, the Company
recorded a pre-tax restructuring charge of $38.0 million ($25.6 million, net of
tax), of which $3.4 million was included in cost of goods sold, for the selling,
closing or merging of 38 company-owned dealer service centers. These centers
were either under-performing financially, located in geographical areas
requiring disproportionate management effort or focused on non-HVAC activities.
The major actions of the plan consist of employee terminations, closure, sale or
merger of retail centers and completion of in-process commercial construction
jobs. All actions have been completed, with long-term lease and other exit cost
payments continuing into 2003. The revenue and net operating loss of the service
centers sold, merged or closed as a part of the Retail Restructuring Program
were $24.5 million and $3.9 million, respectively, for the year ended December
31, 2001.

The $38.0 million restructuring charge consisted of asset impairments and
estimates of future cash expenditures. Charges based on estimated cash
expenditures are as follows (in millions):

The original severance charge of $4.8 million included the termination of
605 employees. All employee termination actions had been completed. The original
other exit costs charged included $4.7 million to complete in-process commercial
construction jobs at the exit date, $4.7 million for non-cancelable operating
lease commitments on closed service center facilities and $2.9 million of other
closure related costs. Payments for these charges will continue through 2003.

49

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In the third and fourth quarter of 2001, the Company identified an
additional 15 centers for closure. The $0.4 million and $0.6 million of new
charges in the above table reflect the Company's estimate of costs related to
closure of these centers.

The other changes in severance and benefits included in the above table
were revisions to the original number of employees to be terminated as a result
of the Company finding buyers for service centers that had previously been
identified for closure. The other changes in other exit costs included in the
above table relate to higher than expected costs to complete the in-process
commercial jobs at closed centers.

Asset impairments included in the restructuring charge consisted of the
following:

The restructuring charge included impairments of $6.6 million for
long-lived assets, principally property, plant and equipment used in the
operations of the closed service centers, $5.7 million in goodwill, $3.4
million for inventory write-downs (included as a component of cost of goods
sold) and $5.2 million in accounts receivable. All asset impairment charges
were related to assets included in the Service Experts reportable segment.

The impairment charges for the long-lived assets reduced the carrying
amount of the assets to management's estimate of fair value which was based
primarily on the estimated proceeds, if any, to be generated from the sale
or disposal of the assets. The property, plant and equipment carrying value
after consideration of the impairment charge was immaterial. The goodwill
impairment charge reduced to zero any goodwill that had been recorded in
conjunction with acquisitions of specific service centers that were
completely idled and for which expected future cash flows were not
sufficient to cover the related property, plant and equipment. For the year
ended December 31, 2002, the Company has recognized as a component of the
Restructurings line item in the accompanying statement of operations $0.2
million in net gains that represent differences between the original
estimate of fair value and actual proceeds received.

The inventory and accounts receivable impairment charges recorded in
conjunction with the restructuring reduced the carrying value of service
center inventories and accounts receivables to net realizable value. These
revisions to net realizable value resulted directly from the Company's
decision to close the related service center operations. For the year ended
December 31, 2002, the Company has recognized as a component of the
Restructurings line item in the accompanying statement of operations, $0.3
million in net gains that represent differences between the original
estimate of net realizable value and actual proceeds received.

Manufacturing and Distribution Restructuring Program. In the fourth
quarter of 2001, the Company recorded pre-tax restructuring charges totaling
$35.2 million ($31.0 million, net of tax) for severance and other exit costs
that resulted from the Company's decision to sell or abandon certain
manufacturing and distribution operations. Inventory impairments of $4.4 million
were included in cost of goods sold. The major actions included in the plan were
the closing of a domestic distribution facility, the Company's Mexico sales
office, manufacturing plants in Canada, Australia and Europe and the disposal of
other non-core heat transfer businesses. All actions under the plan were
completed by September 30, 2002 except for closing the domestic distribution
facility, which will be complete by May 2003 and the disposal of the non-core
heat transfer businesses to be completed in 2003. The revenue and net operating
loss of separately identifiable operations were $36.3 million and $2.3 million,
respectively for the year ended December 31, 2001.

50

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the asset impairments by action and the operating segment
impacted are included in the following table (in millions):

The property, plant and equipment impairment consisted primarily of
manufacturing equipment written down to the cash expected to be received upon
sale or abandonment, if any. The goodwill impairment charges reduced the
goodwill associated with the closed operation to zero. The accounts receivable
and inventory write-downs were recorded in conjunction with the restructuring
since the decisions to close the operations directly impacted the net realizable
value of the related assets. Included in restructurings in the accompanying
statement of operations for the year ended December 31, 2002 are $2.0 million of
net gains upon disposal of these impaired assets that resulted from differences
between original estimates of fair and net realizable value and amounts realized
upon disposal.

A summary of the severance and other exit costs associated with the
Manufacturing and Distribution Restructuring Program are included in the
following table (in millions):

The original severance and benefits charge of $6.0 million primarily
related to the termination of 250 hourly and 46 salaried employees in Canada.
The $3.4 million of new charges represents the 2002 termination of 64 European
Refrigeration, 49 Heat Transfer and other Australian personnel. As of December
31, 2002, two employees have not been terminated. Severance and benefit payments
will continue through November 2003.

The other exit costs consist of $2.5 million for contractual lease
obligations associated with the vacated corporate office lease space and the
closed Australian manufacturing facility. Included in restructurings in the
accompanying statement of operations for the year ended December 31, 2002 are
$0.7 million of restructuring income associated with the subleasing of the
vacated corporate office lease space. The cash obligations associated with these
exit costs continue through 2004.

51

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Engineering Business Restructuring Program. In the third quarter of 2002,
the Company recorded a pre-tax restructuring charge totaling $7.5 million ($5.2
million, net of tax) consisting of $1.0 million of inventory impairments
included in cost of goods sold, severance and other exit costs that resulted
from the Company's decision to abandon the residual portion of the heat transfer
business that does not fit with the Company's strategic focus and was not
included in the joint venture with Outokumpu. The Company will continue to wind
down the business through 2003 and anticipates an additional $1.0 million in
related restructuring charges. The revenue and net operating loss associated
with the engineering business was $9.8 million and $6.9 million, respectively,
for the year ended December 31, 2002.

A summary of the severance and other exit costs, recorded in the quarter
ended September 30, 2002, associated with the Engineering Business Restructuring
Program are included in the following table (in millions):

The severance and benefits charge primarily related to the termination of
147 personnel. As of December 31, 2002, 12 employees were left to be terminated.
Severance and benefit payments will continue through December 2004.

The other exit costs consist of contractual lease and contract takeover
obligations. The cash obligations associated with these exit costs will continue
through November 2005. Included in restructurings in the accompanying statement
of operations for the year ended December 31, 2002 are $0.5 million of net gains
upon disposal of these impaired assets that resulted from differences between
original estimates of fair and net realizable value and amounts realized upon
disposal.

8. LONG-TERM DEBT AND LINES OF CREDIT:

Long-term debt at December 31 consists of the following (in thousands):

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

(1) The capitalized lease obligations and other amount for 2001 includes $46.9
million of notes that were paid off in 2002.

52

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 2002 the aggregate amounts of required principal payments
on long-term debt are as follows (in thousands):

2003........................................................ $ 13,871
2004........................................................ 21,783
2005........................................................ 72,101
2006........................................................ 11,314
2007........................................................ 11,311
Thereafter.................................................. 240,238
--------
$370,618
========

The Company has bank lines of credit aggregating $322 million, of which $9
million was borrowed and outstanding, and $34 million was committed to standby
letters of credit at December 31, 2002. Of the remaining $279 million,
approximately $155 million was available for future borrowings after
consideration of covenant limitations. Included in the lines of credit is a
domestic facility in the amount of $270 million governed by agreements between
the Company and a syndicate of banks. The facility was decreased from $300
million to $270 million as a result of the formation of joint ventures with
Outokumpu in August 2002. The facility contains certain financial covenants and
bears interest, at the Company's option, at a rate equal to either (a) the
greater of the bank's prime rate or the federal fund's rate plus 0.5% or (b) the
London Interbank Offered Rate plus a margin equal to 0.5% to 2.25%, depending
upon the ratio of total funded debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The Company pays a commitment fee,
depending upon the ratio of total funded debt to EBITDA, equal to 0.15% to 0.50%
of the unused commitment. The agreements provide restrictions on the Company's
ability to incur additional indebtedness, encumber its assets, sell its assets,
or pay dividends.

On May 8, 2002, the Company issued $143.8 million of 6.25% convertible
subordinated ("Notes"), maturing June 1, 2009, and received proceeds totaling
approximately $139 million after debt issuance costs. Interest is payable
semi-annually on June 1 and December 1 of each year. Each $1,000 Note is
convertible into 55.28 shares of common stock. Redemption can occur at the
Company's option beginning in June 2005 if the market price of the Company's
common stock has exceeded $23.52 during specified periods and at the option of
the Note holders if the market price of the Company's common stock has exceeded
$19.90 during specified periods or if the market price of the Notes is less than
95% of the market price of the stock multiplied by 55.28. The Notes are junior
in right of payment to all of our existing and future senior indebtedness, and
are structurally subordinated to all liabilities of our subsidiaries, including
trade payables, lease commitments and money borrowed.

Under a revolving period asset securitization arrangement, the Company
transfers beneficial interests in a portion of its trade accounts receivable to
a third party in exchange for cash. The Company's continued involvement in the
transferred assets is limited to servicing. These transfers are accounted for as
sales. The fair values assigned to the retained and transferred interests are
based primarily on the receivables carrying value given the short term to
maturity and low credit risk. As of December 31, 2002 and 2001, the Company has
sold $99.0 million and $143.1 million of beneficial interests in accounts
receivable. The discount incurred in the sale of such receivables of $4.3
million is included as part of Selling, General and Administrative Expense in
the accompanying Consolidated Statements of Operations.

53

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES:

The income tax provision (benefit) consisted of the following (in
thousands):

For the year ended December 31, 2002 income (loss) before income taxes was
comprised of $101 million domestic and $(6) million foreign. The tax provision
without restructuring would have been approximately $14.6 million in 2001.

The difference between the income tax provision computed at the statutory
federal income tax rate and the financial statement provision for taxes is
summarized as follows (in thousands):

Deferred income taxes reflect the tax consequences on future years of
temporary differences between the tax basis of assets and liabilities and their
financial reporting basis and are reflected as current or non-current depending
on the timing of the expected realization. The deferred tax provision (benefit)
for the periods shown represents the effect of changes in the amounts of
temporary differences during those periods.

54

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred tax assets (liabilities), as determined under the provisions of
SFAS No. 109, "Accounting for Income Taxes," were comprised of the following at
December 31 (in thousands):

The Company has net operating loss carryforwards which expire at various
dates in the future. The deferred tax asset valuation allowance relates
primarily to the operating loss carryforwards in various U.S. States, Europe and
Canada. The increase is primarily the result of foreign losses not benefited as
well as an increase of $2.9 million related to a change in expected realization
of deferred tax assets existing at December 31, 2001.

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future federal and foreign taxable income of
approximately $287 million and future state taxable income, a subset of federal
income, of approximately $193 million during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not that the Company will realize the benefits of these
deductible differences, net of the existing valuation allowances at December 31,
2002.

No provision has been made for income taxes which may become payable upon
distribution of the foreign subsidiaries' earnings since management considers
substantially all of these earnings permanently invested. As

55

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of December 31, 2002, the unrecorded deferred tax liability related to the
undistributed earnings of the Company's foreign subsidiaries was insignificant.

10. CURRENT ACCRUED EXPENSES:

Significant components of current accrued expenses are as follows (in
thousands):

11. EMPLOYEE BENEFIT PLANS:

PROFIT SHARING PLANS

The Company maintains noncontributory profit sharing plans for its eligible
domestic salaried employees. These plans are discretionary as the Company's
contributions are determined annually by the Board of Directors. Provisions for
contributions to the plans amounted to $7.0 million, $5.0 million and $7.2
million in 2002, 2001 and 2000, respectively.

EMPLOYEE BENEFITS TRUST

The Company also has an Employee Benefits Trust (the "Trust") to provide
eligible employees of the Company, as defined, with certain medical benefits.
Trust contributions are made by the Company as defined by the Trust agreement.

EMPLOYEE STOCK PURCHASE PLAN

The Company has an employee stock purchase plan for which 2,575,000 shares
of common stock have been reserved. The shares are offered for sale to employees
only, through payroll deductions, at prices equal to 85% of the lesser of the
fair market value of the Company's common stock on the first day of the offering
period or the last day of the offering period. Under the plan, participating
employees purchased 516,580 and 676,660 shares in 2002 and 2001, respectively.

PENSION AND POSTRETIREMENT BENEFIT PLANS

The Company has domestic and foreign pension plans covering substantially
all employees. The Company makes annual contributions to the plans equal to or
greater than the statutory required minimum. The Company also maintains an
unfunded postretirement benefit plan which provides certain medical and life
insurance benefits to eligible employees. The pension plans are accounted for
under provisions of SFAS No. 87, "Employers' Accounting for Pensions." The
postretirement benefit plan is accounted for under the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other than Pensions."
The

56

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

following table sets forth amounts recognized in the Company's financial
statements and the plans' funded status (in thousands):

For measurement purposes, a 9% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2003. The rate was assumed
to decrease gradually to 5.0% by 2008 and remain at that level thereafter.

57

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The benefit obligation and fair value of plan assets for the pension plans
with benefit obligations in excess of plan assets were approximately
$186,643,000 and $128,166,000, respectively, as of December 31, 2002, and
$86,336,000 and $58,936,000, respectively, as of December 31, 2001.

Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in
thousands):

12. STOCK-BASED COMPENSATION PLANS:

STOCK OPTION AND RESTRICTED STOCK PLAN

The Company has a Stock Option and Restricted Stock Plan, which was amended
in September 1998 (the "1998 Incentive Plan").

Under the 1998 Incentive Plan, the Company is authorized to issue options
for 18,254,706 shares of common stock. As of December 31, 2002, 15,858,781
shares of common stock have been granted and 2,305,619 shares have been
cancelled or repurchased. Consequently, as of December 31, 2002, there are
4,701,544 shares available for grant. Under the 1998 Incentive Plan, the
exercise price equals the stock's fair value on the date of grant. The 1998
Incentive Plan options granted prior to 1998 vest on the date of grant.
Beginning in 1998, the 1998 Incentive Plan options vest over three years. The
1998 Incentive Plan options issued prior to December 2000 expire after ten
years. The options issued beginning in December 2000 expire after seven years.

The Company, in connection with the acquisition of Service Experts Inc.,
assumed 416,059 outstanding stock options which are outstanding and fully
vested.

58

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of option activity follows (in thousands, except per share data):

The following table summarizes information about stock options outstanding
at December 31, 2002 (in thousands, except per share data and years):

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:

59

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PERFORMANCE SHARE PLAN

The Company has a long-term incentive plan, the Lennox International Inc.
Performance Share Plan (the "Performance Share Plan"). Under the Performance
Share Plan, performance shares are awarded (the "Fixed Performance Awards") to
certain employees at the discretion of the Board of Directors as of the
beginning of each fiscal year. After ten years of employment (the "Vesting
Period"), the Fixed Performance Awards are converted to an equal number of
shares of the Company's common stock. If certain pre-defined performance
measures are met by the Company over a three-year period, the Vesting Period is
accelerated from ten years to three years for 25% to 100% of the Fixed
Performance Awards granted, depending on the Company's performance. Compensation
expense is measured based on the market price of the stock at date of grant and
is recognized on a straight-line basis over the performance period. The
weighted-average grant-date fair values for Fixed Performance Awards granted in
2002 were $15.32 and in 2000 were $8.52 per share. No Fixed Performance Awards
were granted in 2001. The 63,039,254 shares of common stock issued as of
December 31, 2002 include 1,773,799 shares which represent Fixed Performance
Awards that have not yet vested and 478,640 shares which represent Fixed
Performance Awards which have vested but have not been converted to shares of
the Company's common stock.

The Company also has a Variable Performance Share Plan (the "Variable
Performance Share Plan"). Under the Variable Performance Share Plan, plan
participants may also earn additional shares of the Company's common stock (the
"Variable Performance Awards"). The number of additional shares can range from
0% to 100% of the Fixed Performance Awards granted, depending on the Company's
performance over a three-year period. There are no additional vesting
requirements once the Variable Performance Awards have been earned. Compensation
expense is measured by applying the market price of the Company's stock at the
end of the period to the number of Variable Performance Awards that are expected
to be earned. Such expense is recognized over the performance period. As of
December 31, 2002, no Variable Performance Awards were expected to be earned in
future periods.

13. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

The Company has various leases relating principally to the use of operating
facilities. Rent expense for 2002, 2001 and 2000 was approximately $69.1
million, $69.9 million and $67.3 million, respectively.

The approximate minimum commitments under all non-cancelable leases at
December 31, 2002, are as follows (in thousands):

2003........................................................ $ 54,036
2004........................................................ 33,348
2005........................................................ 22,761
2006........................................................ 14,698
2007........................................................ 9,533
Thereafter.................................................. 65,479
--------
$199,855
========

LITIGATION

The Company is involved in various claims and lawsuits incidental to its
business. In addition, the Company and its subsidiary Heatcraft Inc. have been
named in four lawsuits in connection with its former heat transfer operations.
The lawsuits allege personal injury resulting from alleged emissions of
trichloroethylene, dichloroethylene, and vinyl chloride and other unspecified
emissions from the South Plant in Grenada,

60

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Mississippi, previously owned by Heatcraft Inc. It is not possible to predict
with certainty the outcome of these matters; however, based on present
knowledge, management believes that it is unlikely that resolution of these
matters will result in a material liability for the Company. As of December 31,
2002, no accrual has been made for these matters.

The Company has issued guarantees to third parties in conjunction with the
sale of Company assets and divestiture of businesses. These guarantees indemnify
the respective buyers against certain liabilities that may arise in connection
with the sales transactions and business activities prior to the closing of the
sale. These indemnification obligations typically pertain to breach of
representations and warranties and environmental and tax liabilities.
Liabilities recognized at December 31, 2002 related to these guarantees are
approximately $3.5 million. The maximum obligation under these guaranties is not
determinable. No assets are held as collateral and no specific recourse
provisions exist.

14. EARNINGS PER SHARE:

Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are computed by dividing net income by the sum of the
weighted average number of shares and the number of equivalent shares assumed
outstanding, if dilutive, under the Company's stock-based compensation plans. As
of December 31, 2002 the Company had 60,786,815 shares outstanding of which
3,009,656 were held as treasury shares. Diluted earnings per share are computed
as follows (in thousands, except per share data):

Options to purchase 5,542,241 shares of common stock at prices ranging from
$13.21 to $49.63 per share, options to purchase 4,528,180 shares of common stock
at prices ranging from $10.31 to $49.63 per share and 5,061,136 shares of common
stock at prices ranging from $7.88 to $49.63 per share were outstanding for the
years ended December 31, 2002, 2001 and 2000, respectively, but were not
included in the diluted earnings per share calculation because the assumed
exercise of such options would have been anti-dilutive. The Company's
convertible notes were not considered in the diluted earnings per share
calculation because the conversion of such notes is contingent upon certain
conversion criteria having been met (see Note 8). The Notes are convertible into
approximately 8 million shares.

61

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. QUARTERLY FINANCIAL INFORMATION (unaudited):

FINANCIAL RESULTS (in thousands, except per share data)

STOCK PRICES

16. TREASURY STOCK:

On November 1, 1999, the Company's Board of Directors authorized the
purchase of up to 5,000,000 shares of the issued and outstanding common stock.
As of December 31, 2002 the Company had purchased 3,587,300 of such shares at a
total cost of $37.7 million. There were no outstanding commitments as of
December 31, 2002 to repurchase the remaining 1,412,700 shares. When treasury
shares are reissued, any difference between the average acquisition cost of the
shares and the proceeds from re-issuance is charged or credited to additional
paid-in capital.

17. INVESTMENTS IN AFFILIATES:

Investments in affiliates in which the Company does not exercise control
and has a 20% or more voting interest are accounted for using the equity method
of accounting. Investments in which the Company owns less than 20% are accounted
for at historical cost.

Investments in affiliated companies accounted for under the equity method
consist of 45% common stock ownership interest in Outokumpu (see Note 1), a
joint venture engaged in the manufacture and sale of heat

62

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transfer components -- primarily coils; a 24.5% common stock ownership interest
in Alliance, a joint venture engaged in the manufacture and sale of compressors;
a 50% common stock ownership is Frigus-Bohn, a Mexican joint venture that
produces unit coolers and condensing units; and an 18% interest in Kulthorn
Kirby Public Company Limited, a Thailand company engaged in the manufacture of
compressors for refrigeration applications. The Company has recorded $3.0
million, $(0.0) million and $(1.3) million of equity in the earnings (losses) of
these affiliates for the years ended December 31, 2002, 2001 and 2000,
respectively, and has included these amounts in SG&A in the accompanying
Consolidated Statements of Operations. The carrying amount of investments in
affiliates as of December 31, 2002 is $39.8 million.

18. COMPREHENSIVE INCOME:

The accumulated balances for each classification of comprehensive income
are as follows:

The net change in cash flow hedges during 2002 consisted of $3.1 million,
net of tax of $(1.3) million, in reclassifications to earnings and $(0.8)
million, net of tax of $0.3 million, in changes in the fair value of derivative
contracts.

19. GOODWILL AND OTHER INTANGIBLE ASSETS

On January 1, 2002, the Company adopted SFAS No. 142 and recorded a $285.7
million impairment of goodwill ($249.2 million, net of tax). The adoption of
SFAS No. 142 requires that goodwill and other intangible assets with an
indefinite useful life no longer be amortized as expenses of operations but
rather tested for impairment at least annually by using a fair-value-based test.
The impairment charge relates primarily to the 1998 -- 2000 acquisitions of the
Company's retail and hearth products operations, where lower than expected
operating results occurred. The Company's estimates of fair value for its
reporting units were determined based on a combination of the future earnings
forecasts using discounted values of projected cash flows and market values of
comparable businesses.

The changes in the carrying amount of goodwill for the year ended December
31, 2002, in total and by segment, are as follows (in thousands):

63

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Identifiable intangible assets, subject to amortization, as of December 31,
2002 are recorded in Other Assets in the accompanying consolidated balance sheet
and are comprised of the following (in thousands):

Amortization of intangible assets for the years ended December 31, 2002 and
December 31, 2001 was approximately $5.4 million and $4.8 million, respectively.
Amortization expense for 2003 to 2007 is estimated to be approximately $3.4
million in 2003, $2.6 million in 2004, $1.4 million in 2005, $1.0 million in
2006 and $0.8 million in 2007. As of December 31, 2002, the Company had $15.1
million of intangible assets, primarily pension intangible assets and
trademarks, which are not subject to amortization.

20. RELATED PARTY TRANSACTIONS:

John W. Norris, Jr., LII's Chairman of the Board, David H. Anderson, Thomas
W. Booth, Stephen R. Booth, David V. Brown and John W. Norris III, each a
director of Lennox, as well as other LII stockholders who may be immediate
family members of the foregoing persons are, individually or through trust
arrangements, members of AOC Land Investment, L.L.C. AOC Land Investment L.L.C.
owns 70% of AOC Development II, L.L.C., which owns substantially all of One Lake
Park, L.L.C. LII is leasing part of an office building owned by One Lake Park,
L.L.C. for use as the LII corporate headquarters. The lease, initiated in 1999,
has a term of 25 years and the lease payments for 2002 totaled approximately
$2.9 million. LII also leases a portion of Lennox Center, a retail complex owned
by AOC Development, L.L.C., for use as offices. The lease, initiated in 2000,
terminates in March 2003 and the lease payments for 2002 totaled approximately
$122,580. AOC Land Investment, L.L.C. also owns 70% of AOC Development, L.L.C.
LII believes that the terms of its leases with One Lake Park L.L.C. and AOC
Development, L.L.C. are comparable to terms that could be obtained from
unaffiliated third parties.

21. STOCK RIGHTS:

On July 27, 2000, the Board of Directors of the Company declared a dividend
of one right ("Right") for each outstanding share of its common stock to
stockholders of record at the close of business on August 7, 2000. Each Right
entitles the registered holder to purchase from the Company a unit consisting of
one one-hundredth of a share (a "Fractional Share") of Series A Junior
Participating Preferred Stock, par value $.01 per share, at a purchase price of
$75.00 per Fractional Share, subject to adjustment.

22. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying amounts of cash and cash equivalents, accounts and notes
receivable, net, accounts payable and other current liabilities approximate fair
value due to the short maturities of these instruments. The carrying amount of
long-term debt approximates fair value due to interest rates that approximate
current market rates for instruments of similar size and duration.

64

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

As discussed in the Company's Current Report on Form 8-K dated May 20,
2002, effective May 20, 2002, the Board of Directors of the Company (as
recommended by the Company's Audit Committee) approved the dismissal of Arthur
Andersen LLP as the Company's independent auditors and the appointment of KPMG
LLP to serve as the Company's independent auditors for the year ending December
31, 2002.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information contained under the captions "Proposal 1: Election of
Directors" and "Ownership of LII Common Stock" in the Company's definitive Proxy
Statement for the Company's Annual Meeting of Stockholders to be held May 16,
2003 (the "Proxy Statement") is incorporated herein by reference in response to
this item. See Item 1 above for information concerning executive officers.

ITEM 11. EXECUTIVE COMPENSATION

Information required by Item 11 is specifically incorporated herein by
reference to the Proxy Statement. Such incorporation by reference shall not be
deemed to specifically incorporate by reference the information referenced in
Item 402(a)(8) of Regulation S-K and specifically incorporated by reference into
any other filings of the Company under the Securities Act of 1933 or the
Securities Exchange Act of 1934.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information contained under the captions "Proposal 1: Election of
Directors" and "Ownership of LII Common Stock" in the Proxy Statement is
incorporated herein by reference in response to this item.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information contained under the caption "Certain Relationships and Related
Party Transactions" in the Proxy Statement is incorporated herein by reference
in response to this item.

ITEM 14. CONTROLS AND PROCEDURES

The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures within 90 days of the filing of
this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's current disclosure controls
and procedures are effective for the purpose of ensuring that information
required to be disclosed by the Company in this report has been processed,
summarized and reported in a timely manner. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.

PART IV

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

(a) Financial Statements, Financial Statement Schedules and Exhibits

(1) The following financial statements of Lennox International Inc.
and subsidiaries are included in Part II, Item 8 of this Form 10-K:

Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations for the Years Ended December 31,
2002, 2001 and 2000

65

Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements for the Years Ended December
31, 2002, 2001 and 2000

(2) The following financial statement schedule for Lennox
International Inc. and subsidiaries is included herein:

Report of Independent Public Accountants on Financial Statement Schedule
(pages 32 and 71 of Form 10-K) Schedule II -- Valuation and Qualifying
Accounts and Reserves (page 72 of Form 10-K)

(3) Exhibits:

The exhibits listed in the accompanying Index to Exhibits on pages
73 through 76 of this Form 10-K are filed or incorporated by reference
as part of this Form 10-K.

(b) Reports on Form 8-K:

During the quarter ended December 31, 2002, the Company filed one
Current Report on Form 8-K, dated October 22, 2002 and filed October 24,
2002 reporting under Item 7 -- Financial Statements and Exhibits and Item
9 -- Regulation FD Disclosure, a press release regarding financial results
for the quarter ended September 30, 2002.

66

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.

LENNOX INTERNATIONAL INC.

By: /s/ ROBERT E. SCHJERVEN
----------------------------------
Robert E. Schjerven
Chief Executive Officer

March 27, 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 in the capacities and on the dates indicated.

68

CERTIFICATION

I, Robert E. Schjerven, certify that:

1. I have reviewed this annual report on Form 10-K of Lennox
International Inc.;

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

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

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

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

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

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

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

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

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

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ ROBERT E. SCHJERVEN
--------------------------------------
Robert E. Schjerven
Chief Executive Officer

Date: March 27, 2003

69

CERTIFICATION

I, Richard A. Smith, certify that:

1. I have reviewed this annual report on Form 10-K of Lennox
International Inc.;

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

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

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

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

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

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

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

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

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

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ RICHARD A. SMITH
--------------------------------------
Richard A. Smith
Executive Vice President and
Chief Financial Officer

Date: March 27, 2003

70

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

To the Stockholders and Board of Directors of Lennox International Inc.:

We have audited in accordance with auditing standards generally accepted in
the United States the consolidated financial statements of Lennox International
Inc. and Subsidiaries included in this Annual Report on Form 10-K and have
issued our report thereon dated February 6, 2002. Our audits were made for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. Schedule II, Valuation and Qualifying Accounts and Reserves,
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated statements taken as a whole.

ARTHUR ANDERSEN LLP(1)

Dallas, Texas
February 6, 2002

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

(1) This report is a copy of the previously issued report covering fiscal years
2001 and 2000. The predecessor auditors have not reissued their report. The
consolidated financial statements as of December 31, 2001 and for each of
the years in the two-year period then ended have been revised to include the
transitional disclosures required by Statement of Financial Accounting
Standard No. 142, Goodwill and Other Intangible Assets (see Note 2 under the
heading "Goodwill and Other Intangible Assets"). The report of Arthur
Andersen LLP presented above does not extend to these changes.
71

LENNOX INTERNATIONAL INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002

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

(1) Uncollectible accounts charged off, net of recoveries. Also includes $0.9
million transferred as part of Outokumpu transaction in 2002.

72

INDEX TO EXHIBITS

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

* Management contracts and compensatory plans and arrangements required to be
filed as exhibits to this Form 10-K pursuant to Item 14(c).

76