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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2002       Commission File No. 1-6651

HILLENBRAND INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

(812) 934-7000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)

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

Yes         Ö                                              No_________

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, without par value – 61,692,406 as of August 2, 2002.

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HILLENBRAND INDUSTRIES, INC.

INDEX TO FORM 10-Q

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PART I - FINANCIAL INFORMATION

Item 1.   FINANCIAL STATEMENTS (Unaudited)

Hillenbrand Industries, Inc. and Subsidiaries

See Notes to Condensed Consolidated Financial Statements

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Hillenbrand Industries, Inc. and Subsidiaries

See Notes to Condensed Consolidated Financial Statements

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Hillenbrand Industries, Inc. and Subsidiaries
Condensed Statements of Consolidated Cash Flows

See Notes to Condensed Consolidated Financial Statements

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Hillenbrand Industries, Inc. and Subsidiaries

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2.	Supplementary Balance Sheet Information
	The following information pertains to non-insurance assets and consolidated shareholders’ equity:

	6/30/02				12/01/01
Allowance for possible losses and
discounts on trade receivables		$	38		$	44
Inventories
Finished Products		$	72		$	69
Work in Process			21			22
Raw Materials			11			12
Total Inventory		$	104		$	103
Accumulated depreciation of equipment
leased to others and property		$	566		$	575
Accumulated amortization of intangible assets		$	132		$	128
Capital Stock:
Preferred stock, without par value:
Authorized 1,000,000 shares; shares issued	None			None
Common stock, without par value:
Authorized 199,000,000 shares; shares issued	80,323,912			80,323,912

3.	Earnings per Common Share
	Basic earnings per common share were computed by dividing net income by the average number of common shares outstanding including the effect of deferred vested shares under the Company’s Senior Executive Compensation Program. Diluted earnings per common share were computed consistent with the basic earnings per share calculation including the effect of potentially dilutive unissued common shares relating to stock options. Cumulative treasury stock acquired, less cumulative shares reissued, have been excluded in determining the average number of shares outstanding.
	Earnings per share is calculated as follows:

		Quarterly						Year-To-Date
		Period Ended						Period Ended
		06/30/02			06/30/01			06/30/02			06/30/01
Net income (in thousands)		$	32,854		$	43,284		$	149,439		$	118,273
Average shares outstanding-basic			62,944			62,757			62,877			62,712
Average shares outstanding-diluted			63,272			62,990			63,159			62,908
Basic earnings per common share		$	0.52		$	0.69		$	2.38		$	1.89
Diluted earnings per common share		$	0.52		$	0.69		$	2.37		$	1.88

4.	Comprehensive Income (Loss)
	Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income”, requires unrealized gains or losses on the Company’s available-for-sale securities and foreign currency translation adjustments to be included in accumulated other comprehensive income (loss).

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The components of comprehensive income (loss) are as follows (in millions):

		Quarterly						Year-To-Date
		Period Ended						Period Ended
		06/30/02			06/30/01			06/30/02			06/30/01
Net income		$	33		$	43		$	149		$	118
Net change in unrealized gain (loss) on available-for-sale securities			50			(35	)		16			9
Foreign currency translation adjustment			4			(7	)		–			(10	)
Comprehensive income (loss)		$	87		$	1		$	165		$	117

	The composition of accumulated other comprehensive (loss) at June 30, 2002 and December 1, 2001 is the cumulative adjustment for unrealized gains (losses) on available-for-sale securities of ($17) and ($15) million, respectively, and the foreign currency translation adjustment of ($18) and ($19) million, respectively.
5.	Contingencies
	On August 16, 1995, Kinetic Concepts, Inc. (KCI), and Medical Retro Design, Inc. (collectively, the “plaintiffs”), filed suit against Hillenbrand Industries, Inc., and its subsidiary Hill-Rom Company, Inc., in the United States District Court for the Western District of Texas, San Antonio Division. The plaintiffs allege violation of various antitrust laws, including illegal bundling of products, predatory pricing, refusal to deal and attempting to monopolize the hospital bed industry. They seek monetary damages totaling in excess of $350 million, trebling of any damages that may be allowed by the court, recovery of attorneys’ fees, and injunctions to prevent further alleged unlawful activities.
	On November 20, 1996, the Company filed a Counterclaim to the above action against KCI in the U.S. District Court in San Antonio, Texas. The Counterclaim alleges, among other things, that KCI has attempted to monopolize the therapeutic bed market, interfere with the Company’s and Hill-Rom’s business relationships by conducting a campaign of anticompetitive conduct, and abused the legal process for its own advantage.
	The original claims by the plaintiffs against Hillenbrand Industries and the counterclaims by the Company against KCI are currently scheduled to go to trial in late August 2002. A preliminary verdict with respect to the trial is expected prior to issuance of the Company’s 2002 financial statements. The Company believes it has meritorious defenses to the claims against it and is aggressively defending itself against all allegations. Accordingly, it has not recorded any loss provision relative to damages sought by the plaintiffs.
	In 2000, Hill-Rom, Inc. sued Ohmeda Medical and Datex-Ohmeda, Inc. (collectively, “Ohmeda”) in Federal Court in Indianapolis, Indiana alleging

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	patent infringement. Hill-Rom succeeded in obtaining a preliminary injunction prohibiting Ohmeda from continuing efforts to make, import, sell, or offer for sale its combination incubator and infant warmer, the Giraffe Omnibed, pending a jury trial on Hill-Rom’s patent infringement claim. A jury trial on this matter was held in May 2002, with the jury finding on behalf of Hill-Rom. The trial for determination of damages is scheduled for September 2002. If Ohmeda were to be ultimately successful in an appeal and prove damages, Ohmeda could recover damages against the Company. The Company has not recorded any gain or loss relative to this matter.
	Batesville Casket Company and certain funeral homes are subject to a suit filed in the State Superior Court, Lake County, California, alleging violations of portions of the California Business and Professional Code concerning unfair business practices and false advertising related to sales of caskets in California. The plaintiff sought statewide injunctive relief, attorneys’ fees, costs, and restitution on sales of protective caskets, which depending on the relevant time period could have involved sales in excess of $100 million. Batesville Casket and the plaintiff reached a settlement in the first quarter of 2002, subject to court approval. The settlement amount is not material to the Company’s financial condition, results of operations, or cash flows. In the event the settlement agreement is not approved, the parties could proceed to trial in December 2002. The Company believes it has meritorious defenses to the claims against it and would aggressively defend itself against all allegations. Accordingly, it has not recorded any loss provision relative to damages sought by the plaintiffs in excess of the settlement amount.
	Hill-Rom manufactures and distributes medical devices that are regulated by the Food and Drug Administration (FDA) in the United States and similar agencies in other countries. The regulations adopted and standards imposed by these agencies evolve over time and require Hill-Rom to make changes in its manufacturing processes and quality systems to remain in compliance. These agencies routinely inspect Hill-Rom’s facilities, as with other medical device manufacturers. If Hill-Rom fails to comply with applicable regulations and standards, determined upon inspections or otherwise, Hill-Rom may have to recall products and cease their manufacture and distribution.
	As necessary, Hill-Rom engages in voluntary product recalls and other corrective actions, including voluntarily ceasing shipment of devices. Hill-Rom has also implemented an extensive program to enhance its quality systems to comply with the FDA Quality System Regulation and Good Manufacturing Practices requirements and the regulatory equivalents under the Medical Device Directive in the European Union where its other manufacturing sites are located.
	Over the past year most of Hill-Rom’s United States facilities have been inspected by FDA representatives who, as is customary in the industry, issued reports of their findings to management for discussion and remediation. While Hill-Rom believes it has responded fully to the findings and has implemented corrective actions when necessary, any determination by the FDA or similar

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	foreign agency that Hill-Rom’s products or quality systems do not comply with applicable regulations could result in future product recalls, injunctions preventing shipment of products, or other enforcement actions that could have a material adverse effect on financial condition, results of operations or cash flow.
	The Company is committed to operating all of its businesses in a way that protects the environment. Within the past several years, the Company has voluntarily entered into remediation agreements with various environmental authorities, and has been issued Notices of Violation alleging violation of certain permit conditions. The Notices of Violation involved no or only a minor fine or penalty. In most cases, the voluntary remediation activities are complete or nearing completion. The Company has also been notified as a potentially responsible party in investigations of certain offsite disposal facilities. Based on the nature and volume of materials involved, the cost of such waste-site cleanups to be incurred by the Company in which it is currently involved is not expected to exceed $5 million. The Company has provided adequate reserves in its financial statements for all of these matters, which have been determined without consideration of possible loss recoveries from third parties. Future events or changes in existing laws and regulations or their interpretation may require the Company to make additional expenditures in the future. The cost or need for any such additional expenditures is not known.
	The Company is subject to various other claims and contingencies arising out of the normal course of business, including those relating to commercial transactions, product liability, employee related matters, safety, health, taxes, environmental and other matters. Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. It is reasonably possible that some litigation matters for which reserves have not been established could be decided unfavorably to the Company. Management believes, however, that the ultimate liability, if any, in excess of amounts already provided or covered by insurance, is not likely to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
6.	Unusual Charges
	2002 Actions
	In the first quarter of 2002, the Company announced realignment and streamlining efforts throughout the organization. A charge was taken in relation to these activities, comprised of severance and facility closing costs of $3 million each, in addition to a $7 million impairment charge. The charge was offset by a $2 million reversal of a 1999 provision as actual costs incurred were favorable to those estimated in the original plan. The total net charge for the quarter, which was recorded within the Unusual charges line of the Statement of Consolidated Income, was $11 million, with the cash component of the charge approximating $4 million.

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Included in these actions were the reduction of 30 employees in the United States and Canada and the closure of the Canadian office for Forethought, the reduction of approximately 90 employees in the United States at Batesville Casket and a sales force reduction at Hill-Rom. The impairment charge of $7 million related to the write-down of a Forethought website that will no longer be used to generate revenue ($6 million) and an impaired investment asset at the corporate level ($1 million). The following table summarizes the significant components and the related utilization of the non-impairment components of the above charges:

	Original Charge			Utilization				Remaining Accrual
Severance and Benefit Costs:
HRC	$	1.0		$	(1.0	)		$	–
BCC		1.0			(0.9	)			0.1
FFS		1.0			(0.7	)			0.3
Closure of Forethought’s
Canadian Office		3.0			(2.5	)			0.5
Total	$	6.0		$	(5.1	)		$	0.9

2001 Actions In the first quarter of 2001, Forethought announced a realignment of certain operations, incurring an unusual charge of $1 million. Additionally, the Company announced the retirement of W August Hillenbrand, former Chief Executive Officer. The Company incurred a charge of $8 million related to future payments and other compensation related items under the terms of Mr. Hillenbrand’s retirement agreement. Also in the first quarter, approximately $2 million of a 1999 charge was reversed as actual costs incurred were favorable to those originally expected. In addition, the Company completed the disposition of facilities idled under prior actions, resulting in cumulative gains of $2 million. In the second quarter, Hill-Rom announced realignment and streamlining efforts, primarily within the home care and long-term care businesses. The total net charge for this action was $20 million, with a cash component of $12 million. The charge was comprised of severance and other benefits costs and an impairment of underperforming assets in a non-core product line of $12 million and $8 million, respectively. The severance actions impacted 400 employees in the United States and Europe, all of which have been terminated.

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In the fourth quarter, Batesville Casket announced certain realignment actions, incurring an unusual charge of $1 million. Also during the year the Company incurred approximately $1 million of incremental costs related to prior actions which were classified as Unusual charges within the Statement of Consolidated Income. The following table summarizes the significant components and the related utilization of the non-impairment components of the above charges:

	Original Charge			Utilization				Remaining Accrual
Severance and Benefit Costs:
HRC	$	12.0		$	(10.8	)		$	1.2
BCC		1.0			(0.6	)			0.4
FFS		1.0			(1.0	)			–
Corporate		8.0			(2.6	)			5.4
Total	$	22.0		$	(15.0	)		$	7.0

Other Of the reserve balances outlined above, approximately $3 million is included in other long-term liabilities related to certain retirement obligations of the Company’s former Chief Executive Officer. Other than such retirement obligations, the Company expects substantially all other costs to be incurred by the end of fiscal 2002 or shortly thereafter.

7.

Income Taxes The income tax provision in 2002 reflects the first quarter reversal of $26 million and the third quarter reversal of $6 million of tax reserves previously provided for potential disallowances and valuation allowances no longer considered necessary. During the first quarter of 2002, the Company settled an IRS examination of the 1996 to 1998 tax years. The favorable settlement of the IRS examination resulted in the reversal of tax reserves and recognition in income of approximately $18 million. Also during the first quarter, the Company recognized the benefit of approximately $8 million of operating loss carryforwards and other tax attributes in certain foreign jurisdictions. In the third quarter, the Company recognized the release of $6 million of tax reserves associated with the resolution of certain domestic and foreign tax matters.

Excluding the effect of these reversals, the effective tax rate in 2002 would have been approximately 34.0% compared to 36.0% in the comparable prior year period. The effective tax rate was adjusted downward in the third quarter reflecting the continuing benefit of recent tax initiatives undertaken by the Company.

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8.

Segment Reporting Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information”, requires reporting of segment information that is consistent with the way in which management operates and views the Company. In analyzing segment performance, the Company’s management reviews income before income taxes and unusual items and net income before unusual items. The Company’s reporting segments are Health Care (Hill-Rom), Funeral Services Products (Batesville Casket Company – Batesville) and Funeral Services Insurance (Forethought Financial Services – Forethought). Corporate, while not a segment, is presented separately to aid in the reconciliation of segment information to that reported in the Statements of Consolidated Income. Financial information regarding the Company’s reportable segments is presented below:

				Funeral Services							Corporate
	Health										and Other
	Care			Products			Insurance				Expense				Consolidated
Quarterly Period Ended June 30, 2002
Net revenues	$	285		$	149		$	62			$	–			$	496
Income before income taxes	$	33		$	42		$	(25	)		$	(11	)		$	39
Net income (a)	$	22		$	28		$	(17	)		$	–			$	33
Quarterly Period Ended
June 30, 2001
Net revenues	$	284		$	150		$	95			$	–			$	529
Income before income taxes	$	38		$	39		$	8			$	(17	)		$	68
Net income	$	24		$	25		$	5			$	(11	)		$	43

				Funeral Services							Corporate
	Health										and Other
	Care			Products			Insurance				Expense				Consolidated
Year-to-Date Period Ended June 30, 2002
Net revenues	$	884		$	472		$	216			$	–			$	1,572
Income before income taxes
and unusual items	$	141		$	136		$	(42	)		$	(45	)		$	190
Net income before unusual items (a)	$	92		$	89		$	(28	)		$	3			$	156
Unusual items (after taxes) (b)															$	(7	)
Net income															$	149
Year-to-Date Period Ended
June 30, 2001
Net revenues	$	872		$	482		$	287			$	–			$	1,641
Income before income taxes
and unusual items	$	112		$	131		$	22			$	(54	)		$	211
Net income before unusual items	$	71		$	84		$	14			$	(34	)		$	135
Unusual items (after taxes) (c)															$	(17	)
Net income															$	118

(a)	Corporate and Other Expense includes the first quarter reversal of $26 million and the third quarter reversal of $6 million    of previously provided tax reserves for potential disallowances and valuation allowances no longer considered necessary.
(b)	Reflects a $7 million (after tax) net charge for business realignment and work force reduction activities and certain    asset impairments, partially offset by the reversal of a 1999 provision as prior costs incurred were favorable to those    originally expected.
(c)	Reflects a $17 million (after tax) net charge for the retirement of the Company’s Chief Executive Officer, the realignment of    certain operations, workforce reduction activities and certain asset impairments partially offset by a gain on the sale of    two idled facilities, which were closed as part of a prior unusual charge, and the partial reversal of a 1999 provision as    actual costs incurred were favorable to those originally expected.

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9.

Subsequent Events On August 2, 2002, the Company entered into two new unsecured credit facilities consisting of $500 million (the “Credit Facilities”) to be used to finance acquisitions and for working capital, capital expenditures and other corporate purposes. The Credit Facilities, which are with a syndicate of banks led by Bank of America, N. A. and Citicorp USA, Inc. (as Administrative Agent and Syndication Agent, respectively) consist of a $250 million 364-day senior revolving credit facility and a $250 million three-year senior revolving credit facility. Borrowings under the Credit Facilities bear interest at variable rates, as defined. The availability of borrowings under the Credit Facilities is subject to the Company’s ability at the time to meet certain specified conditions. These conditions include maximum debt to capital, absence of default under the facilities and continued accuracy of the representations and warranties contained in the Credit Facilities. During July, the Company repurchased 445,000 shares of its common stock at a cost of $22 million.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Hillenbrand Industries is organized into two business groups. The Health Care Group, which is considered one reporting segment, consists of Hill-Rom. The Funeral Services Group consists of two reporting segments, Funeral Services Products (Batesville Casket Company – Batesville) and Funeral Services Insurance (Forethought Financial Services – Forethought).

In October, 2001, the Company announced that its board of directors had approved a change in the Company’s fiscal year end from the Saturday nearest November 30 each year to September 30, effective in 2002. Due to this change, Management’s Discussion and Analysis of Financial Condition and Results of Operations presents quarterly reporting periods from April 1, 2002 to June 30, 2002 and April 1, 2001 to June 30, 2001 and year-to-date reporting periods from October 1, 2001 to June 30, 2002 (39 weeks) and September 24, 2000 to June 30, 2001 (40 weeks). The prior year was recast for comparison purposes from previously announced results to reflect the change in the Company’s fiscal year end to September 30.

Unless otherwise indicated, financial comparisons between periods correspond to the periods set forth in the heading of each section.

Third Quarter 2002 Compared to Third Quarter 2001

Consolidated revenues of $496 million in 2002 decreased $33 million compared to $529 million in 2001. The decrease in revenue is primarily attributable to a $33 million impairment charge recognized by Forethought during the quarter with respect to its investment portfolio. Also negatively impacting revenues were the continuing effects of the prior year exit of certain product lines and the sale of a small Health Care subsidiary in the first quarter of 2002. Excluding the impacts of these items, revenues would have increased 1.6% over the levels experienced in 2001. Operating profit decreased $27 million to $43 million in 2002 from $70 million in 2001. Earnings per share also declined $0.17 per share to $0.52 per share in 2002 from $0.69 per share in 2001.

Revenues, operating profit and earnings per share were all negatively impacted by the $33 million impairment charge recognized at Forethought. These losses were incurred primarily within the telecommunications sector of Forethought’s investment portfolio, including approximately $12 million resulting from investments in WorldCom Inc. bonds. Positively impacting net income for the quarter was the release of $6 million of previously provided tax reserves associated with the resolution of certain domestic and foreign tax matters. Excluding the effect of the impairment charge, operating profit would have increased 8.6% to $76 million in 2002 from $70 million in 2001. Excluding the impairment charge and the release of tax reserves, earnings per share would have increased 10.1% to $0.76 per share in 2002, up from $0.69 per share in 2001.

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Revenues:

Health Care

Health Care sales increased $5 million to $205 million in 2002 compared to $200 million in 2001. Strong performance continued during the quarter in acute care sales, especially with respect to the Advanta™ bed and Total Care SpO₂RT™ bed systems. Strong acute care performance was partially offset by decreases in revenue from communication and ambulatory products and a $3.9 million decline in European sales, primarily in Germany and France. Also negatively impacting the year over year sales comparison was the continuing impact of the prior year exit of certain product lines and the sale of a small subsidiary in the first quarter of 2002. Excluding the effects of exiting certain long-term care product lines and the subsidiary sale, revenues would have increased approximately $10 million, or 5.0%, in 2002 when compared to 2001.

Health Care therapy rental revenue decreased $4 million to $80 million in 2002. The decrease can be attributed to lower volumes, including a $1.4 million decline in Europe, primarily in Germany. Also contributing to the decline were the prior year exit of certain product lines within the home care business and the subsidiary sale mentioned earlier. Negative experience in terms of net product revenues after discounts, or realized rate, for the quarter was essentially offset by favorable product mix. Excluding the effects of discontinued products and the subsidiary sale, Health Care therapy rental revenues would have been down only marginally in 2002 when compared to 2001.

Funeral Services:

Funeral Service products revenue of $149 million was essentially flat compared to 2001. Overall, a decline in volume across essentially all product lines was offset with favorable product mix and price realization over the prior year. The volume decline is attributable to lower death rates, coupled with a slightly higher percentage of cremations in 2002.

Insurance revenues, consisting of underwriting and investment revenues, decreased from $95 million in 2001 to $62 million in 2002. Excluding the impact of the $33 million impairment charge recognized during the quarter, as further discussed below, revenues would have been unchanged. Revenues generated by underwriting continue to be strong as earned revenues increased $7 million, or 14.0%, to $57 million in 2002 as a result of increased polices in force. However, the number of policies sold during the quarter declined nearly 6%, primarily as a result of the closure of the Canadian office (see Note 6). Investment performance during the quarter was significantly impacted by the $33 million impairment charge recognized with respect to Forethought’s $2.9 billion investment portfolio. The charge was taken primarily within the telecommunications sector of the portfolio, including approximately $12 million resulting from investments in WorldCom Inc. bonds. Other investments impacted included Nortel, GT Group Telecom, Teleone Europe BV, RCN Corporation, Telewest Communications, Intermedia Communications and Focal Communications. Investment income also

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continues to be negatively impacted by the effects of impairments, the shift in the portfolio from high yield bonds to lower yielding investment grade bonds, lower overall interest rates on new investments and lower partnership income. Forethought has taken steps to mitigate its risk against future impairments by reducing its exposure to high-yield bonds and lowering the limits for investments in individual securities. Volatility in the securities markets, however, represents a continuing risk to future results of operations.

Gross Profit:

Health Care

Gross profit for Health Care sales increased $4 million from $91 million to $95 million in 2002. As a percentage of sales, gross profit was 46.3% in 2002 compared to 45.5% in 2001. This increase is due to slightly higher revenues, an improved product mix and benefits of cost reduction and realignment efforts, partially offset by higher warranty costs on certain products and other costs associated with the exiting of certain businesses.

Health Care therapy rental gross profit increased to $38 million in 2002, up from $30 million in 2001. As a percentage of sales, gross profit was 47.5% compared to 35.7% in 2001. This increase is attributable to cost reduction efforts and favorable performance resulting from previous realignment efforts, partially offset by volume and realized rate declines.

Funeral Services

Funeral Services gross profit increased $4 million, or 5.1%, to $82 million in 2002. As a percentage of sales, gross profit was 55.0% in 2002 compared to 52.0% in 2001. This increase is due to improved price realization, enhanced product mix, primarily from LifeSymbols™ personalization, continued efficiencies and improvements in manufacturing production costs and savings in purchased material resulting from strategic sourcing initiatives. These favorable developments are partially offset by a decline in volume. As mentioned earlier, volumes are currently down as a result of a lower death rate, coupled with an increase in the percentage of cremations in 2002 compared to 2001. Gross profit percentages are exclusive of distribution costs of $22 million, or approximately 15% of revenues, in 2002, up from $20 million in 2001. Such costs are included in operating expenses for all periods. Funeral Services gross profit is expected to come under some pressure in the fourth quarter of 2002 and future periods as a result of recently enacted steel tariffs.

Insurance operating profit decreased $33 million resulting in a loss of $25 million in 2002 compared with $8 million of profit in 2001. The decrease is due essentially to the impairment charge mentioned above as well as slightly higher variable costs, offset by lower fixed costs resulting from the realignment of operations.

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Other

Other operating expenses, including insurance operations, rose $6 million, or 4.1%, from $146 million in 2001 to $152 million in 2002. As a percentage of sales, operating expenses increased to 30.6% in 2002 from 27.6% in 2001 as a result of slightly higher spending and lower revenues. Excluding the impact of the $33 million impairment charge recognized by Forethought during the quarter, the operating expense percentage would have been 28.7%. The increase in operating expenses is primarily attributable to increased business transformation costs, legal expenses, and higher incentive compensation. Business transformation includes information technology infrastructure costs as the Company moves to a single technology platform. The increased legal expenses are associated primarily with trial preparation for the Kinetic Concepts, Inc. antitrust litigation which is scheduled for trial in late August 2002 (See Note 5). These higher costs are partially offset by general cost containment and reduction efforts, along with decreased amortization of goodwill resulting from the current year adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” on December 2, 2001.

Interest expense decreased $2 million compared to 2001 due primarily to the impact of executing interest rate swaps to convert $150 million of long-term debt from fixed to variable interest rates in the fourth quarter of 2001. The average variable interest rate on debt covered by the swaps at June 30, 2002 was 4.11%. Investment income was down $1 million to $3 million in 2002 as a result of lower interest rates, despite the higher cash, cash equivalents and short-term investment balances. Other expenses increased $3 million as a result of losses incurred on the sale or disposition of fixed assets and other investment write-downs.

Income taxes for the quarter were favorably impacted by the release of $6 million of previously provided tax reserves associated with the resolution of certain domestic and foreign tax matters. Exclusive of this release, the effective tax rate would have been 31.5% in 2002 compared to 36.0% in 2001. The decrease in rate is attributable to an adjustment of approximately $1.3 million to bring the effective tax rate for the year in line with the new full year forecasted effective tax rate of 34.0%. The reduction in rate is the result of continuing benefits from recent tax initiatives undertaken by the Company and other opportunities are being evaluated to further reduce the effective tax rate.

Nine Months 2002 Compared to Nine Months 2001

Except as noted below, the factors affecting the third quarter comparisons also affected the year-to-date comparisons.

Consolidated revenues of $1,572 million in 2002 decreased $69 million, or 4.2%, compared to $1,641 million in 2001. Contributing to the decrease in revenue were net capital losses and impairment charges of approximately $65 million recognized by Forethought in 2002 compared with $2 million of net capital gains in 2001. Also contributing to the decline were the continuing effects of the prior

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year exit of certain product lines and the sale of a small Health Care subsidiary in the first quarter of 2002. Excluding the effect of these items, revenues would have increased 1.2% in 2002. Operating profit remained relatively flat from year to year while diluted earnings per share increased $0.49 per share, or 26.1%, to $2.37 per share in 2002 from $1.88 per share in 2001.

Operating results for the first half of 2002 included net capital losses and impairment charges of $32 million, $21 million net-of-tax, within Forethought’s investment portfolio. Of such amount, $22 million, $15 million net-of-tax ($0.23 per share) related to first quarter losses in the high-yield bond portfolio resulting from a reassessment of such investments in light of significant deterioration in the credit markets at that time. Further, in the third quarter an additional impairment charge of approximately $33 million, $21 million net-of-tax ($0.34 per share) was recognized by Forethought in response to continued turmoil in the credit markets underlying the high-yield and telecommunications sectors. Also impacting operating results in the first quarter of 2002 was a net unusual charge of $11 million, $7 million net-of-tax ($0.11 per share), associated primarily with continuing streamlining efforts at all Hillenbrand companies and the impairment of a technology asset at Forethought (see Note 6). Comparable results for 2001 were also negatively impacted by a net unusual charge of $26 million, $17 million net-of-tax ($0.26 per share) primarily related to the realignment of Hill-Rom’s home care and long-term care businesses and the write-down of certain assets in a non-core product line, along with costs incurred with respect to the retirement of the Company’s former Chief Executive Officer. Excluding the impact of the first and third quarter Forethought impairment charges resulting from the deteriorating credit markets, along with the net unusual charges outlined above, consolidated operating profit would have approximated $256 million in 2002 compared with $217 million in 2001, an increase of $39 million, or 18.0%.

In addition to the above matters impacting operating earnings, during the first and third quarters the Company also recognized the release of approximately $32 million ($0.50 per share) of previously provided tax reserves, $26 million in the first quarter and $6 million in the third quarter. Such reserves, which were established for potential disallowances and valuation allowances for foreign operating losses, were no longer considered necessary based on the resolution of certain domestic and foreign tax matters, including audit settlements and improvement in foreign operating results. Excluding the impact of such reversals, along with the other items described in the preceding paragraph, diluted earnings per share would have been $2.55 per share in 2002 compared with $2.14 per share in 2001, an increase of $0.41 per share, or 19.2%.

Revenues:

Health Care

Health Care sales increased $7 million to $635 million in 2002 compared to $628 million in 2001. Acute care sales continue to be strong, specifically with the Total Care SpO₂RT™ and Advanta™ bed systems. This strong performance was partially offset by decreased revenue associated with communications and ambulatory

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products and a $4 million decline in European sales, primarily in Germany. Also adversely impacting sales in the current year were the prior year exit of certain product lines and the sale of a small subsidiary. Excluding the effects of the subsidiary sale and the exiting of certain product lines, revenues in 2002 would have increased approximately $30 million, or nearly 5.0%, over 2001.

Health Care therapy rental revenue increased $5 million to $249 million compared to 2001. This increase is due primarily to improved rate realization, especially in home care where the prior year period included provisions for uncollectible receivables. Partially offsetting the improved rate was an unfavorable product mix, lower units in use and lower revenue in Europe, most notably in Germany and the United Kingdom.

Funeral Services:

Funeral Service product sales declined $10 million, or 2.1%, to $472 million compared to $482 million in 2001. Overall, a decline in volume across essentially all product lines along with an additional week of revenues in the first quarter of 2001 was only partially offset by favorable product mix and price realization. Lower death rates, along with continuing growth in cremations, continue to negatively impact product revenues.

Insurance revenues, consisting of underwriting and investment revenues, decreased $71 million to $216 million in 2002. Excluding net capital gains (losses) and impairment charges in each period, revenues would have decreased approximately $4 million in 2002. As with the third quarter, the year-to-date underwriting business continues to perform well, with earned revenues increasing $11 million, or 7.5%, over 2001 to $158 million. The number of policies sold in 2002, however, is down approximately 15% from 2001. This decline is primarily the result of the closure of the Canadian office (see Note 6) and a significant reduction in trust rollovers from 2001, the timing of which is difficult to predict. As previously highlighted, investment revenues in 2002 have been heavily impacted by net capital losses and impairment charges. In addition, such revenues have suffered as Forethought is forced to invest in lower yielding securities under the current interest rate environment .. Overall, investment revenues are down approximately $80 million in 2002, $67 million associated with the change in net capital gains (losses) and impairments and the remaining $13 million related to lower investment returns on invested assets.

Gross Profit:

Health Care

Gross profit from Health Care sales were $308 million, a 4.8% increase over the $294 million achieved in 2001. As a percentage of sales, gross profit increased to 48.5% in 2002 from 46.8% in 2001, primarily due to improved product mix and cost reduction and realignment efforts, partially offset by higher warranty costs.

Health Care therapy rental gross profit rose 57.9% to $120 million in 2002 and as a percentage of sales were 48.2% compared to 31.1% in 2001. The increased

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gross profit margin for Health Care therapy rentals is attributable to continued cost savings generated from the sales force restructuring of the prior year and other cost containment efforts in the Acute Care and European markets. Also contributing to this increase are favorable comparisons in the year over year period with respect to uncollectible receivables in the home care market as a result of the exit of certain home care product lines in the prior year. These favorable developments were partially offset by decreased volume and a poorer product mix.

Funeral Services

Funeral Services gross profit rose 4.0%, to $258 million, up $10 million from $248 million in 2001. Gross profit as a percentage of sales was 54.7% compared to 51.5% in 2001. This increase is due to improved price realization, enhanced product mix, continued efficiencies in manufacturing and benefits achieved from strategic sourcing initiatives, which were partially offset by reductions in volume in essentially all product lines. Gross profit percentages are exclusive of distribution costs of $63 million, or approximately 13% of revenues, in 2002, essentially flat with 2001. Such costs are included in operating expenses for all periods.

Insurance operating profit decreased approximately $73 million resulting in a loss of $52 million in 2002 compared to a profit of $21 million in 2001. This decrease is driven primarily by net investment losses and impairments and lower investment income of $67 million and $13 million, respectively, as previously discussed. Significant efforts by Forethought to reduce its fixed cost structure resulted in lower expenses, more than offsetting the $10 million of business realignment actions undertaken by Forethought in the first quarter of 2002 (see Note 6).

Other

Other operating expenses, including insurance operations, increased to $461 million from $448 million in 2001. Such expenses also increased as a percentage of sales from 27.3% to 29.3%. Excluding the impact of the $65 million of net capital losses and impairment charges recognized by Forethought during 2002, the operating expense percentage would have been 28.2%. The increase in operating expenses is attributable to the same factors driving the increase in the third quarter.

Interest expense decreased $6 million, or 31.6%, to $13 million. This decrease is primarily related to the impact of previously described interest rate swaps and the resulting conversion of certain debt obligations to variable interest rates in a favorable interest rate environment. Investment income is down $5 million to $9 million in 2002, despite higher average invested amounts, as a result of the lower interest rates. Other expenses have increased to $7 million from $1 million in 2001 as a result of losses incurred on the sale or disposition of fixed assets and other investment write-downs.

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Income taxes in 2002 have been favorably impacted by the release of approximately $32 million of tax reserves as previously described. Absent such reversals, the full year effective tax rate would approximate 34.0% compared to 36.0% in 2001. Tax initiatives undertaken by the Company continue to benefit the effective tax rate and further opportunities are being evaluated.

Liquidity and Capital Resources

Net cash flows from operating activities and selected borrowings represent the Company’s primary sources of funds for growth of the business, including capital expenditures and acquisitions. The Company has not used any off-balance sheet arrangements, other than routine operating leases, and its financing agreements contain no restrictive provisions or conditions relating to dividend payments, working capital or additional indebtedness. The Company’s debt agreements also contain no credit rating triggers with the exception of one of the debt interest rate swaps which would not have a material financial impact on the Company.

During the first nine months of 2002, net cash generated by operating activities increased $9 million to $284 million compared to $275 million in 2001. Operating cash flows were positively impacted by an increase in net income, lower inventories, increased accounts payable, and favorable movements within the insurance business despite higher impairments. These favorable impacts were partially offset by increased other current assets and a decrease in other current liabilities.

Net cash used in investing activities increased $31 million to $248 million primarily due to the effects of investment activities at Forethought and slightly higher capital spending, partially offset by the proceeds received from the sale of a small business.

Net cash used in financing activities decreased to $8 million compared to $16 million in 2001. The decrease was due to the repayment of $52 million of debt in 2001, along with an increase in proceeds from the exercise of stock options in 2002. These positive developments are partially offset by increases in the acquisition of treasury stock of $38 million and dividends paid to shareholders of $8 million in the current year. During the quarter the Company repurchased 696,000 shares of its common stock at a cost of $40 million. An additional 445,000 shares were acquired in July 2002 at a cost of $22 million.

As of June 30, 2002, cash, cash equivalents and short-term investments (excluding investments of insurance operations) had increased $28 million to $297 million compared to September 29, 2001.

On August 2, 2002 the Company entered into two new unsecured credit facilities consisting of $500 million (the “Credit Facilities”) to be used to finance acquisitions and for working capital, capital expenditures and other corporate purposes. The Credit Facilities, which are with a syndicate of banks led by Bank of America, N.A. and Citicorp USA, Inc. (as Administrative Agent and Syndication Agent, respectively) consist of a $250 million 364-day senior revolving credit facility and a $250 million three-year senior revolving credit facility. Borrowings

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under the Credit Facilities bear interest at variable rates, as defined. The availability of borrowings under the Credit Facilities is subject to the Company’s ability at the time to meet certain specified conditions. These conditions include maximum debt to capital, absence of default under the facilities and continued accuracy of the representations and warranties contained in the Credit Facilities.

The Company believes that cash generated from operations and amounts available under its revolving credit facilities will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations.

The Company intends to pursue acquisition candidates, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. The Company expects to fund future acquisitions primarily with cash flow from operations and borrowings, including the unborrowed portion of the Credit Facilities or new debt issuances, but may also issue additional equity or debt in connection with acquisitions. There can be no assurance that additional financing for acquisitions will be available at terms acceptable to the Company.

Unusual Charges

2002 Actions

In the first quarter of 2002, the Company announced realignment and streamlining efforts throughout the organization. A charge was taken in relation to these activities, comprised of severance and facility closing costs of $3 million each, in addition to a $7 million impairment charge. The charge was offset by a $2 million reversal of a 1999 provision as actual costs incurred were favorable to those estimated in the original plan. The total net charge for the quarter, which was recorded within the Unusual charges line of the Statement of Consolidated Income, was $11 million, with the cash component of the charge approximating $4 million.

Included in these actions were the reduction of 30 employees in the United States and Canada and the closure of the Canadian office for Forethought, the reduction of approximately 90 employees in the United States at Batesville Casket and a sales force reduction at Hill-Rom.

The impairment charge of $7 million related to the write-down of a Forethought website that will no longer be used to generate revenue ($6 million) and an impaired investment asset at the corporate level ($1 million).

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The following table summarizes the significant components and the related utilization of the non-impairment components of the above charges:

2001 Actions

In the first quarter of 2001, Forethought announced a realignment of certain operations, incurring an unusual charge of $1 million. Additionally, the Company announced the retirement of W August Hillenbrand, former Chief Executive Officer. The Company incurred a charge of $8 million related to future payments and other compensation related items under the terms of Mr. Hillenbrand’s retirement agreement.

Also in the first quarter, approximately $2 million of a 1999 charge was reversed as actual costs incurred were favorable to those originally expected. In addition, the Company completed the disposition of facilities under prior actions, resulting in cumulative gains of $2 million.

In the second quarter, Hill-Rom announced realignment and streamlining efforts, primarily within the home care and long-term care businesses. The total net charge for this action was $20 million, with a cash component of $12 million. The charge was comprised of severance and other benefits costs and an impairment of underperforming assets in a non-core product line of $12 million and $8 million, respectively. The severance actions impacted 400 employees in the United States and Europe, all of which have been terminated.

In the fourth quarter, Batesville Casket announced certain realignment actions, incurring an unusual charge of $1 million. Also during the year the Company incurred approximately $1 million of incremental costs related to prior actions which were classified as Unusual charges within the Statement of Consolidated Income.

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The following table summarizes the significant components and the related utilization of the non-impairment components of the above charges: