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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

HASTINGS MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)

Registrant's 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 sheets of Hastings Manufacturing Company and subsidiaries as of June 30, 2003, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2003 and 2002, and cash flows for the six-month periods ended June 30, 2003 and 2002, included in the accompanying Securities and Exchange Commission Form 10-Q for the period ended June 30, 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.

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 generally accepted 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, 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 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, 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
August 14, 2003

PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements

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 financial position as of June 30, 2003, and the results of operations for the three months and six months ended June 30, 2003 and 2002, and cash flows for the six months ended June 30, 2003 and 2002.

The results of operations for the six months ended June 30, 2003 are not necessarily indicative of the expected results for all of 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 June 30, 2003 includes the accounts of acquired businesses. The accompanying condensed consolidated statements of income reflect the results of operations of the acquired businesses beginning with the second quarter of 2003.

Stock Compensation

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 Statement of Financial Accounting Standards No. 148, Accounting for Stock Based Compensation -- Transition and Disclosure (SFAS No. 148). Because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized at the date of issuance. Historically, the Company's stock options are 100% vested on the date of grant and, since inception of the plan, have been granted in the fourth quarter of each year. There were no stock option grants in the first half of 2003 or the first half of 2002 and, therefore, there is no pro forma effect on net income and earnings per share during these periods.

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 June 30, 2003 includes the accounts of the Acquired Companies. The operating results of the Acquired Companies are included in the accompanying condensed consolidated statements of income beginning in the second quarter of 2003. Prior to being acquired, Ertel's and Syzygy's net sales for the

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 allocated goodwill and other intangible assets of $6,034,162 and $1,937,384, respectively, none of which will be deductible for tax purposes. The purchase price payable to the sellers was $6,944,710, including $4,083,000 of cash and $2,861,710 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 $8,038,866. Through June 30, 2003, the Company incurred acquisition costs of $518,019. Total acquisition costs increased by $378,073 in the secon d quarter of 2003, in comparison to the acquisition costs of $139,946 recorded at March 31, 2003. This increase represents additional legal and professional fees associated with the acquisition. Costs related to restructuring efforts, as discussed below, are $576,137, and have not changed from the original March 31, 2003 estimate. The Company does not anticipate any significant change to the purchase price, for accounting purposes, in future periods. The following is an allocation of the total estimated purchase price:

Intangible assets of $1,937,384 were independently valued by a third party and include a trademark and a customer contract with estimated fair market values of $1,801,964 and $135,420, respectively. The trademark has an estimated useful life of 20 years while the customer contract is in effect through June 2005.

The above acquisition amounts reflect the U.S. dollar equivalent of the Canadian dollar acquisition costs, translated at the U.S.-Canadian exchange rate in effect as of the March 27, 2003 acquisition date. These amounts differ from the amounts reflected in the June 30, 2003 condensed consolidated balance sheets, as the current balance sheet amounts reflect the U.S.-Canadian exchange rate in effect as of June 30, 2003.

The following unaudited pro forma financial information presents results as if the acquisitions had occurred at the beginning of the respective periods:

These pro forma results have been prepared for comparative purposes only and include certain adjustments such as additional depreciation and amortization expense as a result of adjustments to property and equipment and intangible assets arising from the acquisitions, and from interest expense on acquisition debt. The pro forma results are not necessarily indicative either of the results of operations that actually would have resulted had the acquisitions occurred at the beginning of the respective periods or of future results. They do not include adjustments for reduced costs such as duplicative executive salaries in the Company's Canadian operations expected to result from economies of scale and operational synergies.

In connection with the acquisitions, the Company accrued an estimated $576,137 of restructuring costs, consisting of $401,747 of employee termination benefits for approximately 19 salaried employees and $174,390 related to lease and other contract terminations. Since the acquisition date, $21,505 of the restructuring costs have been paid, leaving a June 30, 2003 accrual balance of $554,632, which is expected to be paid within the next nine months.

Note 3 - Short-Term and Long-Term Debt

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 "borrowing base" amounting to the sum of 75% of the value 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

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% to 3.25%. The effective floating rate is the prime rate increased by a margin rate ranging from 1.00% to 1.75%. 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%.

With this new borrowing capacity, the Company financed the $4,083,000 of cash paid in the acquisitions described in Note 2. The $2,861,710 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 $645,990 and payable as a balloon 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 Hastings, Inc. and are subordinate to a first position by the Company's primary lender. The Canadian loan agreement and the sellers' term loan require the Company to maintain certain financial balances and ratios consistent with those required by the Company's U.S. loan agreement.

The above debt amounts regarding the acquisition reflect the U.S. dollar equivalent of the Canadian dollar, translated at the U.S.-Canadian exchange rate in effect as of the March 27, 2003 acquisition date.

Of the total $15,270,000 short-term lines available to the Company at June 30, 2003, $1,238,000 was unused.

Effective July 14, 2003, the Company's $1,500,000 unsecured short-term line with its secondary lender was replaced with a secured $2,000,000 short-term line with the same lender. This new line is secured by all U.S. accounts receivable and inventory and is subordinate to a first position by the Company's primary lender. The interest rate on this new short-term line is the prime rate less .50%. The increase of this line was included in the availability amounts discussed above.

The term loan agreement requires the Company to maintain certain financial balances and ratios. At June 30, 2003, the Company was in violation of certain covenants and is currently seeking a waiver of the violations or an amendment of the covenants. As a result, the related long-term portion of the debt outstanding under the agreement, amounting to $735,000, has been reclassified as current at June 30, 2003.

Note 4 - Earnings Per Share

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

Note 5 - Comprehensive Income

Comprehensive income and its components consist of the following:

The above $2,557 and $7,526 other comprehensive income, net of tax related to the derivative adjustment for the three months and six months ended June 30, 2003, are made up of the following components:

The above $3,963 and $18,072 other comprehensive income, net of tax related to the derivative adjustment for the three months and six months ended June 30, 2002, are made up of the following components:

The Company's interest rate swap agreement expired on June 30, 2003. The Company is not a party to any derivative financial instrument agreements as of June 30, 2003, nor does it use such instruments for trading purposes.

Hastings Manufacturing Company and Subsidiaries

Review by Independent Certified Public Accountants

The June 30, 2003 and 2002 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

2003 Compared to 2002

Net sales in the second quarter of 2003 increased $2,543,935, or 25.7%, from $9,891,351 in the second quarter of 2002, to $12,435,286. This increase reflects the inclusion of $4,397,486 in sales of acquired businesses in the second quarter of 2003, offset by decreases in sales of products manufactured by the Company and commission revenues of $1,780,624 and $72,927, respectively. Net sales for the first half of 2003 increased $1,587,120, or 8.3%, from $19,223,180 in the first half of 2002, to $20,810,300. This increase reflects the inclusion of $4,397,486 of second quarter 2003 sales of acquired businesses (results of operations of the required businesses were reflected in consolidated results beginning in the second quarter), combined with a slight increase in commission revenue of $54,098, offset by a decrease in sales of products manufactured by the Company of $2,864,464.

The net sales increase pertaining to acquired businesses in the second quarter of 2003 reflects the net sales acquired through the Company's purchase of Ertel and Syzygy, as described in Note 2 to the accompanying condensed consolidated financial statements. The net sales decrease in manufactured products in the second quarter of 2003 reflects volume decreases in the original equipment, private brand and export markets and the domestic and Canadian aftermarkets. The decrease in the original equipment volume reflects the decreased production volume of the domestic and light-duty truck manufacturers during the second quarter of 2003. The decrease in the private brand volume reflects decreases in sales to specific customers in that market. The decrease 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 reflects a prolonged industry-wide so ftness in the automotive replacement parts industry, combined with the loss of $144,000 of sales, in the second quarter of 2003 as compared to the second quarter of 2002, from several production engine rebuilders who went out of business in the fourth quarter of 2002. In response to the prolonged industry-wide softness in the automotive replacement parts industry, 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 decrease in commission revenues, which the Company earns in exchange for providing marketing and distribution services for various engine component manufacturers, primarily reflects the industry-wide softness described earlier.

For the first six months of 2003, the net sales pertaining to acquired businesses are described above. The increase in commission revenues for the first half of 2003 reflects volume growth in the first quarter of 2003, slightly offset by volume decreases in the second quarter of 2003 resulting from the industry-wide softness noted above. For the first half of 2003, net sales of manufactured products decreased in the original equipment, private brand and export markets and the domestic and Canadian aftermarkets, as a result of the items noted above. The closing of several production engine rebuilders in the fourth quarter of 2002 resulted in a loss of $258,000 of domestic and Canadian aftermarket sales for the first half of 2003 in comparison to the same period of 2002.

2002 Compared to 2001

Net sales in the second quarter of 2002 decreased $20,769, or 0.2%, from $9,912,120 in the second quarter of 2001, to $9,891,351. Included in this net sales decrease was an increase in commission

The net sales decrease in manufactured products in the second quarter of 2002 reflected volume decreases in the domestic and Canadian aftermarkets, partially offset by volume increases in the original equipment and export markets. Net sales in the private brand market were relatively flat in the second quarter of 2002 in comparison to the same period in 2001. The net sales decrease in the domestic and Canadian aftermarkets reflected continued industry-wide softness in the automotive replacement parts industry. In addition, net sales volume in the second quarter of 2001 included significant sales of products to a major customer when that customer built inventory to expand the line of products that it offered. The increase in the original equipment volume reflected the improved production volume experienced by domestic automotive and light-duty truck manufacturers. The increase in the export volume reflected the continued broadening of the Company's customer base into new export markets. The increase in com mission revenues reflected the volume growth observed in marketing and distributing engine component products for other companies.

For the first six months of 2002, net sales of manufactured products increased in the original equipment and export markets. However, these increases were partially offset by net sales decreases in the domestic and Canadian aftermarkets. Net sales in the private brand market were relatively flat in the first half of 2002 in comparison to the same period in 2001. The volume variances for these various markets in the first half of 2002 were due to the items noted in the above discussion related to the first quarter of 2002. Commission revenues for the first half of 2002 increased in comparison to the first half of 2001, as discussed above.

COST OF SALES AND GROSS PROFIT

2003 Compared to 2002

Cost of sales in the second quarter of 2003 increased $2,189,160, or 32.8%, from $6,680,920 in the second quarter of 2002, to $8,870,080. For the first half of 2003, cost of sales increased $1,669,235, or 12.8%, from $13,060,221 in the first half of 2002, to $14,729,456. The gross profit margin on net sales decreased in the second quarter of 2003, from 32.5% in the second quarter of 2002, to 28.7%. For the first half of 2003, the gross profit margin on net sales also decreased, from 32.1% in the first half of 2002, to 29.2%. The increase in cost of sales and the corresponding decrease in the gross profit margin on net sales for the second quarter of 2003 reflect the direct costs associated with the net sales increase pertaining to acquired businesses, combined with increased group health insurance, overhead and shipping and distribution costs, slightly offset by reduced cost of sales associated with the lower net sales of manufactured products. The increased shipping and distribution costs primarily refle ct the increased costs associated with distributing products of the acquired businesses. The gross profit margin on net sales for the second quarter of 2003 was also negatively affected by the decrease in commission revenues in comparison to the same period in 2002. The increase in cost of sales and the decrease in the gross profit margin on net sales for the first half of 2003 primarily reflect the items noted above, with the exception of the slight increase in commission revenues in the first half of 2003, which had the effect of slightly offsetting the decreased gross profit margin on net sales for the period.

2002 Compared to 2001

Cost of sales in the second quarter of 2002 decreased $41,572, or 0.6%, from $6,722,492 in the second quarter of 2001, to $6,680,920. For the first half of 2002, cost of sales increased $170,874, or 1.3%, from $12,889,347 in the first half of 2001, to $13,060,221. The gross profit margin on net sales increased slightly for the second quarter of 2002, from 32.2% for the second quarter of 2001, to 32.5%. For the first half of 2002, the gross profit margin on net sales also increased, from 30.6% in the first half of 2001, to 32.1%. The decrease in cost of sales and the corresponding increase in the gross profit margin on net sales for the second quarter of 2002 reflected a decrease in net sales of manufactured products, partially offset by a change in the sales mix of manufactured products and increased shipping and distribution costs. Based on the decrease in net sales of manufactured products noted above, a larger decrease in cost of sales would have been expected. However, as discussed above, the Company experienced net sales increases in the original and export markets, which traditionally have carried a lower gross margin (higher cost of sales as a percentage of net sales) than domestic sales due to the lower level of operating expenses that are required to service those volumes. The increased shipping and distribution costs primarily reflected the additional costs incurred to distribute other manufacturers' engine component products. The effect of these additional costs and the effect of the sales mix change on cost of sales, however, were more than offset by the commission revenue generated from the distribution of these products, and thus contributed to the increased gross profit margin. The increase in cost of sales and the increase in the gross profit margin for the first half of 2002 primarily reflected the increased net sales of manufactured products as discussed above, combined with the effects of the sales mix change and the increased shipping and distribution costs and the increased commission re venue noted above. There was a minimal effect on the gross profit margin from changes made to the Company's individual inventory cost factors (material, labor and overhead) during the first half of 2002.

OPERATING EXPENSES

2003 Compared to 2002

Total operating expenses for the second quarter of 2003 increased $909,560, or 36.9%, from the second quarter of 2002. For the first half of 2003, total operating expenses increased $1,009,921, or 21.0%, from the first half of 2002. Advertising costs for the second quarter of 2003 decreased $7,058, or 13.8%, from the second quarter of 2002. For the first half of 2003, advertising costs decreased $32,411, or 29.6%, from the first half of 2002. These decreases primarily reflect decreases in advertising support and printed material costs. There were no significant advertising costs related to the acquired businesses in the second quarter and first half of 2003. Selling costs for the second quarter of 2003 increased $313,525, or 41.5%, from the second quarter of 2002. For the first half of 2003, selling costs increased $374,278, or 24.8%, from the first half of 2002. These increases reflect increased agents' commissions, sales personnel and sales support costs related to the acquired businesses, slightly offs et by decreases in these same costs associated with remaining operations. The increase in selling costs, for both periods noted, also reflects approximately $15,000 of expense related to the amortization of the Company's customer contract associated with the acquired businesses. General and administrative costs for the second quarter of 2003 increased $603,093, or 36.3%, from the second quarter of 2002. For the first half of 2003, general and administrative costs increased $668,054, or 21.0%, from the first half of 2003. These increased costs primarily reflect increases in general personnel and related support costs associated with the additional personnel required to administer the acquired businesses, partially offset by decreases in these same costs associated with remaining operations. The increase in general and administrative expenses, for both 2003 periods, also reflects an increase in the provision for doubtful accounts receivable combined with additional amortization expense of approximately $59,000 related to the Company's trademark and capital assets associated with the acquired businesses. These increases in general and administrative expenses for the second quarter and first half of 2003 were slightly offset by a

2002 Compared to 2001

Total operating expenses for the second quarter of 2002 increased $242,138, or 10.9%, from the second quarter of 2001. For the first half of 2002, total operating expenses increased $317,409, or 7.1%, from the first half of 2001. Advertising costs for the second quarter of 2002 increased $6,587, or 14.8%, from the second quarter of 2001. For the first half of 2002, advertising costs increased $4,293, or 4.1%, from the first half of 2001. These increases reflected an increase in advertising support costs partially offset by decreases in printed material costs. Selling costs for the second quarter of 2002 decreased $60,033, or 7.4%, from the second quarter of 2001. For the first half of 2002, selling costs decreased $92,639, or 5.8%, from the first half of 2001. These decreases reflected declines in agents' commissions and various sales support costs, partially offset by increases in sales personnel costs and industry trade show expenses. General and administrative costs for the second quarter of 2002 incre ased $295,584, or 21.7%, from the second quarter of 2001. For the first half of 2002, general and administrative costs increased $405,755, or 14.6%, from the first half of 2001. These increases reflected increases in general personnel costs, property insurance, legal and professional fees and various general personnel support costs, offset slightly by decreases in group health insurance costs and the provision for doubtful accounts receivable. The second quarter increase also reflected approximately $89,000 in severance payments to terminated employees, bringing the total severances paid through the first half of 2002 to approximately $122,000.

OTHER EXPENSES

2003 Compared to 2002

Other expenses netted to $126,674 for the second quarter of 2003, compared to a net expense of $81,471 for the second quarter of 2002. This increase reflects a significantly higher interest expense, a higher gain on foreign currency transactions and increased other, net expenses. The increase in interest expense reflects the increased short-term and long-term debt obligations that the Company utilized to finance the purchase of Ertel and Syzygy, as discussed in Note 2 to the accompanying condensed consolidated financial statements. The increase in the gain on foreign currency transactions reflects the Company's increased exposure to Canadian currency fluctuations, relative to the U.S. dollar, associated with the acquired businesses, combined with the effect of the strengthening Canadian dollar compared to the U.S. dollar, in the second quarter of 2003. These items are discussed in Item 3 below. The other, net item primarily reflects the loss (income) derived from the Company's investment in its Casite joi nt venture. For the first half of 2003, other expenses netted to $216,828 versus a net expense of $198,482 in the first half of 2002. The increases in interest expense, gain on foreign currency transactions and other, net expenses in the first half of 2003 reflect the items discussed above.

2002 Compared to 2001

Other expenses netted to $81,471 for the second quarter of 2002, compared to a net expense of $184,747 for the second quarter of 2001. This decrease reflected a significantly lower interest expense, combined with a lower other, net expense in 2002. The decrease in interest expense reflected the reduced short-term interest rates in effect in 2002 compared to 2001, combined with reduced interest expense on the amortization of the Company's long-term debt. The other, net item primarily reflected the loss (income) derived from the Company's investment in its Casite joint venture. For the first half of 2002, other expenses netted to $198,482, compared to a net expense of $296,565 in the first half of 2001. The decrease in interest expense reflected the items discussed above. The other, net item reflected the income derived from the Casite joint venture, combined with the inclusion, in 2001, of a gain recognized on the

TAXES ON INCOME

The 2003 and 2002 year-to-date effective tax rates of 42.6% and 40.0%, respectively, are higher than the domestic statutory federal tax rate of 34.0% due primarily to the impact of various state income taxes and the impact of a higher statutory rate applicable to the Company's Canadian subsidiary.

As of June 30, 2003, the Company recorded net deferred income tax assets of $7,466,119. The major components of these assets are the tax effects of the net operating loss carryforwards and net accrued retirement and postretirement benefit obligations. The realization of these recorded benefits is dependent upon the generation of future taxable income. Management believes that it is more likely than not that adequate levels of future taxable 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 net operating loss carryforwards at June 30, 2003 (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 ta x credits of $45,576 at June 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

In March 2003, the Company implemented cost-containment measures in response to a prolonged volume decrease in the domestic and Canadian piston ring aftermarkets. The Company has observed a decline in net piston ring sales volume in the domestic and Canadian aftermarkets since the third quarter of 2000. This aftermarket volume decrease, combined with an early 2001 decline in original equipment volume, resulted in earlier cost-containment measures implemented in February 2001, as described in the Company's Form 10-K for the year ended December 31, 2000. Since that time, the domestic and Canadian aftermarket volumes have continued to decline. Therefore, in March 2003 the Company determined that additional cost-containment measures were necessary in order to align its operating expenses with current market conditions and improve its profitability and cash position. The cost-containment measures consist of voluntary and involuntary layoffs in the salaried and hourly work forces, salaried payroll reductions an d identification of reductions in various non-payroll expenses. In April 2003, the Company recognized approximately $62,000 of severance costs related to additional cost-containment measures implemented during the second quarter of 2003.

The Company's primary cash requirements continue to be for operating expenses such as labor costs and for funding accounts receivable and long-term debt service, including the additional debt service relating to the Company's March 2003 acquisitions of Ertel and Syzygy, 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. In March and April 2003, in response to a prolonged volume decrease in the domestic and Canadian piston ring aftermarkets, the Company implemented cost-containment measures, as described above. The Company believes that these cost-containment measures, combined with the income derived from the sale of manufactured products, the anticipated future positive financial impact of the Ertel and Syzygy acquisitions and the Company's marketing and distribution agreements with various engine component manufacturers, should allow it to generate suffici ent cash from operations to assist it in satisfying the Company's future cash requirements. The additional funding provided under the Company's U.S. and Canadian loan agreements, restructured in March 2003 in connection with the Ertel and Syzygy acquisitions, combined with the additional funding obtained from the restructuring of the Company's short-term line with its secondary U.S. lender on July 14, 2003, both of which are discussed in Note 3 to the accompanying

The Company's short-term and long-term debt represents its primary contractual obligations as of June 30, 2003. The Company is also a party to various lease commitments and other contractual obligations. The Company has no off-balance sheet arrangements. Total short-term lines available to the Company as of June 30, 2003 totaled $15,270,000, of which $1,238,000 was unused. The increase in the Company's short-term line, resulting from the July 14, 2003 restructuring of its short-term line with its secondary lender, as discussed in Note 3, is included in the availability amounts noted above. A significant portion of the Ertel and Syzygy acquisitions was funded with short-term debt established for the sole purpose of the purchase transaction. Additional economies of scale are anticipated as the Company continues to integrate the acquired operations. As those economies of scale mature, it is the Company's intent to address its current financing arrangements, with the likely prospect of converting certain of t hose obligations into long-term financing vehicles.

The Company's short-term and long-term term loan agreement with its primary lender requires it to maintain certain financial balances and ratios. At June 30, 2003, the Company was in violation of certain covenants and is currently seeking a waiver of the violations or an amendment of the covenants. As a result, the related long-term portion of the debt outstanding under the agreement, amounting to $735,000, has been reclassified as current at June 30, 2003.

The following commentary is based on the condensed consolidated statements of cash flows, which reflect the changes in operating assets and liabilities net of amounts acquired from business acquisitions. During the first half of 2003, the Company used $1,409,542 of cash for operating activities. The increase in accounts receivable, combined with a decrease in the net retirement and postretirement benefit obligations and the net gain on foreign currency transactions, were partially offset by the realized net income and depreciation and amortization, combined with a decrease in inventories and an increase in accounts payable and accruals. The increase in accounts receivable primarily reflects the terms associated with the Company's various marketing and distribution agreements, as discussed below, combined with increased accounts receivable exposure relating to the credit terms associated with the acquired businesses, beginning in the second quarter of 2003. The decrease in the net retirement and postretir ement benefit obligations reflects the excess of actual postretirement benefit claims paid over the actuarially determined annual expense, combined with effect of the required quarterly funding of one of the Company's retirement plans to certain limits. The net gain on foreign currency transactions reflects the Company's increased exposure to Canadian currency fluctuations relative to the U.S. dollar, associated with the acquired businesses, combined with the effect of the strengthening Canadian dollar compared to the U.S. dollar, in the second quarter of 2003, as discussed in Item 3 below. The decrease in inventories primarily reflects the Company's efforts to bring inventory levels more in-line with customer demand. The increase in accounts payable and accruals primarily reflects the timing of certain large purchases from vendors prior to June 30, 2003, slightly offset by a reduction in the workers' compensation accrual, reflecting the required funding of workers' compensation claims to certain levels. The investing activities for the first half of 2003 primarily reflect the cash used for the acquisition of Ertel and Syzygy, as discussed in Note 2 to the accompanying condensed consolidated financial statements. The financing activities for the first half of 2003 reflect the working capital requirements that were needed to fund the operating activities noted above, combined with the financing utilized to purchase Ertel and Syzygy. The financing activities also reflect the principal payments required under the Company's various long-term debt agreements.

During the first half of 2002, the Company generated $948,078 of net cash from operating activities. The realized net income and depreciation and amortization, combined with a decrease in deferred income taxes and an increase in accounts payable and accruals, were partially offset by increases in accounts receivable and inventories, and a decrease in the postretirement benefit obligation. The decrease in

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 and its variable rate long-term borrowings. Of the $15,270,000 total short-term lines available to the Company at June 30, 2003 (which includes the $500,000 increase in availability with the Company's secondary lender, as discussed in Note 3 to the accompanying condensed consolidating financial statements), $14,032,000 was outstanding. The Company's interest rate swap agreement expired on June 30, 2003. As of June 30, 2003, the Company is not a party to any derivative financial instrument agreements, nor does it use such instruments for trading purposes. As described in the "Liquidity and Capital Resources" section of Item 2 above, management is currently reviewing its short-term and long-term financing options. As a part of this review, management will review the Company's anticipated future interest rate exposure to determine if the Company will utilize interest rate swap agreements in the future. Management believes that it is not likely that fluctuations in interest rates in the near future will have a material impact on the Company's consolidated financial statements taken as a whole. However, the possibility for such impacts has increased recently with the significant addition of variable rate borrowings.

The Company has a manufacturing/distribution facility in Canada and, as previously discussed, acquired Ertel and Syzygy, two Canadian distribution companies, in March 2003. These entities' sales are denominated in Canadian dollars, thereby creating exposures to changes in exchange rates. Due to the strengthening of the Canadian dollar versus the U.S. dollar during the second quarter of 2003, the Company's Canadian subsidiary recorded a $188,423 net gain on foreign currency transactions for the six months ended June 30, 2003, as detailed in the accompanying condensed consolidated statements of

The Company's Chief Executive Officer and its Vice-President, Finance, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2003, have concluded that, as of June 30, 2003, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

There were no significant changes in the Company's internal controls over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

The Company's 2003 annual meeting of shareholders was held on May 20, 2003. The purposes of the meeting were to (1) elect three directors to three-year terms expiring in 2006 and elect one director to a one-year term expiring in 2004 and (2) to transact any other business that may have properly come before the meeting.

The name of each director elected at the meeting (along with the number of votes cast for, against or authority withheld) and the name of each other director whose term of office as a director continued after the meeting is set forth below. There were no broker non-votes with respect to the election of directors.

          (a)     Exhibits

          (b)     The Company filed the following Current Reports on Form 8-K and Form 8-K/A during the quarter ended June 30, 2003.

SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX