Fourth quarter 2001 other expenses, net decreased by $682,221 from the 2000 net total. This decrease was the result of the same factors noted in the above discussion.

2000 Compared to 1999

          Other expenses, net for 2000 increased by $54,517 over the 1999 net total. This increase reflected the increased interest expense arising from the added reliance on the Company's short-term lines of credit throughout 2000, offset slightly by the income recognized from the Company's investment in the Casite joint venture, which is recorded as other, net income. There was no income recognized from the joint venture in 1999.

          Fourth quarter 2000 other expenses, net increased $5,682 from the 1999 total. This increase was the result of the same factors noted in the above discussion.

TAXES ON INCOME

          The impact of income taxes on the reported results of the Company is detailed in Note 9 to the Consolidated Financial Statements. The 2002 and 2001 effective tax raterates of 36.5% and 39.1% isare slightly higher than the statutory federal tax rate of 34.0% due primarily to the impact of state income taxes and certain nondeductible expenses. The recording of $271,000 of tax expense on a pre-tax loss of $188,156 for 2000 primarily results from an increase in the deferred income tax asset valuation allowance of approximately $300,000. This increase related to foreign tax credits that management anticipated, based on recent financial results, were likely to expire unutilized in future years. During 2001, $260,651 of foreign tax credits expired. The 2000 tax amount was also impacted by the effect of state income taxes and certain nondeductible expenses. The 1999 effective tax rate of 43.3% is higher than the statutory federal tax rate of 34.0% due primarily to the impact of state income taxes an d certain nondeductible expenses. The 1999 effective tax rate was also affected by the increase in the deferred income tax asset valuation allowance related to foreign tax credits that were expected to expire unutilized in 2000.

          As of December 31, 2001,2002, the Company recorded net deferred income tax assets of $7,322,332.$8,239,697, compared to $7,322,332 as December 31, 2001. The major components include the tax effect of net operating loss carryforwards of $1,417,323$1,212,067 ($1,417,323 at December 31, 2001), the pension obligation of $2,107,570 ($924,257 at December 31, 2001) and net accrued retirement andthe postretirement benefit obligations totaling $5,310,978.obligation of $4,225,617 ($4,386,521 at December 31, 2001). The realization of these recorded benefits is dependent upon the generation of future taxable income. The $1,183,313 increase in the deferred income tax asset related to the Company's pension obligation is primarily due to the $3,714,204 increase in the unrecognized net loss, from $4,983,439 at December 31, 2001 to $8,697,643 at December 31, 2002, as disclosed in Note 5 to the Consolidated Financial Statements. The unrecognized net loss account is described under the subheading "Pension and Postretirement Obligations" in the "Critical Accounting Policie s" section below. As discussed there, the unrecognized net loss account balance fluctuates primarily based on actual versus assumed discount rates and return on plan assets. The balance increased during 2002 primarily due to a reduction in the assumed discount rate and a current return on plan assets that was lower than the return expected in the long-term.

          The net operating loss carryforwards expire in 2012, 2019 and 2020, if not previously utilized. During 2001,2002, the Company utilized net operating loss carryforwards of $1,119,094,$575,782, resulting in a $380,492$205,256 reduction in the related deferred income tax asset. Management currently believes that the cumulative net operating loss carryforward will be fully utilized by late 2004.within the next two to three years.

          The Company further expects to be able to realize the deferred tax assets related to the retirement and postretirement benefit obligations as it pays these benefits. Such payments will constitute an expense that is deductible for tax reporting purposes over many future years. During each of the ten years prior to when the recent net operating loss carryforwards arose, the Company has been able to deduct these benefit payments for tax reporting purposes and reduce its tax liability accordingly. As a result of the 1997 plan amendment to the retiree medical plan as discussed in Note 6 to the Consolidated Financial Statements, current tax deductible payments are expected to exceed the annual expense recognition for financial reporting purposes, thus accelerating the absorption of the future periods' tax benefit.

          Management believes that it is more likely than not that adequate levels of future income will be generated to absorb the net operating loss carryforwards, the deductible amounts related to the retirement and postretirement benefit obligations and the remaining net deductible temporary differences. However, based on the amount of net operating loss carryforwards at December 31, 20012002 (which must be utilized before foreign tax credit carryforwards can be utilized), management believes that it is more likely than not that the foreign tax credits will go unutilized prior to their expiration. As a result, a valuation allowance has been recorded for the total foreign tax credits of $59,467$45,576 at December 31, 2001.2002.

LIQUIDITY AND CAPITAL RESOURCES

          On February 22, 2001, the Company announced that it had instituted a series of cost-containment measures in an effort to reduce its operating expenses and improve its profitability and cash position. The cost-containment measures were in response to a continued softness in the domestic piston ring aftermarket and a downturn in the original equipment market. The cost-containment measures consisted of reductions in the salaried and hourly workforces and identification of reductions in various non-payroll related expenses. The workforce reductions resulted in $36,000 in severance payments. The Company also announced an indefinite suspension of its regular quarterly cash dividend and identified certain assets

for possible future sale in an effort to further improve its cash position. In early November 2001, the Company sold its non-business related real property. The gain on the sale of this property, amounting to $714,279, is included in other expenses, net in the Consolidated Statements of Income included in Item 8 below.

          The Company's primary cash requirements continue to be for operating expenses such as labor costs, and for funding accounts receivable,inventory, capital expenditures and long-term debt service.service, including the additional debt service relating to the Company's March 2003 acquisition of Ertel Manufacturing Corporation of Canada, Ltd. (Ertel), as discussed below. Historically, the Company's primary sources of cash have been from operations and from bank borrowings. These sources of cash depend on attaining future positive financial results. The Company believes that the cost containment measures implemented in 2001,income derived from the sale of manufactured products, combined with the expected future positive financial impact fromof the Ertel acquisition and the marketing

          In late March 2001,May 2002, the Company's loan agreement with its primary lender relating to its short-term and long-term borrowingborrowings was amended. The primary terms of this amendedamendment and the loan agreement are detailed in NoteNotes 3 and 4 to the Company's Consolidated Financial Statements included in Item 8 below.Statements. The Company maintains two additional lines of credit with banks aggregating $2,200,000. Total short-term lines available to the Company as of December 31, 20012002, totaled $6,200,000,$6,450,000, of which $2,500,000$2,250,000 was unused. In an effort to minimize its floating interest rate exposure relating to its long-term borrowings, the Company is a party to an interest rate swap agreement essentially fixing the interest rate on a portion of that debt within a small range. The rate will fluctuate within 8.325%a range of 8.30% to 8.575%8.60% depending upon certain Company performance parameters. As of December 31, 20012002 the "fixed" rate on those borrowings was 8.575%8.60% and the notional amount of the swap agreement, amountedwhich matures on June 30, 2003, a mounted to $1,980,000.$660,000.

          As discussed in Note 13 to the Consolidated Financial Statements, on March 27, 2003, the Company's Canadian subsidiary, Hastings, Inc., acquired 100 percent of the outstanding shares of Ertel. The minimum purchase price payable to the sellers has been established to be approximately $7,034,000, including $4,073,000 of cash and $2,961,000 of secured term notes payable to the sellers. In connection with the acquisition, the Company restructured its U.S. and Canadian loan agreements. The Company's U.S. secured short-term line with its primary lender was increased from $4,250,000 to $7,000,000. In Canada, Hastings, Inc.'s secured $700,000 short-term line with its former lender was replaced with a secured $5,770,000 short-term line with the Canadian affiliate of the Company's primary lender. This new line is secured by accounts receivable, inventory and equipment. Hastings, Inc. also borrowed $1,885,000 on a term loan which is payable over 15 years and is secured by real esta te. With this new borrowing capacity, the Company financed the $4,073,000 paid in the acquisition of Ertel.

          The following table summarizes the Company's contractual obligations at December 31, 2002, as adjusted for the additional long-term debt related to the Ertel acquisition after year-end, and the effect such obligations are expected to have on its liquidity and cash flow in future periods:

          During 2002, the Company generated $1,569,348 of net cash from operating activities. The realized net income, depreciation and deferred income tax expense, combined with an increase in accounts payable and accruals, were partially offset by an increase in inventories and a decrease in the portion of the net retirement and postretirement benefit obligations that affects net income and net cash flows. As discussed under the "Pension and Postretirement Obligations" subheading within the "Critical Accounting Policies" section below, changes in assumptions used in determining the recorded balance of these obligations can have a significant effect on such balances but do not necessarily have an immediate effect on net income or net cash flows. The increase in accounts payable and accruals primarily reflects the terms associated with the marketing and distribution agreements noted earlier. Under the terms of the agreements, the Company bills the customer and records a receivabl e for the gross sales amount of the products covered under the agreement. The Company is responsible for collecting the gross sales amount. The Company then nets the gross sales amount down to the earned commission amount that it receives for performing the marketing and distribution services by recording a payable to the engine component manufacturers that are parties to those agreements. The 2002 increase in accounts payable and accruals reflects the growth in KUS piston volume for December 2002 in comparison to the same period in 2001, combined with an accrual, at December 31, 2002, for two months of ACL volume. The Company began distributing ACL products in the first quarter of 2002, thus there was no liability related to the ACL agreement as of December 31, 2001. The deferred income tax expense primarily reflects the utilization of a portion of the net operating loss carryforward based on earnings for the year. The increase in inventories reflects a planned increase in the Company's inventories to certa in levels in order to achieve and maintain predetermined customer order fill levels. The decrease in the portion of the net retirement and postretirement benefit obligations discussed above reflects the excess of actual postretirement benefit claims paid over the actuarially determined annual expense, combined with the funding of one of the Company's defined benefit plans to certain actuarially determined limits.

          As discussed in Notes 6 and 7 to the Consolidated Financial Statements, in December 2002, the Company announced that it had reached a court-approved settlement in a lawsuit filed three years ago by retirees of the Company. The lawsuit had been filed as a result of the April 1997 amendment of the Company's postretirement benefit plans. The settlement agreement, which resulted in an amendment to the Company's postretirement benefit plans effective June 1, 2002, represents a compromise as to the amounts that the retirees and the Company will pay toward the cost of health insurance premiums. Net periodic benefit cost for 2002 increased by approximately $350,000 and net periodic benefit cost for 2003 is expected to increase by approximately $600,000 (i.e., $250,000 over 2002's increase) as a result of the amendment. The Company's cash payments for postretirement plan benefits increased by approximately $200,000 in 2002 and are expected to increase by approximately $425,000 (i .e., $225,000 over 2002's increase, including a one-time payment of $125,000) in 2003 as a result of the amendment. The estimated expense and cash payments for 2003 are higher than the amounts for 2002 because the plan amendment was only in effect for the last seven months of 2002.

          The investing activities for 2002 reflect the Company's continued support of its lean manufacturing environment, combined with capital expenditures for the modernization of the Company's main distribution center. The investing activities also reflect the proceeds from the sale of excess plant

          During 2001, the Company generated $1,755,937 of net cash from operating activities. The realized net income, depreciation and decreases in deferred income taxes andtax expense, combined with the decrease in inventories, were partially offset by an increase in accounts receivable, a gain on the sale of property and equipment and decreases in accounts payable and accruals and the portion of the net retirement and postretirement benefit obligation.obligation that affects net income and net cash flows. The decrease in deferred income taxestax expense primarily reflectsreflected the utilization of a portion of the net operating loss carryforward based on earnings for the year.2001. The decrease in inventories reflectsreflected a planned reduction in the Company's inventory to certain levels, combined with the shortfall of production output versus customer demand during the first half of 2001. Production output aligned with customer demand throughout the second half of 2001. The increase in accounts receivable reflectsreflected the timing of customer sales and the related payment terms associated with those sales. The gain on the sale of p ropertyproperty and equipment reflectsreflected the sale of the Company's non-business related real property described earlier in this discussion. While this sale resulted in additional cash to the Company, it is not considered an "operating" cash flow item for purposes of determining cash flows provided by operating activities. The decrease in accounts payable and accruals iswas due to a decrease in accruals for general accounts payable and interest, partially offset by increases in accruals for salesmen's bonuses and workers' compensation. The decrease in the portion of the net retirement and postretirement benefit obligation reflectsobligations discussed above reflected the excess of actual postretirement benefit claims paid over the actuarially determined annual expense.

          The investing activities for 2001 reflectreflected the Company's continued support of its lean manufacturing environment, as well as the initial capital expenditures for the modernization of the Company's main distribution center, now being utilized to distribute ACL-related

products.center. The investing activities also reflectreflected the proceeds from the sale of the Company's non-business related real property discussed above. The financing activities for 2001 reflectreflected the working capital requirements that were primarily needed to fund the operating activity items noted above. Due primarily to the improved 2001 operating results and the proceeds from the sale of the non-business related real property, principal payments on the Company's short-term credit facility exceeded related borrowings by $1,300,000. The financing activities also reflectreflected the principal payments under the amended loan agreement as well as the restriction of paying dividends and repurchasing the Company's common stock, as detailedthat was in Note 3 to the Company's Consolidated Financial Statements included in Item 8 below.effect at December 31, 2001.

          During 2000, the Company generated $1,030,145 of net cash from operating activities. The realized depreciation and deferred income tax expense, combined with decreases in accounts receivable and inventories deferred income taxes and an increase in accounts payable and accruals, were partially offset by the net loss and a decrease in the portion of the net retirement and postretirement benefit obligation.obligation that affects net income and net cash flows. The decrease in accounts receivable reflected the timing of customer sales and the related payment terms associated with those sales. The decrease in inventories reflected a reduction in inventory requirements in relation to customer demand. The decrease in deferred income taxestax expense primarily reflected the increase in the valuation allowance for foreign tax credits that management anticipated were likely to expire unutilized in future years. The increase in accounts payable and accruals reflected an increase in general accounts payable, taxes and compensation, offset slightly by a decrease in miscellaneous payables. The decrease in the portion of the net retirement and postretirement benefit obligationobligations discussed above reflected the excess of actual postretirement benefit claims paid over the actuarially determined annual expense.

          The investing activities for 2000 reflected the Company's continued support of its lean manufacturing environment. The investing activities also reflected the investment in a joint venture, in February 2000, related to the "Casite" brand additives products. The financing activities reflected the working capital requirements that were primarily needed to fund the operating activity items noted above. The financing activities also reflected the amortization of the Company's long-term obligationdebt that was amended in March 2001, the payment of dividends and the purchase and retirement of 30,000 shares of the Company's common stock. This stock repurchase was part of the common stock repurchase program

          During 1999, the Company generated $1,112,546 of net cash from operating activities. The realized net income and depreciation, combined with decreases in accounts receivable, prepaid pension cost and deferred income taxes, were partially offset by increases in inventories and decreases in accounts payable and accruals and the postretirement benefit obligation. The decrease in accounts receivable reflected the timing of customer sales and related payment terms associated with those sales. The decrease in the prepaid pension cost reflected the recognition of the pension expense for 1999. The decrease in the net deferred income tax asset reflected the reduction of several deferred tax items, partially offset by the deferred tax effect of the 1999 net operating loss for tax purposes. The increase in inventories reflected the Company's continued efforts toward having sufficient product on hand in order to maintain adequate order fill for its customers. The decrease in a ccounts payable and accruals primarily reflected the reduction in the compensation accrual, offset by slight increases in general accounts payable and miscellaneous payables. The decrease in the postretirement benefit obligation reflected the excess of actual postretirement benefits paid over the actuarially determined annual expense. The investing activities for 1999 reflected a decreased requirement for new capital equipment, as the Company moved to finalize its transition into a lean manufacturing environment. The investing activities also reflected the proceeds from the sale of obsolete plant equipment. The financing activities for 1999 reflected the working capital requirements that were primarily needed to fund the operating activity items noted above. The financing activities also reflected the amortization of the Company's long-term debt obligation.

          As noted earlier in this discussion, in February 2001, the Company instituted a series of cost-containment measures in an effort to reduce its operating expenses and improve its profitability and cash

position. Initial results indicate that these cost-containment measures have had a positive impact on earnings and cash flow, and are expected to continue to have a positive impact on future periods, although the Company cannot be assured that this will happen. These cost-containment measures, combined with the expected positive earnings impact from the Zollner and ACL marketing and distribution agreements, should help to further improve the Company's future financial outlook.

LITIGATION CONTINGENCY

          As disclosed in Note 7 to the Consolidated Financial Statements, on January 24, 2000, the Company's retirees filed a class-action lawsuit against the Company as a result of the April 1997 amendment of the Company's postretirement benefit plans. The plans were amended principally to adjust the cost-sharing provisions. The suit alleges that the Company denied class retirees and their dependents certain health insurance benefits to which the retirees had a "vested" right pursuant to the terms of the Company's collective bargaining agreements. The Company has denied any wrongdoing in this suit, and intends to defend it and any related class certification vigorously. Minimal discovery has taken place in this lawsuit because the parties have been attempting to reach a settlement. As of the date of this report, the Company believes that it is making progress toward a settlement of this lawsuit, but there are still a number of contingencies to be satisfied before any settleme nt can be finalized, and ultimately any settlement must be approved by the court. Therefore, although the Company is hopeful that a settlement will be reached, there is still the possibility that the case will not be settled, and that this lawsuit will be tried. If this case is tried, the Company's ultimate chances of success are uncertain. If the retirees prevail, the Company anticipates that a requirement to provide postretirement benefits at the pre-amendment level would have a material adverse effect on the Company's future financial position, results of operations and cash flows.

CRITICAL ACCOUNTING POLICIES

          The preparation of our financial statements requires that we adopt and follow certain accounting policies. Certain amounts presented in the financial statements have been determined based upon estimates and assumptions. Management has discussed the development, selection and disclosure of the estimates and assumptions with our audit committee. Although we believe that our estimates and assumptions are reasonable, actual results could differ.

          We have included below a discussion of our critical accounting policies that we believe are affected by our more significant judgments and estimates used in the preparation of our financial statements, how we apply such policies and how results differing from our estimates and assumptions would affect the amounts presented in our financial statements. Other accounting policies also have a significant effect on our financial statements and some of these policies also require the use of estimates and assumptions. Note 1 to the Consolidated Financial Statements discusses our significant accounting policies.

         Allowance for Possible Losses on Receivables:We maintain an allowance for possible losses on receivables for estimated losses resulting from the inability of our customers to make required payments. The allowance is estimated based on historical experience of write-offs, the level of past due amounts, information known about specific customers with respect to their ability to make payments and future expectations of conditions that might impact the collectibility of accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

         Inventories:We record inventory reserves for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon the age of specific inventory on hand and assumptions about future demand and market conditions. If actual

market conditions are less favorable than those anticipated by management, additional inventory write-downs may be required.

Goodwill: Goodwill, associated with the Ertel acquisition discussed in Note 13 of our Consolidated Financial Statements, will be tested for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest impairment exists. The test for impairment requires the Company to make several estimates about fair value, most of which are based on projected future cash flows. The estimates associated with the goodwill impairment tests are considered critical due to the judgments required in determining fair value amounts, including projected future cash flows. Changes in these estimates may result in the recognition of an impairment loss.

         Pension and Postretirement Obligations:Each year we calculate the costs of providing retiree benefits under the provisions of SFASStatement of Financial Accounting Standards (SFAS) No. 87 and SFAS No. 106. The key assumptions used in making these calculations are disclosed in Notes 5 and 6 to our Consolidated Financial Statements. The most significant of these assumptions are the discount rate used to value the future obligationobligations of our pension and postretirement benefit plans and the expected return on plan assets.assets of our pension plans (our postretirement benefit plans are unfunded). We select discount rates commensurate with current market interest rates on high-quality, fixed-rate securities. The expected return on assets is based on our current view of long-term returns on assets held by the plans, which is influenced by historical averages. If actual interest rates and returns on plan assets materially differ from our assumptions, future adjustments to our financialfinanc ial statements would be required. While changes in these assumptions can have a significant effect on the pension and postretirement benefit obligations reported in the Consolidated Balance Sheets and the unrecognized gain or loss accounts discussed below, the effect of changes in these assumptions is not expected to have a significant effect on net periodic pension and postretirement benefit costs in the near term. For example, we estimate that a 25 basis point increase or decrease in the discount rate would affect the combined 2003 net periodic pension

         Net Deferred Income Tax Assets:Our estimates of deferred income taxes and the significant items giving rise to the deferred income tax assets and liabilities are disclosed in Note 9 to our Consolidated Financial Statements. These reflect our assessment of actual future taxes to be paid on items reflected in the financial statements, giving consideration to both timing and probability of realization. As discussed earlier in this discussion and analysis, the recorded net deferred income tax assets are significant and our realization of these recorded benefits is dependent upon the generation of future taxable income. If future levels of taxable income are not consistent with our expectations, we may be required to record an additional valuation allowance, which could reduce our net income by a material amount.

         Contingencies and Litigation:Our determination of the treatment of contingent liabilities in the financial statements, including that related to litigation, is based on our view of the expected outcome of the applicable contingency. We consult with legal counsel and other experts on matters related to litigation with respect to specific matters and matters in the ordinary course of business. We accrue a liability if the likelihood of an adverse outcome is probable of occurrence and the amount can be estimated. A significant class actionWe believe that our exposure to contingent losses has substantially declined since last year-end due to the December 2002 court-approved settlement of the lawsuit previously filed by our retirees. The details regarding the Company's retirees, is discussed above under "Litigation Contingency"settlement are included in Notes 6 and in Note 7 to theof our Consolidated Financial Statements. To the extent additional information arises or the Company's strategies change, it is possible that the Company's best estimate of its probable liability in this and other matters may change.

NEW ACCOUNTING STANDARDS

          Emerging Issues Task Force (EITF) 00-25,Vendor IncomeIn December 2002, the Financial Accounting Standards Board (FASB) issued Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products, issued during 2001, requires vendors to reduce their revenues by the costs reimbursed to their customers in connection with the customers' purchase or promotion of the vendor's products. This pronouncement specifically addresses co-op advertising costs that are incurred by the vendor. In accordance with EITF 00-25, co-op advertising costs incurred by the Company are required to be reflected as a reduction of net sales. In previous years, co-op advertising expenditures were included in advertising costs. All periods presented in the Consolidated Financial Statements have been reclassified to conform with the current year presentation.

Accounting Standards No. 148,Accounting for Stock Based Compensation - Transition and Disclosure (SFAS No. 148). SFAS No. 133,148 amends SFAS No. 123,Accounting for Derivative Instruments and Hedging ActivitiesStock-Based Compensation, issued in June 1998, requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet andprovide alternative methods of transition for a voluntary change to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (1) the changes in the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the hedged asset or liability that are attributabledisclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the hedged risk or (2)method of accounting for stock-based employee compensation and the earnings effect of the hedged forecasted transaction. For a derivative not designatedmethod used in reporting results. The Company has decided to continue to account for stock-based employee compensation using the intrinsic value method under APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations, as a hedging instrument, the gain or loss is recognized in income in the period

of change.permitted under SFAS No. 133, as amended by SFAS Nos. 137 and 138, was effective for all fiscal quarters of fiscal years beginning after June 15, 2000.

          Historically, the Company has not entered into derivatives contracts for speculative purposes. The Company does periodically enter into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate borrowings. However, the fair value of such derivatives is not significant. Accordingly, as discussed148. As more fully disclosed in Note 1 to the Consolidated Financial Statements, included in Item 8 below, the adoptionpro forma effect of accounting for stock-based compensation on the new standard on January 1, 2001 didfair value method is not materially affectsignificant to the Company's Consolidated Financial Statements.

          In August 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed Of. SFAS No. 144 also supersedes the accounting and reporting provisions of Accounting Principal Board's Opinion No. 30,Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, related to the disposal of a segment of a business. The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001. The Company does not believe the adoption of SFAS No. 144 will have a material impact on its consolidated financial position or results of operations.

FORWARD-LOOKING STATEMENTS

          With the exception of historical matters, the matters discussed in this commentary and elsewhere in this Form 10-K include forward-looking statements that describe the Company's plans, objectives, goals, expectations or projections. These forward-looking statements are identifiable by words or phrases indicating that the Company or management "expects," "anticipates," "projects," "plans" or "believes" that a particular event "may occur," "should occur" or "will likely occur" in the future, or similar statements. In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this commentary, there are many important factors that could cause actual results to be materially different from the Company's current expectations.

          Anticipated future sales are subject to competitive pressures from many sources. As an example, future sales could be affected by consolidation within the automotive replacement parts industry, whereby the Company could lose sales due to a competitor purchasing all of the assets of a current customer of the Company. Future sales could also be affected by current and future political and economic factors in the foreign markets where the Company conducts business.

          Cost of sales and operating expenses may be adversely affected by unexpected costs associated with various issues. For example, future cost of sales could be affected by unexpected expenses related to the future maintenance of a lean manufacturing environment. Future operating expenses could also be affected, for example, by such items as unexpected large claims within the Company's self-funded group health insurance plan, increased retiree health insurance claim exposure as a result of an adverse court ruling on the current retiree health issue, or bad debt expenses related to deterioration in the credit worthiness of a customer or customers. Furthermore, the Company's cost-containment measures described above under the heading "Liquidity and Capital Resources" may not be as effective as the Company anticipates.

          The Company may also be adversely affected by events relating to the terrorist attacks of September 11, 2001. These events and their repercussions create considerable economic and political uncertainties that could adversely affect consumer buying behavior, automobile production, shipping and transportation costs, and other factors affecting the Company and the automotive industry generally.

          The foregoing is intended to provide meaningful cautionary statements of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The foregoing should not be construed as an exhaustive list of all economic, competitive, governmental and technological factors that could adversely affect the Company's expected consolidated financial position, results of operations or liquidity. The Company disclaims any obligation to update its forward-looking statements to reflect subsequent events or circumstances.

          The Company is exposed to market risks, which include changes in interest rates and changes in the foreign currency exchange rate as measured against the U.S. dollar.

          The Company's interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company is exposed to interest rate changes primarily as a result of its variable rate lines of credit used to finance its short-term working capital needs and for general corporate purposes. Of the $6,200,000$6,450,000 total short-term lines available to the Company at December 31, 2001, $3,700,0002002, $4,200,000 was outstanding. Management believes that the fluctuation in interest rates in the near future will not have a material impact on the Company's consolidated financial statements taken as a whole.

          With respect to its variable rate long-term borrowings, the Company has entered into an interest rate swap agreement essentially to fix the interest rate on $1,980,000$660,000 of the total $3,060,000$1,935,000 outstanding borrowings at December 31, 2001.2002. The Company does not use derivative financial instruments for trading purposes.

          The Company has a manufacturing/distribution facility in Canada.Canada and, as previously discussed, acquired a Canadian distribution company in March 2003. The facility'sfacilities' sales are denominated in Canadian dollars, thereby creating exposures to changes in exchange rates. Changes in the Canadian/U.S. exchange rate may positively or negatively affect the Company' sales, gross margins and retained earnings. The Company attempts to minimize currency exposure through working capital management. The Company does not hedge its exposure to translation gains and losses relating to foreign currency net asset exposures.

Hastings Manufacturing Company and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 20012002 and 20002001
Contents
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Report of Independent Certified Public Accountants

Hastings Manufacturing Company
Hastings, Michigan

We have audited the accompanying consolidated balance sheets of Hastings Manufacturing Company and subsidiaries as of December 31, 20012002 and 2000,2001, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001.2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

As described in Note 7, on January 24, 2000, a class action lawsuit was filed against the Company by its retirees with respect to the 1997 amendment of the Company's postretirement benefit plans. The outcome of the lawsuit is pending at this time.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hastings Manufacturing Company and subsidiaries at December 31, 20012002 and 2000,2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001,2002, in conformity with accounting principles generally accepted in the United States of America.

/s/BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
February 28, 2003, except Note 13,
       which is dated March 1, 200227, 2003

Hastings Manufacturing Company and Subsidiaries
Consolidated Balance Sheets
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See accompanying notes to consolidated financial statements.

Hastings Manufacturing Company and Subsidiaries
Consolidated Balance Sheets
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See accompanying notes to consolidated financial statements.

Hastings Manufacturing Company and Subsidiaries
Consolidated Statements of Income
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See accompanying notes to consolidated financial statements.

Hastings Manufacturing Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
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