WATTS INDUSTRIES INC, DEF 14A, 1994-09-13

WATTS INDUSTRIES INC
DEF 14A, 1994-09-13
MISCELLANEOUS FABRICATED METAL PRODUCTS

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SCHEDULE 14A

SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]

Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Materials Pursuant to s. 240.14a-11(c) or s. 240.14a-12

Watts Industries, Inc.
(Name of Registrant as Specified In Its Charter)

Thomas J. White, Esq.
(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

1) Title of each class of securities to which transaction applies:

_________________________________________________________________

2) Aggregate number of securities to which transaction applies:

_________________________________________________________________

3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:(1)

_________________________________________________________________

4) Proposed maximum aggregate value of transaction:

_________________________________________________________________

(1)Set forth the amount on which the filing fee is calculated and
state how it was determined.

[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration number, or the
Form or Schedule and the date of its filing.

1) Amount Previously Paid: $125.00

2) Form, Schedule or Registration Statement No.: Pre 14A

3) Filing Party: Watts Industries, Inc.

4) Date Filed: August 22, 1994 (Via EDGAR)

<PAGE>

[WATTS LOGO]
WATTS INDUSTRIES, INC.

SEPTEMBER 14, 1994

Dear Stockholder:

We cordially invite you to attend our 1994 Annual Meeting, which will be held
on Tuesday, October 18, 1994 at 10:00 a.m., in the Phillips Room of The
Andover Inn at Phillips Academy, Chapel Avenue, Andover, Massachusetts 01810.

The purposes of the Annual Meeting are (i) to elect Directors as set forth in
Proposal 1, (ii) to ratify the selection of independent auditors for the
current fiscal year as set forth in Proposal 2, and (iii) to approve an
amendment to the Restated Certificate of Incorporation to increase the number
of authorized shares of the Company's Class A Common Stock from 40,000,000
shares to 80,000,000 shares and to increase the number of authorized shares
of the Company's Class B Common Stock from 13,000,000 shares to 25,000,000
shares as set forth in Proposal 3. The Board of Directors recommends that you
vote in favor of these proposals and urges you to read the proxy statement
which describes these proposals and presents other important information.

Your support of our efforts is important to the other Directors and to me
regardless of the number of shares you own. Accordingly, we urge you to
complete, sign and return your proxy promptly in the envelope provided for
your convenience.

Following the completion of the scheduled business, we will report on the
Company's operations and plans and answer questions from the floor. We hope
that you will be able to join us on October 18th.

Sincerely,
[Timothy P. Horne Signature]
Timothy P. Horne
Chairman of the Board, President
and Chief Executive Officer

<PAGE>

WATTS INDUSTRIES, INC.
815 CHESTNUT STREET
NORTH ANDOVER, MA 01845
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 18, 1994

To the Stockholders of
Watts Industries, Inc.

Notice is hereby given that the Annual Meeting of Stockholders of Watts
Industries, Inc. will be held in the Phillips Room of The Andover Inn at
Phillips Academy, Chapel Avenue, Andover, Massachusetts 01810, on Tuesday,
October 18, 1994, at 10:00 a.m., for the following purposes:

1. To elect to the Board of Directors of Watts Industries, Inc. eight
Directors to hold office until the next Annual Meeting of Stockholders and
until their successors are duly elected and qualified;

2. To ratify the selection of Ernst & Young as the independent auditors of
the Company for the current fiscal year;

3. To approve an amendment to the Company's Restated Certificate of
Incorporation restating Article Fourth thereof to increase the number of
authorized shares of the Company's capital stock by increasing the number of
authorized shares of Class A Common Stock to 80,000,000 and the number of
authorized shares of Class B Common Stock to 25,000,000; and

4. To consider and act upon any matters incidental to the foregoing or any
other matters which may properly come before the meeting or any
adjournment(s) or postponement(s) thereof.

Only stockholders of record at the close of business on September 2, 1994
will be entitled to notice of and to vote at the meeting or any
adjournment(s) or postponement(s) thereof.

By Order of the Board of Directors
[Kenneth J. McAvoy]
Kenneth J. McAvoy
Secretary

North Andover, Massachusetts
September 14, 1994

IMPORTANT

IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE ANNUAL MEETING OF
STOCKHOLDERS. ACCORDINGLY, YOU ARE URGED TO PLEASE COMPLETE, SIGN, DATE AND
PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE PAID
ENVELOPE. IF YOU SO CHOOSE, YOU MAY VOTE YOUR SHARES IN PERSON AT THE ANNUAL
MEETING.

<PAGE>

WATTS INDUSTRIES, INC.
ANNUAL MEETING OF STOCKHOLDERS
OCTOBER 18, 1994
PROXY STATEMENT

INFORMATION CONCERNING
SOLICITATION AND VOTING

This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Watts Industries, Inc. (the "Company")
for use at the Company's 1994 Annual Meeting of Stockholders to be held on
Tuesday, October 18, 1994 and at any adjournment(s) or postponement(s)
thereof. Shares represented by duly executed proxies will be voted for the
election of the nominees named herein for Director, for the ratification of
the selection of Ernst & Young as the independent auditors of the Company for
the current fiscal year, and for approval of an amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of the Company's capital stock by increasing the number of authorized
shares of Class A Common Stock to 80,000,000 and the number of authorized
shares of Class B Common Stock to 25,000,000, unless authority is withheld or
different instructions are given.

Proxies may be revoked by a written revocation received by the Secretary of
the Company at the address of the Company set forth below or in open meeting
at any time prior to the voting thereof. Submission of a later dated proxy
will revoke any earlier dated proxy. Unless previously revoked, proxies
delivered will be voted at the meeting. Where a choice or instruction is
specified by the stockholder thereon, the proxy will be voted in accordance
with such specification. Where a choice or instruction is not specified by
the stockholder, the proxy will be voted as recommended by the Directors.
Shares held for customers of brokers which are not voted on a proposal
because of a lack of instructions from such brokers' customers are not
considered entitled to vote on that proposal, but if represented by proxy
will be treated as present at the meeting. Because directors are elected by a
plurality of the votes cast, withholding authority to vote for a nominee has
the same effect as a vote against such nominee.

Stockholders of record at the close of business on September 2, 1994 are
entitled to receive notice of and to vote at the meeting. Each share of Class
A Common Stock of the Company outstanding on the record date is entitled to
one vote and each share of Class B Common Stock of the Company outstanding on
the record date is entitled to ten votes. As of the close of business on
September 2, 1994, there were outstanding and entitled to vote 18,013,522
shares of Class A Common Stock and 11,472,470 shares of Class B Common Stock.

This proxy statement and the enclosed proxy are being mailed together by the
Company on or about September 14, 1994 to stockholders of record as of
September 2, 1994. The Company's Annual Report for the fiscal year ended June
30, 1994 was mailed to such stockholders of the Company with this proxy
statement.

The principal executive offices of the Company are located at 815 Chestnut
Street, North Andover, Massachusetts 01845.

The expenses of preparing, printing and assembling the materials used in the
solicitation of proxies will be borne by the Company. In addition to the
solicitation of proxies by use of the mails, the Company will pay $2,500 plus
expenses to Corporate Investor Communications, Inc. to solicit proxies and
the Company may also use the services of some of its officers and employees
(who will receive no compensation therefor in addition to their regular
salaries) to solicit proxies personally and by mail, telephone and telegraph.
Brokerage houses, nominees, fiduciaries and other custodians will be
requested to forward solicitation materials to the beneficial owners of
shares held of record by them and will be reimbursed for their reasonable
expenses.

At the date hereof the management of the Company has no knowledge of any
business other than the matters set forth in the Notice of Annual Meeting of
Stockholders and described above that will be presented for consideration at
the meeting. If any other business should come before such meeting, the
persons appointed by the enclosed form of proxy will have discretionary
authority to vote all such proxies as they shall decide. Each of the persons
appointed by the enclosed form of proxy present and acting at the meeting, in
person or by substitute, shall have and may exercise all of the powers and
authority of the proxies.

<PAGE>

PROPOSAL 1
ELECTION OF DIRECTORS

The Board of Directors of the Company has fixed the number of Directors at
eight and nominated the individuals named below for election as Directors. If
elected, the nominees will serve until the next Annual Meeting of
Stockholders and until their successors shall have been duly elected and
qualified. Proxies will be voted for the nominees named below unless
otherwise specified in the proxy. All of the nominees are presently members
of the Board of Directors. Management does not contemplate that any of the
nominees will be unable to serve, but in that event, proxies solicited hereby
will be voted either for the election of another person or persons to be
designated by the Board of Directors or to fix the number of Directors at a
lesser number and elect the nominees able to serve. Holders of voting rights
sufficient to elect each of the nominees named below have indicated an
intention to vote in favor of such nominees.

INFORMATION AS TO NOMINEES FOR DIRECTOR

Set forth below is the name and age of each nominee for director, who are the
current directors of the Company, his or her principal occupation for the
past five years, the year each became a director of the Company and the names
of certain other companies in which he or she serves as a director. The
information is as of August 16, 1994.
<TABLE>
<CAPTION>
Present Principal Employment and Director
Name Age Prior Business Experience (1) Since (1)
<S> <C> <C> <C>
Timothy P. Horne 56 Chairman of the Board since 1986 and Chief 1962
Executive Officer since 1978; President since
1994. Mr. Horne joined the Company in 1959.
David A. Bloss, Sr. 44 Executive Vice President since July, 1993. 1994
Prior to July, 1993, Mr. Bloss was associated
for five years with the Norton Company, a
manufacturer of abrasives and cutting tools,
serving as President of its Superabrasives
Division from 1991 to 1993.
Frederic B. Horne 44 Corporate Vice President since 1987; Vice 1980
President and General Manager from 1978 to
1987. Mr. Horne joined the Company in 1973.
Kenneth J. McAvoy 54 Chief Financial Officer and Treasurer since 1994
1986; Vice President of Finance since 1984;
Executive Vice President of European Operations
since 1994; Secretary since 1985. Mr. McAvoy
joined the Company in 1981.
Noah T. Herndon 62 Partner of Brown Brothers Harriman & Co., 1981
private bankers, since 1974. Mr. Herndon is a
director of Agency Rent-A-Car, Inc.
Wendy E. Lane 44 Chairman of Lane Holdings, Inc., an investment 1994
banking firm, since 1992. Prior to forming Lane
Holdings, Ms. Lane was a Principal and Managing
Director of Donaldson, Lufkin & Jenrette, an
investment banking firm, serving in these and
other positions from 1980 to 1992.
Gordon W. Moran 56 President and Chief Executive Officer of 1990
Hollingsworth & Vose Company, a paper
manufacturer, since 1983. Mr. Moran is a
director of Associated Industries of
Massachusetts, the American Paper Institute and
the South Norfolk County Association for
Retarded Citizens, Inc.
Daniel J. Murphy, III 52 Chairman of Northmark Bank, a commercial bank, 1986
since August 1987. Prior to forming Northmark
Bank in 1987, Mr. Murphy was a Managing
Director of Knightsbridge Partners,
Incorporated, a venture capital firm, from
January to August 1987 and President and a
director of Arltru Bancorporation, a bank
holding company, and its wholly-owned
subsidiary, Arlington Trust Company, from 1980
to 1986. Mr. Murphy is a director of Bay State
Gas Company.

</TABLE>
(1) All positions with the Company indicated for periods prior to January 1,
1986 were held with Watts Regulator Co. The Company became the parent company
of Watts Regulator Co. and its various subsidiaries pursuant to a
reorganization effective as of January 1, 1986.
Timothy P. Horne and Frederic B. Horne are brothers.

<PAGE>

FEES TO CERTAIN DIRECTORS

Each non-employee Director receives a fee of $15,000 per year and $500 per
Board of Directors or committee meeting attended, effective January 1, 1994,
and also receives reimbursement for out-of-pocket expenses incurred in
connection with attending such meetings. Prior to January 1, 1994, the fee
was $12,000 per year. In addition, each non-employee Director is eligible to
receive grants of stock options under the Company's 1991 Non-Employee
Directors' Nonqualified Stock Option Plan. Directors of the Company who are
employees of the Company receive no compensation for their services as
Directors.

MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES

The Company's Board of Directors held seven meetings during the fiscal year
ended June 30, 1994. Each of the Directors of the Company attended at least
three-quarters of the meetings of the Board and of the committees on which
such Director served. The Company's Board of Directors has a standing Audit
Committee and a standing Stock Option and Compensation Committee. The Audit
Committee held three meetings, and the Stock Option and Compensation
Committee held one meeting, during the fiscal year ended June 30, 1994. The
Audit Committee reviews audit performance, recommends appropriate action on
the basis of audit results and receives and reviews the auditors' "management
letters" and management's responses thereto. The Stock Option and
Compensation Committee is responsible for administering the Company's 1986
Incentive Stock Option Plan and its 1989 Nonqualified Stock Option Plan
pursuant to authority delegated to it by the Board of Directors and for
approving the compensation arrangements of the principal executive officers
of the Company. Messrs. Herndon, Murphy and Moran comprised both the Audit
Committee and the Stock Option and Compensation Committee during the fiscal
year ended June 30, 1994. As of August 9, 1994, Messrs. Herndon and Moran and
Ms. Lane comprise the Audit Committee and Messrs. Murphy and Herndon and Ms.
Lane comprise the Stock Option and Compensation Committee.

PRINCIPAL AND MANAGEMENT STOCKHOLDERS

The following table sets forth as of August 16, 1994 (except as otherwise
indicated) certain information concerning shares of Class A Common Stock and
Class B Common Stock held by (i) all beneficial owners of 5% or more of
either class of the Company's common stock, (ii) each Director or person
nominated for election as a Director of the Company and (iii) the
Chairman/President/Chief Executive Officer, the four other most highly
compensated executive officers listed in the Summary Compensation Table, one
individual who would have been one of such four most highly compensated
executive officers but who was not serving as an executive officer at fiscal
year ended June 30, 1994 and, as a group, all officers and Directors or
persons nominated for election as Directors of the Company.

<TABLE>
<CAPTION>
Number of
Shares
Beneficially Total Percent (1)
Name of Beneficial Owner (2) Owned(3)(16) Equity Voting
<S> <C> <C> <C>
Timothy P. Horne (4) 10,682,494(5)(6) 36.2% 79.7%
Frederic B. Horne (4) 10,980,750(6)(7) 37.2 82.3
George B. Horne (4) (8) 2,200,000(6)(8)(9) 7.5 16.6
Daniel W. Horne (4)(10) 1,335,840(6)(9)(10) 4.5 10.1
Deborah Horne (4)(11) 1,335,840(6)(9)(11) 4.5 10.1
Peter W. Horne (4)(12) 1,335,840(6)(9)(12) 4.5 10.1
Nicholas Company, Inc. 2,561,800(13)(14) 8.7 1.9
Nicholas Fund, Inc. 1,857,000(13)(14) 6.3 1.4
First Pacific Advisors, Inc. 1,143,800(13)(15) 3.9 *
Noah T. Herndon 8,000(13)(17) * *
Wendy E. Lane 1,000(13) * *
Daniel J. Murphy, III 7,000(13)(17) * *
Gordon W. Moran 7,000(13)(17) * *
David A. Bloss, Sr. 4,000(13)(20) * *
Kenneth J. McAvoy 36,000(13)(18) * *
Robert T. McLaurin 27,550(19)(22) * *
Martin W. Pickett 100(13) * *
Charles W. Grigg 9,190(13) * *
All officers and Directors as a
group (12 persons) 11,554,288(21)(22) 39.2 85.2
</TABLE>
* Less than 1%.

<PAGE>

(1) The percentages have been determined as of August 16, 1994 in accordance
with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). At that date, a total of 29,485,992 shares were outstanding,
of which 11,472,470 were shares of Class B Common Stock entitled to ten votes
per share and 18,013,522 were shares of Class A Common Stock entitled to one
vote per share. Each share of Class B Common Stock is convertible into one
share of Class A Common Stock.

(2) The address of Nicholas Company, Inc. and Nicholas Fund, Inc. is 700
North Water Street, Milwaukee, Wisconsin 53202. The address of First Pacific
Advisors, Inc. is 11400 West Olympic Boulevard, Los Angeles, California
90064. The address of each other stockholder in the table is c/o Watts
Industries, Inc., 815 Chestnut Street, North Andover, Massachusetts 01845,
except for Martin W. Pickett whose address is Cla-Val Company, 1701
Placentia, Costa Mesa, CA 92726 and Charles W. Grigg whose address is 87
Spruce Hill Road, Weston, Massachusetts 02193.

(3) "Beneficial ownership" means the sole or shared power to vote, or to
direct the voting of, a security, or the sole or shared investment power with
respect to a security (i.e., the power to dispose of, or to direct the
disposition of, a security). A person is deemed, as of any date, to have
"beneficial ownership" of any security that such person has the right to
acquire within 60 days after such date.

(4) Timothy P. Horne, Frederic B. Horne, George B. Horne, Daniel W. Horne,
Deborah Horne and Peter W. Horne, together with Judith Rae Horne (as trustee
and custodian for her minor daughter) may be deemed a "group" as that term is
used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
Shares of Class B Common Stock of the Company held by each member of the
Horne family named in the above table and any voting trust certificates in
respect thereof are subject to a right of first refusal in favor of the other
Horne family members named in the table. The Company has granted registration
rights with respect to the shares of Class B Common Stock beneficially owned
by such Horne family members.

(5) Includes (i) 2,936,068 shares, of which 84,848 shares are Class A Common
Stock, beneficially owned by Timothy P. Horne (for purposes of this footnote,
"Mr. Horne"), (ii) 1,355,166 shares owned by Frederic B. Horne, Mr. Horne's
brother, (iii) 1,335,840 shares held for the benefit of Daniel W. Horne, Mr.
Horne's brother, under a revocable trust for which Mr. Horne serves as sole
trustee, (iv) 1,335,840 shares held for the benefit of Deborah Horne, Mr.
Horne's sister, under a trust for which Mr. Horne serves as sole trustee,
which trust is revocable with the consent of the trustee, (v) 1,335,840
shares held for the benefit of Peter W. Horne, Mr. Horne's brother, under a
revocable trust for which Frederic B. Horne serves as sole trustee, (vi)
2,200,000 shares held for the benefit of George B. Horne, Mr. Horne's father,
under a revocable trust for which Mr. Horne serves as co-trustee, and (vii)
26,000 shares issuable upon the exercise of stock options. Also includes
157,740 shares held by Judith Rae Horne, Mr. Horne's wife, as trustee or
custodian for Mr. Horne's minor daughter, of which Mr. Horne disclaims
beneficial ownership. A total of 2,851,220 of the shares of Class B Common
Stock noted in clause (i), the shares noted in clause (ii) through (v), and
2,000,000 of the shares noted in clause (vi), of this footnote (10,213,906
shares in the aggregate) are held in a voting trust for which Mr. Horne
serves as co-trustee. See footnote 6. All shares beneficially owned or which
may be deemed beneficially owned by Mr. Horne are Class B Common Stock except
84,848 of the 2,936,068 shares noted in clause (i) and all of the shares
noted in clause (vii) of this footnote.

(6) All shares of Class B Common Stock beneficially owned by Timothy P.
Horne, all shares of Class B Common Stock beneficially owned by trusts for
the benefit of Daniel W. Horne, Deborah Horne and Peter W. Horne, 1,355,166
shares of Class B Common Stock beneficially owned by Frederic B. Horne and
2,000,000 shares beneficially owned by a trust for the benefit of George B.
Horne (10,213,906 shares in the aggregate) are subject to the terms of the
Horne Family Voting Trust Agreement--1991 (the "Voting Trust"). Under the
terms of the Voting Trust, the two trustees (currently Timothy P. Horne and
Frederic B. Horne) have sole power to vote all shares subject to the Voting
Trust. However, as long as Timothy P. Horne and Frederic B. Horne are serving
as trustees of the Voting Trust, Timothy P. Horne generally has the right to
vote all shares subject to such trust in the event that the trustees do not
concur with respect to any proposed action, including any exercise of the
trustee's right to authorize the withdrawal of shares from the Voting Trust
(the "Determination Power"). The sole exception to the Determination Power is
that the concurrence of Timothy P. Horne and Frederic B. Horne is required
for the voting of shares in connection with any vote involving the election
or removal of directors of the Company. Under the terms of the Voting Trust,
Timothy P. Horne, the Chairman of the Board of Directors, President and Chief
Executive Officer of the Company, Frederic B. Horne, a Corporate Vice
President and a Director of the Company, and George B. Horne, the father of
Timothy P. Horne

<PAGE>

and Frederic B. Horne, may designate up to two successor trustees to succeed
Timothy P. Horne and Frederic B. Horne, one to be designated as the primary
designee and the other as the secondary designee. If either Timothy P. Horne
or Frederic B. Horne ceases for any reason to serve as a trustee, first the
primary designee and then the secondary designee (if any) would become a
co-trustee with the remaining Horne brother. Under such circumstances the
remaining Horne brother would generally have the Determination Power except
that (i) the concurrence of the remaining Horne brother and the co-trustee
would be required in connection with any vote involving the election or
removal of directors of the Company, (ii) the designated successor would vote
those shares owned by the departed Horne brother and (iii) the designated
successor would have sole authority with respect to withdrawals of shares
beneficially owned by the departed Horne brother. If both Timothy P. Horne
and Frederic B. Horne cease to serve as trustees, first the primary designee
and then the secondary designee would remain as the sole trustee for the term
of the Voting Trust. If designated successors become trustees but do not
survive whichever of Timothy P. Horne or Frederic B. Horne is still serving
as trustee, that trustee would remain as the sole trustee absent an amendment
to the Voting Trust. If each of Timothy P. Horne and Frederic B. Horne and
the two designated successors cease to serve as trustees for any reason, the
holders of a majority of the voting trust certificates then outstanding have
the right to designate successor trustees as necessary under the terms of the
Voting Trust. Pursuant to the power of designation described above, Timothy
P. Horne, Frederic B. Horne and George B. Horne have designated Noah T.
Herndon, a Director of the Company, as the primary designee and John
LeClaire, Esq., a partner in the law firm of Goodwin, Procter & Hoar, as the
secondary designee, should either Timothy P. Horne or Frederic B. Horne cease
to serve as a trustee under the Voting Trust. Timothy P. Horne, Frederic B.
Horne and George B. Horne can collectively agree to revoke the designation of
any successor before he begins to serve or to appoint a new designated
successor. If one or more of such Horne family members are unable to take
such action, this power rests in the survivor or survivors of them.

The Voting Trust expires on October 31, 2001, subject to extension on or
after October 31, 1999 by stockholders (including the trustee of any trust
stockholder, whether or nor such trust is then in existence) who deposited
shares of Class B Common Stock in the Voting Trust and are then living or, in
the case of shares in the Voting Trust the original depositor of which (or
the trustee of the original depositor of which) is not then living, the
holders of voting trust certificates representing such shares. The Voting
Trust may be amended by vote of the holders of a majority of the voting trust
certificates then outstanding and, while one or more of Timothy P. Horne,
Frederic B. Horne and their successor designated as described in the
preceding paragraph is serving as trustee, the trustees. In certain cases
(i.e., changes to the extension, termination and amendment provisions), the
original depositors must also approve amendments. Shares may not be removed
from the trust during its term without the consent of the trustees.

Timothy P. Horne beneficially owns 27.9% of the total beneficial interest in
the Voting Trust (the "Beneficial Interest") individually, 13.1% of the
Beneficial Interest as trustee of a revocable trust, 13.1% of the Beneficial
Interest as trustee of a trust revocable with the consent of the trustee and
19.6% of the Beneficial Interest as co-trustee of a revocable trust
(representing an aggregate of 73.7% of the Beneficial Interest). Frederic B.
Horne beneficially owns 13.3% of the Beneficial Interest individually and
13.1% of the Beneficial Interest as trustee of a revocable trust
(representing an aggregate of 26.4% of the Beneficial Interest). George B.
Horne holds 19.6% of the Beneficial Interest as co-trustee of a revocable
trust. Voting trust certificates are subject to any restrictions on transfer
applicable to the stock which they represent.

(7) Includes (i) 2,102,010 shares, of which 46,844 are shares of Class A
Common Stock, beneficially owned by Frederic B. Horne (for purposes of this
footnote, "Mr. Horne"), (ii) 2,851,220 shares beneficially owned by Timothy
P. Horne, (iii) 1,335,840 shares beneficially owned by a revocable trust for
the benefit of Daniel W. Horne for which Timothy P. Horne serves as sole
trustee, (iv) 1,335,840 shares beneficially owned by a trust for the benefit
of Deborah Horne, for which Timothy P. Horne serves as sole trustee, which
trust is revocable with the consent of the trustee, (v) 1,335,840 shares
beneficially owned by a revocable trust for the benefit of Peter W. Horne for
which Mr. Horne serves as sole trustee, (vi) 2,000,000 shares beneficially
owned by a revocable trust for the benefit of George B. Horne, for which
George B. Horne and Timothy P. Horne serve as co-trustees and (vii) 20,000
shares issuable upon the exercise of stock options. A total of 1,355,166 of
the 2,102,010 shares of Class B Common Stock noted in clause (i) and all of
the shares noted in clauses (ii) through (vi) above (10,213,906 shares in the
aggregate) are held in the voting trust described in footnote 6 above. All
shares beneficially owned or which may be deemed beneficially owned by Mr.
Horne are Class B Common Stock except 46,844 of the 2,102,010 shares noted in
clause (i) and all of the shares noted in clause (vii) of this footnote.

<PAGE>

(8) Includes 2,200,000 shares held in a revocable trust for which Timothy P.
Horne and George B. Horne serve as co-trustees. A total of 2,000,000 of such
shares are subject to the voting trust described in footnote 6 above.

(9) All shares are Class B Common Stock.

(10) Shares are held in a revocable trust for which Timothy P. Horne serves
as sole trustee, and are subject to the voting trust described in footnote 6.

(11) Shares are held in a trust for which Timothy P. Horne serves as sole
trustee, which trust is revocable with the consent of the trustee, and are
subject to the voting trust described in footnote 6.

(12) Shares are held in a revocable trust for which Frederic B. Horne serves
as sole trustee, and are subject to the voting trust described in footnote 6.

(13) All shares are shares of Class A Common Stock or options to purchase
Class A Common Stock exercisable presently or within 60 days of August 16,
1994.

(14) The information is based on a Schedule 13G dated February 8, 1994 filed
with the Securities and Exchange Commission by Nicholas Company, Inc.,
Nicholas Fund, Inc. and Albert O. Nicholas reporting their holdings of shares
of Class A Common Stock as of December 31, 1993. Nicholas Company, Inc. has
stated in the Schedule 13G that it is an investment adviser registered under
the Investment Advisers Act of 1940 and possesses sole dispositive power over
2,561,800 shares indicated as owned by it. Nicholas Fund, Inc. has stated in
the Schedule 13G that it is an investment company registered under the
Investment Company Act of 1940 and possesses sole voting power for 1,857,000
of the shares owned by Nicholas Company, Inc. Albert O. Nicholas has stated
in the Schedule 13G that he is an individual and disclaims direct beneficial
ownership of all securities reported as beneficially owned by Nicholas
Company, Inc. and Nicholas Fund, Inc. Mr. Nicholas is the President, a
Director and the majority stockholder of Nicholas Company, Inc. and President
and Director of Nicholas Fund, Inc.

(15) The information is based on a Schedule 13G dated February 9, 1994 filed
with the Securities and Exchange Commission by First Pacific Advisors, Inc.
reporting its holdings of shares of Class A Common Stock as of December 31,
1993. First Pacific Advisors, Inc. has stated in the Schedule 13G that it is
an investment adviser registered under the Investment Advisers Act of 1940
and that it possesses shared voting power over 983,400 shares and shared
dispositive power over 1,143,800 shares.

(16) All share amounts were doubled as a result of a two-for-one stock split
of the Company's Common Stock effected by means of a stock dividend payable
on March 15, 1994.

(17) Includes 6,000 shares of Class A Common Stock issuable upon the exercise
of stock options under the 1991 Non-Employee Directors' Nonqualified Stock
Option Plan.

(18) Represents 36,000 shares of Class A Common Stock issuable upon the
exercise of stock options.

(19) Includes (i) 23,200 shares of Class A Common Stock issuable upon the
exercise of stock options presently or within 60 days of August 16, 1994 and
(ii) 4,350 shares of Class B Common Stock of the Company.

(20) Represents 4,000 shares of Class A Common Stock issuable upon the
exercise of stock options.

(21) Includes (i) 11,275,996 shares of Class B Common Stock, (ii) 136,692
shares of Class A Common Stock, and (iii) 141,600 shares of Class A Common
Stock issuable upon the exercise of stock options.

(22) Shares of Class B Common Stock of the Company held by members of
management other than Horne family members are subject to a right of first
refusal in favor of the Company.

<PAGE>
COMPENSATION ARRANGEMENTS

Summary Compensation Table
The following table contains information with respect to the compensation for
the past three fiscal years of the Company's Chairman/President/Chief
Executive Officer, the four other most highly compensated executive officers
(the "named executive officers") and one individual who would have been one
of such four most highly compensated executive officers but who was not
serving in such capacity at fiscal year ended June 30, 1994.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
OTHER
ANNUAL LTIP ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION OPTIONS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2)(3) (#)(4)(11) ($)(5) ($)(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Timothy P. Horne 1994 596,838 84,503 -- 40,000 (7) -- --
Chairman of the Board, 1993 570,000 0 -- 20,000 (7) -- --
President and Chief 1992 550,000 75,000 -- 25,000 (7) -- --
Executive Officer
David A. Bloss, Sr. (13) 1994 201,674 104,170 -- 20,000 (7) -- --
Executive Vice President 1993 -- -- -- -- -- --
1992 -- -- -- -- -- --
Kenneth J. McAvoy 1994 158,340 91,760 -- 30,000 (7) -- --
Vice President of 1993 148,834 37,650 -- 15,000 (7) -- --
Finance, CFO, 1992 140,836 78,650 -- 15,000 (7) -- --
Executive V.P. of
European Operations,
Treasurer and
Secretary
Robert T. McLaurin 1994 143,590 75,908 -- -- -- --
Corporate Vice President 1993 135,416 31,395 -- -- -- --
of Asian Operations 1992 128,330 65,000 -- -- -- --
Martin W. Pickett (8) 1994 127,840 52,653 -- 16,000(10)(12) -- --
Corporate Vice President 1993 110,834 28,782 -- 5,000(10)(12) -- --
1992 99,164 32,000 -- 5,000(10)(12) -- --
Charles W. Grigg (9) 1994 181,254 0 -- 50,000(10) -- --
President and Chief 1993 270,838 106,425 106,303 (7) -- --
Operating Officer 1992 245,008 197,500 (6) 30,000(10) -- --

-- (7)
25,000(10)
(7)

</TABLE>
(1) Amounts awarded under the Executive Incentive Bonus Plan for the
respective fiscal years.

(2) In accordance with the revised rules on executive compensation disclosure
adopted by the Securities and Exchange Commission, as informally interpreted
by the Commission's Staff, amounts of Other Annual Compensation and All Other
Compensation are excluded for the Company's 1992 fiscal year.

(3) No amounts for executive perquisites and other personal benefits,
securities or property are shown because the aggregate dollar amount per
executive is the lesser of either $50,000 or 10% of annual salary and bonus.

(4) Awarded under the 1986 Incentive Stock Option Plan (the "Incentive Plan")
and the 1989 Nonqualified Stock Option Plan (the "Nonqualified Plan").

(5) The Company does not offer a long term incentive compensation plan to the
named executive officers.

(6) Includes an interest free loan granted to Mr. Grigg by the Company in the
amount of $102,900 that was utilized for the payment of income taxes due upon
the exercise of a total of 10,000 options previously granted under the
Nonqualified Plan. Mr. Grigg repaid the loan to the Company in the 1994
fiscal year.

<PAGE>

(7) Amount awarded under the Nonqualified Plan.

(8) Mr. Pickett resigned as Corporate Vice President on July 15, 1994.

(9) Mr. Grigg resigned as President, Chief Operating Officer and Director on
January 18, 1994.

(10) All stock options granted, whether exercisable or not, generally lapse
upon the termination of employment.

(11) All option amounts for fiscal 1994 were doubled as a result of a
two-for-one stock split of the Company's Common Stock effected by means of a
stock dividend payable on March 15, 1994.

(12) Amount Awarded under the Incentive Plan.

(13) Mr. Bloss joined the Company in July, 1993.

Stock Option Grants
The following table shows information concerning options to purchase the
Company's Class A Common Stock granted in fiscal 1994 to the named executive
officers.

<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants (8) for Option Term (3)
% of Total
Options
Granted to Exercise Market Price
Options Employees or Base on Date of
Granted in Fiscal Price Grant Expiration
Name (#)(1)(2) Year ($/Sh) ($/Sh) Date 0%($) 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Timothy P.
Horne 40,000 (4) 10.43 17.10 (6) 21.25 9-1-2003 166,000 700,560 1,520,680
David A.
Bloss, Sr. 20,000 (4) 5.21 15.725 (6) 17.125 7-19-2003 28,000 243,396 573,856
Kenneth J.
McAvoy 30,000 (4) 7.82 17.10 (6) 21.25 9-1-2003 124,500 525,420 1,140,510
Robert T.
McLaurin -- -- -- -- -- -- -- --
Martin W.
Pickett (9) 16,000 (5) 4.17 18.00 (7) 18.00 9-1-2003 0 0 0
Charles W.
Grigg (9) 50,000 (4) 13.03 17.10 (6) 21.25 9-1-2003 0 0 0
</TABLE>

(1) All options were granted on September 1, 1993, except for the options
granted to Messrs. Bloss and Pickett which were granted on July 19, 1993 and
August 10, 1993, respectively.

(2) Options vest over five years at the rate of 20% per year on successive
anniversaries of the respective dates on which the options were granted and
generally terminate upon the earlier of the termination of employment,
subject to certain exceptions, or ten years from the date of grant. Under the
terms of the 1986 Incentive Stock Option Plan, the options granted to
optionees who hold more than 10% of the combined voting power of all classes
of stock of the Company have a maximum duration of five years from the date
of grant.

(3) Based upon the market price on the date of grant and an annual
appreciation at the rate stated on such market price through the expiration
date of such options. The dollar amounts in these columns are the result of
calculations of 0% and at the 5% and 10% rates set by the SEC and therefore
are not intended to forecast possible future appreciation, if any, of the
Company's stock price. The Company did not use an alternative formula for a
grant date valuation, as the Company is not aware of any formula which will
determine with reasonable accuracy a present value based on future unknown or
volatile factors.

(4) Awarded under the Company's 1989 Nonqualifed Stock Option Plan (the
"Nonqualified Plan").

(5) Awarded under the Company's 1986 Incentive Stock Option Plan (the
"Incentive Plan").

(6) Under the terms of the Nonqualified Plan, the exercise price of options
cannot be less than 50% of fair market value.

(7) Under the terms of the Incentive Plan, the exercise price of options
cannot be less than 110% of fair market value for optionees who hold more
than 10% of the combined voting power of all classes of stock of the Company
and 100% of fair market value for all other optionees.

(8) All share amounts have been doubled and option exercise prices and market
prices of the underlying security on the date of grant have been halved as a
result of a two-for-one stock split of the Company's Common Stock effected by
means of a stock dividend payable on March 15, 1994.

<PAGE>

(9) All stock options granted to an individual generally lapse upon the
termination of employment. Mr. Pickett resigned as Corporate Vice President
on July 15, 1994. Mr. Grigg resigned as President, Chief Operating Officer
and Director on January 18, 1994. Therefore, there is no potential realizable
value to report for either of these individuals.

Aggregated Option Exercises and Option Values
The following table shows information concerning the exercise of stock
options during fiscal year 1994 by each of the named executive officers and
the fiscal year-end value of unexercised options.

<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at Fiscal Year In-the-Money Options
End(#) (2) (5) at Fiscal Year End($) (3)
Shares
Acquired Value
on Realized($)
Name Exercise(#) (1) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Timothy P. Horne 42,424(4) 669,057.50(4) -- 137,788 -- 1,115,302.50
David A. Bloss,
Sr. -- -- -- 20,000 -- 150,500
Kenneth J.
McAvoy 7,800(4) 199,875(4) 18,000 90,000 116,460 696,810
Robert T.
McLaurin -- -- 20,000 8,000 138,400 61,600
Martin W.
Pickett (6) 1,000(4) 27,250(4) 5,900 34,000 5,137.50 133,500
Charles W. Grigg
(6) 30,093(4) 519,313.50(4) -- -- -- --
</TABLE>

(1) Represents the difference between the market price on the date of
exercise and the exercise price of the options.

(2) Options vest over five years at the rate of 20% per year on successive
anniversaries of the respective dates on which the options were granted and
shall generally terminate upon the earlier of the termination of employment,
subject to certain exceptions, or ten years from the date of grant.

(3) Represents the difference between the market price on the last day of the
fiscal year and the exercise price of the options.

(4) Share amounts and dollar values are shown as of the dates of exercise
which occurred prior to the date of the two-for-one stock split referred to
in Note (5) below.

(5) All option amounts were doubled and option exercise prices were halved as
a result of a two-for-one stock split of the Company's Common Stock effected
by means of a stock dividend payable on March 15, 1994.

(6) All stock options granted to an individual generally lapse upon the
termination of employment. Mr. Grigg resigned on January 18, 1994 as
President, Chief Operating Officer and Director. Therefore, Mr. Grigg
possessed no options at fiscal year end.

1991 Non-Employee Directors' Nonqualified Stock Option Plan. Stock options
granted under the 1991 Non- Employee Directors' Nonqualified Stock Option
Plan (the "Directors' Plan") are granted automatically and without any
further action on the part of the Board of Directors as of November 1 in each
year commencing in 1991 (with respect to each year, the "Grant Date"). The
Directors' Plan provides that options to purchase 2,000 shares of Class A
Common Stock (or such lesser amount as shall enable each non-employee
Director then in office to receive an equal grant in the event that there are
not sufficient shares of Class A Common Stock for each such non-employee
Director to receive a grant of 2,000 shares) shall be granted to each
non-employee Director duly elected and serving as such on each Grant Date.

The purchase price of shares which may be purchased under the Directors' Plan
is $22.75, which is equal to the closing sale price of the Class A Common
Stock on the over-the-counter market on October 18, 1991 (as adjusted for the
March, 1994 two-for-one split of the Company's Common Stock), as reported by
the National Market System of NASDAQ.

Options granted under the Directors' Plan are exercisable when granted, but
no option is exercisable after the earlier of (a) the date ten years after
the Grant Date or (b) the date on which the Director to whom such options
were granted ceases for any reason to serve as a Director of the Company;
provided, however, that in the event of termination as a result of disability
or death, the Director or his personal representative may exercise any
outstanding options not theretofore exercised during the 90-day period
following such disability or death.

<PAGE>
The Directors' Plan is administered by the Board of Directors or an
authorized committee thereof in accordance with Rule 16b-3 under the Exchange
Act. The Board of Directors or an authorized committee thereof determines the
form of options granted under the Directors' Plan and makes other
determinations and interpretations concerning the Directors' Plan and options
granted thereunder.

During fiscal 1994, Messrs. Herndon, Moran and Murphy, being all the
non-employee Directors of the Company on the Grant Date, were each granted
options to purchase 2,000 shares of Class A Common Stock (as adjusted for the
March, 1994 stock split) under the Directors' Plan.

Pension Plan
Watts Regulator Co., a subsidiary of the Company, maintains a qualified
non-contributory defined benefit pension plan (the "Pension Plan") for
eligible salaried employees of the Company and its subsidiaries, including
the named executive officers specified in the "Summary Compensation Table"
above and it maintains a nonqualified non-contributory defined benefit
supplemental plan (the "Supplemental Plan") generally for certain highly
compensated employees. The eligibility requirements of the Pension Plan are
attainment of age 21 and one year of service of 1,000 or more hours. The
assets of the Pension Plan are maintained in a trust fund at State Street
Bank and Trust Company. The Pension Plan is administered by the Pension Plan
Committee, which is appointed by the Board of Directors of Watts Regulator
Co. Annual contributions to the Pension Plan are computed by an actuarial
firm based on normal pension costs and a portion of past service costs. The
Pension Plan provides for monthly benefits to, or on behalf of, each covered
employee at age 65 and has provisions for early retirement after ten years of
service and attainment of age 55 and surviving spouse benefits after five
years of service. Covered employees who terminate employment prior to
retirement with at least five years of service are vested in their accrued
retirement benefit. The Pension Plan is subject to the Employee Retirement
Income Security Act of 1974, as amended.

The annual normal retirement benefit for employees under the Pension Plan is
1.67% of Final Average Compensation (as defined in the Pension Plan)
multiplied by years of service (maximum 25 years), reduced by the Maximum
Offset Allowance (as defined in the Pension Plan). For the 1994 Pension Plan
year, Annual Compensation in excess of $150,000 per year is disregarded under
the Pension Plan for all purposes. However, benefits accrued prior to the
1994 plan year may be based on compensation in excess of $150,000.
Compensation recognized under the Pension Plan includes base salary and
annual bonus.

The Supplemental Plan provides additional monthly benefits to individuals who
were projected to receive reduced benefits as a result of changes made to the
Pension Plan to comply with the Tax Reform Act of 1986 or who will be
affected by IRS limits on Pension Plan Compensation.

The annual normal retirement benefit payable from the Supplemental Plan is
equal to the difference between (1) the pre-Tax Reform Act promise of 45% of
Final Average Compensation less 50% of the participant's Social Security
Benefit, the result prorated for years of service less than 25 and (2) the
Pension Plan formula above with Annual Compensation in excess of $175,000
disregarded. For eligible employees who were not plan participants of the
Pension Plan as of January 1, 1989, the benefit under the Supplemental Plan
is based on the Pension Plan formula set forth above, with Annual
Compensation in excess of $242,283 disregarded. For the 1994 Plan Year,
Annual Compensation in excess of $302,863 is disregarded for all purposes
under the Supplemental Plan. Compensation recognized under the
Supplemental Plan is W-2 pay.

The following table illustrates total annual normal retirement benefits
(payable from both the Pension Plan and from the Supplemental Plan and
assuming attainment of age 65 during 1994) for various levels of Final
Average Compensation and years of benefit service, prior to application of
the Social Security offset, which is an integral part of the benefits payable
under the Supplemental Plan.
<TABLE>
<CAPTION>
Estimated Total Annual Retirement Benefit
(Pension Plan plus Supplemental Plan)
Based on Years of Service (1)
Final Average Compensation for
Five Highest Consecutive Years 25 Years
in Last 10 Years: 10 Years 15 Years 20 Years or more
<S> <C> <C> <C> <C>
$100,000 $18,000 $27,000 $ 36,000 $ 45,000
150,000 27,000 40,500 54,000 67,500
200,000 31,825 47,738 63,650 79,563
250,000 40,825 61,238 81,650 102,063
300,000 49,825 74,738 99,650 124,563
350,000 50,340 75,511 100,681 125,851
</TABLE>
(1) The annual Pension Plan benefit is computed on the basis of a straight
life annuity.

<PAGE>

Messrs. Timothy P. Horne, Bloss, McAvoy, McLaurin, Pickett and Grigg have 35,
1, 13, 16, 5 and 10 years, respectively, of benefit service under the Pension
Plan. Eligible employees are currently limited to a maximum annual benefit
under the Pension Plan of $118,800 (subject to cost of living adjustments)
under Internal Revenue Code requirements regardless of their years of service
or Final Average Compensation. Accordingly, under current salary levels and
law, Mr. Timothy P. Horne's annual benefit would be limited to such amount.

Employment, Termination, Supplemental and Deferred Compensation Agreements
On May 1, 1993, the Company entered into an Employment Agreement with Mr.
Horne providing for annual base salary of at least $570,000 plus other
benefits and bonuses generally available to senior executives of the Company.
The Employment Agreement provides for the employment of Mr. Horne as Chairman
of the Board and Chief Executive Officer of the Company for a period of not
less than four years and is terminable by Mr. Horne on thirty days notice.
The Employment Agreement supersedes all prior employment agreements between
the Company and Mr. Horne. Under the Employment Agreement, if Mr. Horne
shall, without his consent, cease to be, or cease to have the
responsibilities and duties of, Chairman of the Board of Directors of the
Company and Chief Executive Officer other than for a willful illegal act
relating to the performance of his duties, or if he shall be assigned duties
inconsistent with those previously performed by him, he shall be entitled to
terminate his employment upon notice and, if so terminated, he shall be
entitled to receive a severance payment equal to the greater of (i) the
compensation which would have been payable under the Employment Agreement at
the base salary in effect on the termination date for the balance of the
original term thereof or (ii) two years' compensation at that rate.

Under a Supplemental Compensation Agreement, effective as of May 1, 1993,
Timothy P. Horne is entitled to receive annual payments during his lifetime
following his retirement or other termination of employment with the Company
equal to the greater of (a) one-half of the average of his base salary for
the three years immediately preceding such retirement or termination or (b)
$350,000. During this period Mr. Horne will be available as a consultant to
the Company for 300 to 500 hours per year.

Mr. Horne is also entitled under a Deferred Compensation Agreement to
retirement benefits aggregating $233,333 payable over a period of 28
consecutive months commencing upon the earliest of his retirement, attainment
of the age of 65 or other termination of employment. The Deferred
Compensation Agreement represents compensation which Mr. Horne deferred prior
to the Company's past three fiscal years. The Company has fully expensed its
obligations under this Deferred Compensation Agreement.

Stock Option and Compensation Committee Report
The Stock Option and Compensation Committee is currently composed of Messrs.
Murphy and Herndon and Ms. Lane. Mr. Murphy is the Chairman of the Committee.
The three members of the Stock Option and Compensation Committee are
non-employee directors and are ineligible to participate in any of the
compensation plans which are administered by the Committee.

In accordance with the rules adopted by the Securities and Exchange
Commission, the Stock Option and Compensation Committee will report on the
compensation and benefits provided in fiscal 1994 to Timothy P. Horne, David
A. Bloss, Sr., Kenneth J. McAvoy, Robert T. McLaurin, Martin W. Pickett and
Charles W. Grigg.

Compensation Philosophy
The Company's executive compensation program is designed to promote corporate
performance and thereby enhance stockholder returns. The Committee believes
that executives should have a greater portion of their compensation tied
directly to performance, both of the business and of individual objectives
established by management. To this end, overall compensation strategies and
specific compensation plans have been developed to tie a significant portion
of executive compensation to the success in meeting specified performance
goals. The overall objectives of this strategy are to attract and retain the
best possible executive talent, to motivate executives to achieve goals
inherent in the Company's business strategy, to link executive and
stockholder interests and to provide compensation packages that recognize
individual contributions as well promote achievement of business goals.

The key elements of the Company's executive compensation program consists of
three components, each of which is intended to serve the overall compensation
philosophy: base salary, an annual bonus and stock options granted under
either the 1986 Incentive Stock Option Plan or the 1989 Nonqualified Stock
Option Plan. These programs, as well as the basis for Mr. Timothy P. Horne's
compensation in fiscal 1994, are discussed below.

<PAGE>

Base Salary
Base salaries for executive officers are initially determined by evaluating
the responsibilities of the position held and the experience of the
individual, coupled with a review of the base salaries for comparable
positions at other companies.

Executive's base salaries are reviewed on an annual basis following the close
of the fiscal year and completion of the audit of the Company's financial
results by the independent auditors. Adjustments are determined by evaluating
the performance of the Company and each executive officer. The performance of
executive officers with functional or administrative responsibilities is
considered by reviewing the quality and efficiency of administrative and
functional processes. In the case of executive officers with responsibility
for one or more business units within the Company, the business results of
those units are also considered. The Committee also considers, where
appropriate, certain non-financial performance measures, such as increase in
market share, market expansion, corporate development and acquisitions,
achievement of manufacturing efficiencies, improvements in product quality
and/or relations with customers, suppliers or employees. Adjustments in base
salary are also made when and as appropriate to reflect changes in job
responsibilities.

The Committee believes that the Company's most direct competitors for
executive talent are not necessarily all of the companies that would be
included in the peer group established to compare shareholder returns. Thus,
the compensation packages which may be considered during the Company's
compensation review process are not the same group as the peer group index in
the Comparison of Five Year Cumulative Total Return graph included in this
proxy statement.

The base salary received by Mr. Timothy P. Horne in fiscal 1994 was $596,838,
an increase of 4.5% from $570,000 in the prior fiscal year. Under the terms
of an Employment Agreement with the Company, Mr. Horne's base salary was
established in 1993 at $570,000, subject to a guaranteed annual adjustment
equal to the increase in the Consumer Price Index for all Urban Consumers,
with such other additional increase, if any, as the Committee deems
appropriate in its discretion. The CPI increased by approximately 3.0% from
June 1992 to June 1993, the twelve month period immediately prior to the
Committee's adjustment in Mr. Horne's base salary for fiscal 1994.

The key performance measure the Committee used in determining Mr. Horne's
compensation for fiscal 1994 was its assessment of his ability and dedication
to enhance the long-term value of the Company through continuation of the
leadership and vision he has provided during his tenure as Chairman,
President and CEO. Under his leadership, the sales of the Company have
experienced a compounded annual growth rate of approximately 17%.

Annual Bonus
The Company's executive officers are eligible for an annual cash bonus.
Individual and corporate performance objectives are established at or near
the beginning of each fiscal year by the Chairman/President/Chief Executive
Officer in consultation with the Executive Vice President and the Chief
Financial Officer. These objectives are then reviewed by the Committee. Once
established, eligible executives are assigned threshold, target and maximum
bonus levels. Each participant in the plan is assigned a percentage, based
upon the participant's position in the Company, of base salary as a target
upon which the bonus is calculated.

The Committee believes that a significant portion of executive compensation
should be tied to an annual bonus potential based on performance of specified
objectives. During fiscal 1994, the Company's net income increased by 15%.
This represents a significant reversal from the 5% decline in net income
experienced during fiscal 1993. As a result, the annual bonus payments for
fiscal 1994 were more than the prior year with respect to all of the named
executive officers.

Under the Employment Agreement, Mr. Timothy P. Horne is eligible for an
annual bonus in an amount to be determined by the Committee based upon such
factors as the Committee deems appropriate. Mr. Horne received a bonus of
$84,503 for fiscal 1994. The Committee believes that Mr. Horne's continued
leadership and focus on the long-term growth of the Company were significant
factors in contributing to the 15% increase in net income for fiscal 1994.

Stock Options
Under the Company's 1986 Incentive Stock Option Plan and 1989 Nonqualified
Stock Option Plan, both of which were approved by the stockholders, stock
options may be granted to the Company's executive officers. The

<PAGE>

Committee sets guidelines for the size of stock option awards based on
similar factors as used to determine base salaries and annual bonuses,
including corporate performance and individual performance against
objectives. Stock options are the principal vehicle for the payment of
long-term compensation. This component of compensation is intended to
motivate executives to improve stock market performance.

Stock options are designed to align the interests of the executives with
those of the stockholders as the full benefit of the compensation package
will not be realized unless stock appreciation occurs over a number of years.
Stock options under the Incentive Plan are typically granted annually and
vest 20% per year over five years beginning with the first anniversary of the
grant date. Under the Incentive Plan, the exercise price equals the market
price of the Common Stock on the date of the grant with an exception for
executives who own more than 10% of the combined voting power of the Company;
for those employees the exercise price is equal to 110% of the market price
on the date of the grant. Stock options under the Nonqualified Plan have an
exercise price which may be no less than 50% of the market price on the date
of the grant. The duration of options under either plan is generally 10
years, with the exception of grants under the Incentive Plan to owners of
more than 10% of the combined voting power of the Company, in which case such
grants terminate after 5 years.

Options are normally granted in the fall following the close of the fiscal
year in order to provide the Committee with an opportunity to review the
fiscal year performance, both of individual and business goals.

On September 1, 1993, Mr. Timothy P. Horne received options under the
Nonqualified Plan to purchase 20,000 shares with an exercise price of $34.20,
which represents 80% of the fair market value of $42.50 on the grant date
(share amounts and dollar values are shown as of the date of grant which is
prior to the March, 1994 stock split). This is the same number of options
which were granted to Mr. Horne for the fiscal year ended June 30, 1992. Mr.
Horne holds a significant equity interest in the Company.

Conclusion
Through the programs described above, a very significant portion of the
Company's executive compensation is linked to individual and corporate
performance and stock appreciation. The Stock Option and Compensation
Committee intends to continue the policy of linking executive compensation to
corporate performance and enhancement of stockholder returns.

Stock Option and Compensation Committee
Daniel J. Murphy, III (Chairman)
Noah T. Herndon
Wendy E. Lane

<PAGE>

Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder
return on the Company's Class A Common Stock, based on the market price of
the Common Stock, with the cumulative return of companies on the Standard &
Poor's 500 Stock Index and a peer group of companies engaged in the valve and
pump industries, for a period of five fiscal years commencing June 30, 1989
and ended June 30, 1994. The performance indicator of peer group companies
consists of Keystone International, Inc., Bw Ip, Inc., Zurn Industries, Inc.,
Goulds Pumps, Inc. and Duriron, Inc. The graph assumes that the value of the
investment in the Company's Class A Common Stock and each index was $100 at
June 30, 1989 and that all dividends were reinvested.

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG WATTS INDUSTRIES, INC., THE S&P 500 INDEX AND A PEER GROUP

[TABULAR REPRESENTATION OF LINE GRAPH]
<TABLE>
<CAPTION>
Cumulative Total Return
6/30/89 6/30/90 6/30/91 6/30/92 6/30/93 6/30/94
<S> <C> <C> <C> <C> <C> <C>
Watts Industries, Inc. 100 129 157 157 121 152
Peer Group 100 130 136 143 151 118
S&P 500 100 116 125 142 161 163
</TABLE>

Certain Transactions
George B. Horne, the father of Timothy P. Horne and Frederic B. Horne,
receives monthly payments of $7,959 ($95,505 annually) from the Watts
Regulator Co. Retirement Plan for Salaried Employees.

Compliance with Section 16(a) of the Securities Exchange Act of 1934
During fiscal year 1994, Charles W. Grigg, a former director and executive
officer of the Company, failed to file with the Securities and Exchange
Commission ("SEC") on a timely basis reports on Form 4 for the months of
December 1993 and January 1994 relating to a total of 5 transactions.

In making these disclosures, the Company has relied solely upon written
representations of its Directors and executive officers and copies of the
reports that they have filed with the SEC.

<PAGE>

PROPOSAL 2

RATIFICATION OF INDEPENDENT AUDITORS

Although Delaware law does not require that the selection by the Directors of
the Company's independent auditors be approved each year by the stockholders,
the Directors believe it is appropriate to submit the selection of
independent auditors to the stockholders for their approval and to abide by
the result of the stockholders' vote. Upon the recommendation of the Audit
Committee of the Board, the Directors have recommended that the stockholders
ratify the selection of Ernst & Young as the Company's independent auditors
for fiscal 1995.

The Company expects that a representative of Ernst & Young will be present at
the meeting and will be given the opportunity to make a statement if he or
she wishes to do so. This representative is also expected to be available to
respond to questions from stockholders.

Holders of voting rights sufficient to ratify the selection of Ernst & Young
as independent auditors have indicated an intention to vote in favor of this
proposal.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.

PROPOSAL 3

AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION
AUTHORIZING ADDITIONAL SHARES OF CLASS A AND CLASS B COMMON STOCK

The presently authorized capital stock of the Company consists of 40,000,000
shares of Class A Common Stock, par value $.10 per share, 13,000,000 shares
of Class B Common Stock, par value $.10 per share, and 5,000,000 shares of
Preferred Stock, par value $.10 per share. On August 16, 1994, there were
issued and outstanding 18,013,522 shares of Class A Common Stock, 11,472,470
shares of Class B Common Stock and no shares of Preferred Stock. An aggregate
of 14,684,416 additional shares of Class A Common Stock were reserved for
issuance under the 1986 Plan, the 1989 Plan, the 1991 Non-Employee Directors'
Nonqualified Stock Option Plan, and conversion of shares of Class B Common
Stock into shares of Class A Common Stock pursuant to the terms of the
Restated Certificate of Incorporation. Accordingly, on that date there were
7,302,062 and 1,527,530 unissued and unreserved shares of Class A Common
Stock and Class B Common Stock, respectively.

The Board of Directors recommends that the first paragraph of Article FOURTH
of the Company's Restated Certificate of Incorporation be amended and
restated to increase the aggregate number of authorized shares of capital
stock of the Company, of the Company's Class A Common Stock, and of the
Company's Class B Common Stock from 58,000,000 shares, 40,000,000 shares, and
13,000,000 shares to 110,000,000 shares, 80,000,000 shares, and 25,000,000
shares, respectively. The proposed amendment would not affect the number of
authorized shares of Preferred Stock, the number of issued and outstanding
shares of Class A Common Stock or Class B Common Stock or the relative
rights, powers or preferences of any class of the Company's capital stock.
There are no preemptive rights with respect to the Company's Class A Common
Stock, Class B Common Stock or Preferred Stock. The Board of Directors has
adopted a resolution approving the proposed amendment, declaring the proposed
amendment advisable and recommending that it be approved by the Company's
stockholders at the 1994 Annual Meeting.

The Board of Directors believes that the authorization of an additional
40,000,000 shares of Class A Common Stock and 12,000,000 shares of Class B
Common Stock will benefit the Company and its stockholders by providing
additional flexibility for the Board in connection with a variety of
corporate matters. The newly authorized shares, together with the shares that
are presently authorized but unissued would be available for such general
corporate purposes as the Board of Directors may determine, including,
without limitation, public offerings, private placements, acquisitions, stock
options and other benefit arrangements and stock dividends or splits. The
Board of Directors will consider such uses from time to time as circumstances
warrant and has no current plans to issue shares of Class A Common Stock or
Class B Common Stock.

No shares of Class B Common Stock may be issued without the affirmative vote
of the holders of a majority of the outstanding shares of the Company's Class
A Common Stock and Class B Common Stock, voting as separate classes, except
where a stock dividend has been declared by the Board of Directors on all of
the outstanding capital stock of the Company, in which case additional shares
of Class B Common Stock will be issued as dividends to holders of the Class B
Common Stock. The newly authorized shares of Class A Common Stock generally
would

<PAGE>

be issuable in the discretion of the Board of Directors without stockholder
approval, except as required by applicable laws, rules or regulations. In
this regard, the rules of the National Association of Securities Dealers,
Inc. for issuers whose securities are quoted on its National Market System,
including the Company, would generally require stockholder approval of
certain stock issuances including, among others, issuances in connection with
the acquisition of the stock or assets of another entity that result in an
increase of 20% or more of the outstanding shares of Class A Common Stock.
Any issuance of Class A Common Stock (other than stock dividends and stock
splits) would reduce the percentage of equity ownership and voting power of
all existing stockholders.

Vote Required. Amending the Company's Restated Certificate of Incorporation
in the manner described above requires the affirmative vote of the holders of
a majority of the outstanding shares of the Company's Class A Common Stock
and Class B Common Stock, voting as separate classes. The holders of the
Company's Class A Common Stock and Class B Common Stock are entitled to one
vote and ten votes for each share held, respectively. Holders of shares of
Class B Common Stock sufficient to approve the proposed amendment on behalf
of such class have indicated an intention to vote for the proposed amendment.
Assuming receipt of stockholder approval for the proposed amendment, the
Company will file a Certificate of Amendment effecting the proposed amendment
with the Secretary of State of Delaware. It is anticipated that the
Certificate of Amendment will be filed on and become effective at the close
of business on October 18, 1994. Upon filing of the Certificate of Amendment,
all stockholders will be bound by the amendments, whether or not they have
voted in favor of it.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.

OTHER MATTERS

The Board of Directors is not aware of any other matters which may come
before the meeting. If any other matters shall properly come before the
meeting, it is the intention of the persons named in the enclosed proxy to
vote the proxy in accordance with their judgment on any such matters.

STOCKHOLDER PROPOSALS

In order for any stockholder proposal to be included in the proxy statement
for the Company's 1995 Annual Meeting of Stockholders, such proposal must be
received at the principal executive offices of the Company, 815 Chestnut
Street, North Andover, MA 01845, not later than May 17, 1995 and must satisfy
certain rules of the Securities and Exchange Commission.

Nominations and proposals of stockholders may also be submitted to the
Company for consideration at the 1995 Annual Meeting if certain conditions
set forth in the Company's By-laws are satisfied, but will not be included in
the proxy materials unless the conditions set forth in the preceding
paragraph are satisfied. Such nominations (or other stockholder proposals)
must be delivered to or mailed and received by the Company not less than 75
days nor more than 120 days prior to the anniversary date of the 1994 Annual
Meeting. If the date of the 1995 Annual Meeting is subsequently moved to a
date more than seven days (in the case of Director nominations) or ten days
(in the case of other stockholders proposals) prior to the anniversary date
of the 1994 Annual Meeting, the Company will publicly disclose such change
and nominations or other proposals to be considered at the 1995 Annual
Meeting must be received by the Company not later than the 20th day after
such disclosure (or, if disclosed more than 75 days prior to such anniversary
date, the later of 20 days following such disclosure or 75 days before the
date of the 1995 Annual Meeting, as rescheduled). To submit a nomination or
other proposal, a stockholder should send the nominee's name or proposal and
appropriate supporting information required by the Company's By-Laws to the
Secretary of the Company at the address set forth above.

<PAGE>

PROXY

WATTS INDUSTRIES, INC.
815 Chestnut Street, North Andover, MA 01845
Proxy for Class A Common Stock
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Timothy P. Horne and
Kenneth J. McAvoy, and each of them acting solely,
proxies, with power of substitution and with all powers
the undersigned would possess if personally present, to
represent and vote, as designated below, all of the shares
of Class A Common Stock of Watts Industries, Inc. which
the undersigned is entitled to vote at the Annual Meeting
of Stockholders of Watts Industries, Inc. to be held in
the Phillips Room of The Andover Inn at Phillips Academy,
Chapel Avenue, Andover, Massachusetts, on Tuesday, October
18, 1994 at 10:00 a.m. (Boston time), and at any
adjournment(s) or postponement(s) thereof, upon the
matters set forth on the reverse side hereof and described
in the Notice of Annual Meeting of Stockholders and
accompanying Proxy Statement and upon such matters as may
properly be brought before such meeting and any
adjournment(s) or postponement(s) thereof.

The undersigned hereby revokes any proxy previously given in connection with
such meeting and acknowledges receipt of the Notice of Annual Meeting and
Proxy Statement for the aforesaid meeting and the 1994 Annual Report to
Stockholders.

CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE
SIDE

<PAGE>

[X] Please mark
votes as in
this example

This proxy when properly executed will be voted in the manner directed herein
by the undersigned stockholder. If no instruction is indicated with respect
to Items 1, 2 and 3 below, the undersigned's votes will be cast in favor of
such matters. PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
1. To elect eight Directors to hold office until the next Annual Meeting of
Stockholders and until their successors are duly elected and qualified.

Nominees: Timothy P. Horne, David A. Bloss, Sr., Frederic B. Horne, Kenneth
J. McAvoy, Noah T. Herndon, Wendy E. Lane, Gordon W. Moran and Daniel J.
Murphy, III.

FOR [ ] WITHHELD [ ]

[ ] For all nominees except as noted above

2. To ratify the selection of Ernst & Young as the independent auditors of
the Company for the current fiscal year.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To approve an amendment to the Company's Restated Certificate of
Incorporation increasing the number of authorized shares of Class A Common
Stock from 40 million shares to 80 million shares and increasing the number
of authorized shares of Class B Common Stock from 13 million shares to 25
million shares, with a corresponding increase in the capital stock, as
described in the Proxy Statement.
[ ] [ ] [ ]
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]

Sign exactly as name appears on this Proxy. If the shares are registered in
the names of two or more persons, each should sign. Executors,
administrators, trustees, partners, custodians, guardians, attorneys and
corporate officers should add their full titles as such.

Signature: Date

<PAGE>

PROXY

WATTS INDUSTRIES, INC.
815 Chestnut Street, North Andover, MA 01845
Proxy for Class B Common Stock
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Timothy P. Horne and
Kenneth J. McAvoy, and each of them acting solely,
proxies, with power of substitution and with all powers
the undersigned would possess if personally present, to
represent and vote, as designated below, all of the shares
of Class B Common Stock of Watts Industries, Inc. which
the undersigned is entitled to vote at the Annual Meeting
of Stockholders of Watts Industries, Inc. to be held in
the Phillips Room of The Andover Inn at Phillips Academy,
Chapel Avenue, Andover, Massachusetts, on Tuesday, October
18, 1994 at 10:00 a.m. (Boston time), and at any
adjournment(s) or postponement(s) thereof, upon the
matters set forth on the reverse side hereof and described
in the Notice of Annual Meeting of Stockholders and
accompanying Proxy Statement and upon such matters as may
properly be brought before such meeting and any
adjournment(s) or postponement(s) thereof.

CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE
SIDE

<PAGE>

[X] Please mark
votes as in
this example

Nominees: Timothy P. Horne, David A. Bloss, Sr., Frederic B. Horne, Kenneth
J. McAvoy, Noah T. Herndon, Wendy E. Lane, Gordon W. Moran and Daniel J.
Murphy, III.

FOR [ ] WITHHELD [ ]

For all nominees except as noted above

Sign exactly as name appears on this Proxy. If the shares are registered in
the names of two or more persons, each should sign. Executors, administrators,
trustees, partners, custodians, guardians, attorneys and corporate officers
should add their full titles as such.

Signature: Date

<PAGE>

WATTS INDUSTRIES, Inc.

(FRONT COVER GRAPHICS: Pictures of valves)

ANNUAL REPORT
- - - -------------
1994

(LOGO)

<PAGE>

(INSIDE FRONT COVER)

(Descriptions of valves on front cover)

Contromatics
Actuated
Butterfly Valve

KF Industries
Top Entry Valve

Circle Seal Controls
Motor Operated Valve

Leslie Controls
Aeroflow(TM)
Control Valve

Henry Pratt Company
Butterfly Valve

Watts Regulator Company
Water Pressure
Reducing Valve

KF Industries
Three-Way Trunnion
Ball Valve

Spence Engineering
Company
Steam Pressure
Reducing
Valve

Watts ACV
Automatic Control Valve

Watts Regulator Company
Actuated
Ball Valve

Watts Regulator Company
Backflow Preventer

ANNUAL REPORT
- - - -------------
1994

<PAGE>

Watts Industries, Inc. Annual Report 1994

Page
Long Term Growth ..................................2
To Our Shareholders ...............................3
Operational Strategy ..............................4
Industrial and Oil & Gas ..........................5
Plumbing & Heating and
Water Quality ...................................6-7
Municipal Water ...................................8
Steam .............................................9
Consolidated Financial Statements ................10
Report of Independent Auditors ...................10
Management's Discussion .......................22-25
Quarterly Information ............................25
Fifteen Year Financial Summary ................26-27
Acquisitions .....................................28
Directors and Officers ............Inside back cover

A LEADER IN VALVE TECHNOLOGY
WATTS(R)
INDUSTRIES, INC.
SINCE 1874

<PAGE>

Watts Industries: Committed to the achievement of
sustained long-term growth. (Fifteen year history)

[Graph of Net Sales showing a Compounded Annual Growth Rate of 17%]

[Graph of Net Income showing a Compounded Annual Growth Rate of 19%]

[Graph of Stockholders' Equity showing a Compounded Annual Growth Rate of 20%]

2
<PAGE>
To Our Shareholders

Watts achieved yet another record year for both sales and earnings. This
performance marked the 18th consecutive year of increased sales and 17th of 18
years of record net income.

Net sales for Fiscal 1994 increased 11% to $519 million and net income
increased 50% to $41 million. Excluding the unusual charges and the cumulative
effect of the tax accounting change in Fiscal 1993, net income increased 18% and
the fully diluted earnings per share were $1.38 versus $1.16 last year.

Acquisition activity included two Canadian-based manufacturers of traps and
drains for commercial, industrial, and institutional construction. Ancon and
Enpoco were acquired during the first half of Fiscal 1994. With combined annual
sales of approximately $12 million, these companies have a significant share of
the Canadian market and will add strong product lines to our domestic plumbing
product range during Fiscal 1995.

Many weeks were devoted to business trips to Asia to explore the region's
unfolding growth markets, including China. The first tangible result of these
efforts was the commencement on September 1st of a joint venture with the
Tianjin Tanggu Valve Plant of the People's Republic of China, in which Watts has
a 60% controlling investment. Tanggu, an established ISO 9001 certified
manufacturer, sells its butterfly, globe, and check valves to 29 provinces and
autonomous regions in China and exports to the United States, Europe, Australia,
and Southeast Asia. We expect there will be further joint ventures in China
during Fiscal 1995. In addition to water and industrial, our focus will be on
the valve markets for oil and gas, power generation, and central steam heating.

Sales were flat in Europe owing to the recession which continued throughout
Fiscal 1994. Some of the impact of the recession was offset by the rebuilding of
former East Germany, and the developing markets of Poland, Czech Republic,
Hungary, Slovakia, and other emerging Eastern European markets. Our
consolidation of the acquired companies and product lines resulted in an
operating profit of 14%. Any increase in sales volume during Fiscal 1995 should
have a meaningful impact upon operating earnings because of the leverage now
established.

Europe continues to be an area of opportunity for growth by acquisition.
Watts will also continue to explore the world markets for joint ventures and
acquisitions. Our near-term Corporate objective is to increase international
business as a percent of total sales. International sales, including Canada,
increased as a percent of sales from 23% in Fiscal 1993 to 29% during 1994.

Domestically, our growth was led by the Watts Regulator Company and its
water-oriented Plumbing and Heating, Water Quality (backflow preventers), and
OEM Divisions. The sales for these divisions increased by 10% from $150 million
in Fiscal 1993 to $165 million in Fiscal 1994. A return to some normalization
within their traditional markets, including a strong rebound in residential
construction, helped these divisions in their record performance.

Strong sales growth was also experienced within the oil and gas segment led
by KF Industries. KF's sales increased by 14% from $57 million in Fiscal 1993 to
$65 million in Fiscal 1994. This increase was derived primarily from a strong
international market, especially in gas transmission pipeline projects.

On July 28, 1994, Watts announced the acquisition of Jameco Industries, a
domestic manufacturer of valves and plumbing hardware sold through wholesale
plumbing and heating distribution and to the DIY (do-it-yourself) market.
Jameco, with sales of $56 million for the twelve months ending June 30, 1994,
represents one of our largest acquisitions to date. Its complementary fit with
the Watts Regulator Plumbing and Heating Division should enhance both companies
in presenting one of the largest arrays of plumbing products available to the
U.S. market.

We remain committed to our goal of double-digit growth with the ambitious
objective of reaching $1 billion in sales by the end of the decade. Including
the latest acquisitions, we expect our sales will exceed $600 million in Fiscal
1995. With more financial resources allocated to new product development, the
prospect of improving markets for more of our business segments, and our ongoing
acquisition search, we are optimistic about future growth prospects.

[Signature of Timothy P. Horne]

Timothy P. Horne
Chairman of the Board, President,
and Chief Executive Officer

[Photograph of Timothy P. Horne]

<PAGE>
Operational
Strategy

During the past ten years, Watts has embarked on an aggressive growth plan
resulting in acquisitions of 28 valve companies that represented more than 60%
of our sales during Fiscal 1994. In doing so, we have diversified the company
into new valve markets and added important product lines. Our sales have grown
at a compounded growth rate of 17% during this period as each year set new sales
records for the company.

Our ability to successfully grow at this pace can be attributed to a number
of factors, but primarily to our commitment and focus on what we know best - the
valve industry. Having achieved a milestone of over $500 million in sales, our
next objective is to double our size within the next five years. During Fiscal
1994, we dedicated ourselves to setting the stage for this growth through a
series of measures:

[Photograph of David A. Bloss, Sr., Executive Vice President]

1. Organized businesses according to markets served: Within the United
States, we have organized our independently-operated businesses into four
strategic groups focused on major valve markets: Plumbing & Heating and Water
Quality, Municipal Water, Industrial and Oil & Gas, and Steam. This alignment
will allow us to offer extensive product lines and capitalize on economies of
scale to achieve greater market share and profitability.

2. Expanded our international scope to Asia: To achieve global market
participation, we are positioning ourselves for the tremendous growth that is
expected in the Asian markets. Our initial focus is the People's Republic of
China where significant capital expenditures are anticipated to develop its
domestic infrastructure. Our objective is to leverage our valve technology and
manufacturing expertise by joint ventures with manufacturers in China who serve
the region's valve markets for municipal water, oil and gas, and steam
applications.

3. New product development: During Fiscal 1994, we directed substantial
capital and human resources to new product development. A key initiative was the
formation of teams within our businesses to identify, engineer and commercialize
new products to strengthen our position in our target markets.

4. Improved employee development and communication: "Developing tomorrow's
leaders today" is a pervasive theme in our efforts to create an organizational
environment that supports our growth objectives. During the past year, we have
organized employee work-group sessions to inspire creativity and develop key
leadership skills. These ongoing sessions are also designed to promote
information sharing between business units to identify opportunities to improve
sales and operating performance. We have already seen tangible results.

[Photograph of Kenneth J. McAvoy, Chief Financial Officer and Executive Vice
President of European Operations]

We believe that these strategic moves will assist us in our efforts to
achieve our $1 billion sales objective by the end of this decade. The following
pages describe how we are addressing each of our major market segments and
identify the significant activities of the past year.

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

Tianjin
Tanggu
Valve [Photo of Business License [Photos]
Company of the Joint Venture]
Joint Tianjin Tanggu Watts Valve Company, Ltd.
Venture

<PAGE>
Industrial and
Oil & Gas

Watts' oil and gas companies supply valves to the major independent petroleum
and natural gas production companies worldwide, while the Watts Regulator
Industrial Division supplies valves to the domestic markets for petrochemical,
process control, severe service, and fugitive emission control. The Industrial
and Oil & Gas Group supplies a comprehensive line of valves to its market,
including ball valves, check valves, butterfly valves and needle valves.

Building on their strength of having one of the broadest product lines, the
oil and gas companies and the Industrial Division have consolidated most of
their domestic field sales representation. This allows the Group to offer a more
complete valve package to its customers. The integrated marketing effort is more
efficient and less costly than the prior system, and eliminates the potential
for confusion and overlap at the distributor and end-user levels.

Domestic demand for industrial valves was comparable to last year. However,
earnings for the Industrial Division grew as cost reduction efforts, product
consolidations and a greater emphasis on engineered products improved margins.
Domestic chemical and petrochemical companies are shifting their capital
investment projects to offshore locations, primarily to be closer to raw
material extraction sites. Therefore, we are targeting sales and marketing
efforts to become a more significant participant in valve purchases for
international projects during Fiscal 1995. Operating the Industrial Division and
oil and gas companies as one group with coordinated distribution for the two
market segments provides an efficient and expedient method of delivering Watts'
valves to the changing world markets.

Domestic demand for oil and gas products increased moderately during the
fiscal year, while international results, reflecting the ever more global
economy, showed robust growth. KF Industries actively marketed overseas and
supported these efforts with a strong new product development program and rapid
deliveries. Overall, the oil and gas business enjoyed strong growth in sales and
earnings.

During the year, the Group leveraged its resources by opening a new valve
automation and repair center in Houston, Texas, to provide distributors and end
users with factory-authorized automation and repair of quarter-turn valve
products. Automation and repair will strengthen Watts' competitive position in
the domestic and international marketplace. Furthermore, the Group has
established regional offices in Singapore and London and is focusing its
attention on developing joint ventures in China, Indonesia and Venezuela during
the coming year.

[Photograph of Alfred S. Schommer, Group Vice President Industrial and Oil &
Gas]

Allied with our Industrial Division is Circle Seal Controls, Inc., which
supplies valves to the aerospace, industrial and cryogenic markets.

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

[Photo] [Photo of a valve]
KF Industries, Inc.
Oklahoma City, OK

[Pie Graph Showing Percentages of
Oil & Gas (13%) and Industrial (12.4%)
in the Industrial, Oil & Gas Market]

[Photo]
Watts Regulator Industrial Division
Milford, NH

<PAGE>
Plumbing & Heating
and Water Quality

Watts serves the Plumbing and Heating and Water Quality markets with a
comprehensive line of valve products. These include temperature and pressure
relief valves for water heaters, water pressure reducing valves to regulate
water pressures within the home and high-rise buildings, and backflow preventers
to protect potable water systems from the potential hazard of water backflowing
from contaminated sources downstream. The application of these products is
generally enforced by strict national and regional plumbing codes and, in the
case of backflow preventers, is supported by federal legislation such as the
Safe Drinking Water Act of 1974.

Watts manufactures many other speciality and commodity products for these
markets including temperature control valves, ball valves, pipeline strainers,
hydronic heating specialities, electric motorized valves, thermal expansion
tanks, and other plumbing and heating products to provide customers with the
broadest range of valves and assemblies. Watts' customer base includes over
6,000 plumbing and heating wholesalers who resell to mechanical contractors and
installing plumbers. Watts' wholesalers have the advantage of buying a full
product range from a single source.

[Photo of Kevin R. Sweeney, Executive Vice President, Water Products Division
and Paul A. Lacourciere, Executive Vice President, Watts Regulator Company]

Domestic demand for plumbing and heating and water quality valves increased
significantly during the year owing primarily to the resurgence of residential
housing construction. Sales of water quality valves, namely backflow preventers,
also increased for the first time in three years as their principal market,
commercial construction, finally tempered its decline, and there was more
stringent enforcement of the plumbing codes governing the installation of these
products.

We also expanded sales to original equipment manufacturers (OEMs). Standard
catalog products were augmented with valves custom designed to the exacting
specifications of individual OEM requirements, thereby stimulating a sales
increase for this division of nearly 20%.

The replacement demand for Watts' products has consistently offset some of
the impact of interest-rate-sensitive construction cycles. Watts estimates that
approximately 40% of sales derived from these markets are replacement driven.
With market leadership for its principal valves and an installed base in excess
of 100 million valves, Watts' prospects for increasing replacement business are
excellent.

[Photo of Ernest E. Elliott, Vice President, Watts Products Division]

The flagship company serving these markets is the Watts Regulator Company,
founded in 1874. Its seven domestic manufacturing plants produce over 65,000
valves per day, providing all of the benefits of high volume manufacturing
including significant purchasing power.

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

[Photos of valves]

[Pie Graph Showing Percentages of Plumbing & Heating (34%) and Water Quality
(12.5%) in the Plumbing & Heating and Water Quality Markets]

[Photo] [Photo]
Franklin, NH facility Spindale, NC facility

[Photo] [Photo]
Canaan, NH facility Chesnee, SC facility

<PAGE>

The European counterpart of Watts Regulator is Intermes, S.p.A.,
headquartered in Italy. Intermes has an extensive range of valve products to
satisfy the demands of diverse wholesaler requirements in the major European
markets, including Germany, France, Italy, Holland, the Benelux countries,
Spain, Portugal, and, more recently, Eastern European countries as well. Most of
the Intermes product range mirrors the valve products produced by Watts
Regulator, except the Intermes products are custom designed for the European
market requirements since product styling and performance characteristics
generally differ from those of the United States.

[Photo of Jean-Marc Sassier, Managing Director, Watts Industries Europe]

Watts SFR in France and Watts Ocean in Holland augment the Intermes line with
relief valves, pressure regulators, and backflow preventers. The products from
all companies are combined into a single product offering to several thousand
plumbing and heating wholesalers throughout the major European markets.

The enforcement of European plumbing codes for pressure relief valves, water
pressure regulators, and backflow preventers offers many of the same advantages
in Europe for Intermes as in the domestic market for Watts Regulator.

The German sales arm of Intermes, MTR GmbH, headquartered in Stuttgart,
offers excellent future market opportunities in Eastern Europe. Initial sales
during the past year have been realized in Poland, Hungary, Czech Republic,
Slovakia, and other emerging markets. While Germany has been beleaguered with a
serious recession throughout Fiscal 1994, construction and remodeling in former
East Germany have provided some support to Watts' sales base. Overall sales for
Fiscal 1994 for Watts Europe were flat, but there are some prospects for
gradually improving market conditions in Western Europe and continued growth in
Eastern Europe.

[Photo of Victor L. Pitt, President, Watts Industries (Canada) Inc.]

Watts Canada also enjoyed a year of increasing sales as the Canadian economy
partially recovered from its long-term recession. Watts has a large market share
in Canada which is supported by three manufacturing operations. During the year,
Watts acquired the leading Canadian manufacturer of floor and roof drains,
intercepters, backwater valves, and yard hydrants when it purchased LeHage
Industries in July, 1993. The Ancon Division of LeHage presents an entirely new
range of products to complement Watts' plumbing line of valves sold through
wholesale distribution in Canada and the United States. As a further complement
to the Ancon line of products, Watts Canada acquired Enpoco in November, 1993.
The introduction of these product lines into the U.S. is one of Watts'
priorities for growth during the new fiscal year.

[Photo] [Photo] [Photo]
Watts Ocean B.V. Watts SFR SA Woodbridge, Ontario facility
Eerbeek, Netherlands Fressenneville, France

[Photo] [Photo] [Photo]
Intermes, SpA MTR GmbH Burlington, Ontario facility
Caldaro, Italy Gemmrigheim, Germany

[Pie Graph showing Fiscal 1994 Sales: International 29% and Domestic 71%]

<PAGE>
Municipal Water

Watts' Municipal Water Group manufactures valves that are widely used to
control the flow, pressure and level of water in systems for potable water
supply, wastewater treatment, industrial process water and cooling water for
power generation. The performance and quality of these valves enhance the
reliability and efficiency of the systems in which they are installed.

Demand in the municipal water market comes from a combination of new
construction, expansion, renovation and repair. The obsolescence of systems
installed after the second World War, a shifting and expanding population, and
federal regulations regarding clean water drive a continuing need for the
Group's products. Federal and state funding limitations sometimes delay the
implementation of some of these projects which are highly competitive.

[Photo of Edward G. Holtgraver, Group Vice President, Municipal Water]

Henry Pratt Company is a leading producer of butterfly and ball valves for
municipal water supply. In power generation, Henry Pratt is one of a limited
number of companies certified to supply valves to nuclear plants. With its large
installed base, Henry Pratt is positioned to benefit from the growing business
for maintenance and repair as domestic nuclear power plants age.

James Jones Company markets bronze fire hydrants, ball valves, curb stops and
related bronze products for public and private potable water distribution
systems. It has experienced growth from improved customer service, quality and
delivery lead times, and a renewed emphasis on its core products and regional
markets. Profits have improved due to increased volumes and aggressive cost
management. James Jones is currently active in 11 states, with plans for
controlled expansion within the United States and certain export markets as
regionally focused products are developed. With the acquisition of EBCO, Watts
provides a similar line of products for the United Kingdom.

The Watts Automatic Control Valve (ACV) is a pilot-operated,
diaphragm-actuated, automatic hydraulic control valve used for water, fuels and
other low to medium viscosity liquids. Henry Pratt will market Watts ACV
products with its project specification and bid packages during Fiscal 1995. By
providing a more comprehensive, integrated product package, the Municipal Water
Group will meet more of its customers' needs and make it more attractive for
independent distributors to promote the line. At the same time, the companies
will maintain the independence necessary to provide the customer responsiveness
that has been key to their competitive success.

[Photo of Robert T. McLaurin, Corporate Vice President, Asian Operations]

Serving the municipal water valve market in the People's Republic of China,
Tianjin Tanggu Watts Valve Company, Ltd. is Watts' first effort to leverage
domestic valve technology and manufacturing expertise in this international
market.

[Photo] [Photo]
Watts Automatic Control Valve, Inc. Henry Pratt Company
Houston, TX Aurora and Dixon, IL

[Pie Graph Showing Percentage of Municipal
Water (16.1%) in the Municipal Water Market]

[Photo of valve]

[Photo] [Photo]
Edward Barber & Company, Ltd. James Jones Company
Tottenham, U.K. El Monte, CA

<PAGE>
Steam

The Steam Group companies provide products that control the efficient and
safe use of steam - recognized as an economical method of transferring energy
from one place to another.

Watts' four companies in this segment address a wide variety of markets, from
HVAC, where steam is used in heating and cooling applications, to power
generation, industrial process, and propulsion systems on U.S. Navy ships.
Spence Engineering is a leader in the control of HVAC steam and is also active
in industrial plants. Leslie Controls is both the premier supplier of control
valves to the U.S. Navy and a supplier of products that are used in a variety of
industrial and commercial steam applications. Nicholson Steam Trap is a leader
in thermostatic trap technology, and the R. G. Laurence Company manufactures
products primarily for the gas turbine industry.

[Photo of Charles S. Wolley, Group Vice President, Steam]

Overall, the long-term market outlook for steam generation is flat, but some
new products and ongoing maintenance and repair opportunities should continue to
support moderate growth. Steam unleashes a destructive force on system
components, creating a demand for replacement parts that is predictable and
steady. Proper handling of steam is also critical for safety. Therefore, the
Steam Group's approach of selling through technical representatives
concentrating on safety, reliability, and proper system design creates added
value for its customer base.

Growth in 1994 was led by a rebound in sales to the U.S. Navy and the results
of a strong new product development program. Leslie introduced the Aeroflow(TM)
control valve which, coupled with its digital positioning system and optical
feedback, delivers precision previously unattainable within the power industry.
Spence Engineering strengthened its position in HVAC with a significant
expansion of its ASME safety relief valve product line, and R.G. Laurence
experienced strong growth in the gas turbine industry by redesigning its
Soli-Con(TM) line of solenoid control valves to meet changing OEM requirements.

Cost management remains a focus. The recently completed relocation of
Nicholson's manufacturing operations from Wilkes-Barre, Pennsylvania, to the
Spence facility in Walden, New York, will reduce operating costs and improve
manufacturing capabilities. Also, significant manufacturing cost improvements
were realized through product engineering efforts.

[Photo of Frederic B. Horne, Corporate Vice President]

International
Sourcing

The global economy presents opportunities to procure materials
internationally. Watts is sourcing worldwide for competitive supplies of lower
cost steel, iron and bronze castings, and other commodity materials, while
maintaining sound partnerships with the most progressive and competitive U.S.
suppliers. Through a careful blending process, our lower cost base will benefit
and complement our capital investment program and position Watts for consistent,
profitable growth.

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

[Photo]
Leslie Controls, Inc.
R.G. Laurence Company, Inc.
Tampa, FL

[Photo]
Spence Engineering Company, Inc.,
Nicholson Steam Trap, Inc.
Walden, NY

[Pie Graph Showing Percentage of Steam (12%) in the Steam Market]

[Photo of valve]

<PAGE>
Statements of Consolidated Earnings
(Amounts in thousands, except per share information)

<TABLE>
<CAPTION>
Fiscal Year Ended June 30
1994 1993 1992
---------------------------------------
<S> <C> <C> <C>
Net sales ............................................................................. $ 518,541 $ 465,796 $ 423,808
Cost of goods sold .................................................................... 322,336 292,103 262,804
--------- --------- ---------
GROSS PROFIT .................................................................. 196,205 173,693 161,004
Selling, general and administrative expenses .......................................... 121,597 111,550 96,458
Unusual charges ....................................................................... 7,000
--------- --------- ---------
OPERATING EARNINGS ............................................................ 74,608 55,143 64,546
Other (income) expense:

Interest income .................................................................... (2,986) (4,397) (4,103)
Interest expense ................................................................... 8,779 9,152 7,879
Other--net .......................................................................... 1,480 1,248 831
--------- --------- ---------
7,273 6,003 4,607
--------- --------- ---------
EARNINGS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING ..................................... 67,335 49,140 59,939
Provision for income taxes ............................................................ 26,325 18,734 23,314
--------- --------- ---------
EARNINGS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING .......................................................... 41,010 30,406 36,625
Cumulative effect on prior years (to June 30, 1992)
of change in accounting for income taxes ........................................... 3,132
--------- --------- ---------
NET EARNINGS .................................................................. $ 41,010 $ 27,274 $ 36,625
========= ========= =========
Primary earnings per Common Share:

Earnings before cumulative effect of change in accounting .......................... $ 1.38 $ 1.01 $ 1.29
Cumulative effect on prior years of change in accounting ........................... (.10)
--------- --------- ---------
NET EARNINGS .................................................................. $ 1.38 $ .91 $ 1.29
========= ========= =========
Fully diluted earnings per Common Share:

Earnings before cumulative effect of change in accounting .......................... $ 1.38 $ 1.01 $ 1.27
Cumulative effect on prior years
of change in accounting ............................................................ (.10)
--------- --------- ---------
NET EARNINGS .................................................................. $ 1.38 $ .91 $ 1.27
========= ========= =========
Dividends paid per Common Share ....................................................... $ .20 $ .16 $ .13
========= ========= =========
Weighted average number of Common Shares:

Primary ............................................................................ 29,674 30,090 28,326
========= ========= =========
Fully diluted ...................................................................... 29,717 30,098 30,080
========= ========= =========

</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.

Report of Independent Auditors
Board of Directors
Watts Industries, Inc.

We have audited the accompanying consolidated balance sheets of Watts
Industries, Inc. and subsidiaries as of June 30, 1994 and 1993, and the related
statements of consolidated earnings, consolidated stockholders' equity, and
consolidated cash flows for each of the three years in the period ended June 30,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1994 and 1993 financial
statements of Watts Industries Europe B.V., a wholly-owned subsidiary, which
statements reflect total assets of $107,729,000 and $100,219,000 as of June 30,
1994 and 1993, respectively, and total revenues of $79,709,000 and $57,645,000,
for the years then ended. Those 1994 and 1993 statements were audited by other
auditors, Deloitte & Touche, whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Watts Industries Europe
B.V., is based solely on the report of the other auditors.

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

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Watts Industries, Inc. and subsidiaries
at June 30, 1994 and 1993, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended June 30, 1994,
in conformity with generally accepted accounting principles.

As discussed in Note 4 to the consolidated financial statements, in 1993, the
Company changed its method of accounting for income taxes.

Boston, Massachusetts [Signature of Ernst & Young]
August 5, 1994

<PAGE>
Consolidated Balance Sheets
(Amounts in thousands, except share information)

ASSETS June 30
1994 1993
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ............................................................ $ 6,231 $ 16,937
Short-term investments ............................................................... 58,769 66,198
Trade accounts receivable, less allowance of $4,488 in 1994
and $3,565 in 1993 for doubtful accounts ......................................... 79,342 68,099
Inventories:
Finished goods ................................................................... 60,104 48,910
Work in process .................................................................. 39,671 33,939
Raw materials .................................................................... 53,305 49,064
--------- ---------
153,080 131,913

Prepaid expenses and other current assets ............................................ 8,484 9,494
Deferred income taxes ................................................................ 14,973 8,551
--------- ---------
Total Current Assets ............................................................. 320,879 301,192

OTHER ASSETS
Goodwill, net of accumulated amortization
of $7,232 in 1994 and $4,743 in 1993 ............................................. 89,500 87,017
Other ................................................................................ 12,222 13,205
--------- ---------
101,722 100,222

PROPERTY, PLANT AND EQUIPMENT
Land ................................................................................. 11,263 11,247
Buildings and improvements ........................................................... 62,279 59,951
Machinery and equipment .............................................................. 149,652 142,384
Construction in progress ............................................................. 7,181 4,665
--------- ---------
230,375 218,247

Less allowance for depreciation ...................................................... 94,126 83,986
--------- ---------
136,249 134,261
--------- ---------
$ 558,850 $ 535,675
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable ..................................................................... $ 24,672 $ 21,180
Accrued expenses and other liabilities ............................................... 36,840 40,441
Accrued compensation ................................................................. 8,355 10,059
Income taxes payable ................................................................. 3,340 4,494
Current portion of long-term debt .................................................... 1,141 2,366
--------- ---------
Total Current Liabilities ........................................................ 74,348 78,540
LONG-TERM DEBT, net of current portion ................................................... 97,479 101,468
DEFERRED INCOME TAXES .................................................................... 16,357 13,435
OTHER LIABILITIES ........................................................................ 9,115 7,112
STOCKHOLDERS' EQUITY
Preferred Stock, $.10 par value; 5,000,000 shares authorized,
no shares issued or outstanding
Class A Common Stock, $.10 par value; authorized 40,000,000 shares;
issued 18,009,822 shares in 1994 and 9,226,770 in 1993 ........................... 1,801 923
Class B Common Stock, $.10 par value; authorized 13,000,000 shares;
issued 11,472,470 in 1994 and 5,744,635 in 1993 .................................. 1,147 574
Additional paid-in capital ........................................................... 92,996 101,491
Retained earnings .................................................................... 268,706 235,052
Foreign currency translation adjustment .............................................. (3,099) (2,920)
--------- ---------
361,551 335,120
--------- ---------
$ 558,850 $ 535,675
========= =========
</TABLE>

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

11
<PAGE>
Statements of Consolidated Stockholders' Equity
(Amounts in thousands, except share information)

<TABLE>
<CAPTION>
Foreign
Class A Class B Additional Currency Total
Common Stock Common Stock Paid-In Retained Translation Stockholders'
Shares Amount Shares Amount Capital Earnings Adjustment Equity
--------- ------ --------- ------ -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1991 7,826,522 $ 783 5,778,575 $ 578 $ 55,308 $178,759 $ 287 $235,715
Net earnings 36,625 36,625
Shares of Class A Common Stock
issued upon conversion of debt 1,245,944 125 42,951 43,076
Shares of Class B Common Stock
converted to Class A Common Stock 32,940 3 (32,940) (3)
Shares of Class A Common Stock
exchanged upon the exercise
of stock options and retired (5,129) (1) (266) (267)
Shares of Class A Common Stock
issued upon the exercise of
stock options 70,553 7 2,041 2,048
Common Stock cash dividends (3,865) (3,865)
Change in foreign currency
translation adjustment 1,561 1,561
---------- ------ ---------- ------ -------- -------- ------- --------
Balance at June 30, 1992 9,170,830 917 5,745,635 575 100,034 211,519 1,848 314,893

Net earnings 27,274 27,274
Shares of Class B Common Stock
converted to Class A Common Stock 1,000 1 (1,000) (1)
Shares of Class A Common Stock
exchanged upon the exercise of
stock options and retired (4,500) (1) (218) (219)
Shares of Class A Common Stock
issued upon the exercise of
stock options 59,440 6 1,675 1,681
Common Stock cash dividends (3,741) (3,741)
Change in foreign currency
translation adjustment (4,768) (4,768)
---------- ------ ---------- ------ -------- -------- ------- --------
Balance at June 30, 1993 9,226,770 923 5,744,635 574 101,491 235,052 (2,920) 335,120
Net earnings 41,010 41,010
Shares of Class B Common Stock
converted to Class A Common Stock 16,500 1 (16,500) (1)
Shares of Class A Common Stock
exchanged upon the exercise
of stock options and retired (25,498) (3) (1,172) (1,175)
Shares of Class A Common Stock
issued upon the exercise of
stock options 154,761 16 4,707 4,723
Purchase and retirement of
treasury stock (342,700) (34) (12,030) (12,064)
Common Stock cash dividends (5,884) (5,884)
Effect of two-for-one stock split 8,979,989 898 5,744,335 574 (1,472)
Change in foreign currency
translation adjustment (179) (179)
---------- ------ ---------- ------ -------- -------- ------- --------
Balance at June 30, 1994 18,009,822 $1,801 11,472,470 $1,147 $ 92,996 $268,706 ($3,099) $361,551
========== ====== ========== ====== ======== ======== ======= ========
</TABLE>

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

<PAGE>
Statements of Consolidated Cash Flows
(Amounts in thousands)

<TABLE>
<CAPTION>
Fiscal Year Ended June 30
1994 1993 1992
--------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings .................................................................... $41,010 $27,274 $36,625
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization.............................................. 22,393 20,560 17,630
Deferred income taxes...................................................... (151) (1,273) (4,274)
Loss on disposal of equipment.............................................. 15 168 67
Cumulative effect of change in accounting for income taxes................. 3,132
Changes in operating assets and liabilities, net of effects from
business acquisitions:
Accounts receivable................................................. (9,849) 8,755 (5,687)
Inventories......................................................... (18,592) (3,540) (4,228)
Prepaid expenses and other current assets........................... 1,425 1,334 1,218
Accounts payable, accrued expenses and other liabilities............ 158 (9,447) (2,494)
------- ------- -------
Net cash provided by operating activities..................................... 36,409 46,963 38,857

INVESTING ACTIVITIES
Additions to property, plant and equipment........................................ (19,928) (25,798) (18,054)
Proceeds from sale of equipment................................................... 395 635 505
Increase in goodwill and other assets............................................. (1,196) (1,378) (1,081)
Business acquisitions, net of cash acquired:
Henry Pratt................................................................... (57,154)
Intermes .................................................................... (6,094) (22,184)
Other acquisitions............................................................ (4,783) (13,494) (2,393)
Repayment of debt of acquired businesses.......................................... (1,935) (6,872)
Net changes in short-term investments............................................. 7,429 32,690 (27,644)
------- ------- -------
Net cash used in investing activities......................................... (26,112) (36,401) (105,821)

FINANCING ACTIVITIES
Purchase and retirement of treasury stock......................................... (12,064)
Payments of long-term debt........................................................ (6,032) (963) (879)
Proceeds from the sale of Notes................................................... 75,000
Proceeds from long-term borrowings................................................ 716 3,048
Proceeds from exercise of stock options........................................... 2,418 1,265 1,286
Cash dividends.................................................................... (5,884) (4,785) (3,637)
------- ------- -------
Net cash provided by (used in) financing activities........................... (20,846) (1,435) 71,770
Effect of exchange rates on cash and cash equivalents............................. (157) (2,179) 378
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. (10,706) 6,948 5,184
Cash and cash equivalents at beginning of year.................................... 16,937 9,989 4,805
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................................... $ 6,231 $16,937 $ 9,989
======== ======= ========
</TABLE>

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

13
<PAGE>
Notes to Consolidated Financial Statements

1. ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include
the accounts of Watts Industries, Inc. and its majority-owned subsidiaries (the
Company). Upon consolidation, all significant intercompany accounts and
transactions are eliminated.

Foreign Currency Translation: Balance sheet accounts of foreign subsidiaries
are translated into United States dollars at fiscal year-end exchange rates.
Operating accounts are translated at average exchange rates for each year. Net
translation gains or losses are adjusted directly to a separate component of
stockholders' equity.

Cash Equivalents and Short-Term Investments: Cash equivalents consist of
investments having maturities of three months or less at the date of purchase.
Short-term investments consist of corporate and municipal bonds, and mutual
funds whose portfolios consist principally of United States Government
securities. Short-term investments are valued at cost, which approximates
market.

In May 1993, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This Statement will be effective
beginning in fiscal year 1995, and expands the use of fair value accounting and
reporting for certain investments in debt and equity securities, but retains the
use of the amortized cost method for those investments in debt securities for
which the holder has the positive intent and ability to hold to maturity. The
Company believes that adoption of this Standard will not have a significant
effect on its results of operations or financial condition.

Concentrations of Credit Risk: Financial instruments which potentially
subject the Company to concentration of credit risk consist principally of cash
equivalents, short-term investments and trade receivables. The Company places
its cash equivalents and short-term investments with high credit, quality
financial institutions and, by policy, limits the amount of credit exposure to
any one financial institution. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers included in
the Company's customer base and their dispersion across many different
industries and geographic areas. As of June 30, 1994, the Company had no
significant concentrations of credit risk.

Inventories: Inventories are stated at cost (principally first-in, first-out
method) not in excess of net realizable value. Inventories amounting to
$14,050,000 at June 30, 1994 and $14,019,000 at June 30, 1993 are valued using
the last-in, first-out method (LIFO), which approximates current replacement
cost.

Property, Plant and Equipment: Property, plant and equipment are recorded at
acquired cost. Depreciation is provided on the straight-line basis over the
estimated useful lives of the assets.

Income Taxes: Deferred income taxes are recognized for temporary differences
between financial statement and income tax bases of assets and liabilities for
which income tax benefits and obligations will be realized in future years.

Goodwill: Goodwill represents the excess of cost over the fair value of net
assets of businesses acquired. This balance is amortized over 40 years using the
straight-line method. To the extent the Company makes payments under contingent
earn-out arrangements related to businesses previously acquired, those amounts
are recorded as additional goodwill.

The carrying value of goodwill is reviewed if the facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will not
be recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the Company's carrying value of
the goodwill would be reduced to its fair value.

Earnings Per Common Share: Earnings per common share is based upon the
weighted average number of Class A and B Common Shares outstanding during each
period and the dilutive effect of Class A Common Stock options. Shares of Class
A Common Stock issuable upon conversion of outstanding Convertible Subordinated
Debentures were included in the calculation of fully diluted earnings per share,
up to the date of conversion on March 15, 1992. Had the conversion of these
Debentures taken place at the beginning of 1992, primary earnings per share in
1992 would have been $1.27.

Basis of Presentation: Certain amounts in 1993 and 1992 have been
reclassified to permit comparison with the 1994 presentation.

2. BUSINESS ACQUISITIONS

On November 6, 1992, the Company acquired 100% of the outstanding common
stock of Intermes, a plumbing and heating valve manufacturer, for $28.3 million.
14

<PAGE>
2. BUSINESS ACQUISITIONS(cont'd.)
On September 30, 1991, the Company acquired 100% of the outstanding common
stock of Henry Pratt Company for cash of $57.2 million. In addition, upon
Pratt's achievement of targeted operating income levels, the Company will be
required to make annual contingent payments through 1997 of $1.3 million plus
25% of amounts in excess of targeted operating income levels.

In addition, the Company acquired other valve manufacturers for cash of $4.8
million, $13.5 million and $2.4 million in fiscal 1994, 1993 and 1992,
respectively.

These acquisitions were accounted for under the purchase method. The results
of operations of the acquired businesses are included in the consolidated
financial statements from the dates of acquisition.

The following unaudited pro forma consolidated results of operations for the
years ended June 30, 1993 and 1992 are presented as if the acquisitions made in
1993 and 1992 had been made at the beginning of the year in which the
acquisitions occurred, and at the beginning of the year immediately preceding
the year of the acquisitions. The effects of acquisitions made in 1994 are not
material and, accordingly, have been excluded from the pro forma presentation.

1993 1992
------------ ------------
Net sales .................................... $483,081,000 $485,061,000
Net earnings ................................. 26,807,000 37,184,000
Primary net earnings per Common Share ........ .89 1.32

The pro forma results of operations give effect to interest costs of funds
used to finance the acquisitions and include adjustments for depreciation and
amortization resulting from the allocation of the costs of the acquisitions. The
unaudited pro forma information is not necessarily indicative of either the
results of operations that would have occurred had the purchase been made during
the periods presented, or the future results of the combined operations.

3. UNUSUAL CHARGES

In December 1992, the Company recorded unusual charges of $7 million. These
unusual charges were related to environmental matters and costs associated with
the downsizing and restructuring of certain previously acquired companies. The
charges include approximately $2 million relating to the resolution of
environmental litigation arising under CERCLA (Comprehensive Environmental
Response, Compensation and Liability Act) involving a manufacturing facility
sold in 1978, and clean-up costs principally relating to certain of the
Company's foundry operations; a $3 million accrual for estimated future
environmental clean-up costs; and $2 million relating to downsizing of certain
previously acquired operations which have been negatively impacted by reduced
military spending and to the consolidation and relocation of the operations of a
previously acquired business.

4. INCOME TAXES

The Company adopted SFAS Statement No. 109 ("Accounting for Income Taxes") as
of the beginning of fiscal year 1993. The cumulative effect on prior years of
this change in accounting principle decreased fiscal 1993 net earnings by $3.1
million or $.10 per share, and is reported separately in the statement of
consolidated earnings for the year ended June 30, 1993. The effect of adopting
Statement 109, including its application to prior business combinations, did not
have a material impact on 1993 pre-tax earnings.

At June 30, 1994, the Company has foreign net operating loss carryforwards of
$6.2 million for income tax purposes that expire in years 1995 through 2004. In
addition, foreign net operating losses of $3.4 million can be carried forward
indefinitely. These carryforwards resulted primarily from the Company's 1993
business acquisitions.

The significant components of the Company's deferred tax liabilities and
assets are as follows:
June 30
1994 1993
Deferred tax liabilities: ------------ -------------
Depreciation ................................ $ 12,402,000 $ 12,172,000
Other ....................................... 3,955,000 1,263,000
------------ ------------
Total deferred tax liabilities ............ 16,357,000 13,435,000
Deferred tax assets:
Accrued expenses ............................ 8,202,000 6,367,000
Other ....................................... 7,613,000 3,998,000
------------ ------------
Total deferred tax assets ................. 15,815,000 10,365,000
Valuation allowance for deferred tax assets . (842,000) (1,814,000)
------------ ------------
Net deferred tax assets ................... 14,973,000 8,551,000
------------ ------------
Net deferred tax liabilities .............. $ 1,384,000 $ 4,884,000
============ ============
15
<PAGE>
Notes to Consolidated Financial Statements (cont'd.)

4. INCOME TAXES (cont'd.)

The provision for income taxes is based on the following pre-tax earnings:

1994 1993 1992
----------- ----------- -----------
Domestic .............. $57,375,000 $42,260,000 $52,238,000
Foreign ............... 9,960,000 6,880,000 7,701,000
----------- ----------- -----------
$67,335,000 $49,140,000 $59,939,000
=========== =========== ===========

The provision for income taxes as reflected in the statements of
consolidated earnings consists of the following:

Deferred
Liability Method Method
---------------------------- -------------
1994 1993 1992
------------- ----------- -------------
Currently payable:
Federal ...................... $ 20,035,000 $ 14,583,000 $ 20,987,000
Foreign ...................... 2,606,000 2,850,000 2,995,000
State ........................ 3,835,000 2,574,000 3,606,000
------------ ------------ ------------
26,476,000 20,007,000 27,588,000
Deferred, principally federal .. (151,000) (1,273,000) (4,274,000)
------------ ------------ ------------
$ 26,325,000 $ 18,734,000 $ 23,314,000
============ ============ ============

Total income taxes reported are different than would have been computed by
applying the federal statutory tax rate to earnings before income taxes. The
reasons for this difference are as follows:

Deferred
Liability Method Method
---------------------------- -----------
1994 1993 1992
------------ ------------ -----------
Computed expected federal
income tax expense ........... $23,567,000 $16,708,000 $20,379,000
State income taxes, net
of federal tax benefit ....... 2,350,000 1,548,000 2,243,000
Other .......................... 408,000 478,000 692,000
----------- ----------- -----------
$26,325,000 $18,734,000 $23,314,000
=========== =========== ===========

Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $36 million, $29 million and $25 million at June 30, 1994, 1993
and 1992 respectively. Those earnings are considered to be indefinitely
reinvested and, accordingly, no provision for U.S. federal and state income
taxes has been provided thereon. Upon distribution of those earnings in the form
of dividends or otherwise, the Company would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding taxes
payable to the various foreign countries.

Determination of the amount of U.S. income tax liability that would be
incurred is not practicable because of the complexities associated with its
hypothetical calculation; however, unrecognized foreign tax credits would be
available to reduce some portion of any U.S. income tax liability. Withholding
taxes of approximately $2.8 million would be payable upon remittance of all
previously unremitted earnings at June 30, 1994.

The Company made income tax payments of $31.4 million, $20.5 million and
$27.6 million in 1994, 1993 and 1992, respectively.

5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
June 30
1994 1993
----------- -----------
Commissions and sales incentives payable ....... $ 6,860,000 $ 5,915,000
Accrued insurance costs ........................ 6,330,000 4,481,000
Accrued medical and pension benefits ........... 3,072,000 2,820,000
Accrued payments in connection with
business acquisitions ........................ 2,982,000 10,612,000
Other .......................................... 17,596,000 16,613,000
----------- -----------
$36,840,000 $40,441,000
=========== ===========
16

<PAGE>
6. FINANCING ARRANGEMENTS

<TABLE>
<CAPTION>
Long-term debt consists of the following: June 30
1994 1993
------------ ------------
<S> <C> <C>
8-3/8% Notes, Due 2003 ............................. $ 75,000,000 $ 75,000,000

Industrial Revenue Bonds, maturing periodically from
2006 through 2019. Interest accrues at a variable
rate based on weekly tax-exempt interest rates
(2.75% at June 30, 1994) ......................... 17,268,000 17,653,000
Other .............................................. 6,352,000 11,181,000
------------ ------------
98,620,000 103,834,000

Less current portion ............................... 1,141,000 2,366,000
------------ ------------
$ 97,479,000 $101,468,000
============ ============
</TABLE>

On November 26, 1991, the Company issued $75,000,000 principal amount of
8-3/8% Notes Due 2003. Interest is payable semiannually on December 1 and June 1
each year. The notes are not subject to optional redemption prior to maturity
and there are no sinking fund payments required. The notes are considered
general unsecured obligations of the Company. The notes include covenants,
which, among other things, restrict borrowings secured by certain assets and
certain sale and leaseback transactions by the Company or any "restricted
subsidiary" (as defined), subject to certain exceptions, including secured
borrowings not exceeding 10% of the Company's consolidated stockholders' equity,
unless the notes are secured ratably with such borrowings.

Principal payments during each of the next five fiscal years are due as
follows: 1995-$1,141,000; 1996-$883,000; 1997-$682,000; 1998-$552,000; and
1999-$5,457,000. Interest paid during fiscal 1994 and 1993 approximates interest
expense.

7. COMMON STOCK

On January 18, 1994, the Board of Directors declared a two-for-one stock
split, effective March 15, 1994, in the form of a dividend of one additional
share of the Company's Common Stock (Class A and B) for each share owned by
stockholders of record at the close of business on March 1, 1994. Par value
remained at $.10 per share. Earnings per share, cash dividends per share,
weighted average common shares outstanding and the stock option plan share
information have been restated for all periods presented to reflect the stock
split.

During 1994, the Company repurchased 342,700 shares of Class A Common Stock
prior to the stock split for $12.1 million.

The Class A Common Stock and Class B Common Stock have equal dividend and
liquidation rights. Each share of the Company's Class A Common Stock is entitled
to one vote on all matters submitted to stockholders and each share of Class B
Common Stock is entitled to ten votes on all such matters. Shares of Class B
Common Stock are convertible into shares of Class A Common Stock, on a
one-to-one basis, at the option of the holder.

The Company has reserved a total of 14,663,116 shares of Class A Common
Stock for issuance under its Incentive Stock Option Plan, its Nonqualified Stock
Option Plan and conversion of shares of Class B Common Stock into Class A Common
Stock.

8. QUALIFIED AND NONQUALIFIED STOCK OPTION PLANS

The Company has a qualified incentive stock option plan whereunder options
to purchase up to 1,980,000 shares of Class A Common Stock may be granted to key
employees. Options are granted at an exercise price equal to 100% of the fair
market value per share on the date of grant. At June 30, 1994, the Company has
reserved 1,495,800 shares of Class A Common Stock for issuance under the plan.

The Company also has a nonqualified stock option plan whereunder options to
purchase up to 2,000,000 shares of Class A Common Stock may be granted to key
employees. Options are granted at an exercise price determined by the Board of
Directors, but not less than 50% of the fair market value per share on the date
of grant. At June 30, 1994, the Company has reserved 1,694,846 shares of Class A
Common Stock for issuance under the plan.
17

<PAGE>
Notes to Consolidated Financial Statements (cont'd.)

8. QUALIFIED AND NONQUALIFIED STOCK OPTION PLANS (cont'd.)

A summary of activity in the plans is as follows:

Number of Shares
Qualified Nonqualified Exercise Price
--------- ------------ --------------
Outstanding options at
July 1, 1991 467,510 312,586 $ 8.09 to $17.50
Granted 206,000 136,000 16.88 to 24.75
Exercised (71,384) (69,722) 8.09 to 17.50
Cancelled (14,000) 10.50 to 17.50
------- -------
Outstanding options at
June 30, 1992 588,126 378,864 8.09 to 24.75
Granted 210,000 136,000 16.60 to 24.34
Exercised (86,880) (32,000) 8.09 to 22.50
Cancelled (34,000) 14.25 to 22.50
------- -------
Outstanding options at
June 30, 1993 677,246 482,864 8.75 to 24.75
Granted 237,500 146,000 15.73 to 22.50
Exercised (108,446) (167,432) 8.75 to 22.50
Cancelled (54,000) (158,000) 8.75 to 22.50
------- -------
Outstanding options at
June 30, 1994 752,300 303,432 $ 8.75 to $24.75
======= =======

Outstanding options generally vest at the rate of 20% per year. At June
30, 1994, 192,880 qualified options were exercisable and 45,432 nonqualified
options were exercisable.

9. RETIREMENT BENEFITS

The Company has defined benefit pension plans covering substantially all of
its domestic nonunion employees. Plans covering salaried employees provide
pension benefits that are based on years of service and the employee's
compensation during the last five years of employment. Plans covering hourly
employees generally provide benefits of stated amounts for each year of service.
The Company's funding policy is to contribute annually the maximum amount that
can be deducted for federal income tax purposes. Contributions are intended to
provide not only for benefits attributable to service to date, but also for
those expected to be earned in the future.

The following table sets forth the components of pension expense, the funded
status and amounts recognized in the consolidated balance sheets for the
Company's domestic defined benefit pension plans. Defined benefit plans for the
Company's foreign subsidiaries are not material. The Company computes its
pension obligations and expense using March 31 as its measurement date.

<TABLE>
<CAPTION>
March 31
1994 1993
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $18,361,000 at March 31, 1994 and $15,951,000 at March 31, 1993 ............... $ 19,046,000 $ 16,647,000
============ ============
Projected benefit obligation for services rendered to date ....................... $ 24,288,000 $ 20,714,000
Plan assets at fair value, primarily fixed income securities ..................... 24,432,000 22,443,000
------------ ------------
Plan Assets in Excess of Projected Benefit Obligation ............................... 144,000 1,729,000
Unrecognized net (gain) loss from past experience different from
that assumed and effect of changes in assumptions ................................ 410,000 (467,000)
Unrecognized prior service cost ..................................................... 1,089,000 1,178,000
Unrecognized net transition asset ................................................... (3,181,000) (3,499,000)
------------ ------------
Accrued Pension Liability ........................................................... ($ 1,538,000) ($ 1,059,000)
============ ============
</TABLE>

<PAGE>
9. RETIREMENT BENEFITS (cont'd)

Net pension cost included the following components:

<TABLE>
<CAPTION>
Year Ended March 31
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Service cost--benefits earned during the year ................................... $ 1,753,000 $ 1,678,000 $ 1,486,000
Interest cost on projected benefit obligation ................................... 1,775,000 1,556,000 1,359,000
Actual return on plan assets .................................................... (1,608,000) (1,787,000) (1,930,000)
Net amortization and deferral ................................................... (418,000) (105,000) 255,000
----------- ----------- -----------
$ 1,502,000 $ 1,342,000 $ 1,170,000
=========== =========== ===========
</TABLE>

The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were approximately 8% and 6%, respectively, at
March 31, 1994 and 1993. The expected long-term rate of return on plan assets in
1994, 1993 and 1992 was approximately 8%.

In November 1992, the FASB issued SFAS No. 112 "Employers' Accounting for
Postemployment Benefits." The Statement will be effective for fiscal year 1995
and requires in certain cases that estimated costs of postemployment benefits be
recognized over the service lives of employees. The Company believes that
adoption of the Standard will not have a material effect on its results of
operations or financial condition.

10. COMMITMENTS AND CONTINGENCIES

The Company is engaged in various claims and litigation arising from its
operations. In the opinion of management, uninsured losses, if any, resulting
from these matters will not have a material adverse impact on the consolidated
financial position or future results of operations of the Company.

The Company has been named a potentially responsible party with respect to
identified contaminated sites. The level of contamination varies significantly
from site to site and remediation efforts that are underway are in various
stages. In certain cases, remediation has not begun. The Company has evaluated
its potential exposure based on all currently available information and has
recorded an estimate of its liability for environmental matters.

With respect to one contaminated site included on the Environmental
Protection Agency's National Priorities List, the Company expects to be named a
potentially responsible party. The process of determining the causes and extent
of contamination, the cost of remediation and the method to allocate that cost
among those ultimately determined to be responsible is in a very early stage.
Accordingly, the ultimate outcome of this matter cannot be determined at this
time.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following method and assumptions were used by the Company to estimate the
fair value of its financial statements:

Cash and Cash Equivalents and Short-Term Investments

The carrying amounts reported in the balance sheet approximate fair value.

Long-Term Debt

The fair value of the Company's 8-3/8% Notes, Due 2003 is based on quoted
market prices. The fair value of other long-term debt is estimated using
discounted cash flow analyses, based on the Company's incremental borrowing
rates for similar types of borrowing arrangements.

The carrying amount and the estimated fair market value of the Company's long
term debt are as follows:

June 30
1994 1993
------------ ------------
Carrying amount ...................... $ 98,620,000 $103,834,000
Estimated fair value ................. 99,745,000 113,115,000

<PAGE>
Notes to Consolidated Financial Statements (cont'd.)

12. FINANCIAL INFORMATION BY GEOGRAPHIC AREA

The Company designs, manufactures and sells an extensive line of valves for
plumbing and heating, municipal water, water quality, industrial, steam, and oil
and gas markets. Sales, operating profit and identifiable assets by major
geographic area are summarized as follows. Transfer prices to foreign
subsidiaries are intended to produce profit margins commensurate with sales and
marketing efforts.
<TABLE>
<CAPTION>
(Amounts in thousands)
-----------------------------------------------------------------------------
Domestic Canada Europe Eliminations Consolidated
-------- -------- -------- ------------ ------------
1994
- - - -----------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales ........................................ $410,100 $ 28,732 $ 79,709 $518,541
Transfer between areas ....................... 14,991 2,820 $ 17,811
-------- -------- -------- -------- --------
$425,091 $ 31,552 $ 79,709 $ 17,811 $518,541
======== ======== ======== ======== ========
Operating Earnings of
Geographic Areas ............................ $ 68,120 $ 2,304 $ 10,276 $ 94 $ 80,606
======== ======== ======== ========
General corporate expenses ................... 5,998
--------
Operating Earnings ............................ $ 74,608
========
Identifiable Assets .......................... $428,293 $ 23,469 $108,072 $ 984 $558,850
======== ======== ======== ======== ========

1993
- - - -----------------------------------------------
Sales ........................................ $388,804 $ 19,347 $ 57,645 $465,796
Transfer between areas ....................... 13,166 2,196 $ 15,362
-------- -------- -------- -------- --------
$401,970 $ 21,543 $ 57,645 $ 15,362 $465,796
======== ======== ======== ======== ========
Operating Earnings of

Geographic Areas ............................ $ 52,105 $ 2,306 $ 6,294 $ 264 $ 60,441
======== ======== ======== ========
General corporate expenses ................... 5,298
--------
Operating Earnings ............................ $ 55,143
========
Identifiable Assets .......................... $415,759 $ 20,343 $100,463 $ 890 $535,675
======== ======== ======== ======== ========

1992
- - - -----------------------------------------------
Sales ........................................ $376,782 $ 19,836 $ 27,190 $423,808
Transfer between areas ....................... 13,623 1,694 $ 15,317
-------- -------- -------- -------- --------
$390,405 $ 21,530 $ 27,190 $ 15,317 $423,808
======== ======== ======== ======== ========
Operating Earnings of
Geographic Areas ............................ $ 60,621 $ 3,420 $ 4,538 $ 94 $ 68,485
======== ======== ======== ========
General corporate expenses ................... 3,939
--------
Operating Earnings ........................... $ 64,546
========
Identifiable Assets .......................... $433,737 $ 19,624 $ 22,885 $ 626 $475,620
======== ======== ======== ======== ========
</TABLE>
Included in domestic sales are export sales of $45.4 million in 1994, $31.6
million in 1993 and $28.1 million in 1992.

13. SUBSEQUENT EVENTS

During July, the Company purchased a domestic manufacturer of metal and
plastic water supply products with annual revenues of approximately $56 million
for $35.2 million in cash. The Company also entered into a joint venture for
$8.5 million with a valve manufacturer located in the People's Republic of China
in exchange for a 60% interest in the Chinese joint venture.

During August, the Company entered into a five year agreement with a banking
syndicate which permits the Company to borrow up to $125 million under an
unsecured line of credit facility. Borrowings under the agreement accrue
interest at LIBOR, plus 25 basis points.

<PAGE>
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Amounts in thousands, except share information)

<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
1994
----
<S> <C> <C> <C> <C>
Net sales....................................................... $130,581 $127,734 $133,532 $126,694
Gross profit.................................................... 49,272 49,342 50,691 46,900
Net earnings.................................................... 10,537 10,548 11,040 8,885
Primary and fully diluted net earnings per Common Share......... .35 .36 .37 .30
Dividends paid per share........................................ .045 .045 .055 .055

1993
----
Net sales........................................................ $109,616 $113,909 $119,764 $122,507
Gross profit..................................................... 41,186 43,899 44,755 43,853
Earnings before cumulative effect
of change in accounting........................................ 9,932 4,996 8,567 6,911
Net earnings..................................................... 6,800 4,996 8,567 6,911
Primary and fully diluted earnings per Common Share:
Earnings before cumulative effect
of change in accounting........................................ .33 .17 .28 .23
Net earnings..................................................... .23 .17 .28 .23
Dividends paid per share......................................... .035 .035 .045 .045

1992
----
Net sales........................................................ $94,098 $108,078 $110,238 $111,394
Gross profit..................................................... 35,909 41,446 42,819 40,830
Net earnings..................................................... 9,101 8,932 10,117 8,475
Earnings per Common Share:
Primary........................................................ .33 .32 .36 .28
Fully diluted.................................................. .32 .32 .35 .28
Dividends paid per share......................................... .030 .030 .035 .035

</TABLE>

Primary and fully diluted earnings per share and dividends paid per share
have been restated for all periods presented above to reflect the stock split
effected in March 1994.

<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Results of Operations
Fiscal Year Ended June 30, 1994 Compared to
Fiscal Year Ended June 30, 1993

Net sales increased $52,745,000 (11.3%) to $518,541,000. This increase was
attributable to the inclusion of the net sales of acquired companies and
increased unit shipments of certain product lines. The net sales of Intermes,
S.p.A. ("Intermes") acquired in November 1992, Edward Barber Company ("EBCO")
acquired in May 1993, Ancon Products, Inc. ("Ancon") acquired in July 1993, and
Enpoco Canada, Ltd. ("Enpoco") acquired in November 1993, all foreign based
companies, represented approximately 56% of the increase. The Company had
increased unit shipments of plumbing and heating valves, water quality valves,
and oil and gas valves. These increases were partially offset by decreased unit
shipments of municipal water valves and aerospace/military valves. International
sales increased from 23% to 29% of total sales, principally as a result of the
acquisitions discussed above. Export sales increased almost $14,000,000 (44%) to
$45,400,000, primarily due to increased shipments of oil and gas valves. The
Company intends to maintain its strategy of seeking acquisition opportunities as
well as developing its international sales to achieve sales growth.

Gross profit increased $22,512,000 (13.0%) to $196,205,000 and increased as a
percentage of net sales from 37.3% to 37.8%. This increased percentage was
primarily attributable to improved manufacturing performance and increased
volume, particularly in the plumbing and heating and water quality segments, as
well as decreased costs of bronze ingot. During fiscal 1995, the Company
anticipates the cost of ingot to rise which may unfavorably impact its margin
depending on its ability to increase selling prices.

Selling, general and administrative expenses increased $3,047,000 (2.6%) to
$121,597,000. The Company recorded $7,000,000 of unusual charges in the year
ended June 30, 1993 for environmental matters and costs associated with the
downsizing and restructuring of certain acquired companies. Excluding the effect
of this charge, selling, general and administrative expenses would have
increased $10,047,000 (9.0%) in the period ended June 30, 1994. This increase is
primarily attributable to the inclusion of the expenses of acquired companies
and increased commissions associated with the higher sales volume. These
increases were partially offset by decreased spending at several subsidiaries as
a result of downsizing programs implemented during the last fiscal year.

The Company from time to time is involved with environmental proceedings and
incurs costs on an ongoing basis related to environmental matters. The Company
has been or expects to be named a potentially responsible party with respect to
currently identified contaminated sites, which are in various stages of the
remediation process. The Company has evaluated its potential exposure based on
all currently available information and has recorded its estimate of its
liability for environmental matters. The ultimate outcome of these environmental
matters cannot be determined. The Company currently anticipates that it will not
incur significant expenditures in fiscal 1995 in connection with any of these
environmentally contaminated sites. Please see Note 10 to the accompanying
consolidated financial statements.

Interest income decreased $1,411,000 (32.1%) to $2,986,000 due to decreased
levels of cash and short-term investments.

Net earnings increased $13,736,000 (50.4%) to $41,010,000. If the Company had
not incurred the $7,000,000 of unusual charges and the cumulative effect of the
change in accounting method in fiscal 1993, net earnings would have increased
18.5%. The Company's return on investment for the fiscal year ended June 30,
1994 was 11.8%. The Company's return on investment for the fiscal year ended
June 30, 1993 before the change in accounting method and the $7,000,000 of
unusual charges was 10.4%. This compares to 13.7% for fiscal year 1992, 15.8%
for fiscal year 1991, and 17.6% for fiscal year 1990. The primary reasons for
these declining percentages is the increase in stockholders' equity associated
with the conversion of the Company's $44,000,000 Convertible Debentures on or
prior to March 15, 1992 and the sale on February 28, 1991 of 920,000 shares of
Class A Common Stock in a public offering at a price to the public of $40.50 per
share. Stockholders' equity increased $78,732,000 as a result of these
transactions. These transactions have also resulted in a relatively high level
of cash and short-term investments which also had the effect of decreasing the

<PAGE>
return on investment ratio due to the lower return earned on these assets as
compared to the return earned on operating assets.

The change in foreign exchange rates since June 30, 1993 did not have a
material impact on the results of operations or the financial condition of the
Company.

The weighted average number of common shares, after giving effect to the
two-for-one stock split described in Note 7 to the accompanying consolidated
financial statements, outstanding on June 30, 1994 decreased to 29,674,464 from
30,089,898 for primary earnings per share. This decrease is the result of the
repurchase by the Company, prior to the stock split, of 342,700 shares of Class
A Common Stock. Primary and fully diluted earnings per share were $1.38 for the
period ended June 30, 1994 compared to $1.16 before unusual charges and the
cumulative effect of the change in accounting method for the period June 30,
1993.

Results of Operations
Fiscal Year Ended June 30, 1993 Compared to
Fiscal Year Ended June 30, 1992

Net sales increased $41,988,000 (9.9%) to $465,796,000. This increase was
attributable exclusively to the inclusion of the net sales of acquired
companies, including the net sales of Intermes, S.p.A. ("Intermes") acquired in
November 1992, Henry Pratt Company ("Pratt") acquired in September 1991,
Waletzko Armaturen GmbH ("Waletzko") acquired in July 1992, Edward Barber
Company (EBCO) acquired in May 1993, and Rockford Valve Company ("Rockford")
acquired in August 1992. Without the net sales of these acquired companies, net
sales for fiscal year 1993 would have been equal to the net sales for fiscal
year 1992. The Company had increased unit shipments of plumbing and heating
valves, water flow control valves, and oil and gas valves. However, these
increases were offset by decreased unit shipments of steam control valves to the
Navy, and aerospace/military valves. The Company believes the reduction in
Navy/military sales to be a long-term condition. The Company also believes that
as long as the general economic environment remains at its current level, it
will be difficult to achieve meaningful internal sales growth. The Company
intends to maintain its strategy of seeking acquisition opportunities as well as
developing its international sales to achieve growth.

Gross profit increased $12,689,000 (7.9%) to $173,693,000 but decreased as a
percentage of net sales from 38.0% to 37.3%. This decreased percentage was
primarily attributable to decreased unit pricing in certain product lines due to
competitive pricing pressure, decreased absorption of fixed manufacturing
expenses resulting from lower production levels associated with decreased sales
of steam control valves to the Navy, and a less favorable product mix.

Selling, general and administrative expenses increased $22,092,000 (22.9%)
to $118,550,000. This increase includes $7,000,000 of unusual charges; without
these unusual charges the increase would have been $15,092,000 (15.6%). These
unusual charges are related to environmental matters and costs associated with
the downsizing and restructuring of certain acquired companies. The charges
include approximately $2,000,000 relating to the resolution of environmental
litigation arising under CERCLA (Comprehensive Environmental Response,
Compensation, and Liability Act) involving a manufacturing facility sold in
1978, and clean-up costs relating principally to certain of the Company's
foundry operations; a $3,000,000 accrual for estimated future environmental
clean-up costs; and $2,000,000 relating to downsizing of certain previously
acquired operations which have been negatively impacted by reduced military
spending and to the consolidation and relocation of the operations of a
previously acquired company. The balance of the increased expenses is due to the
inclusion of expenses of Intermes and the other acquired companies discussed
above, and increased international selling expenses. The Company from time to
time is involved with environmental proceedings and incurs costs on an on-going
basis related to environmental matters.

Interest expense increased $1,273,000 (16.2%) to $9,152,000 due to the
issuance on November 26, 1991 of $75,000,000 aggregate principal amount of the
Company's 8-3/8% Notes Due 2003 and the inclusion of the interest expense of

<PAGE>
Management's Discussion (cont'd.)

Intermes. These increases were partially offset by the conversion of $44,000,000
aggregate principal amount of the Company's 7-3/4% Convertible Subordinated
Debentures Due 2014 into Class A Common Stock on or prior to March 15, 1992.
Other expense increased $417,000 (50.2%) to $1,248,000 primarily due to the
inclusion of the company's share of the net loss of a partially owned subsidiary
of Intermes.

Earnings before income taxes decreased $10,799,000 (18.0%) to $49,140,000.
Net earnings before the change in accounting method decreased $6,219,000 (17.0%)
to $30,406,000. If the Company had not incurred the $7,000,000 of unusual
charges, net earnings before the change in accounting method would have
decreased $1,880,000 (5.1%).

Effective retroactively to July 1, 1992, the Company changed its method of
accounting for income taxes from the deferred method to the liability method
required by FASB Statement No. 109, "Accounting for Income Taxes". The change is
required for the Company's fiscal year beginning July 1, 1993 (fiscal 1994),
however, the Company has elected early adoption of the new rules. As permitted
under the new rules, prior years' financial statements were not restated. The
cumulative effect of adopting Statement No. 109 as of July 1, 1992 is to
decrease net earnings $3,132,000 or $.10 per share for the current fiscal year.
The on-going effect of the net income tax rules is expected to decrease pre-tax
income by approximately $100,000 per year because of increased depreciation
expense as a result of Statement No. 109's requirement to report assets acquired
in prior business combinations at their pre-tax amounts. The net deferred tax
liabilities at June 30, 1993 will not be materially affected by the recently
enacted federal corporate income tax rate increase.

The change in foreign exchange rates since June 30, 1992 did not have a
material impact on the results of operations or the financial condition of the
Company.

The weighted average number of common shares outstanding on June 30, 1993
increased to 30,089,898 from 28,325,552 for the period ended June 30, 1992 due
to the conversion of the Company's 7-3/4% Convertible Subordinated Debentures
Due 2014 described above. Primary earnings per share decreased to $.91 for the
fiscal year ended June 30, 1993 from $1.29 for the fiscal year ended June 30,
1992. Fully diluted earnings per share decreased to $.91 from $1.27 for the same
periods.

The following table illustrates the reasons for the changes in fully diluted
earnings per share:

Fiscal Year Ended
June 30,
-------------------
1993 1992
------ ------
Earnings per share as reported....................... $.91 $1.27
Change in accounting method.......................... .10
Impact of unusual charges............................ .15
----- -----
$1.16 $1.27
===== =====

Liquidity and Capital Resources

During the fiscal year ended June 30, 1994, the Company repurchased 342,700
shares on a pre-split basis of its Class A Common Stock through open market
repurchases for an aggregate purchase price of $12,064,000. The Company's
repurchase program is now complete. In July, 1993, a subsidiary of the Company
purchased Ancon Products, Inc. located in Scarborough, Ontario, Canada. Ancon
manufactures a wide range of floor and roof drains, intercepters, backwater
valves, yard hydrants, and stainless and carbon steel specialty products used
primarily in commercial and industrial construction applications. In November,
1993, a subsidiary of the Company also purchased Enpoco Canada, Ltd., a
manufacturer of drains located in Ontario, Canada. The aggregate purchase price
for these acquisitions was U.S. $4,783,000. The Company also repaid $1,935,000
of debt acquired with one of the companies. The Company made contingent purchase
price payments of $6,094,000 as part of the Intermes acquisition. The Company

<PAGE>
also spent $19,928,000 on capital expenditures, primarily manufacturing
machinery and equipment. The Company is budgeting $27,000,000 of capital
expenditures in the fiscal year ending June 30, 1995, as part of its commitment
to continuously improve its manufacturing capabilities.

Working capital at June 30, 1994 was $246,531,000 compared to $222,652,000 at
June 30, 1993. Cash and short-term investments were $65,000,000 at June 30, 1994
compared to $83,135,000 at June 30, 1993. The ratio of current assets to current
liabilities was 4.3 to 1 at June 30, 1994 compared to 3.8 to 1 at June 30, 1993.
Debt as a percentage of total capital employed was 21.4% at June 30, 1994
compared to 23.7% at June 30, 1993.

Subsequent to fiscal year end, on July 28, 1994, the Company purchased Jameco
Industries, Inc. ("Jameco") of Wyandanch, New York, for a cash purchase price of
$35,200,000. Jameco is a manufacturer of metal and plastic water supply
products, including valves, tubular products and sink strainers that are sold
primarily to residential construction and home repair and remodeling markets in
the United States and overseas. Jameco had net sales of approximately
$56,000,000 for the twelve months ended June 30, 1994.

In August, 1994, the Company entered into a joint venture with a valve
company in Tianjin, People's Republic of China. The Company will invest a total
of $8,500,000 for a 60% interest in the joint venture during fiscal year 1995.

In August, 1994, the Company acquired the Cryolab valve product line from
SAES Pure Gas, Inc. for a total purchase price of approximately $890,000.
Cryolab will be integrated into the existing cryogenic valve business at the
Company's wholly-owned subsidiary, Circle Seal Controls of Corona, California.

In order to support the Company's acquisition program, working capital
requirements which would arise due to acquisitions, and for general corporate
purposes, the Company received a five-year commitment for an unsecured line of
credit for $125,000,000.

The Company anticipates that available funds and those funds provided from
current operations will be sufficient to meet current operating requirements and
anticipated capital expenditures for at least the next 24 months.

Quarterly Information

<TABLE>
<CAPTION>
Dividends
Fiscal Quarters Market Price Per Share
1994 1993 1994 1993
-------------------- -------------------- ---- ----
High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First 22-1/16 17-1/8 24-1/2 22 $.045 $.035
Second 25-1/4 21-1/4 25-1/8 22 .045 .035
Third 28-5/8 23-1/2 24-1/4 19-1/2 .055 .045
Fourth 27 22-1/4 20-5/8 17-11/16 .055 .045
----- -----
Year $.20 $.16
===== =====
</TABLE>

<PAGE>
Fifteen Year Financial Summary
(Amounts in thousands, except per share information)

<TABLE>
<CAPTION>
Operating Data 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Net sales $518,541 $465,796 $423,808 $350,780 $291,861
- - - ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 196,205 173,693 161,004 134,790 115,167
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 37.8 37.3 38.0 38.4 39.5
- - - ------------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 121,597 118,550 96,458 80,584 68,552
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 23.4 25.5 22.8 23.0 23.5
- - - ------------------------------------------------------------------------------------------------------------------------------------
Operating income 74,608 55,143 64,546 54,206 46,615
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 14.4 11.8 15.2 15.5 16.0
- - - ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 67,335 49,140 59,939 51,332 44,223
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 13.0 10.55 14.1 14.6 15.2
- - - ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 26,325 18,734 23,314 19,651 16,521
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of earnings before income taxes 39.1 38.1 38.9 38.2 37.4
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings 41,010 27,274 36,625 31,681 27,702
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 7.9 5.9 8.6 9.0 9.5
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings before unusual charges & accounting change -- 34,745 -- -- --
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net earnings before unusual charges & accounting change -- 7.5 -- -- --
- - - ------------------------------------------------------------------------------------------------------------------------------------

Investment Data
Total assets $558,850 $535,675 $475,620 $353,223 $286,761
- - - ------------------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments 65,000 83,135 108,877 76,049 42,031
- - - ------------------------------------------------------------------------------------------------------------------------------------
Current assets 320,879 301,192 301,291 229,583 181,089
- - - ------------------------------------------------------------------------------------------------------------------------------------
Current ratio 4.3 to 1 3.8 to 1 5.5 to 1 5.1 to 1 4.3 to 1
- - - ------------------------------------------------------------------------------------------------------------------------------------
Working capital 246,531 222,652 246,355 184,796 138,640
- - - ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 19,928 25,798 18,054 14,101 17,788
- - - ------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense 22,393 20,560 17,630 13,581 11,561
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 136,249 134,261 105,373 90,309 80,290
- - - ------------------------------------------------------------------------------------------------------------------------------------
Capital employed:
- - - -------------------
Total debt 98,620 103,834 96,564 66,209 71,100
- - - ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 361,551 335,120 314,893 235,715 170,775
- - - ------------------------------------------------------------------------------------------------------------------------------------
Capital employed 460,171 438,954 411,457 301,924 241,875
- - - ------------------------------------------------------------------------------------------------------------------------------------
Debt as a % of capital employed 21.4 23.7 23.5 21.9 29.4
- - - ------------------------------------------------------------------------------------------------------------------------------------

Return on Investment Data
Return on average stockholders' investment less
ending cash and short-term investments - % 14.2 10.5 17.5 20.1 20.8
- - - ------------------------------------------------------------------------------------------------------------------------------------
Return on average stockholders' investment - % 11.8 8.4 13.7 15.8 17.6
- - - ------------------------------------------------------------------------------------------------------------------------------------

Per Share Data
Net earnings - Fully diluted/Before unusual charges &
accounting change $1.38 $.91/1.16 $1.27 $1.18 $1.06
- - - ------------------------------------------------------------------------------------------------------------------------------------
Common cash dividends paid .20 .16 .13 .11 .09
- - - ------------------------------------------------------------------------------------------------------------------------------------
Ending stockholders' equity 12.18 11.14 11.12 9.03 6.72
- - - ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Fully diluted 29,717 30,098 30,080 28,707 27,955
- - - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Please refer to acquisition history on page 28.
26

<PAGE>

Operating Data 1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C>
Net sales $223,871 $181,353 $145,561 $137,004 $124,372
- - - ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 86,612 72,628 59,641 54,650 48,384
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 38.7 40.0 41.0 39.9 38.9
- - - ------------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 48,483 40,502 31,608 30,606 26,948
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 21.7 22.3 21.7 22.3 21.7
- - - ------------------------------------------------------------------------------------------------------------------------------------
Operating income 38,129 32,126 28,033 24,044 21,436
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 17.0 17.7 19.3 17.5 17.2
- - - ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 37,758 31,058 27,611 24,197 21,732
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 16.9 17.1 19.0 17.7 17.5
- - - ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 14,743 12,133 13,306 11,427 10,312
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of earnings before income taxes 39.0 39.1 48.2 47.2 47.5
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings 23,015 18,925 14,305 12,770 11,420
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 10.3 10.4 9.8 9.3 9.2
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings before unusual charges & accounting change -- -- -- -- --
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net earnings before unusual charges & accounting change -- -- -- -- --
- - - ------------------------------------------------------------------------------------------------------------------------------------

Investment Data
Total assets $246,821 $176,760 $148,241 $115,337 $103,829
- - - ------------------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments 79,099 40,405 41,905 16,735 11,905
- - - ------------------------------------------------------------------------------------------------------------------------------------
Current assets 175,333 118,925 99,542 71,590 65,124
- - - ------------------------------------------------------------------------------------------------------------------------------------
Current ratio 5.8 to 1 5.1 to 1 6.6 to 1 5.6 to 1 3.7 to 1
- - - ------------------------------------------------------------------------------------------------------------------------------------
Working capital 145,300 95,734 84,345 58,831 47,636
- - - ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 12,257 10,704 7,127 11,688 9,840
- - - ------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense 8,807 6,793 5,399 4,356 3,261
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 59,225 52,877 44,793 38,659 31,496
- - - ------------------------------------------------------------------------------------------------------------------------------------
Capital employed:
- - - -------------------
Total debt 67,165 24,448 23,045 23,611 21,582
- - - ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 143,714 122,944 104,982 75,813 64,052
- - - ------------------------------------------------------------------------------------------------------------------------------------
Capital employed 210,879 147,392 128,027 99,424 85,634
- - - ------------------------------------------------------------------------------------------------------------------------------------
Debt as a % of capital employed 31.9 16.6 18.0 23.7 25.2
- - - ------------------------------------------------------------------------------------------------------------------------------------

Return on Investment Data
Return on average stockholders' investment less
ending cash and short-term investments - % 21.9 23.1 21.0 21.7 24.5
- - - ------------------------------------------------------------------------------------------------------------------------------------
Return on average stockholders' investment - % 17.3 16.6 15.8 18.3 19.4
- - - ------------------------------------------------------------------------------------------------------------------------------------

Per Share Data
Net earnings - Fully diluted/Before unusual charges &
accounting change $ .91 $ .75 $ .58 $ .56 $ .50
- - - ------------------------------------------------------------------------------------------------------------------------------------
Common cash dividends paid .07 .05 .03 .04 .02
- - - ------------------------------------------------------------------------------------------------------------------------------------
Ending stockholders' equity 5.69 4.88 4.23 3.31 2.80
- - - ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Fully diluted 25,922 25,186 24,816 22,896 22,870
- - - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Operating Data 1984 1983 1982 1981 1980
<S> <C> <C> <C> <C> <C>
Net sales $102,551 $77,211 $71,626 $66,023 $54,777
- - - ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 39,912 30,608 25,253 21,734 16,668
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 38.9 39.6 35.3 32.9 30.4
- - - ------------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 22,517 17,732 14,469 11,838 10,442
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 22.0 23.0 20.2 17.9 19.1
- - - ------------------------------------------------------------------------------------------------------------------------------------
Operating income 17,395 12,876 10,784 9,896 6,226
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 17.0 16.7 15.1 15.0 11.4
- - - ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 17,818 13,226 11,283 9,919 6,216
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 17.4 17.1 15.8 15.0 11.3
- - - ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 8,306 5,975 4,895 4,765 3,024
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of earnings before income taxes 46.6 45.2 43.4 48.0 48.6
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings 9,512 7,251 6,388 5,154 3,192
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net sales 9.3 9.4 8.9 7.8 5.8
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings before unusual charges & accounting change -- -- -- -- --
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of net earnings before unusual charges & accounting change -- -- -- -- --
- - - ------------------------------------------------------------------------------------------------------------------------------------

Investment Data
Total assets $80,745 $67,369 $58,150 $49,756 $34,476
- - - ------------------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments 18,966 11,772 13,319 4,020 2,819
- - - ------------------------------------------------------------------------------------------------------------------------------------
Current assets 60,671 50,092 43,332 35,407 24,026
- - - ------------------------------------------------------------------------------------------------------------------------------------
Current ratio 3.8 to 1 4.3 to 1 4.1 to 1 2.8 to 1 4.5 to 1
- - - ------------------------------------------------------------------------------------------------------------------------------------
Working capital 44,701 38,521 32,659 22,948 18,694
- - - ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 5,081 5,670 1,483 2,100 2,229
- - - ------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense 2,357 1,954 1,710 1,779 924
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 19,582 16,956 13,419 13,647 7,635
- - - ------------------------------------------------------------------------------------------------------------------------------------
Capital employed:
- - - -------------------
Total debt 9,707 10,145 9,249 6,215 4,009
- - - ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 53,475 44,622 37,393 31,255 25,537
- - - ------------------------------------------------------------------------------------------------------------------------------------
Capital employed 63,182 54,767 46,642 37,470 29,546
- - - ------------------------------------------------------------------------------------------------------------------------------------
Debt as a % of capital employed 15.4 18.5 19.8 16.6 13.6
- - - ------------------------------------------------------------------------------------------------------------------------------------

Return on Investment Data
Return on average stockholders' investment less
ending cash and short-term investments - % 25.9 22.9 22.1 19.3 14.4
- - - ------------------------------------------------------------------------------------------------------------------------------------
Return on average stockholders' investment - % 19.4 17.7 18.6 17.9 13.3
- - - ------------------------------------------------------------------------------------------------------------------------------------

Per Share Data
Net earnings - Fully diluted/Before unusual charges &
accounting change $ .42 $ .32 $ .26 $ .21 $ .15
- - - ------------------------------------------------------------------------------------------------------------------------------------
Common cash dividends paid -- -- .01 -- --
- - - ------------------------------------------------------------------------------------------------------------------------------------
Ending stockholders' equity 2.34 1.95 1.55 1.30 1.22
- - - ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Fully diluted 22,860 22,860 24,110 24,122 20,890
- - - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

27
<PAGE>

Acquisitions (Fiscal Years)

1995-Tianjin Tanggu Watts Valve Company, Ltd.,
Jameco Industries, Inc.,
Cryolab

1994-Enpoco,
LeHage Industries, Inc.

1993-Edward Barber & Company Ltd.,
Intermes Group,
Rockford Controls,
Waletzko GmbH

1992-Contromatics,
Henry Pratt Company

1991-Bailey,
SFR-France,
Circle Seal Controls

1990-Nicholson Steam Trap,
Leslie Controls

1989-Eagle Valve Company,
KF Industries,
Taras Valve,
Epps Mfg. Ltd.,
A.S.M.E. Steam Pop Relief Valves

1988-Ocean B.V.,
Flippen Float Valves

1987-Muesco Valve Company,
Prier Frost-Proof Hydrants,
James Jones Company

1985-Spence Engineering Company,
Hale Oilfield Products

1874-Watts Regulator Company - Founded

A LEADER IN VALVE TECHNOLOGY
WATTS(R)
INDUSTRIES, INC.
SINCE 1874

<PAGE>

(INSIDE BACK COVER)

Directors
Timothy P. Horne
Chairman of the Board,
President and
Chief Executive Officer
of the Corporation

David A. Bloss, Sr.
Executive Vice President
of the Corporation

Kenneth J. McAvoy
Chief Financial Officer,
Treasurer, Secretary
of the Corporation

Frederic B. Horne
Corporate Vice President
of the Corporation

Noah T. Herndon
Partner of Brown Brothers
Harriman & Company

Gordon W. Moran
President and Chief Executive
Officer
Hollingsworth & Vose Company

Wendy E. Lane
Chairman
Lane Holdings, Inc.

Daniel J. Murphy, III
Chairman
Northmark Bank

Corporate Officers
Timothy P. Horne
Chairman of the Board,
President and
Chief Executive Officer

David A. Bloss, Sr.
Executive Vice President

Kenneth J. McAvoy
Chief Financial Officer,
and Executive Vice President
of European Operations

Frederic B. Horne
Corporate Vice President

Suzanne M. Zabitchuck
Corporate Counsel and
Assistant Secretary

William C. McCartney
Vice President of
Finance and Controller

Robert T. McLaurin
Corporate Vice President
Asian Operations

Michael O. Fifer
Vice President
Corporate Development

Division Officers
Paul A. Lacourciere
Executive Vice President
Watts Regulator Company

Kevin R. Sweeney
Executive Vice President
Water Products Division

Ernest E. Elliott
Vice President
Water Products Division

Alfred S. Schommer
Group Vice President
Industrial and Oil & Gas

Edward G. Holtgraver
Group Vice President
Municipal Water

Charles S. Wolley
Group Vice President
Steam

Victor L. Pitt
President
Watts Industries (Canada) Inc.

Jean-Marc Sassier
Managing Director
Watts Industries Europe

Corporate Information

Executive Offices
815 Chestnut Street
North Andover, MA 01845-6098
Tel. (508) 688-1811
Fax: (508) 688-5841

Registrar and Transfer Agent
The First National Bank of Boston
100 Federal Street
Boston, MA 02110

Counsel
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109

Auditors
Ernst & Young
200 Clarendon Street
Boston, MA 02116

Annual Meeting
October 18, 1994
10:00 am
Andover Inn
Andover, MA

Stock Listing
National Market System
of NASDAQ
Ticker Symbol: WATTA

Form 10-K
Stockholders may obtain
without charge a copy of the
Company's most recent Annual
Report on Form 10-K filed
with the Securities and Exchange
Commission by writing to
Watts Industries, Inc.
Attn: Chief Financial Officer
815 Chestnut St.
North Andover, MA 01845-6098

<PAGE>

(BACK COVER)

The Companies of
Watts Industries, Inc.

PLUMBING & HEATING

Watts Regulator Company, Water Products Division
North Andover, MA

Watts Industries (Canada) Inc.
Woodbridge, Ontario, Canada

Watts SFR SA, Fressenneville, France

Intermes SpA, Caldaro, Italy

MTR GmbH, Gemmrigheim, Germany

G.R.C. Controls S.A., Badalona (Barcelona), Spain

Jameco Industries, Inc., Wyandanch, NY

WATER QUALITY

Watts Regulator Company, Backflow Prevention Division
North Andover, MA

Watts Ocean B.V., AB Eerbeek, Netherlands

MUNICIPAL WATER

Henry Pratt Company, Aurora, IL

James Jones Company, El Monte, CA

Watts ACV, Inc., Houston, TX

Edward Barber & Company, Ltd., United Kingdom

Tianjin Tanggu Watts Valve Company, Ltd.
Tianjin, People's Republic of China

STEAM

Leslie Controls, Inc., Tampa, FL

Spence Engineering Company, Inc., Walden, NY

Nicholson Steam Trap, Inc., Walden, NY

R.G. Laurence Company, Inc., Tampa, FL

INDUSTRIAL

Watts Regulator Co, Industrial Division
North Andover, MA

Contromatics, Milford, NH

Circle Seal Controls, Inc., Corona, CA

OIL & GAS

KF Industries, Inc., Oklahoma City, OK

Hale Oilfield Products, Houston, TX

(WATTS COMPANY LOGO)