ASD Amer Standard CO

NOTES TO FINANCIAL STATEMENTS

Note 1. Basis of Financial Statement Presentation

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

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, including normal recurring items, considered necessary for a fair presentation of financial data have been included. Certain reclassifications of amounts reported in prior years have been made to conform to the 2007 classifications. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the entire year. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and the Company’s current report on Form 8-K filed on August 6, 2007 related to the tax free spinoff of our Vehicle Control Systems business.

Preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis and Notes 2 and 14 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the calendar year 2006 describe the most significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ materially from management’s estimates. There have been no significant changes in the Company’s assumptions regarding critical accounting estimates during the first nine months of 2007.

Planned Separation

On February 1, 2007, the Company’s Board of Directors approved a plan to separate its three segments. The Board of Directors believes that separating the businesses will create greater shareowner value. The separation is expected to provide the separated companies with certain opportunities and benefits, including increased strategic focus, increased market recognition, improved capital flexibility and increased ability to attract, retain and motivate employees. On July 12, 2007 the Board of Directors approved the tax-free spinoff of its Vehicle Control Systems business into a new publicly traded company named WABCO Holdings Inc. (“WABCO”). As part of its approval, the Board of Directors authorized a dividend on its common stock of one WABCO share for every three shares of American Standard and established the close of business on July 19, 2007 as the record date. The spinoff was completed at 11:59pm on July 31, 2007. Approval of the Company’s shareholders was not required for the spinoff. In accordance with Statement of Financial Accounting Standard No. 144 (“FAS 144”), the Vehicle Control Systems business has been included in discontinued operations for all periods presented.

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On July 23, 2007, the Company entered into a definitive agreement to sell its Bath and Kitchen business to affiliates of Bain Capital Partners, LLC for $1.755 billion in cash, subject to certain adjustments. The sale is expected to close on or about October 31, 2007 and shareholder approval is not required for the Bath and Kitchen sale. The Bath and Kitchen business has been reported as discontinued operations for all periods presented. Proceeds from the sale of Bath and Kitchen are expected to be used primarily to repurchase common stock and to reduce debt to keep the Company at investment grade standards.

Upon completion of the sale of Bath and Kitchen, the Company’s principal focus will be on its Air Conditioning Systems and Services business. On September 28, 2007, the shareowners of the Company approved an amendment to the certificate of incorporation allowing the Company to change its name from American Standard Companies Inc., to Trane Inc. (“Trane”). The Company expects to change its name before the end of the year.

Note 2. Discontinued Operations

As discussed above, the Company completed the separation of the Vehicle Control Systems business during the third quarter of 2007. The Company also entered into a definitive agreement on July 23, 2007 to sell the Bath and Kitchen business to affiliates of Bain Capital Partners, LLC. Based on these facts, the Vehicle Control Systems and Bath and Kitchen businesses have been reported as discontinued operations for all periods presented.

Loss from discontinued operations for the quarter ended September 30, 2007 and income from discontinued operations for the nine months ended September 30, 2007 include separation costs, net of tax and separation related taxes, of $78.6 million and $133.0 million, respectively. The separation costs relate to investment banking fees, legal fees, tax and accounting fees, professional advisory services, employee costs and other costs and income taxes associated with executing the separation transactions.

Revenue, income (loss) before income taxes, income taxes from discontinued operations and condensed balance sheet information are as follows for Vehicle Control Systems and Bath and Kitchen.

Vehicle Control Systems ($ in millions):

The results of Vehicle Control Systems are included in the table above through the date of the spinoff.

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The composition of Vehicle Controls Systems net assets distributed to shareholders on July 31, 2007 was as follows:

On March 30, 2007, the Company sold its Armitage Venesta business included within the Bath and Kitchen segment. Venesta is a leading supplier of commercial washroom solutions in both the United Kingdom and Ireland. The Company received proceeds of $165 million and recognized a pre-tax gain of $80.8 million, $56.8 million net of taxes. The gain has been included as a component of income from discontinued operations as noted in the above table.

Bath and Kitchen incurred $37.8 million of operational consolidation expenses during the third quarter of 2007 including $37.6 million related to 2007 plans and $0.2 million related to 2006 plans. Bath and Kitchen expended $26.7 million of cash on operational consolidation activities in the third quarter of 2007. The 2007 charges relate to its consolidation of operations and

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streamlining of commercial functions in Europe and the Americas. Bath and Kitchen is in the process of closing its Wolverhampton, UK, location and transferring its fittings assembly and logistics to more cost effective locations; Bath and Kitchen is also in the process of closing its Excelsior, United Kingdom facility, and has closed its Chiva, Spain and Queimados, Brazil facilities and transferred the ceramics manufacturing operations to more cost effective locations. Bath and Kitchen also streamlined and simplified its commercial organization in several European countries and discontinued the production of cast iron bathtubs at its Revin, France location. Bath and Kitchen also discontinued production of metal tubs and basins at a plant in Cambridge, Ontario Canada. Bath and Kitchen incurred $71.3 million of operational consolidation expenses for the nine months ended September 30, 2007 and expended $38.1 million of cash on operational consolidation activities. Of this amount, $71.8 million related to 2007 plans and a net benefit of $0.5 million related to prior period plans. Bath and Kitchen incurred $25.4 million of operational consolidation expenses during the third quarter of 2006 and $45.4 million during the nine months ended September 30, 2006.

Accumulated other comprehensive income was also impacted by the spinoff of the Vehicle Control Systems business. Specifically, foreign currency translation effects were increased by $83.0 million and unrealized losses on benefit plans were decreased by $68.6 million.

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Note 4. Net Income Per Share

Basic net income per share has been computed using the weighted average number of common shares outstanding. The average number of outstanding shares of common stock used in computing diluted net income per share for the three months ended September 30, 2007 and 2006 included 4,969,886 and 4,454,934 weighted average incremental shares, respectively, for the assumed exercise of stock options; the nine month periods ended September 30, 2007 and 2006 included 5,557,692 and 4,492,725 weighted average incremental shares, respectively. The weighted average incremental shares represent the net amount of shares the Company would issue upon the assumed exercise of in-the-money employee stock options after assuming that the Company would use the proceeds from the exercise of options to repurchase treasury stock. The average number of outstanding shares of common stock used in computing diluted net income per share for the three months ended September 30, 2007 and 2006 excluded 1,588,669 and 2,344,196 shares associated with options to purchase shares of the Company’s stock, respectively, due to their anti-dilutive effect. The nine month periods ended September 30, 2007 and 2006 excluded 1,590,969 and 2,150,422 shares due to their anti-dilutive effect. Anti-dilutive options represent those options whose exercise price was greater than the average price of the Company’s common stock during the three and nine month periods ended September 30, 2007 and 2006, respectively.

Note 5. Capital Stock

On September 20, 2007, a dividend of $0.16 per share of common stock was paid to shareholders of record as of September 4, 2007, totaling $32.1 million. On October, 5, 2007, the Board of Directors approved the payment of a dividend of $0.16 per share of common stock to be paid on December 20, 2007, to shareholders of record on December 3, 2007.

Following is a summary of net shares outstanding and shares issued or reacquired during the first, second and third quarters of 2007.

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The Company accounts for purchases of treasury stock under the cost method as defined in Accounting Principles Board Opinion Number 6, Status of Accounting Research Bulletins with the costs of such share purchases reflected in treasury stock in the accompanying consolidated balance sheets. When treasury shares are reissued they are recorded at the average cost of treasury shares acquired since the inception of the share buy back programs, net of shares previously reissued and the Company reflects the difference between the average cost paid and the amount received for the reissued shares in capital surplus. The primary objective of the Company’s share repurchase program is to provide a return to investors and to a lesser extent to satisfy stock option exercises. At September 30, 2007, the Company had an unexpended balance of $54.1 million available to repurchase shares under an authorization by the Board of Directors.

Note 6. Stock-Based Compensation

On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standard No. 123 (Revised 2004) (“FAS 123r”), Share Based Payments using the modified prospective approach. Total share-based compensation cost recognized during the three months ended September 30, 2007 and 2006 of $5.0 million and $6.1 million, respectively, has been included in the Consolidated Statements of Income. Share-based compensation cost recognized for the nine months ended September 30, 2007 and 2006 is $15.5 million and $18.4 million. This amount excludes $0.6 million and $0.8 million for the third quarter of 2007 and 2006, respectively, and $2.1 million and $2.6 million for the nine months ended September 30, 2007 and 2006, respectively, of stock-based compensation cost relating to the Bath and Kitchen business. In addition, this amount excludes $0.2 million and $0.7 million for the third quarter of 2007 and 2006, respectively, and $1.7 million and $2.3 million for the nine months ended September 30, 2007 and 2006, respectively, of stock-based compensation costs related to the Vehicle Control Systems business.

The Company issues its annual share-based compensation grants during the first quarter of each year. The total number and type of awards granted primarily in connection with the annual grant and the related weighted-average grant-date fair values were as follows:

The options granted in 2007 are exercisable in equal annual installments over a period of three years. 142,611 of the restricted stock units granted in 2007 will vest three years from the date of issuance. The remaining 259,422 of the restricted stock units granted in 2007 will vest two years from the date of issuance.

The following table summarizes the significant assumptions used during the three and nine month periods ended September 30, 2007 and 2006:

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The weighted average grant date fair value was calculated under the Black-Scholes option- pricing model. The risk free interest rate is based on the yield of U.S. Treasury securities that correspond to the expected holding period of the options. The Company reviewed the historic volatility of its common stock over 12-month, 5-year and 10-year periods, and the implied volatility for at the money options to purchase shares of the Company’s common stock. Based on this data, the Company chose to use the average of the 5-year historic volatility of the Company’s common stock and the average implied volatility of at the money options. The 5-year historical volatility period was selected since that period corresponds with the expected holding period. The expected term was calculated by reviewing the historical exercise pattern of all holders over a ten year period, the exercise pattern of domestic versus international option holders (including an analysis by country) and the exercise behavior of officers versus non officers. The results of the analysis support one expected term for all groups of employees. The expected forfeiture rate was determined based on the historical stock option forfeiture data. The dividend yield was based on the Company’s expected dividend rate.

In connection with the spinoff of its Vehicle Control Systems business, adjustments were made to outstanding options in accordance with the original terms of the plans under which the options were granted. These plans require that, in the event of a change in capitalization, outstanding equity awards be proportionally adjusted to reflect the change in capitalization in an equitable manner. All options granted prior to 2007, except for options qualified as incentive stock options (“ISOs”) under Section 422 of the Internal Revenue Code and certain options granted to employees in Italy and Canada, have been adjusted into two separate options based on the WABCO spinoff distribution ratio. The per share exercise price of the original option was proportionately allocated between the adjusted options based on the relative trading prices of the respective underlying stock immediately following the distribution. The options granted to WABCO employees in 2007 have been equitably adjusted so as to relate solely to shares of WABCO’s common stock and the ISOs and certain options granted in Italy and Canada have been equitably adjusted to relate solely to shares of the Company’s stock. Because these adjustments were required by the terms of the original award and the adjustment maintains the economic value before and after the equity restructuring, no compensation costs have been recognized as a result of these adjustments.

The Company options and the WABCO options issued as part of this adjustment will continue to be subject to the original vesting schedules. Further, for purposes of vesting and the post-termination exercise periods applicable to such stock options, continued employment with WABCO or the Company, as the case may be, will be viewed as continued employment with the issuer of the options.

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Note 8. Accounts Receivable Securitization Agreements

Accounts receivables that related to the Vehicle Control Systems business ceased to be sold into the Company’s European accounts receivable asset securitization program as of May 31, 2007. In conjunction with this, the Company repurchased Vehicle Control Systems accounts receivables previously sold into the program for a purchase price of $197.2 million. On August 31, 2007, the Company terminated the remainder of its accounts receivable financing facility in Europe due to the spinoff of the Vehicle Controls Systems business and the pending sale of the Bath and Kitchen business. In conjunction with the termination, the Company repurchased the outstanding balances of the receivables sold into the program for a purchase price of $203.5 million.

On September 15, 2007, due to the pending sale of the Bath and Kitchen business, the Company repurchased accounts receivables related to the Bath and Kitchen business that were previously sold into the U.S. asset securitization program for a purchase price of $7.7 million. The Company also reduced the size of its U.S. accounts receivable securitization program. The limit on the Company’s U.S asset securitization program was reduced to $150 million from $200 million.

Note 9. Debt

On May 31, 2007, the Company replaced the primary bank credit agreement in existence as of March 31, 2007 and various other 364 day credit facilities with two new credit agreements that provide the Company and certain subsidiaries (the “Borrowers”) with senior unsecured revolving credit facilities, aggregating $1.5 billion, available to all Borrowers as follows: (a) a five year, $1 billion multi-currency revolving credit facility expiring in 2012 of which up to $250 million may be used for issuing letters of credit and up to $100 million for same-day, short-term borrowings and (b) a 364 day, $500 million multi-currency revolving credit facility of which up to $75 million can be used for same-day, short term borrowings. The 364 day facility has an option to renew for an additional 364 days.

Under the five year facility, the Company pays a facility fee of .125% per annum. Borrowings thereunder bear interest generally at the London Interbank Offered Rate (“LIBOR”) plus a spread of .425% for usage less than or at 50% and a spread of .475% for usage over 50%. The Company also pays a fee of .425% per annum plus issuance fees for letters of credit.

Under the 364 day facility, the Company pays a facility fee of .10% per annum. Borrowings thereunder bear interest generally at the London Interbank Offered Rate (“LIBOR”) plus a spread of .45% for usage less than or at 50% and a spread of .50% for usage over 50%.

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The LIBOR spreads for both the five year facility and the 364 day facility are subject to adjustments should the Company’s debt ratings change. Under the primary credit agreements, the Company, American Standard Inc. and American Standard International Inc. guarantee the debt obligations.

The primary credit agreements contain various covenants that limit, among other things, liens, transactions, subsidiary indebtedness, and certain mergers and sales of assets. The covenants also require the Company to meet certain financial tests: ratio of Consolidated Total Debt to consolidated EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), the ratio of Consolidated EBITDA to Consolidated Interest Expense and a Liquidity Test. The Company is currently in compliance with the covenants contained in the credit agreement.

In connection with the entry into its current primary credit facilities, the Company terminated its then existing American Standard Inc. 364 day facilities. On April 30, 2007 the Company repaid the 30 million Euro ($41.0 million at April 30, 2007 exchange rates) 7.59% Guaranteed Senior Bonds due 2013 with its credit facility. Also, on July 31, 2007 the Company terminated a subsidiary borrower’s 40 million Euro Dollar Facility. In addition to its primary 364 day facility, the Company, through a foreign subsidiary, continues to maintain a $50.0 million 364 day facility to support operations in Canada (the “Canadian Facility” together with the “364 Day Foreign Facilities”).

Note 10. Warranties, Guarantees, Commitments and Contingencies

Warranties

Products sold by the Company are covered by a basic limited warranty with terms and conditions that vary depending upon the product and country in which they are sold. Limited warranties cover the equipment, parts and, in limited circumstances, labor necessary to satisfy the warranty obligation for a period ranging from one to ten years generally. The Company estimates the costs that may be incurred under its warranty obligations and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. On a quarterly basis the Company assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Costs to satisfy warranty claims are charged as incurred to the accrued warranty liability.

The Company also sells a variety of extended warranty contracts for up to ten years on certain air conditioning products. Revenues from the sales of extended warranties are deferred and amortized on a straight-line basis over the terms of the contracts or based upon historical experience. Actual costs to satisfy claims on extended warranty contracts are charged to cost of sales as incurred and were $12.4 million and $11.8 million for the three months ended September 30, 2007 and 2006, respectively, and $32.4 million for both the nine months ended September 30, 2007 and 2006. Total warranty expense was $60.1 million and $47.3 million for the three months ended September 30, 2007 and 2006, respectively, and $143.4 million and $113.3 million for the nine months ended September 30, 2007 and 2006, respectively.

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Following is a summary of changes in the Company’s product warranty liability for the three and nine months ended September 30, 2007 and 2006 ($ in millions).

Guarantees and Commitments

The Company has commitments and performance guarantees, including energy savings guarantees totaling $84.6 million as of September 30, 2007, extending from 2007 to 2027, under long-term service and maintenance contracts related to its air conditioning equipment and system controls. Through September 30, 2007 the Company has experienced one insignificant loss under such energy savings guarantees and considers the probability of any significant future losses to be unlikely and has therefore not recorded a liability for such guarantees.

The Company and ASII fully and unconditionally guarantee the payment obligations under all the Company’s Senior Notes that were issued by its wholly owned subsidiary American Standard Inc. The Company, American Standard Inc., and ASII guarantee obligations under the primary bank credit agreement.

Contingencies

General

The Company and certain of its subsidiaries are parties to a number of pending legal and tax proceedings. The Company is also subject to federal, state and local environmental laws and regulations and is involved in environmental proceedings concerning the investigation and remediation of various sites, including certain facilities in the process of being closed. In those instances where it is probable as a result of such proceedings that the Company will incur costs that can be reasonably determined, the Company has recorded a liability.

Litigation

In November 2004, the Company was contacted by the European Commission as part of a multi-company investigation into possible infringement of European Union competition law relating to the distribution of bathroom fixtures and fittings in certain European countries. In November 2005, the European Commission sent the Company’s indirect subsidiary, American Standard Europe BVBA (“ASE”), a written request for information. On March 28, 2007, the Company, along with a number of other companies, received a Statement of Objections from the European Commission. The Statement of Objections, an administrative complaint, alleges infringements of European Union competition rules by numerous bathroom fixture and fittings companies, including the Company and certain of its European subsidiaries engaged in the Bath and Kitchen business.

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Certain of these legal entities were transferred to WABCO Holdings Inc. (“WABCO”) as part of a legal reorganization in connection with the spinoff of the Company’s Vehicle Control Systems business that occurred on July 31, 2007. The Company and certain of its subsidiaries and, in light of that legal reorganization, certain of WABCO’s subsidiaries will be jointly and severally liable for any fines that result from the investigation. However, pursuant to an Indemnification and Cooperation Agreement among the Company and certain other parties (the “Indemnification Agreement”), ASE, which is a subsidiary of WABCO following the reorganization, will be responsible for, and will indemnify the Company and its subsidiaries (including certain subsidiaries formerly engaged in the Bath and Kitchen business) and their respective affiliates against, any fines related to this investigation. American Standard and the charged subsidiaries responded to the European Commission on August 1, 2007 and July 31, 2007, respectively. A hearing with the European Commission regarding the response to the Statement of Objections has been scheduled for November 12-15, 2007, in Brussels. ASE and other former Company subsidiaries are expected to participate in the hearing. The Company, however, will not participate in the hearing.

The European Commission recently adopted new fining guidelines (the “2006 Guidelines”) and stated its intention to apply these guidelines in all cases in which a Statement of Objections is issued after September 2006. In applying the 2006 Guidelines, the Commission retains considerable discretion in calculating the fine although the European Union regulations provide for a cap on the maximum fine equal to 10% of the parent company’s ( i.e ., the Company’s) worldwide revenue attributable to all of its products for the fiscal year prior to the year in which the fine is imposed. If the maximum fine were levied in 2007, the total liability would be approximately $1.1 billion based on the Company’s worldwide revenue in 2006 subject to a probable reduction for leniency of at least 20% provided the leniency applicant fulfills all conditions set forth in the Commission’s leniency notice. The Company is confident in ASE’s ability to satisfy its obligations under the Indemnification Agreement, because WABCO’s capital structure includes only a minimal amount of debt. As a result, the Company believes that WABCO will have sufficient funds available under its existing five year revolving credit facility, from operating cash flows and from additional bank credit facilities it expects to be able to arrange, in order for ASE to pay the fine.

On February 23, 2005, the Company received a grand jury subpoena from the Antitrust Division of the U.S. Department of Justice seeking information primarily related to the sale and marketing of bathroom fittings by its European affiliates from January 1997 to the present. Because the Company has not been accused of any wrong-doing in this investigation, which is ongoing, the Company is unable to reasonably estimate the loss or range of loss that may result from it. The Company is cooperating fully with this investigation.

Also, in February 2005, the Company was named as a defendant in several lawsuits filed in the United States District Court for the Eastern District of Pennsylvania alleging that the Company and certain of its competitors conspired to fix prices for fittings and fixtures in the U.S. The federal cases were subsequently consolidated, and in June 2005 the plaintiffs filed an amended complaint in the federal action alleging that the Company conspired to fix prices for fixtures in the U.S. The amended complaint deleted reference to fittings and identified a somewhat different group of alleged co-conspirator co-defendants. On September 22, 2005, the Company filed a motion to dismiss the complaint in the federal action, which was argued before the trial court on January 26, 2006. The other defendants in the federal action also filed motions to dismiss. On January 24, 2007, the trial judge granted the defendants’ motion for entry of judgment in favor of defendants, dismissing the consolidated amended complaint with prejudice, and on February 20, 2007, the plaintiffs filed a Notice of Appeal of the trial judge’s order. While the Company cannot predict the outcome of this appeal with certainty, the Company believes that the plaintiffs’ underlying claims in this lawsuit were entirely without merit.

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On or about June 5, 2007, the former distributor of Trane commercial products in Indonesia, PT Tatasolusi Pratama (“TSP”), filed suit in the South Jakarta District Court against the Company and four of the Company’s subsidiaries. The complaint alleges that the Company and its affiliates wrongfully terminated TSP’s alleged exclusive distributorship and appointed a subsidiary of the Company, defendant PT Trane Indonesia, as the new distributor. The complaint also alleges that the Company and its affiliates unlawfully acquired TSP’s customers. Finally, the complaint alleges that the Company and one of its subsidiaries violated a 1990 shareholder agreement and supplemental documents with TSP and its Singapore parent, Solutions Pte., by failing to form a business entity in Indonesia to market Trane products. In total, the complaint seeks approximately $69 million in damages. The Company and its subsidiaries intend to vigorously contest the allegations raised in the Complaint, which it believes lack merit and therefore has not recorded a liability related to this matter. On October 23, 2007, the Company and two affiliates filed a Statement of Claim in the High Court of the Republic of Singapore against TSP. The Statement of Claim seeks declarations that none of the defendants has an interest in the distribution of Trane products, or any rights of any kind, arising out of the 1990 shareholder agreement and related agreements, as well as injunctions restraining the defendants from commencing and/or maintaining lawsuits in Singapore and elsewhere in relation to an interest in the distribution of Trane products, or rights of any kind, allegedly arising out of the 1990 shareholder agreement and related agreements. The grant of such an injunction would effectively prohibit TSP and Solutions Pte. from continuing to prosecute the Indonesian litigation.

The Company believes that the resolution of the litigation matters described above will not have a material adverse effect on the financial position, liquidity or results of operations of the Company.

Asbestos Litigation

Over the years, the Company has been named as a defendant in numerous lawsuits alleging various asbestos-related personal injury claims arising primarily from its historical sales of boilers and railroad brake shoes.

In these asbestos-related lawsuits, the Company is usually named as one of a large group of defendants. Many of these lawsuits involve multiple claimants, do not specifically identify the injury or disease for which damages are sought and/or do not allege a connection between any Company product and a claimed injury or disease. As a result, numerous lawsuits have been placed, and may remain on, inactive or deferred dockets, which some jurisdictions have established.

Asbestos Claims Activity

From receipt of its first asbestos claim more than twenty years ago to September 30, 2007, the Company has resolved 62,797 claims. The total amount of all settlements paid by the Company (excluding insurance recoveries) and by its insurance carriers is approximately $100.2 million, for an average payment per resolved claim of $1,595. The average payment per claim resolved during the nine months ended September 30, 2007 and the year ended December 31, 2006 was $8,175 and $1,260, respectively.

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The table below provides additional information regarding asbestos-related claims filed against the Company, reflecting updated information for all periods.

Because claims are frequently filed and settled in large groups, the amount and timing of settlements, as well as the number of open claims, can fluctuate significantly from period to period.

At September 30, 2007 and December 31, 2006 the total asbestos liability was estimated at $650.0 million and $665.8 million, respectively. The asbestos indemnity liability decreased by $15.8 million during the first nine months of 2007 due to claims payments made during the year.

Asbestos Insurance Recovery

The Company is in litigation against certain carriers whose policies it believes provide coverage for asbestos claims. The insurance carriers named in this suit are challenging the Company’s right to recovery. The Company filed the action in April 1999 in the Superior Court of New Jersey, Middlesex County, against various of its primary and lower layer excess insurance carriers, seeking coverage for environmental claims (the “NJ Litigation”). The NJ Litigation was later expanded to also seek coverage for asbestos related liabilities from twenty-one primary and lower layer excess carriers and underwriting syndicates. On September 19, 2005, the court granted the Company’s motion to add to the NJ Litigation 16 additional insurers and 117 new insurance policies. The court also required the parties to submit all contested matters to mediation. The Company and the defendants in the NJ Litigation engaged in their first mediation session on January 18, 2006 and have engaged in active discussions since that time. During the mediation, the parties agreed to an extension of discovery through November 12, 2007.

With the addition of the parties and policies referred to above, the NJ Litigation would resolve the coverage issues with respect to approximately ninety-four percent of the recorded receivable. The remaining 6% of the recorded receivable comes from policies as to which the Company has not sought resolution of coverage because the policies were issued by parties whose coverage obligations are triggered at higher excess layers that are not expected to be reached in the near future. Ninety-two percent of the recorded insurance recovery receivables are with carriers rated A or better by AM Best. This percentage excludes amounts that have been settled but not yet collected.

The Company estimates and records an asbestos receivable for amounts due to the Company for previously settled and paid claims, the reimbursable portion of incurred legal expenses, and the probable reimbursements relating to its estimated liability for pending and future claims. Please see Note 14 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 for a discussion of the methodology used by the Company to calculate the receivable and the factors considered by the Company when concluding that its insurance receivable including amounts in litigation is probable of recovery.

In February 2005, the Company settled with Equitas for $84.5 million to buy-out the participants of certain underwriters in pre-1993 Lloyd’s, London policies included in the Company’s insurance coverage. As of December 31, 2006, $64.9 million remained in a trust, excluding interest, which expired January 3, 2007. Pursuant to the settlement, since there was no U.S. Federal legislation by January 3, 2007 that took asbestos claims out of the courts, the balance of

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the funds was disbursed to the Company on January 4, 2007. Of the $64.9 million, approximately $44.2 million relates to historical asbestos claim settlements and current legal expenses incurred and the balance represents amounts relating to future legal costs to be incurred.

At September 30, 2007 and December 31, 2006 the asbestos receivable was $345.4 million and $385.8 million, respectively. The asbestos receivable decreased by $40.4 million during the first nine months of 2007. The decrease is primarily driven by cash collected from the Equitas trust as described above, partially offset by the recoverable portion of incurred legal expenses.

Note 11. Effect of Recently Issued Accounting Standards

On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 provides recognition criteria and a related measurement model for tax positions taken by companies. In accordance with FIN 48, a tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions shall be recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position will be sustained upon examination. Tax positions that meet the more likely than not threshold should be measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement.

The total amount of unrecognized tax benefits as of the date of adoption was $213.5 million. As a result of the implementation of FIN 48, the Company recognized a $19.1 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to retained earnings and an increase to the non current tax liability. During the nine months ended September 30, 2007, the Company realized tax benefits of $12.0 million of the $213.5 million of unrecognized tax benefits as of the date of adoption. The benefits recognized in the first nine months of 2007 relate to foreign audit settlements and the expiration of statute of limitations. Also, during the first quarter, the Company recorded an unrecognized tax benefit of approximately $17.3 million related to a specific transaction undertaken during the current year. If recognized, this amount would impact the effective tax rate.

Included in the balance of unrecognized tax benefits at January 1, 2007, are $191.3 million of tax benefits that, if recognized, would impact the effective tax rate. Also included in the balance of unrecognized tax benefits at January 1, 2007, are $22.2 million of tax benefits that, if recognized, would result in a decrease to goodwill. With regard to the unrecognized tax benefits at September 30, 2007, the Company believes that it is reasonably possible that $14.6 million of such unrecognized tax benefits could be recognized in the next 12 months. The benefits relate to the anticipated expiration of statutes of limitations.

On July 31, 2007 the Company completed the spinoff of Vehicle Control Systems. As a result, approximately $71.8 million of unrecognized tax benefits were removed from the Company’s balance sheet, as these amounts represent legal liabilities of WABCO entities. Included in these unrecognized tax benefits, are $22.2 million of tax benefits that, if recognized by the Company, would have resulted in a decrease to goodwill. In addition, WABCO has agreed to indemnify the Company for $42.0 million of unrecognized tax benefits. See Note 14. Income Taxes, for additional information regarding the Tax Sharing Agreement between the Company and WABCO.

The Company classifies interest and penalties related to unrecognized tax benefits in tax expense. The Company had $31.4 million of interest and penalties accrued at January 1, 2007. Of this amount approximately $12.4 million is related to amounts transferred to or indemnified by WABCO on July 31, 2007.

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The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. With no material exceptions, the Company is no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2000.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements . SFAS No. 157 defines fair value, provides a framework for measuring fair value under current standards in GAAP, and requires additional disclosure about fair value measurements. In accordance with the Statement, the definition of fair value retains the exchange price notion, and exchange price is defined as the price in an orderly transaction between market participants to sell an asset or transfer a liability. If there is a principal market for the asset or liability, the fair value measurement should reflect that price, whether that price is directly observable or otherwise used in a valuation technique. Depending on the asset or liability being valued, the inputs used to determine fair value can range from observable inputs (i.e. prices based on market data independent from the entity) and unobservable inputs (i.e. entity’s own assumptions about the assumptions that market participants would use). The Statement applies to other accounting pronouncements that require or permit fair value measurements and will be effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the provisions of SFAS No. 157 to determine the potential impact, if any, the adoption will have on the Company’s financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities . SFAS No. 159 permits entities to voluntarily choose to measure many financial assets and financial liabilities at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the provisions of SFAS No. 159 to determine the potential impact, if any, the adoption will have on the Company’s financial statements.

Note 12. Operational Consolidation Expenses

During 2007 and 2006, the Company incurred charges related to operational consolidation activities consisting principally of severance and related expenses as more fully described below.

During the third quarter of 2007, the Company recorded $1.3 million of operational consolidation expenses which were included in selling and administrative expenses. Included in the $1.3 million was $0.4 million related to 2007 programs and $0.9 million related to programs that were initiated prior to 2007. During the first nine months of 2007, the Company recorded $2.5 million of operational consolidation expenses, all of which were included in selling and administrative expenses. Of this amount, $0.8 million related to 2007 programs and $1.7 million related to programs that were initiated prior to 2006. The Company expended $1.2 million of cash on operational consolidation activities during the first nine months of 2007. The company incurred $0.5 and $0.6 million of operational consolidation expenses during the third quarter and first nine months of 2006, respectively.

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During 2006, the Company incurred charges related to operational consolidation activities as more fully described in our Form 10-K for the year ended December 31, 2006. The total cost of the 2006 actions was $2.1 million and included the elimination of 42 jobs .

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

In the third quarter of 2007, the Company contributed $32.9 million to its domestic pension plans. The Company does not expect to make additional pension plan contributions during the remainder of 2007.

Note 14. Income Tax

Provision for Income Taxes

The income tax provision from continuing operations for the third quarter of 2007 was $65.3 million, or 33.6% of pre-tax income, compared with a provision of $55.7 million, or 31.2% of pre-tax income in the third quarter of 2006. The income tax provision for the third quarter of 2007 included tax costs of $1.9 million, which included adjustments of the 2006 tax provision to the final filed tax returns, whereas the third quarter of 2006 included a tax benefit of $1.4 million, which principally relates to adjustments of the 2005 tax provision to the final filed tax returns. The tax provision for the first nine months of 2007 was $175.8 million, or 34.2% of pre-tax income, compared with a provision of $134.7 million or 30.2% of pre-tax income for the nine months ended September 30, 2006. The income tax provision for the first nine months of 2007 reflected tax costs of $1.4 million, which includes benefits associated with foreign audit settlements, the expiration of statute of limitations and adjustments of the 2006 tax provision to the final filed tax returns. The tax provision for the nine months ended September 30, 2006 reflected a tax benefit of $7.8 million primarily related to the reduction of a tax contingency as a result of an expiring statute of limitations in a jurisdiction outside the U.S.

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Tax Separation Agreement with WABCO

In connection with the spin-off of its Vehicle Control Systems business, the Company and WABCO and their respective affiliates entered into a Tax Sharing Agreement that generally governs their respective rights, responsibilities and obligations after the distribution with respect to taxes, including ordinary course of business taxes, taxes related to certain pre- spinoff restructurings and taxes, if any, incurred as a result of any failure of the spinoff of WABCO to qualify as a tax-free distribution for U.S. federal income tax purposes within the meaning of Section 355 of the Code.

Under the Tax Sharing Agreement, American Standard will be responsible for American Standard’s income tax liabilities and WABCO will be responsible for WABCO’s income tax liabilities related to the ordinary course of business for periods prior to and including July 31, 2007 except for specific agreed assumed liabilities and indemnifications. WABCO has agreed to assume $36.7 million and indemnify American Standard for $24.4 million of tax liabilities related to the Bath & Kitchen taxes. WABCO has also assumed $11.1 million of tax separation cost liabilities and has agreed to pay American Standard for an additional $26.4 million.

In the event the separation is determined to be taxable and such determination was the result of the actions taken after the separation by American Standard or WABCO, the party responsible for such failure would be responsible for all taxes imposed on American Standard or WABCO as a result thereof. If such determination is not the result of actions taken after the separation, then WABCO would be solely responsible for any taxes imposed on American Standard or WABCO as a result of such determination. Such tax amounts could be significant. American Standard is responsible for all of its own taxes that are not shared pursuant to the Tax Sharing Agreement. Additionally, WABCO is responsible for its taxes that are not subject to the Tax Sharing Agreement.

Note 15. Supplemental Consolidating Condensed Financial Information

All of the Company’s Senior Notes were issued by its 100%-owned subsidiary, American Standard Inc. (“ASI”). American Standard Companies Inc. (the “Parent Company”) and American Standard International Inc. fully and unconditionally guarantee the payment obligations under these securities (the Company’s “Public Debt”). In lieu of providing separate financial statements for ASI and ASII, the Company has included the accompanying consolidating condensed financial information. The following supplemental financial information sets forth, on a consolidating basis, unaudited statements of income for the three and nine months ended September 30, 2007 and 2006, unaudited statements of cash flows for the nine months ended September 30, 2007 and 2006, and unaudited balance sheets as of September 30, 2007 and December 31, 2006 for the Parent Company, ASI, ASII and the subsidiaries of the Parent Company which are not subsidiaries of ASI or ASII (the “Other Subsidiaries”). None of the Other Subsidiaries guarantees the Public Debt of ASI. The equity method of accounting is used to reflect investments of the Parent Company in ASI and Other Subsidiaries.

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