SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

OR

Commission File Number:  1-3574

HASTINGS MANUFACTURING COMPANY
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)

Registrant's Telephone Number, Including Area Code:telephone number, including area code:269-945-2491

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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

Hastings Manufacturing Company and Subsidiaries

Contents

FORWARD-LOOKING STATEMENTS

With the exception of historical matters, the matters discussed in this Form 10-Q include forward-looking statements that describe plans, objectives, goals, expectations or projections of the Company. 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 or result "may occur," "should occur," "will likely occur" or "may possibly occur" in the future, or that an event or result is "probable," "more likely than not" or "less likely than not," or similar statements. In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this Form 10-Q, 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 or bad debt expenses related to deterioration in the credit worthiness of a customer or customers. Furthermore, the economies of scale and operating results actually realized from the Company's March 2003 acquisitions of Ertel and Syzygy may not be at the level anticipated by the Company.

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.

Report on Review by Independent Certified Public Accountants

Board of Directors
Hastings Manufacturing Company
Hastings, Michigan

We have reviewed the accompanying condensed consolidated balance sheetssheet of Hastings Manufacturing Company and subsidiaries as of September 30, 2002,March 31, 2003, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2002 and 2001, and cash flows for the nine-monththree-month periods ended September 30,March 31, 2003 and 2002, and 2001, included in the accompanying Securities and Exchange Commission Form 10-Q for the period ended September 30, 2002.March 31, 2003. These condensed consolidated financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

As described in Note 4, 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.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.accounting principles.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2001,2002, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended (not presented herein). In our report dated March 1, 2002,February 28, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001,2002 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/BDO Seidman, LLP

BDO Seidman, LLP
Grand Rapids, Michigan
October 23, 2002May 2, 2003

PART I - FINANCIAL INFORMATION

Hastings Manufacturing Company and Subsidiaries

Condensed Consolidated Balance Sheets

Hastings Manufacturing Company and Subsidiaries

Condensed Consolidated Balance Sheets

See accompanying independent accountants' review report and notes to condensed consolidated financial statements.

Hastings Manufacturing Company and Subsidiaries

Condensed Consolidated Statements of Income

See accompanying independent accountants' review report and notes to condensed consolidated financial statements.

Hastings Manufacturing Company and Subsidiaries

Condensed Consolidated Statements of Cash Flows

See accompanying independent accountants' review report and notes to condensed consolidated financial statements.

Hastings Manufacturing Company and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Note 1 - Basis of Presentation

In the opinion of the management of Hastings Manufacturing Company and subsidiaries (the "Company"), the accompanying unaudited condensed consolidated financial statements include all normal recurring adjustments considered necessary to present fairly the Company's financial position as of September 30, 2002,March 31, 2003, and the Company's results of operations and cash flows for the three-month periods ended March 31, 2003 and 2002.

The results of operations for the three months and nine months ended September 30, 2002 and 2001, and cash flows for the nine months ended September 30, 2002 and 2001.

The results of operations for the nine months ended September 30, 2002March 31, 2003 are not necessarily indicative of the expected results for all of 2002.2003.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances, transactions and stockholdings have been eliminated.

The accompanying consolidated financial statements are condensed and do not contain all of the information and footnote disclosures required by generally accepted accounting principles in a complete set of financial statements.

Acquisitions

As discussed in Note 2, the accompanying condensed consolidated balance sheet as of March 31, 2003 includes the accounts of the acquired businesses. Results of operations of the acquired businesses will be included in the Company's consolidated results of operations beginning in the second quarter of 2003.

Stock Compensation

As discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148,Accounting for Stock Based Compensation - Transition and Disclosure (SFAS No. 148) in December 2002. SFAS No. 148 amends SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In accordanceaddition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method 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 permitted under SFAS No. 148. Because the exercise price of the Company's stock options equals the market price of the underlying stock on

Note 2 - Acquisitions

On March 27, 2003, the Company, through its Canadian subsidiary, Hastings, Inc., acquired 100 percent of the outstanding shares of Ertel Manufacturing Corporation of Canada, Ltd. ("Ertel") and Syzygy Auto Distribution Inc. ("Syzygy"), both Canadian corporations. Ertel and Syzygy are referred to below collectively as the "Acquired Companies." The accompanying condensed consolidated balance sheet as of March 31, 2003 includes the accounts of the Acquired Companies. The operating results of the Acquired Companies will be included in the Company's consolidated results of operations beginning in the second quarter of 2003. Prior to being acquired, Ertel's and Syzygy's net sales for the year ended December 31, 2002 were approximately $16,235,000 and $149,000, respectively. (All amounts set forth in this Note 2 are in U.S. dollars.)

Ertel distributes a full line of internal engine parts through a network of distribution centers located throughout Canada. Syzygy is a distributor of consignment aftermarket products in Canada through Ertel's distribution network. As a result of these acquisitions, the Company (through Hastings, Inc.) is expected to be a leading Canadian distributor of internal engine components, including piston rings, pistons, gaskets, bearings, camshafts and other parts. The Company expects to reduce costs of the combined Canadian operations through economies of scale and various operational synergies.

Prior to the acquisitions, the Acquired Companies were closely related parties. For the purpose of this note, the purchase transactions were aggregated. Due to the nature of the distribution operations of the Acquired Companies, the purchase price was primarily determined based on the Acquired Companies' past operating results rather than their tangible assets. The acquisitions were accounted for under the purchase method of accounting with Emerging Issues Task Force (EITF) 00-25,Vendor Income Statement Characterizationallocated goodwill and other intangible assets of Consideration Paid$5,690,599 and $1,937,384, respectively, none of which will be deductible for tax purposes. The purchase price payable to the sellers was $6,979,220, including $4,083,000 of cash and $2,896,220 of secured term notes payable issued to the sellers (see Note 3). The total purchase price, for accounting purposes, including estimated acquisition and restructuring costs, amounted to $7,695,303. Acquisition costs have been estimated at $139,946 and estimated costs relating to restructuring efforts, as discussed below, amounted to $576,137. The final purchase price (for accounting purposes) will change as actual acquisition and restructuring costs are determined. The following is an allocation of the total estimated purchase price:

In connection with the acquisitions discussed in Note 2, 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. This short-term line increase was the result of a sixth amendment to the Company's loan agreement. In addition to the short-term line increase, this latest amendment resulted in the following changes to the primary terms of the U.S. loan agreement: (1) an adjustment to the maximum limitation on permitted short-term borrowings equal to a Reseller"borrowing base" amounting to the sum of 75% of the Vendor's Productsvalue of eligible accounts receivable, 35% of the value of eligible finished goods and raw materials inventories and 20% of the inventory LIFO reserve, all related to U.S. accounts receivable and inventory, (2) a revision of the maturity date on the short-term line to April 30, 2004, (3) a revision to the effective interest rates, as discussed below, and (4) the addition of, and adjustment to, certain affirmative and negative covenants contained in the agreement. Required principal payments related to the Company's U.S. term loan remained unchanged. Borrowings under the short-term line and the term loan are secured by all U.S. accounts receivable, inventory, furniture and equipment, personal property, a mortgage lien on the Company's U.S. real property and the pledge of 65% of the capital stock of all foreign subsidiaries and are guaranteed by the Company's domestic subsidiary.

Interest for both the U.S. short-term and long-term borrowings is based on two different pricing options: a Eurodollar rate plus a factor and a floating rate (greater of the federal funds rate plus a factor, or the prime rate). As amended, the effective Eurodollar rate on the short-term line is increased by a margin rate ranging from 2.50% to 3.25%. The effective floating rate on the short-term line is the prime rate adjusted by a margin rate ranging from (.25%) to .25%. The effective Eurodollar rate on the long-term borrowings is increased by a margin rate of 2.65%. The effective floating rate on the long-term borrowings is the prime rate. The margin rates are based upon certain consolidated performance parameters. The Company is also subject to a fee on the unused portion of the short-term line at a rate of .25%.

In the U.S., the Company records co-op advertisingmaintains an additional $1,500,000 unsecured line of credit with a bank, with interest based on prime.

In Canada, Hastings, Inc.'s secured $700,000 short-term line with its former lender was replaced with a secured $5,784,000 short-term line with the Canadian affiliate of the Company's primary lender. Maximum borrowings under the short-term line are limited to a "borrowing base" computed as described above for the Company's U.S. loan agreement (except for inventory, which is eligible for up to 40% of its value) relating to the U.S. short-term line, as applied to Canadian accounts receivable and inventory. This new line is secured by all Canadian accounts receivable, inventory and equipment and, through an unlimited guarantee of the Company, all other assets of the Company. Hastings, Inc. also borrowed $1,890,000 on a term loan that is secured by a first mortgage on its land and buildings located in Barrie, Ontario. This term loan is payable in 60 equal principal payments through March 2008, plus interest at prime plus 1.75%.

Interest for the Canadian short-term line is based on two different pricing options, a cost of funds rate (the bank's base rate for fixed rate loans) plus a factor and a floating rate (the prime rate) plus a factor. The effective cost of funds rate is increased by a margin rate ranging from 2.50%

With this new borrowing capacity, the Company financed the $4,083,000 of cash paid in the acquisitions described in Note 2. The $2,896,220 secured notes payable to the sellers, as discussed in Note 2, are comprised of two notes. The first note is for $2,215,720 and payable in 16 equal quarterly principal payments through March 2007, plus interest at prime plus 1.5%. The second note is for $680,500 and payable as a reductionballoon payment in June 2005 with monthly interest payments at prime plus 1.5%. The notes payable to the sellers are secured by all assets of net sales. In previous years, co-op advertising expenditures were included in advertising costs. ForHastings, Inc. and are subordinate to a first position by the three monthsCompany's primary lender. The Canadian loan agreement and nine months ended September 30, 2001, $15,164the sellers' term loan require the Company to maintain certain financial balances and $79,193, respectively, have been reclassifiedratios consistent with those required by the Company's U.S. loan agreement.

Of the total $14,284,000 short-term lines available to reduce net sales and advertising costs over the amounts previously reported to conform with the current year presentation.Company at March 31, 2003, $1,962,680 was unused.

Note 24 - Earnings Per Share

A reconciliation of the numerators and denominators used in the "basic" and "diluted" earnings per share (EPS) calculations follows:

For the three months ended March 31, 2003 and 2002, the Company has not included the effect of stock options and contingently issuable shares of 80,300 and 47,380, respectively, in its calculation of diluted EPS, due to their anti-dilutive effect.

Note 35 - Comprehensive Income

Comprehensive income and its components consist of the following:

The above $7,216$4,969 and $25,288$14,109 other comprehensive income, net of tax, related to the derivative adjustment for the three months ended March 31, 2003 and nine months ended September 30, 2002, respectively, are made up of the following components:

The above $(16,385) and $(47,212) other comprehensive loss, net of tax related to the derivative adjustment for the three months and nine months ended September 30, 2001, are made up of the following components:

Note 4 - Contingency

In April 1997, the Company announced the amendment of its postretirement health benefit plans, principally to adjust the cost-sharing provisions. As a result of these changes, the Company's retirees filed a class-action suit in the United States District Court for the Western District of Michigan on January 24, 2000. 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. Specifically, the retirees dispute the increase in their health insurance deductibles, the increase in required co-pay obligations with respect to their prescription drug cards, and the requirement that they pay a portion of their health insurance premiums. The Company has denied any wrongdoing in this suit, and has defended it vigorously. The Company and the retirees recently entered into a settlement agreement intended to resolve the litigation. The ag reement represents a compromise as to the amounts that the retirees and the Company will pay toward the cost of health insurance premiums. The settlement has been tentatively approved by the court, as fair and reasonable to all class members. Retirees have until November 15, 2002 to withdraw from the class and to submit objections to the settlement. As of the date of this Quarterly Report on Form 10-Q, the Company has not received any notice that any retirees have withdrawn from the class or submitted objections to the settlement. A hearing on final court approval of the settlement is scheduled for December 4, 2002. If the court gives final approval to the settlement, the case will be concluded. If the court does not give final approval, the lawsuit will continue. 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.

Hastings Manufacturing Company and Subsidiaries

Review by Independent Certified Public Accountants

The September 30,March 31, 2003 and 2002 and 2001 condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been reviewed by BDO Seidman, LLP, Independent Certified Public Accountants, in accordance with established professional standards and procedures for such a review.

RESULTS OF OPERATIONS

NET SALES

20022003 Compared to 20012002

Net sales in the thirdfirst quarter of 2003 decreased $956,815, or 10.3%, from $9,331,829 in the first quarter of 2002, increased $423,001, or 5.1%, from $8,227,937 in the third quarter of 2001, to $8,650,938.$8,375,014. Included in these net sales were commission revenues of $428,674$466,743 in the thirdfirst quarter of 20022003 and $110,148$339,718 in the thirdfirst quarter of 2001,2002, which the Company earns in exchange for providing marketing and distribution services for various engine and component manufacturers. Excluding these commission revenues, net sales of products manufactured by the Company increased $104,475,decreased $1,083,840, or 1.3%12.1%, from $8,117,789 in the third quarter of 2001, to $8,222,264. Net sales for the first nine months of 2002 increased $1,079,164, or 4.0%, from $26,794,954$8,992,111 in the first nine monthsquarter of 2001,2002, to $27,874,118. Included in these net sales were commission revenues of $301,215 and $1,204,619, respectively. Excluding these commission revenues, net sales of products manufactured by the Company increased $175,760, or 0.7%, from $26,493,739 in the first nine months of 2001, to $26,669,499.$7,908,271.

The net sales increase ondecrease in manufactured products in the third quarter of 2002 reflects a volume increasedecreases in the original equipment, market, partially offset by volume decreases in theexport and domestic and Canadian aftermarkets. Net salesaftermarkets, slightly offset by an increase in the private brand and export markets were relatively flat in the third quarter of 2002 in comparison to the same period in 2001.volume. The increasedecrease in the original equipment volume reflects the improveddecreased production volume experienced byof the domestic automotive and light-duty manufacturers.truck manufacturers during the first quarter of 2003. The net sales decreasesdecrease in the export volume reflects reduced volume in several of the Company's export markets, resulting from the economic and political instability present in those markets. The decrease in the domestic and Canadian aftermarkets reflectreflects a continued industry-wide softness in the automotive replacement parts industry.industry, combined with the loss of approximately $114,000 of sales, in the first quarter of 2003, from several production engine rebuilders in the Canadian aftermarket who went out of business in the fourth quarter of 2002. In response to the prolonged industry-wide softness in the automotive replacement parts ind ustry, the Company implemented cost-containment measures in March 2003. These cost-containment measures are described in the "Liquidity and Capital Resources" section below. The slight volume increase in the private brand market reflects volume increases to certain of the Company's private brand customers. The increase in commission revenues reflects the volume growth observed in marketing and distributing engine component products for other companies. The Company has signed distribution agreements with several engine component manufacturers in the United States and Canada. Under the terms of these agreements, the Company retains a portion of the net product revenues, in the form of commissions, in exchange for providing marketing and distribution services. The Company anticipates that these distribution arrangements will continue

2002 Compared to contribute to its future sales and profitability and seeks to enter into similar distribution arrangements with other component manufacturers.2001

For the first nine months of 2002, net sales of manufactured products increased in the original equipment and export markets. However, these sales were substantially offset by net sales decreases in the domestic and Canadian aftermarkets. Net sales in the private brand market were relatively flat forfirst quarter of 2002 increased $676,932, or 7.8%, from $8,654,897 in the first nine monthsquarter of 2001, to $9,331,829. Included in this net sales increase was an increase in commission revenue of $270,004 in the first quarter of 2002, in comparison to the same period in 2001. The increase in the original equipment volume is due to the improved production volume noted above. The increase in the export volume reflects the continued broadening of the Company's customer base into new export markets. The decreases in the domestic and Canadian aftermarket volumes are partially due to the industry-wide softness described above. In addition, the decrease in the domestic aftermarket volume reflects significant net sales, in the first nine months of 2001, to a major customer when that customer expanded the line of products that it offers to its customers. Commission revenues for the first nine months of 2002 inc reased in comparison to the first half of 2001, as detailed above.

2001 Compared to 2000

Net sales in the third quarter of 2001 increased $73,075, or 0.9%, from $8,154,862 in the third quarter of 2000 to $8,227,937. Included in this net sales amount was an increase in commission revenue of $28,446 in the third quarter of 2001, in comparison to the same period in 2000. Excluding this commission revenue increase, net sales of products manufactured by the Company increased $44,629,$406,928, or 0.6%, for the period noted. Net sales for the first nine months of 2001 decreased $203,446, or 0.8%4.7%, from $26,998,400$8,585,183 in the first nine monthsquarter of 2000,2001, to $26,794,954. Included in this$8,992,111.

The net sales amount was an increase in commission revenue of $96,442 formanufactured products in the first nine monthsquarter of 2001,2002 reflected improved sales volume in the original equipment and export markets, offset slightly by a sales decrease in

2001. The net sales increase in the third quarter of 2001 reflected volume increases in the export and original equipment markets, slightly offsetvolume reflected the improved production volume experienced by a volume decrease in the domestic aftermarket.automotive and light-duty manufacturers. The volumes in the Canadian aftermarket and private brand market were relatively flat for the third quarter of 2001. The net sales increase in the export volume inreflected the third quarter of 2001 reflected thecontinued broadening of the Company's customer base into new export markets. The increase in the original equipment volume reflected increased sales to the domestic automotive and light-duty truck manufacturers. The decrease in the domestic aftermarket volume reflected ana continued industry-wide softness in the automotive replacement parts industry.

For the first nine months of 2001, net sales decreases in the private brand and original equipment markets were slightly offset by increases in the export market and domestic aftermarket. The decrease in the private brand volume reflected reduced sales to a specific industry, while the decrease in the original equipment volume was consistent with the decreased production volume of the domestic automotive and light-duty truck manufacturers. The increase in the export volume reflected the broadening of the Company's export customer base. The increase in the domestic aftermarket volume reflected improved sales to a major customer as part of an expansion of the customer's product offerings. The increase in commission revenues reflected the volume growth observed ininitial success of the marketing and distributingdistribution agreements that the Company signed in 2001 with two engine component products for other companies. Commission revenue increased for both the third quarter and first nine months of 2001 in comparison to the same periods in 2000, as detailed above.manufacturers.

COST OF SALES AND GROSS PROFIT

20022003 Compared to 20012002

Cost of sales in the thirdfirst quarter of 2003 decreased $519,925, or 8.2%, from $6,379,301 in the first quarter of 2002, increased $77,528, or 1.3%, from $5,848,661 in the third quarter of 2001, to $5,926,189. For the first nine months of 2002, cost of sales increased $248,402, or 1.3%, from $18,738,008 for the first nine months of 2001, to $18,986,410.$5,859,376. The gross profit margin on net sales increased fordecreased from 31.6% in the thirdfirst quarter of 2002, from 28.9% for the third quarter of 2001, to 31.5%. For the first nine months of 2002, the gross profit margin on net sales also increased, from 30.1% for the first nine months of 2001, to 31.9%30.0%. The increasedecrease in cost of sales for the third quarter and for the first nine months of 2002 reflects the net sales decrease noted above, offset by a slight increase in net sales of manufactured products noted earlier, combined withshipping and distribution costs. The increased shipping and distribution costs, that werewhich contributed slightly to the decrease in the gross profit margin, primarily reflect the additional costs incurred in distributingto distribute other manufacturers' engine component products. The effect of these additional costs, however, were more than offset by the commission revenue generated from the distribution of these products, and thus cont ributed to the increased gross profit margin for both periods noted. There was a minimal effect on the gross profit margin from changes made to the Company's individual inventory factors (material, labor and overhead) during the first nine months of 2002.

2001 Compared to 2000

Cost of sales in the third quarter of 2001 increased $38,621, or 0.7%, from $5,810,040 in the third quarter of 2000, to $5,848,661. For the first nine months of 2001, cost of sales decreased $206,156, or 1.1%, from $18,944,164 in the first nine months of 2000, to $18,738,008. The gross profit margin on net sales increased slightly forwas also negatively affected by a change in sales mix. As noted above, with the third quarterexception of 2001, from 28.8% for the third quarter of 2000, to 28.9%. Exporta slight increase in private brand volume, increased in the third quarter and on a year-to-date basis. This volume has traditionally carried a lower gross profit margin (higher cost of sales as a percentage of net sales) than domestic sales due to the lower level of operating expenses (not included in cost of sales) that are required to service that volume. Domestic aftermarket sales on products manufactured by the other hand,Company decreased in the thirdfirst quarter of 2001.2003 in comparison to the same period in 2002. However, approximately $896,000 of the aforementioned $1,083,840 decrease in net sales decrease was observed in the do mestic and Canadian aftermarkets. Sales in this marketthese markets have traditionally carried a higher gross profit margin in order to support the higher level of operating expenses (not included in cost of sales) associated w ithwith that volume. The negative effectAs noted in the "Liquidity and Capital Resources" section below, the Company instituted cost-containment measures in March 2003, primarily in an attempt to align employee production costs (which are included in cost of thissales) with the net sales mix change on the gross profit margin, however, was more than offset by the positive gross profit impact derived from the distribution of other manufacturers' engine component products. Fordecrease observed in the first nine monthsquarter of 2003.

2002 Compared to 2001

Cost of sales for 2002 increased $212,446, or 3.4%, from $6,166,855 in the first quarter of 2001, theto $6,379,301. The gross profit margin on net sales increased from 29.8%28.7% in the first nine monthsquarter of 2000,2001, to 30.1%31.6%. The decreased gross profit margin onincrease in cost of sales fromreflected the export volume wasnet sales increase noted above, combined with an increase in shipping and distribution costs. The increased shipping and distribution costs primarily reflected the additional costs incurred to distribute other manufacturers' engine component products. These additional costs, however, were more than offset by the gross profit margincommission revenue generated on a nine-month total increase in domestic aftermarket sales, combined with the positive gross profit impact from the distribution of other manufacturers' engine component products. Finally,these products, and thus contributed to the increased gross profit margin. The gross profit margin was also positively affected by thea reduction in someseveral of the Company's individual inventory cost factors (material labor and overhead costs). Whilelabor) included in inventory at December 31, 2001 and charged to cost of sales in the first quarter of 2002. The lower applied material cost factor utilized in the first quarter of 2002 resulted from lower raw material costs remained relatively unchangedobtained from the prior year average, laborCompany's rolled steel vendors in

OPERATING EXPENSES

2003 Compared to 2002

Total operating expenses in the first quarter of 2003 increased $100,361, or 4.3%, from $2,337,874 in the first quarter of 2002, to $2,438,235. Advertising expenses for the first quarter of 2003 decreased $25,353, or 43.6%, from the same period in 2002. This decrease primarily reflects a decrease in advertising support costs, with slight decreases also decreased, reflecting anobserved in printed material and ring catalog costs. Selling expenses for the first quarter of 2003 increased effort$60,753, or 8.0%, from the same period in 2002. This increase reflects increases in costs associated with sales personnel, sales support and agents' commissions. These increased costs reflect the additional sales support necessary to market and distribute engine components for other manufacturers. These increased costs were slightly offset by a decrease in industry trade show expense. General and administrative expenses for the first quarter of 2003 increased $64,961, or 4.3%, from the same period in 2002. This increase reflects increases in general personnel costs, the provision for doubtful accounts receivable and various general personnel support costs. These increases were slightly offset by the absence, in 2003, of approximately $33,000 in severance payments made to terminated employees in the first quarter of 2002. The increases in general personnel and various general personnel support costs, were the result of expenses incurred prior to the implementation of cost-containment measures in March 2003, as described in the "Liquidity and Capital Resources" section below. The Company to controlshould recognize a reduction in general personnel and various personnel support costs in future periods, as a result of the non-fixed portionimplementation of these costs.

OPERATING EXPENSEScost-containment measures.

2002 Compared to 2001

Total operating expenses forin the thirdfirst quarter of 2002 increased $256,551,$75,271, or 12.0%3.3%, from $2,262,603 in the thirdfirst quarter of 2001. For2001, to $2,337,874. Advertising expenses for the first nine months of 2002, total operating expenses increased $573,960, or 8.7%, from the first nine months of 2001. Advertising costs for the third quarter of 2002 decreased $7,977,$2,294, or 13.6%3.8%, from the third quarter ofsame period in 2001. For the first nine months of 2002, advertising costs decreased $3,684, or 2.3%, from the first nine months of 2001. These decreases reflectThis decrease primarily reflected a declinedecrease in printed material costs, relatedrelating to the inclusion, in 2001, of a one-time charge for the start-up of the marketing and distribution of Zollner brand pistons,pistons. Selling expenses for the first quarter of 2002 decreased $32,606, or 4.1%, from the same period in 2001. This decrease reflected declines in agents' commissions, sales personnel costs and various sales support costs, partially offset by an increase in advertising support costs. Selling costsindustry trade show expense. General and administrative expenses for the thirdfirst quarter of 2002 increased $61,224,$110,171, or 8.4%7.8%, from the third quarter ofsame period in 2001. This increase reflects increases in costs associated with sales personnel, sales support and industry trade shows. For the first nine months of 2002, selling costs decreased $31,415, or 1. 3%, from the first nine months of 2001. This decrease reflects declines in agents commissions, sales promotion and sales support costs, partially offset by increases in sales personnel costs and industry trade show expenses as discussed above. General and administrative costs for the third quarter of 2002 increased $203,304, or 15.1%, from the third quarter of 2001. For the first nine months of 2002, general and administrative costs increased $609,059, or 14.8%, from the first nine months of 2001. These increases primarily reflectreflected increases in general personnel costs, property insurance, group health insurance and various general personnel support costs, combined with a smaller increase in property insurance costs. These increases were offset slightly by decreases a decrease

OTHER EXPENSES

20012003 Compared to 20002002