##### 



SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




---



FORM 10-Q

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

|                                     |  |                            
|------------------------------------ |  | ---------------------------
|For Quarter Ended September 27, 2003 |  | Commission File No. 0-12640

KAYDON CORPORATION

(Exact name of registrant as specified in its charter)


|                                                          |  |                                     
|--------------------------------------------------------- |  | ------------------------------------
|Delaware                                                  |  | 13-3186040                          
|(State or other jurisdiction of                           |  | (I.R.S. Employer Identification No.)
|incorporation or organization)                            |  |                                     
|                                                         
|Suite 300, 315 E. Eisenhower Parkway, Ann Arbor, Michigan |  | 48108                               
|(Address of principal executive offices)                  |  | (Zip Code)                          

Registrants telephone number, including area code: (734) 747-7025

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. YES
[X]  NO [   ]

Indicate by check mark whether the registrant is an accelerated filer.
YES [X]  NO [   ]

Common Stock Outstanding at October 31, 2003  28,162,627 shares, $.10 par
value.





---



##### 



KAYDON CORPORATION FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 27, 2003

INDEX

|                                |  |                                                                                                                                    |  |          |        | 
|------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ------ | 
|                                |  |                                                                                                                                    |  | Page No.
|                                |  |                                                                                                                                    |  |         
|Part
I - Financial Information: |  |                                                                                                                                    |  |         
|                                |  | Item 1. Financial Statements                                                                                                       |  |          |        | 
|                                |  | Consolidated Condensed Balance Sheets -
September 27, 2003 and December 31, 2002                                                   |  |          | 1      | 
|                                |  | Consolidated Condensed Statements of Operations -
Quarter and First Three Quarters Ended
September 27, 2003 and September 28, 2002 |  |          | 2      | 
|                                |  | Consolidated Condensed Statements of Cash Flows -
First Three Quarters Ended September 27, 2003 and
September 28, 2002             |  |          | 3      | 
|                                |  | Notes to Consolidated Condensed Financial Statements                                                                               |  |          | 4 - 17 | 
|                                |  | Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations                                      |  |          | 18-31  | 
|                                |  | Item 3. Quantitative and Qualitative Disclosures About
Market Risk                                                                 |  |          | 31     | 
|                                |  | Item 4. Controls and Procedures                                                                                                    |  |          | 32     | 
|Part
II - Other Information:    |  |                                                                                                                                    |  |         
|                                |  | Item 1. Legal Proceedings                                                                                                          |  |          | 33     | 
|                                |  | Item 6. Exhibits and Reports on Form 8-K                                                                                           |  |          | 33     | 
|                                |  | Signatures                                                                                                                         |  |          | 34     | 





---



##### 



ITEM 1. FINANCIAL STATEMENTS
KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS

|                                           |  |                    |              |                   |  |   |              |  
|------------------------------------------ |  | ------------------ | ------------ | ----------------- |  | - | ------------ | -
|                                           |  | September 27, 2003 |              | December 31, 2002
|                                           |  |                    |              |                  
|                                           |  | (Unaudited)        |              |                   |  |  
|Assets:                                    |  |                    |              |                   |  |   |              |  
|Cash and cash equivalents                  |  | $                  | 244,695,000  |                   |  | $ | 146,301,000  |  
|Accounts receivable, net                   |  |                    | 42,164,000   |                   |  |   | 38,334,000   |  
|Inventories, net                           |  |                    | 48,140,000   |                   |  |   | 47,019,000   |  
|Other current assets                       |  |                    | 15,065,000   |                   |  |   | 12,396,000   |  
|                                           |  |                    |              |                   |  |   |              |  
|Total current assets                       |  |                    | 350,064,000  |                   |  |   | 244,050,000  |  
|                                           |  |                    |              |                   |  |   |              |  
|Property, plant and equipment, net         |  |                    | 82,023,000   |                   |  |   | 84,380,000   |  
|Goodwill, net                              |  |                    | 110,480,000  |                   |  |   | 108,770,000  |  
|Other intangible assets, net               |  |                    | 9,113,000    |                   |  |   | 9,744,000    |  
|Other assets                               |  |                    | 32,049,000   |                   |  |   | 30,203,000   |  
|                                           |  |                    |              |                   |  |   |              |  
|Total assets                               |  | $                  | 583,729,000  |                   |  | $ | 477,147,000  |  
|                                           |  |                    |              |                   |  |   |              |  
|Liabilities and Shareholders Equity:      |  |                    |              |                   |  |   |              |  
|Accounts payable                           |  | $                  | 12,591,000   |                   |  | $ | 10,724,000   |  
|Taxes payable                              |  |                    | 6,361,000    |                   |  |   | 4,194,000    |  
|Salaries and wages                         |  |                    | 6,744,000    |                   |  |   | 5,549,000    |  
|Accrued legal costs                        |  |                    | 2,709,000    |                   |  |   | 5,328,000    |  
|Other accrued expenses                     |  |                    | 18,866,000   |                   |  |   | 14,638,000   |  
|                                           |  |                    |              |                   |  |   |              |  
|Total current liabilities                  |  |                    | 47,271,000   |                   |  |   | 40,433,000   |  
|                                           |  |                    |              |                   |  |   |              |  
|Long-term debt                             |  |                    | 200,143,000  |                   |  |   | 72,367,000   |  
|Long-term liabilities                      |  |                    | 68,544,000   |                   |  |   | 65,598,000   |  
|                                           |  |                    |              |                   |  |   |              |  
|Total long-term liabilities                |  |                    | 268,687,000  |                   |  |   | 137,965,000  |  
|                                           |  |                    |              |                   |  |   |              |  
|Shareholders equity:                      |  |                    |              |                   |  |   |              |  
|Common stock                               |  |                    | 3,693,000    |                   |  |   | 3,693,000    |  
|Paid-in capital                            |  |                    | 46,134,000   |                   |  |   | 46,014,000   |  
|Retained earnings                          |  |                    | 417,834,000  |                   |  |   | 405,633,000  |  
|Less  treasury stock, at cost             |  |                    | (185,000,000 | )                 |  |   | (139,446,000 | )
|Less  restricted stock awards             |  |                    | (5,640,000   | )                 |  |   | (5,380,000   | )
|Accumulated other comprehensive loss       |  |                    | (9,250,000   | )                 |  |   | (11,765,000  | )
|                                           |  |                    |              |                   |  |   |              |  
|                                           |  |                    | 267,771,000  |                   |  |   | 298,749,000  |  
|                                           |  |                    |              |                   |  |   |              |  
|Total liabilities and shareholders equity |  | $                  | 583,729,000  |                   |  | $ | 477,147,000  |  
|                                           |  |                    |              |                   |  |   |              |  

See accompanying notes to consolidated condensed financial statements.

1



---



##### 



KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                                                                                     |         |   |                |            |                            |   |                |            |                |   |             |            |  |   |             |            |  
|---------------------------------------------------------------------------------------------------- | ------- | - | -------------- | ---------- | -------------------------- | - | -------------- | ---------- | -------------- | - | ----------- | ---------- |  | - | ----------- | ---------- | -
|                                                                                                     |         |   | Quarter Ended  |            | First Three Quarters Ended
|                                                                                                     |         |   |                |            |                           
|                                                                                                     |         |   | Sept. 27, 2003 |            | Sept. 28, 2002             |   | Sept. 27, 2003 |            | Sept. 28, 2002
|                                                                                                     |         |   |                |            |                            |   |                |            |               
|Net sales                                                                                            |         | $ | 67,995,000     |            |                            | $ | 68,529,000     |            |                | $ | 214,953,000 |            |  | $ | 207,917,000 |           
|Cost of sales                                                                                        |         |   | 43,441,000     |            |                            |   | 44,477,000     |            |                |   | 139,459,000 |            |  |   | 137,006,000 |           
|                                                                                                     |         |   |                |            |                            |   |                |            |                |   |             |            |  |   |             |           
|Gross profit                                                                                         |         |   | 24,554,000     |            |                            |   | 24,052,000     |            |                |   | 75,494,000  |            |  |   | 70,911,000  |           
|Selling, general and
administrative expenses                                                         |         |   | 11,721,000     |            |                            |   | 11,222,000     |            |                |   | 38,853,000  |            |  |   | 37,684,000  |           
|Litigation-related charge                                                                            |         |   |               |            |                            |   |               |            |                |   |            |            |  |   | 7,500,000   |           
|                                                                                                     |         |   |                |            |                            |   |                |            |                |   |             |            |  |   |             |           
|Operating income                                                                                     |         |   | 12,833,000     |            |                            |   | 12,830,000     |            |                |   | 36,641,000  |            |  |   | 25,727,000  |           
|Net interest income (expense)                                                                        |         |   | (1,829,000     | )          |                            |   | 187,000        |            |                |   | (1,930,000  | )          |  |   | 376,000     |           
|                                                                                                     |         |   |                |            |                            |   |                |            |                |   |             |            |  |   |             |           
|Income from operations before income
taxes                                                           |         |   | 11,004,000     |            |                            |   | 13,017,000     |            |                |   | 34,711,000  |            |  |   | 26,103,000  |           
|Provision for income taxes                                                                           |         |   | 3,852,000      |            |                            |   | 4,686,000      |            |                |   | 12,149,000  |            |  |   | 9,397,000   |           
|                                                                                                     |         |   |                |            |                            |   |                |            |                |   |             |            |  |   |             |           
|Income from operations before
cumulative effect of
accounting change                                 |         |   | 7,152,000      |            |                            |   | 8,331,000      |            |                |   | 22,562,000  |            |  |   | 16,706,000  |           
|Cumulative effect of accounting change
(goodwill impairment), net of
income tax credit of $3,544,000 |         |   |               |            |                            |   |               |            |                |   |            |            |  |   | (13,222,000 | )         
|                                                                                                     |         |   |                |            |                            |   |                |            |                |   |             |            |  |   |             |           
|Net income                                                                                           |         | $ | 7,152,000      |            |                            | $ | 8,331,000      |            |                | $ | 22,562,000  |            |  | $ | 3,484,000   |           
|                                                                                                     |         |   |                |            |                            |   |                |            |                |   |             |            |  |   |             |           
|Weighted average common shares:                                                                      |         |   |                |            |                            |   |                |            |                |   |             |            |  |   |             |           
|                                                                                                     | Basic   |   |                | 27,764,000 |                            |   |                | 29,997,000 |                |   |             | 28,846,000 |  |   |             | 29,987,000 |  
|                                                                                                     | Diluted |   |                | 27,790,000 |                            |   |                | 30,016,000 |                |   |             | 28,863,000 |  |   |             | 30,006,000 |  
|Earnings per share from operations-
before cumulative effect of accounting
change                    |         |   |                |            |                            |   |                |            |                |   |             |            |  |   |             |           
|                                                                                                     | Basic   |   | $              | 0.26       |                            |   | $              | 0.28       |                |   | $           | 0.78       |  |   | $           | 0.56       |  
|                                                                                                     | Diluted |   | $              | 0.26       |                            |   | $              | 0.28       |                |   | $           | 0.78       |  |   | $           | 0.56       |  
|(Loss) per share  cumulative effect of
accounting change                                            |         |   |                |            |                            |   |                |            |                |   |             |            |  |   |             |           
|                                                                                                     | Basic   |   |                |           |                            |   |                |           |                |   |             |           |  |   | $           | (0.44      | )
|                                                                                                     | Diluted |   |                |           |                            |   |                |           |                |   |             |           |  |   | $           | (0.44      | )
|Earnings per share                                                                                   |         |   |                |            |                            |   |                |            |                |   |             |            |  |   |             |           
|                                                                                                     | Basic   |   | $              | 0.26       |                            |   | $              | 0.28       |                |   | $           | 0.78       |  |   | $           | 0.12       |  
|                                                                                                     | Diluted |   | $              | 0.26       |                            |   | $              | 0.28       |                |   | $           | 0.78       |  |   | $           | 0.12       |  
|Dividends per share                                                                                  |         | $ | 0.12           |            |                            | $ | 0.12           |            |                | $ | 0.36        |            |  | $ | 0.36        |           

See accompanying notes to consolidated condensed financial statements.

2



---



##### 



KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                             |  |                            |             |               |  |   |             |  
|------------------------------------------------------------ |  | -------------------------- | ----------- | ------------- |  | - | ----------- | -
|                                                             |  | First Three Quarters Ended
|                                                             |  |                           
|                                                             |  | Sept. 27, 2003             |             | Sept. 28,2002
|                                                             |  |                            |             |              
|Cash flows from operating activities                         |  | $                          | 42,517,000  |               |  | $ | 45,306,000  |  
|Cash flows used in investing activities:                     |  |                            |             |               |  |   |             |  
|Capital expenditures, net                                    |  |                            | (7,206,000  | )             |  |   | (6,588,000  | )
|Acquisition of business, net                                 |  |                            |            |               |  |   | (4,401,000  | )
|                                                             |  |                            |             |               |  |   |             |  
|Cash used in investing activities                            |  |                            | (7,206,000  | )             |  |   | (10,989,000 | )
|                                                             |  |                            |             |               |  |   |             |  
|Cash flows from (used in) financing activities:              |  |                            |             |               |  |   |             |  
|Retirement of long-term debt                                 |  |                            | (72,250,000 | )             |  |   | (40,052,000 | )
|Proceeds from convertible notes                              |  |                            | 200,000,000 |               |  |   |            |  
|Convertible notes and credit facility issuance costs         |  |                            | (7,194,000  | )             |  |   |            |  
|Dividends paid                                               |  |                            | (10,648,000 | )             |  |   | (10,959,000 | )
|Proceeds from issuance of common stock                       |  |                            | 5,104,000   |               |  |   | 475,000     |  
|Purchase of treasury stock                                   |  |                            | (51,843,000 | )             |  |   | (20,000     | )
|                                                             |  |                            |             |               |  |   |             |  
|Cash from (used in) financing activities                     |  |                            | 63,169,000  |               |  |   | (50,556,000 | )
|Effect of exchange rate changes on cash and
cash equivalents |  |                            | (86,000     | )             |  |   | (784,000    | )
|                                                             |  |                            |             |               |  |   |             |  
|Net increase (decrease) in cash and cash equivalents         |  |                            | 98,394,000  |               |  |   | (17,023,000 | )
|Cash and cash equivalents  Beginning of period              |  |                            | 146,301,000 |               |  |   | 152,570,000 |  
|                                                             |  |                            |             |               |  |   |             |  
|Cash and cash equivalents  End of period                    |  | $                          | 244,695,000 |               |  | $ | 135,547,000 |  
|                                                             |  |                            |             |               |  |   |             |  
|Cash expended for income taxes                               |  | $                          | 4,423,000   |               |  | $ | 7,786,000   |  
|                                                             |  |                            |             |               |  |   |             |  
|Cash expended for interest                                   |  | $                          | 603,000     |               |  | $ | 1,464,000   |  
|                                                             |  |                            |             |               |  |   |             |  

See accompanying notes to consolidated condensed financial statements.

3



---



##### 



KAYDON CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)



|(1) |  | The accompanying unaudited consolidated condensed financial statements of
Kaydon Corporation and subsidiaries (Kaydon or the Company) have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation
have been included, and such adjustments are of a normal recurring nature.
The year-end condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles. For further information, refer
to the consolidated financial statements and footnotes thereto included in
the Companys annual report on Form 10-K for the year ended December 31,
2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Inventories are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                |  |                |            |                   |  |   |            | 
|--------------- |  | -------------- | ---------- | ----------------- |  | - | ---------- | 
|                |  | Sept. 27, 2003 |            | December 31, 2002
|                |  |                |            |                  
|Raw Material    |  | $              | 17,443,000 |                   |  | $ | 16,089,000 | 
|Work in Process |  |                | 15,143,000 |                   |  |   | 10,976,000 | 
|Finished Goods  |  |                | 15,554,000 |                   |  |   | 19,954,000 | 
|                |  |                |            |                   |  |   |            | 
|                |  | $              | 48,140,000 |                   |  | $ | 47,019,000 | 
|                |  |                |            |                   |  |   |            | 



|(3) |  | Comprehensive income reflects the change in equity of a business
enterprise during a period from transactions and other events, and from
circumstances involving nonowner sources. For the Company, comprehensive
income consists primarily of net income, foreign currency translation
adjustments and minimum pension liability adjustments. Other
comprehensive income (loss), net of tax, was approximately $0.5 million
and $(0.4) million, resulting in comprehensive income of $7.6 million and
$ 7.9 million for the quarters ended September 27, 2003, and September 28,
2002. For the first three quarters, other comprehensive income, net of
tax, was approximately $2.5 million and $2.0 million, resulting in
comprehensive income of $25.1 million and $5.5 million for the first three
quarters ended September 27, 2003 and September 28, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4



---



##### 





|(4) |  | The following table reconciles the numerators and denominators used in
the calculation of basic and diluted earnings per share from operations
before cumulative effect of accounting change for the periods presented.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                  |                                                                                                                                                                                              |   |                |            |                |   |      |            | 
|--------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------- | ---------- | -------------- | - | ---- | ---------- | 
|                                                                                  |                                                                                                                                                                                              |   | Quarter Ended 
|                                                                                  |                                                                                                                                                                                              |   |               
|                                                                                  |                                                                                                                                                                                              |   | Sept. 27, 2003 |            | Sept. 28, 2002
|                                                                                  |                                                                                                                                                                                              |   |                |            |               
|Numerators:                                                                       |                                                                                                                                                                                              |   |                |            |                |   |      |           
|                                                                                  | Numerators for both basic and
diluted earnings per share from
operations before cumulative
effect of accounting
change, income from
operations before
cumulative effect of accounting
change |   | $              | 7,152,000  |                |   | $    | 8,331,000  | 
|                                                                                  |                                                                                                                                                                                              |   |                |            |                |   |      |           
|Denominators:                                                                     |                                                                                                                                                                                              |   |                |            |                |   |      |           
|                                                                                  | Denominator for basic earnings
per share from operations before
cumulative effect of accounting
change, weighted average
common shares outstanding                                           |   |                | 27,764,000 |                |   |      | 29,997,000 | 
|                                                                                  | Potential dilutive shares resulting
from stock options, restricted
stock awards and phantom stock
units                                                                                      |   |                | 26,000     |                |   |      | 19,000     | 
|                                                                                  |                                                                                                                                                                                              |   |                |            |                |   |      |           
|                                                                                  | Denominator for diluted
earnings per share from operations
before cumulative effect of
accounting change                                                                                     |   |                | 27,790,000 |                |   |      | 30,016,000 | 
|                                                                                  |                                                                                                                                                                                              |   |                |            |                |   |      |           
|Earnings per share from operations before
cumulative effect of accounting change: |                                                                                                                                                                                              |   |                |            |                |   |      |           
|Basic                                                                             |                                                                                                                                                                                              | $ | 0.26           |            |                | $ | 0.28 |           
|                                                                                  |                                                                                                                                                                                              |   |                |            |                |   |      |           
|Diluted                                                                           |                                                                                                                                                                                              | $ | 0.26           |            |                | $ | 0.28 |           
|                                                                                  |                                                                                                                                                                                              |   |                |            |                |   |      |           

5



---



##### 



|                                                                                   |                                                                                                                                                                                              |   |                            |            |                |   |      |            | 
|---------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------- | ---------- | -------------- | - | ---- | ---------- | 
|                                                                                   |                                                                                                                                                                                              |   | First Three Quarters Ended
|                                                                                   |                                                                                                                                                                                              |   |                           
|                                                                                   |                                                                                                                                                                                              |   | Sept. 27, 2003             |            | Sept. 28, 2002
|                                                                                   |                                                                                                                                                                                              |   |                            |            |               
|Numerators:                                                                        |                                                                                                                                                                                              |   |                            |            |                |   |      |           
|                                                                                   | Numerators for both basic and
diluted earnings per share from
operations before cumulative
effect of accounting
change, income from
operations before
cumulative effect of accounting
change |   | $                          | 22,562,000 |                |   | $    | 16,706,000 | 
|                                                                                   |                                                                                                                                                                                              |   |                            |            |                |   |      |           
|Denominators:                                                                      |                                                                                                                                                                                              |   |                            |            |                |   |      |           
|                                                                                   | Denominator for basic earnings
per share from operations before
cumulative effect of accounting
change, weighted average
common shares outstanding                                           |   |                            | 28,846,000 |                |   |      | 29,987,000 | 
|                                                                                   | Potential dilutive shares resulting
from stock options, restricted
stock awards and phantom stock
units                                                                                      |   |                            | 17,000     |                |   |      | 19,000     | 
|                                                                                   |                                                                                                                                                                                              |   |                            |            |                |   |      |           
|                                                                                   | Denominator for diluted
earnings per share from operations
before cumulative effect of
accounting change                                                                                     |   |                            | 28,863,000 |                |   |      | 30,006,000 | 
|                                                                                   |                                                                                                                                                                                              |   |                            |            |                |   |      |           
|Earnings
 per share from operations before cumulative effect
of accounting change: |                                                                                                                                                                                              |   |                            |            |                |   |      |           
|Basic                                                                              |                                                                                                                                                                                              | $ | 0.78                       |            |                | $ | 0.56 |           
|                                                                                   |                                                                                                                                                                                              |   |                            |            |                |   |      |           
|Diluted                                                                            |                                                                                                                                                                                              | $ | 0.78                       |            |                | $ | 0.56 |           
|                                                                                   |                                                                                                                                                                                              |   |                            |            |                |   |      |           



| |  | Options to purchase 113,000 shares of common stock at prices ranging from
$24.25 to $33.3125 per share were outstanding during the third quarter of
2003, but were not included in the computation of diluted earnings per
share because the options exercise price was greater than the average
market price of the common shares during that period. Options to purchase
439,300 shares of common stock at prices ranging from $24.25 to $33.3125
per share were outstanding during the third quarter of 2002, but were not
included in the computation of diluted earnings per share because the
options exercise price was greater than the average market price of the
common shares during that period.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6



---



##### 





|    |  | In May of 2003, the Company completed the sale of $200.0 million of 4%
Contingent Convertible Senior Subordinated Notes due 2023 (the Notes).
The Notes are convertible into a total of 6,858,710 shares of Company
common stock at a conversion price of $29.16 per share, provided certain
contingencies are met including that Kaydon common stock has traded above
$34.99 for 20 out of 30 trading days for specified periods of time.
Unless and until this contingency or other conversion contingencies are
met, the above mentioned
shares of the Companys common stock underlying the Notes will not be
included in the Companys basic or diluted earnings per share
calculations. Should this contingency be met, diluted earnings per share
would, depending on the relationship between the interest on the Notes
and the earnings per share of Kaydon common stock, be expected to
decrease as a result of the inclusion of the underlying shares in the
diluted earnings per share calculation. Volatility in the Companys
stock price could cause this condition to be met in one quarter and not
in a subsequent quarter, increasing the volatility of diluted earnings
per share. For more information on the Notes, readers should refer to
Notes to Consolidated Financial Statements (Note 6), and Managements
Discussion and Analysis of Financial Condition and Results of Operations
in this quarterly report on Form 10-Q.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(5) |  | The Company operates through individual operating units for which
separate financial information is available, and for which operating
results are evaluated regularly by the Companys chief operating decision
maker in determining resource allocation and assessing performance
(operating segments). The Companys operating segments manufacture
complex and standard metal products that are sold primarily to equipment
manufacturers and other assemblers or integrators and distributors.
Certain of the operating segments have similar long-term average gross
margins and all of them exhibit other common attributes, including the
nature of the products and production processes, distribution patterns and
classes of customers. As a result, based upon current and expected future
long-term financial performance, the Company aggregates its operating
segments into three reportable segments engaged in the manufacture and
sale of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | Specialty Metal Formed
Products  complex metal products used in
specialized medical, aerospace, defense, security, electronic, material
handling, construction and other industrial applications. Products
include anti-friction bearings, split roller bearings, specialty balls,
linear deceleration products and metal retaining devices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | Ring, Seal and Filtration
Products  complex and standard ring, seal and
filtration products used in demanding industrial, aerospace, defense,
security, medical, electronic and marine equipment applications. Products
include engine rings, sealing rings, shaft seals, slip-rings, slip-ring
assemblies, video                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

7



---



##### 





| |  | and data multiplexers, fiber optic rotary joints,
printed circuit boards, filter elements and filtration systems.                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Other Metal Products- metal alloys, machine tool components, presses,
dies and benders used in a variety of industrial applications.                                                                                                                                                                                                                               
|
| |  | The accounting policies of the operating segments are the same as those
of the Company. Segment performance is evaluated based on segment
operating
income (which includes an estimated provision for state income taxes) and
segment assets.                                                                                                                      
|
| |  | Items not allocated to segment operating income include certain
amortization and corporate administrative expenses, and other amounts.
Corporate assets consist of cash and cash equivalents, fixed assets and
certain prepaid expenses. The selling price for transfers between
operating segments and geographic areas is generally based on cost plus a
mark-up.

8



---



##### 



|                                   |                    |   |                |            |                            |   |                |            |                |   |             |             |   |   |             |             |  
|---------------------------------- | ------------------ | - | -------------- | ---------- | -------------------------- | - | -------------- | ---------- | -------------- | - | ----------- | ----------- | - | - | ----------- | ----------- | -
|                                   |                    |   | Quarter Ended  |            | First Three Quarters Ended
|                                   |                    |   |                |            |                           
|                                   |                    |   | Sept. 27, 2003 |            | Sept. 28, 2002             |   | Sept. 27, 2003 |            | Sept. 28, 2002
|                                   |                    |   |                |            |                            |   |                |            |               
|Net sales                          |                    |   |                |            |                            |   |                |            |                |   |             |             |   |   |             |            
|Specialty Metal Formed Products    |                    |   |                |            |                            |   |                |            |                |   |             |             |   |   |             |            
|                                   | External customers |   | $              | 42,424,000 |                            |   | $              | 42,037,000 |                |   | $           | 133,805,000 |   |   | $           | 123,280,000 |  
|                                   | Intersegment       |   |                | 116,000    |                            |   |                | 99,000     |                |   |             | 288,000     |   |   |             | 243,000     |  
|                                   |                    |   |                |            |                            |   |                |            |                |   |             |             |   |   |             |            
|                                   |                    |   | 42,540,000     |            |                            |   | 42,136,000     |            |                |   | 134,093,000 |             |   |   | 123,523,000 |            
|Ring, Seal and Filtration Products |                    |   |                |            |                            |   |                |            |                |   |             |             |   |   |             |            
|                                   | External customers |   |                | 21,280,000 |                            |   |                | 21,526,000 |                |   |             | 67,064,000  |   |   |             | 68,048,000  |  
|                                   | Intersegment       |   |                | (116,000   | )                          |   |                | (99,000    | )              |   |             | (288,000    | ) |   |             | (243,000    | )
|                                   |                    |   |                |            |                            |   |                |            |                |   |             |             |   |   |             |            
|                                   |                    |   | 21,164,000     |            |                            |   | 21,427,000     |            |                |   | 66,776,000  |             |   |   | 67,805,000  |            
|Other Metal Products               |                    |   | 4,291,000      |            |                            |   | 4,966,000      |            |                |   | 14,084,000  |             |   |   | 16,589,000  |            
|                                   |                    |   |                |            |                            |   |                |            |                |   |             |             |   |   |             |            
|Total consolidated net sales       |                    | $ | 67,995,000     |            |                            | $ | 68,529,000     |            |                | $ | 214,953,000 |             |   | $ | 207,917,000 |            
|                                   |                    |   |                |            |                            |   |                |            |                |   |             |             |   |   |             |            

|                                                                |  |                |            |                            |  |                |            |                |  |   |            |   |  |   |            |  
|--------------------------------------------------------------- |  | -------------- | ---------- | -------------------------- |  | -------------- | ---------- | -------------- |  | - | ---------- | - |  | - | ---------- | -
|                                                                |  | Quarter Ended  |            | First Three Quarters Ended
|                                                                |  |                |            |                           
|                                                                |  | Sept. 27, 2003 |            | Sept. 28, 2002             |  | Sept. 27, 2003 |            | Sept. 28, 2002
|                                                                |  |                |            |                            |  |                |            |               
|Operating income                                                |  |                |            |                            |  |                |            |                |  |   |            |   |  |   |            |  
|Specialty Metal Formed Products                                 |  | $              | 9,759,000  |                            |  | $              | 8,781,000  |                |  | $ | 26,870,000 |   |  | $ | 21,303,000 |  
|Ring, Seal and Filtration Products                              |  |                | 1,853,000  |                            |  |                | 2,433,000  |                |  |   | 5,871,000  |   |  |   | 8,751,000  |  
|Other Metal Products                                            |  |                | 290,000    |                            |  |                | 314,000    |                |  |   | 956,000    |   |  |   | 1,222,000  |  
|                                                                |  |                |            |                            |  |                |            |                |  |   |            |   |  |   |            |  
|Total segment operating income                                  |  |                | 11,902,000 |                            |  |                | 11,528,000 |                |  |   | 33,697,000 |   |  |   | 31,276,000 |  
|State income tax provision
included in segment operating
income |  |                | 388,000    |                            |  |                | 435,000    |                |  |   | 1,087,000  |   |  |   | 1,187,000  |  
|Items not allocated to segment
operating income                 |  |                | 543,000    |                            |  |                | 867,000    |                |  |   | 1,857,000  |   |  |   | (6,736,000 | )
|Interest expense                                                |  |                | (2,477,000 | )                          |  |                | (424,000   | )              |  |   | (3,692,000 | ) |  |   | (1,464,000 | )
|Interest income                                                 |  |                | 648,000    |                            |  |                | 611,000    |                |  |   | 1,762,000  |   |  |   | 1,840,000  |  
|                                                                |  |                |            |                            |  |                |            |                |  |   |            |   |  |   |            |  
|Income from operations before income
taxes                      |  | $              | 11,004,000 |                            |  | $              | 13,017,000 |                |  | $ | 34,711,000 |   |  | $ | 26,103,000 |  
|                                                                |  |                |            |                            |  |                |            |                |  |   |            |   |  |   |            |  

9



---



##### 



|                                                 |  |                |           |                            |  |                |           |                |  |   |            |  |  |   |            | 
|------------------------------------------------ |  | -------------- | --------- | -------------------------- |  | -------------- | --------- | -------------- |  | - | ---------- |  |  | - | ---------- | 
|                                                 |  | Quarter Ended  |           | First Three Quarters Ended
|                                                 |  |                |           |                           
|                                                 |  | Sept. 27, 2003 |           | Sept. 28, 2002             |  | Sept. 27, 2003 |           | Sept. 28, 2002
|                                                 |  |                |           |                            |  |                |           |               
|Depreciation and amortization                    |  |                |           |                            |  |                |           |                |  |   |            |  |  |   |            | 
|Specialty Metal Formed Products                  |  | $              | 2,023,000 |                            |  | $              | 1,945,000 |                |  | $ | 6,738,000  |  |  | $ | 7,150,000  | 
|Ring, Seal and Filtration Products               |  |                | 709,000   |                            |  |                | 740,000   |                |  |   | 2,430,000  |  |  |   | 2,334,000  | 
|Other Metal Products                             |  |                | 141,000   |                            |  |                | 140,000   |                |  |   | 431,000    |  |  |   | 417,000    | 
|Corporate                                        |  |                | 269,000   |                            |  |                | 263,000   |                |  |   | 1,116,000  |  |  |   | 744,000    | 
|                                                 |  |                |           |                            |  |                |           |                |  |   |            |  |  |   |            | 
|Total consolidated depreciation and
amortization |  | $              | 3,142,000 |                            |  | $              | 3,088,000 |                |  | $ | 10,715,000 |  |  | $ | 10,645,000 | 
|                                                 |  |                |           |                            |  |                |           |                |  |   |            |  |  |   |            | 

|                                                                  |  |                |           |                            |  |                |           |                |  |   |           |  |  |   |           | 
|----------------------------------------------------------------- |  | -------------- | --------- | -------------------------- |  | -------------- | --------- | -------------- |  | - | --------- |  |  | - | --------- | 
|                                                                  |  | Quarter Ended  |           | First Three Quarters Ended
|                                                                  |  |                |           |                           
|                                                                  |  | Sept. 27, 2003 |           | Sept. 28, 2002             |  | Sept. 27, 2003 |           | Sept. 28, 2002
|                                                                  |  |                |           |                            |  |                |           |               
|Additions to net property, plant and equipment                    |  |                |           |                            |  |                |           |                |  |   |           |  |  |   |           | 
|Specialty Metal Formed Products                                   |  | $              | 1,255,000 |                            |  | $              | 1,582,000 |                |  | $ | 5,244,000 |  |  | $ | 3,610,000 | 
|Ring, Seal and Filtration Products                                |  |                | 457,000   |                            |  |                | 472,000   |                |  |   | 1,583,000 |  |  |   | 2,463,000 | 
|Other Metal Products                                              |  |                | 32,000    |                            |  |                | 13,000    |                |  |   | 228,000   |  |  |   | 160,000   | 
|Corporate                                                         |  |                | 45,000    |                            |  |                | 42,000    |                |  |   | 151,000   |  |  |   | 355,000   | 
|                                                                  |  |                |           |                            |  |                |           |                |  |   |           |  |  |   |           | 
|Total consolidated additions to net
property, plant and equipment |  | $              | 1,789,000 |                            |  | $              | 2,109,000 |                |  | $ | 7,206,000 |  |  | $ | 6,588,000 | 
|                                                                  |  |                |           |                            |  |                |           |                |  |   |           |  |  |   |           | 

|                                   |                           |   |                |             |               |   |             |             | 
|---------------------------------- | ------------------------- | - | -------------- | ----------- | ------------- | - | ----------- | ----------- | 
|                                   |                           |   | Period Ended  
|                                   |                           |   |               
|                                   |                           |   | Sept. 27, 2003 |             | Dec. 31, 2002
|                                   |                           |   |                |             |              
|Total assets                       |                           |   |                |             |               |   |             |            
|Specialty Metal Formed Products    |                           | $ | 215,050,000    |             |               | $ | 205,989,000 |            
|Ring, Seal and Filtration Products |                           |   | 75,924,000     |             |               |   | 74,813,000  |            
|Other Metal Products               |                           |   | 24,778,000     |             |               |   | 25,642,000  |            
|Corporate                          |                           |   | 267,977,000    |             |               |   | 170,703,000 |            
|                                   |                           |   |                |             |               |   |             |            
|                                   | Total consolidated assets |   | $              | 583,729,000 |               |   | $           | 477,147,000 | 
|                                   |                           |   |                |             |               |   |             |            

10



---



##### 



(6)  On May 23, 2003, the Company completed the sale of $170.0 million of 4%
Contingent Convertible Senior Subordinated Notes due 2023 (the Notes) in a
private placement to a group of qualified institutional investors pursuant to
Rule 144A under the Securities Act of 1933, as amended. On May 30, 2003, the
Company completed the sale of an additional $30.0 million of Notes. The Notes
bear interest at 4 percent per year, payable semi-annually, and under certain
circumstances beginning in 2008, may bear additional contingent interest of
0.50 percent per year. The Notes are convertible into a total of 6,858,710
shares of the Companys common stock at a conversion price of $29.16 per share,
provided certain contingencies are met including that Kaydon common stock has
traded above $34.99 for 20 out of 30 trading days for specified periods of
time. The conversion price represents a 34 percent premium based on the
closing price of $21.76 per share for the common stock on May 19, 2003. The
Notes may not be redeemed by the Company for five years, but are redeemable at
any time thereafter at par, plus accrued and unpaid interest. Holders of the
Notes will have the option to require Kaydon to purchase their Notes at par for
one day each at the end of 5, 10, and 15 years after issuance. In addition,
the holders have the right to require redemption of the Notes before the
specified maturity dates in the event of a change of control of the Company, as
identified in the Notes Indenture.

Interest expense on the Notes equaled $2.0 million for the third quarter of
2003. Note issuance costs of approximately $6.4 million are being amortized
over a five-year period. Amortization of Note issuance costs during the third
quarter of 2003 was $0.3 million. Amortization of Note issuance
costs is recorded as a component of net
interest expense. $6.0 million of these costs are included in other assets in
the Consolidated Condensed Balance Sheet as of September 27, 2003.

A portion of the net proceeds from the Notes was utilized to repay the
outstanding balance on the Companys $300.0 million revolving credit facility,
which was then cancelled. On July 28, 2003, the Company entered into a new
three-year $200.0 million unsecured revolving credit facility with seven banks.
The new revolving credit facility provides for borrowings and issuance of
letters of credit by the Company and its subsidiaries in various currencies for
general corporate purposes including acquisitions. Interest expense incurred
on borrowings under the new revolving credit facility will be based on the
London Interbank Offered Rate (LIBOR). The revolving credit facility contains
restrictive financial covenants on a consolidated basis including a leverage
ratio and an interest coverage ratio. Under the leverage ratio restriction,
the Company may not allow the ratio of total indebtedness, net of domestic cash
in excess of $15.0 million, to adjusted earnings before interest expense,
taxes, depreciation and amortization to exceed 3.00 to 1.00. Under the
interest coverage ratio restriction, the Company may not allow the ratio of
adjusted earnings before interest expense and taxes to interest expense to be
less than 3.00 to 1.00. The Company is in compliance with all restrictive
covenants contained in the revolving credit facility at September 27, 2003.
After consideration of the facilitys covenants and $2.6 million of letters of
credit issued under the facility, the Company has available credit under its
revolving credit facility

11



---



##### 



of $197.4 million at September 27, 2003.

The Companys outstanding debt as of September 27, 2003, and December 31, 2002,
was as follows:

|                                                             |  |                |             |                   |  |   |            | 
|------------------------------------------------------------ |  | -------------- | ----------- | ----------------- |  | - | ---------- | 
|                                                             |  | Sept. 27, 2003 |             | December 31, 2002
|                                                             |  |                |             |                  
|4% Contingent Convertible Senior
Subordinated Notes due 2023 |  | $              | 200,000,000 |                   |  | $ |           | 
|Bank revolving credit facility                               |  |                |            |                   |  |   | 72,150,000 | 
|Other                                                        |  |                | 250,000     |                   |  |   | 346,000    | 
|                                                             |  |                |             |                   |  |   |            | 
|Total debt                                                   |  |                | 200,250,000 |                   |  |   | 72,496,000 | 
|Less current maturities                                      |  |                | 107,000     |                   |  |   | 129,000    | 
|                                                             |  |                |             |                   |  |   |            | 
|Long-term debt                                               |  | $              | 200,143,000 |                   |  | $ | 72,367,000 | 
|                                                             |  |                |             |                   |  |   |            | 

(7)  As previously reported, the Company, along with certain other companies,
was named as a defendant in a lawsuit filed in 1996 in the United States
District Court for the Southern District of New York (the Transactions
Lawsuit). Captioned Richard A. Lippe, et al. v. Bairnco Corporation, et al.,
the Transactions Lawsuit sought damages alleged by plaintiffs to be an amount
of $700 million, plus interest and punitive damages against the defendants
collectively.

On March 14, 2003, the Court granted the motion of Kaydon and the other
defendants for summary judgment, dismissing the case in its entirety against
all defendants. In its ruling, the Court held, among other things, that
plaintiffs had failed to support their fraudulent conveyance claims against the
Company with any concrete evidence, so that no reasonable jury could find
against the Company.

On April 14, 2003, the plaintiffs filed a notice of appeal from the Courts
order granting summary judgment and dismissing the action. Briefing
on the appeal currently is underway, and the appeal is expected to be
heard by the Court of Appeals during the first or second quarter of
2004. Management has
always believed that the Company had meritorious defenses to the claims pending
against it in this litigation and believes the Courts dismissal of the action
will be upheld on appeal. Accordingly, no provision has been reflected in the
consolidated financial statements for any alleged damages. Expenditures to
litigate this matter equaled $2.6 million in the first three quarters of 2003,
$6.6 million in 2002, $3.9 million in 2001, and $2.8 million in 2000. As of
September 27, 2003, a $2.7 million accrual is included as a current liability
in the consolidated financial statements, reflecting the estimated remaining
costs to litigate this matter.

As previously reported, in July 2001, Kaydon, Kaydons insurance provider and
the plaintiff agreed to a settlement of a lawsuit which involved one of
Kaydons subsidiaries as the defendant, with the settlement payment to the
plaintiff being shared between Kaydon and Kaydons insurance provider. The
Company believes that the loss sustained in the settlement of the lawsuit is
covered under Kaydons commercial general liability policy, and that the
ultimate resolution of the current litigation related to this matter between
Kaydon and Kaydons insurance provider will not have a material effect on the
Companys consolidated financial

12



---



##### 



statements.

In August 2000, an accident involving a MH53E helicopter manufactured by
Sikorsky Aircraft Corporation, resulted in four deaths and two injuries during
a military training mission. The Company manufactures and sells swashplate
bearings used on MH53E helicopters. In May 2002, the Company, along with
Sikorsky Aircraft Corporation, The Armoloy Corporation, Armoloy of Illinois,
Inc., Armoloy of Connecticut, Inc. and
Investment Holdings, Inc., was named as a defendant in a lawsuit filed by the
relatives and the estates of the four deceased individuals, and by the two
injured individuals. The litigation currently is pending in the District Court
of Nueces County, Texas, 28th Judicial District. Armoloy of Connecticut, Inc.
is no longer a party to the litigation. The Companys insurance provider has
retained legal counsel to respond to the lawsuit. The Company believes that
the alleged damages claimed in this lawsuit, and the associated legal costs,
will be fully covered under the Companys insurance policy. Further, the
Company believes it has meritorious defenses to these claims including, but not
limited to, the fact that the bearing utilized in the helicopter involved in
the accident was inspected and approved prior to shipment by both U.S.
government and Sikorsky Aircraft Corporation inspectors. Accordingly, an
accrual is not recorded in the consolidated financial statements related to
this legal action.

Various other claims, lawsuits and environmental matters arising in the normal
course of business are pending against the Company. The Companys estimated
legal costs expected to be incurred in connection with claims, lawsuits and
environmental matters are consistently accrued in the consolidated financial
statements.

(8)  The changes in the carrying amount of goodwill for the first three quarters
ended September 27, 2003, are as follows:

|                                                 |  |                 |            |                     |  |                      |            |       |  |   |            |  |  |   |             | 
|------------------------------------------------ |  | --------------- | ---------- | ------------------- |  | -------------------- | ---------- | ----- |  | - | ---------- |  |  | - | ----------- | 
|                                                 |  | Specialty Metal |            | Ring, Seal and      |  |                      |            |       |  |   |            | 
|                                                 |  | Formed Products |            | Filtration Products |  | Other Metal Products |            | Total
|                                                 |  |                 |            |                     |  |                      |            |      
|Balance as of
December 31,
2002                  |  | $               | 70,731,000 |                     |  | $                    | 23,265,000 |       |  | $ | 14,774,000 |  |  | $ | 108,770,000 | 
|Effect of foreign
currency
exchange rate
changes |  |                 | (354,000   | )                   |  |                      | 503,000    |       |  |   |           |  |  |   | 149,000     | 
|                                                 |  |                 |            |                     |  |                      |            |       |  |   |            |  |  |   |             | 
|Balance as of
March 29, 2003                     |  | $               | 70,377,000 |                     |  | $                    | 23,768,000 |       |  | $ | 14,774,000 |  |  | $ | 108,919,000 | 
|Effect of foreign
currency
exchange rate
changes |  |                 | 752,000    |                     |  |                      | 752,000    |       |  |   |           |  |  |   | 1,504,000   | 
|                                                 |  |                 |            |                     |  |                      |            |       |  |   |            |  |  |   |             | 
|Balance as of
June 28, 2003                      |  | $               | 71,129,000 |                     |  | $                    | 24,520,000 |       |  | $ | 14,774,000 |  |  | $ | 110,423,000 | 
|Effect of foreign
currency
exchange rate
changes |  |                 | 97,000     |                     |  |                      | (40,000    | )     |  |   |           |  |  |   | 57,000      | 
|                                                 |  |                 |            |                     |  |                      |            |       |  |   |            |  |  |   |             | 
|Balance as of
September 27, 2003                 |  | $               | 71,226,000 |                     |  | $                    | 24,480,000 |       |  | $ | 14,774,000 |  |  | $ | 110,480,000 | 
|                                                 |  |                 |            |                     |  |                      |            |       |  |   |            |  |  |   |             | 

During the first quarter of 2003, the
Company completed the annual goodwill impairment test for certain of
the Companys reporting units. Fair values of the reporting
units tested were carried forward from detailed calculations
completed during the first quarter of 2002, as allowed by Statement
of Financial Accounting Standards No. 142 Goodwill and Other
Intangible Assets. The fair value of all reporting units tested
exceeded their carrying value, which indicated no goodwill impairment.

During the third quarter of 2003, the
Company completed the annual goodwill impairment test for the
Companys remaining reporting units. Fair values of the reporting units
were estimated using the expected present value of future cash flows.
The fair value of all reporting units tested exceeded their carrying
value, which indicated no goodwill impairment.

13



---



##### 



Other intangible assets are summarized as follows:

|                            |  |                    |           |                   |  |                |           |              |  |   |            |  |  |   |           | 
|--------------------------- |  | ------------------ | --------- | ----------------- |  | -------------- | --------- | ------------ |  | - | ---------- |  |  | - | --------- | 
|                            |  | September 27, 2003 |           | December 31, 2002
|                            |  |                    |           |                  
|                            |  | Gross Carrying     |           | Accumulated       |  | Gross Carrying |           | Accumulated 
|Amortized Intangible Assets |  | Amount             |           | Amortization      |  | Amount         |           | Amortization
|                            |  |                    |           |                   |  |                |           |             
|Customer lists              |  | $                  | 7,740,000 |                   |  | $              | 1,999,000 |              |  | $ | 8,140,000  |  |  | $ | 1,818,000 | 
|Patents                     |  |                    | 1,124,000 |                   |  |                | 148,000   |              |  |   | 1,553,000  |  |  |   | 527,000   | 
|Other                       |  |                    |          |                   |  |                |          |              |  |   | 950,000    |  |  |   | 950,000   | 
|                            |  |                    |           |                   |  |                |           |              |  |   |            |  |  |   |           | 
|                            |  | $                  | 8,864,000 |                   |  | $              | 2,147,000 |              |  | $ | 10,643,000 |  |  | $ | 3,295,000 | 
|                            |  |                    |           |                   |  |                |           |              |  |   |            |  |  |   |           | 

During the third quarter of 2003 certain fully-amortized intangible assets were removed from the Companys financial statements. The remaining intangible
assets are being amortized on a straight-line basis over periods of 10 to 20 years.

|                              |  |                    |           |                   |  |   |           | 
|----------------------------- |  | ------------------ | --------- | ----------------- |  | - | --------- | 
|                              |  | September 27, 2003 |           | December 31, 2002
|Unamortized Intangible Assets |  | Carrying Amount    |           | Carrying Amount  
|                              |  |                    |           |                  
|Trademarks                    |  | $                  | 2,396,000 |                   |  | $ | 2,396,000 | 
|                              |  |                    |           |                   |  |   |           | 

|                                                  |  |   |           | 
|------------------------------------------------- |  | - | --------- | 
|Aggregate Intangible Assets Amortization Expense  |  |   |           | 
|For the first three quarters ended Sept. 27, 2003 |  | $ | 630,000   | 
|For the first three quarters ended Sept. 28, 2002 |  | $ | 1,312,000 | 
|Estimated Intangible Assets Amortization Expense  |  |   |           | 
|For the year ending December 31, 2003             |  | $ | 840,000   | 
|For the year ending December 31, 2004             |  | $ | 840,000   | 
|For the year ending December 31, 2005             |  | $ | 840,000   | 
|For the year ending December 31, 2006             |  | $ | 840,000   | 
|For the year ending December 31, 2007             |  | $ | 840,000   | 

14



---



##### 



(9)  During the fourth quarter of 2002, the Company initiated a
restructuring plan to enhance operating performance and balance the
manufacturing capacity among three plants in the Specialty Metal Formed
Products reporting segment. The restructuring plan reserve equaled $0.5 million
at December 31, 2002. During the first quarter of 2003, the Company increased
the reserve by $0.4 million related to employee termination and severance costs
for 57 hourly and 11 salaried employees. Activity related to this
restructuring plan reserve for the first three quarters of 2003 is as follows:

|                                      |  |             |         |       |  |       |          |   |  |   |          |  
|------------------------------------- |  | ----------- | ------- | ----- |  | ----- | -------- | - |  | - | -------- | -
|                                      |  | Employee    |         |       |  |       |          |   |  |  
|                                      |  | Termination |         |       |  |       |          |   |  |  
|                                      |  | and         |         |       |  |       |          |   |  |  
|                                      |  | Severance   |         |       |  |       |          |   |  |  
|                                      |  | Costs       |         | Other |  | Total
|                                      |  |             |         |       |  |      
|Reserve balance at
December 31, 2002  |  | $           |        |       |  | $     | 450,000  |   |  | $ | 450,000  |  
|Restructuring charges                 |  |             | 436,182 |       |  |       |         |   |  |   | 436,182  |  
|Cash paid                             |  |             | (25,071 | )     |  |       | (22,181  | ) |  |   | (47,252  | )
|                                      |  |             |         |       |  |       |          |   |  |   |          |  
|Reserve balance at
March 29,
2003     |  |             | 411,111 |       |  |       | 427,819  |   |  |   | 838,930  |  
|Cash
paid/reclassification            |  |             | (30,263 | )     |  |       | (273,796 | ) |  |   | (304,059 | )
|                                      |  |             |         |       |  |       |          |   |  |   |          |  
|Reserve balance at
June 28, 2003      |  | $           | 380,848 |       |  | $     | 154,023  |   |  | $ | 534,871  |  
|Cash paid                             |  |             | (78,367 | )     |  |       | (13,054  | ) |  |   | (91,421  | )
|                                      |  |             |         |       |  |       |          |   |  |   |          |  
|Reserve balance at
September 27, 2003 |  | $           | 302,481 |       |  | $     | 140,969  |   |  | $ | 443,450  |  
|                                      |  |             |         |       |  |       |          |   |  |   |          |  



| |  | In connection with the restructuring plan, the Company has incurred
equipment relocation costs, which are expensed as incurred, of $0.1
million during the third quarter of 2003, and $0.4 million during the
first three quarters of 2003. Also, the Company expects to incur and
record $0.6 million of additional costs during the fourth quarter of 2003
related primarily to equipment relocation expenses.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15



---



##### 





|(10) |  | The Company accounts for stock-based compensation granted to employees
and Directors using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25. The following table details the effect
on net income and earnings per share had compensation cost for stock-based
awards been recognized based on the fair value method prescribed under
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation:
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                             |             |   |                |      |                            |   |                |      |                |   |            |      |  |   |           |      | 
|------------------------------------------------------------------------------------------------------------ | ----------- | - | -------------- | ---- | -------------------------- | - | -------------- | ---- | -------------- | - | ---------- | ---- |  | - | --------- | ---- | 
|                                                                                                             |             |   | Quarter Ended  |      | First Three Quarters Ended
|                                                                                                             |             |   |                |      |                           
|                                                                                                             |             |   | Sept. 27, 2003 |      | Sept. 28, 2002             |   | Sept. 27, 2003 |      | Sept. 28, 2002
|                                                                                                             |             |   |                |      |                            |   |                |      |               
|Reported net income                                                                                          |             | $ | 7,152,000      |      |                            | $ | 8,331,000      |      |                | $ | 22,562,000 |      |  | $ | 3,484,000 |     
|Add: Total stock-based
compensation expense
included in reported net
income, net of tax                      |             |   | 210,000        |      |                            |   | 145,000        |      |                |   | 630,000    |      |  |   | 433,000   |     
|Deduct: Total stock-based
compensation expense
determined under fair value
method for all awards, net
of tax |             |   | (255,000       | )    |                            |   | (281,000       | )    |                |   | (763,000   | )    |  |   | (841,000  | )   
|                                                                                                             |             |   |                |      |                            |   |                |      |                |   |            |      |  |   |           |     
|Pro-forma net income                                                                                         |             | $ | 7,107,000      |      |                            | $ | 8,195,000      |      |                | $ | 22,429,000 |      |  | $ | 3,076,000 |     
|                                                                                                             |             |   |                |      |                            |   |                |      |                |   |            |      |  |   |           |     
|Earnings per share  Basic:                                                                                  |             |   |                |      |                            |   |                |      |                |   |            |      |  |   |           |     
|                                                                                                             | As reported |   | $              | 0.26 |                            |   | $              | 0.28 |                |   | $          | 0.78 |  |   | $         | 0.12 | 
|                                                                                                             | Pro-forma   |   | $              | 0.26 |                            |   | $              | 0.27 |                |   | $          | 0.78 |  |   | $         | 0.10 | 
|Earnings per share  Diluted:                                                                                |             |   |                |      |                            |   |                |      |                |   |            |      |  |   |           |     
|                                                                                                             | As reported |   | $              | 0.26 |                            |   | $              | 0.28 |                |   | $          | 0.78 |  |   | $         | 0.12 | 
|                                                                                                             | Pro-forma   |   | $              | 0.26 |                            |   | $              | 0.27 |                |   | $          | 0.78 |  |   | $         | 0.10 | 

(11)  The Company periodically enters into derivative financial instruments in
the form of forward exchange contracts to reduce the effect of fluctuations in
exchange rates on certain short-term intercompany transactions as well as
certain third-party sales transactions denominated in non-functional
currencies. Gains and losses on the derivative instruments are intended to
offset gains and losses on the hedged transaction in an effort to reduce the
earnings volatility resulting from fluctuations in foreign exchange rates. The
Company is not a party to leveraged derivatives. Based on the provisions of
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, the Company formally documents its hedge
relationships, including the identification of the hedging instrument and
hedged items, as well as its risk management objectives and strategies for
undertaking the hedge transaction. As of September 27, 2003, forward exchange
contracts representing a notional amount of $4.0 million were outstanding with
maturities of less than one year. The currency hedged by the Company as of
September 27, 2003, is the United States

16



---



##### 



Dollar. The forward exchange
contracts relate to foreign subsidiaries with functional currencies of the
European Euro and Canadian Dollar and are accounted for as cash flow hedges.
The fair value of these exchange contracts recorded in the consolidated balance
sheet as of September 27, 2003, was an asset of approximately $9,000. As of
September 27, 2003, the net income related to the derivative instrument and
hedging activities recorded in accumulated other comprehensive income was
approximately $13,000.

(12)  During the third quarter of 2003, the Company classified certain land and
building assets that are in the process of being sold as assets held for sale
as required under Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. These
assets, part of a warehousing facility in the Companys Specialty Metal Formed
Products reporting segment, are valued at their carrying amount of $0.8 million
and are recorded as a component of other current assets on the Consolidated
Condensed Balance Sheet at September 27, 2003. The opportunity to sell these
assets arose due to the facility transferring its inventory to third party
warehousing locations in various geographic areas to provide better logistical
support to customers. It is expected that the Company will sell the assets
during the fourth quarter of 2003.

17



---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

During the third quarter of 2003, Kaydon Corporation and subsidiaries (Kaydon
or the Company) achieved sales of $68.0 million, as compared to $68.5 million
in the third quarter of 2002. Increased demand for specialty bearings, linear
deceleration products, rings and seals, and filtration elements utilized in
various defense and industrial applications was offset by weaker demand from
other markets, including specialty electronic manufacturing equipment, power
generation equipment and security equipment markets.

Specifically, Kaydons Specialty Metal Formed Products reporting segment
experienced modestly increased sales during the third quarter of 2003 compared
to the third quarter of last year. Sales of this reporting segment of $42.5
million during the third quarter of 2003 increased $0.4 million from third
quarter 2002 sales of $42.1 million. Increased sales of linear deceleration
products of $1.5 million, were offset by reduced sales to specialty bearing
markets of $0.8 million. Within the specialty bearings markets, increased
demand from military-related bearing products was more than offset by reduced
demand from other markets including the security equipment, machinery
equipment, and specialty electronic manufacturing equipment markets. In
addition, sales to specialty ball markets were down $0.2 million during the
third quarter of 2003 compared to the third quarter of 2002.

The Ring, Seal and Filtration Products reporting segment achieved sales of
$21.2 million during the third quarter of 2003 as compared with $21.4 during
the third quarter of 2002. This segment experienced reduced sales of slip-ring
products of $1.0 million, primarily to the security equipment markets, and
reduced sales of filtration systems of $0.8 million to industrial markets,
including the power generation equipment market. Partially offsetting these
losses, the segment experienced increased sales of rings, seals and filtration
elements to military-related markets of $1.5 million.

The Other Metal Products reporting segment achieved sales of $4.3 million
during the third quarter of 2003, which was down $0.7 million from the third
quarter 2002 sales figure. Reduced sales of metal forming equipment of $0.4
million and machine tool components of $0.2 million contributed to the decline
in sales.

Gross profit during the third quarter of 2003 of $24.6 million was 36.1 percent
of sales, compared with $24.1 million or 35.1 percent of sales in the third
quarter of 2002. Compared to the third quarter of 2002, the third quarter 2003
gross margin was positively impacted by sales mix, primarily within the
Specialty Metal Formed

18



---



##### 



Products reporting segment.

Selling, general and administrative expenses during the third quarter of 2003
were $11.7 million, or 17.2 percent of sales, as compared to $11.2 million or
16.4 percent of sales during the third quarter of 2002. Third quarter 2003
selling, general and administrative expenses include $0.1 million of equipment
relocation charges in connection with the Companys restructuring plan to
enhance manufacturing utilization in the Specialty Bearings Product Group.

Both cost of sales and selling, general and administrative expenses were
equally affected during the third quarter of 2003 by increased insurance and
employment-related costs, as well as expenses for Sarbanes-Oxley compliance,
and expenses related to Company-wide Six Sigma programs. These costs
negatively impacted the third quarter of 2003 by approximately $1.2 million and
the first three quarters of 2003 by approximately $2.9 million. These costs
will continue to impact the Companys results during the fourth quarter of
2003.

Operating income during the third quarter was $12.8 million or 18.9 percent of
sales as compared to $12.8 million or 18.7 percent of sales in the third
quarter of 2002.

Depreciation and amortization during both the third quarter of 2003 and the
third quarter of 2002 equaled $3.1 million.

Specifically, on a reporting segment basis, operating income from the Specialty
Metal Formed Products reporting segment was $9.8 million during the third
quarter of 2003 as compared to $8.8 million during the comparable period last
year. The increase in operating income is primarily due to increased sales and
favorable mix of products sold, as well as certain inventory adjustments
recorded last year that did not repeat this year.

The Ring, Seal and Filtration Products reporting segment contributed $1.9
million to the Companys operating income during the third quarter of 2003 as
compared to $2.4 million during the comparable period last year. The reduced
operating income in this reporting segment was primarily due to reduced
top-line performance and unfavorable sales mix in the Slip-Ring Products group.

Also, the Other Metal Products reporting segment contributed $0.3 million to
the Companys operating income during the third quarter of 2003, consistent
with the comparable period last year.

As previously disclosed, during the fourth quarter of 2002 the Company
initiated a restructuring plan to enhance operating performance and balance the
manufacturing capacity in the Specialty Bearings Product Group, part of the
Specialty Metal Formed Products reporting segment. This restructuring plan
resulted in a $0.1 million charge in the third quarter of 2003 primarily
related to equipment relocation

19



---



##### 



expenses. Restructuring charges for the first
three quarters of 2003 equaled $0.8 million. The Company expects to incur and
record $0.6 million of additional costs during the fourth quarter of 2003
primarily related to equipment relocation expenses. In addition, capital
expenditures for the first three quarters of 2003 related to the restructuring
totaled $2.2
million. The Company expects to invest an additional $0.7 million in capital
expenditures related to the restructuring during the fourth quarter of 2003.
The restructuring plan is expected to provide annualized cost savings to the
Company of approximately $2.0 million per year beginning in 2004. Readers
should refer to the Notes to Consolidated Condensed Financial Statements (Note
9) in this quarterly report on Form 10-Q for further information on the
Companys restructuring plan.

Net interest expense of $1.8 million during the third quarter of 2003 compares
to net interest income of $0.2 million during the third quarter of 2002. Net
interest expense increased from last years comparable period due to interest
expense on the Companys $200.0 million 4% Contingent Convertible Senior
Subordinated Notes due 2023 (the Notes) issued in late May 2003. Interest on
the Notes during the third quarter of 2003 was $2.0 million. Also,
amortization of Note issuance costs was $0.3 million during the third quarter
of 2003. Amortization of Note issuance costs is recorded as a component of net interest
expense. The Company would expect approximately $2.3 million of interest and
amortization of Note issuance costs to be charged to interest expense on a
quarterly basis going forward. The additional interest expense related to the
Notes was partially offset during the third quarter of 2003 by greater interest
income earned due to higher average cash balances as compared to the third
quarter of 2002. Please see the Liquidity and Capital Resources section of
this Managements Discussion and Analysis of Financial Condition and Results of
Operations and Notes to Consolidated Condensed Financial Statements (Note 6) in
this Form 10-Q for further information on the Notes.

The effective income tax rate in the third quarter of 2003 was 35.0 percent as
compared to a 36.0 percent tax rate in the third quarter of 2002 and a 35.1
percent tax rate during the 2002 year. The effective tax rate is expected to
remain approximately 35.0 percent for the fourth quarter of 2003.

Third quarter 2003 net income and diluted earnings per share were $7.2 million
and $0.26, based on 27.8 million common shares outstanding. Third quarter 2002
net income and diluted earnings per share were $8.3 million and $0.28, based on
30.0 million common shares outstanding.

Sales during the first three quarters of 2003 were $215.0 million, compared to
$207.9 million during the comparable period last year. As a result of the
higher sales volume, favorable product mix, and reduced inventory reserve
expenses, gross profit for the first three quarters of 2003 increased to $75.5
million or 35.1 percent of sales as compared to $70.9 million or 34.1 percent
of sales during the first three quarters of 2002. Operating income for the
first three quarters of 2003

20



---



##### 



was $36.6 million or 17.0 percent of sales.
Operating income for the first three quarters of 2002 was $25.7 million, or
12.4 percent of sales. First three quarters 2002 operating income includes the
previously disclosed pre-tax $7.5 million provision for litigation costs
recorded during the second quarter of 2002.

Depreciation and amortization for the first three quarters of 2003 was $10.7
million, compared to $10.6 million in 2002s first three quarters.

As previously disclosed, the Company adopted Statement of Financial Accounting
Standards No. 142 as of January 1, 2002. As a result, a $16.8 million goodwill
impairment loss, $13.2 million or $0.44 per share on an after tax, diluted
basis, was recognized as the cumulative effect of a change in accounting
principle as of January 1, 2002. The goodwill impairment loss recorded in the
first quarter of 2002 related to two operating units within the Other Metal
Products reporting segment.

Net income for the first three quarters of 2003 was $22.6 million or $0.78 per
common share on a diluted basis. First three quarters 2002 net income and
diluted earnings per common share were $3.5 million and $0.12. First three
quarters 2002 results include the after tax effect ($4.8 million or $0.16 per
share on a diluted basis) of a $7.5 million provision for litigation costs and
the after tax charge of $13.2 million, or $0.44 per common share on a diluted
basis, for the cumulative effect of an accounting change related to goodwill
impairment.

Liquidity and Capital Resources

On May 23, 2003, the Company completed the sale of $170.0 million of 4%
Contingent Convertible Senior Subordinated Notes due 2023 in a private
placement to a group of qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933, as amended. On May 30, 2003, the Company
completed the sale of an additional $30.0 million of Notes. The Notes bear
interest at 4 percent per year, payable semi-annually, and under certain
circumstances beginning in 2008, may bear additional contingent interest of
0.50 percent per year. The Notes are convertible into a total of 6,858,710
shares of the Companys common stock at a conversion price of $29.16 per share,
provided certain contingencies are met including that Kaydon common stock has
traded above $34.99 for 20 out of 30 trading days for specified periods of
time. Unless and until this contingency or other conversion contingencies are
met, the above mentioned shares of the Companys common stock underlying the
Notes will not be included in the Companys basic or diluted earnings per share
calculations. Should this contingency be met, diluted earnings per share
would, depending on the relationship between the interest on the Notes and the
earnings per share of Kaydon common stock, be expected to decrease as a result
of the inclusion of the underlying shares in the diluted earnings per share
calculation. Volatility in the Companys stock price could cause this
condition to be met in one quarter and not in a subsequent quarter, increasing
the volatility of diluted earnings per share. The conversion price represents
a 34 percent premium based on the closing price of

21



---



##### 



$21.76 per share for the
common stock on May 19, 2003. The Notes may not be redeemed by the Company for
five years, but are redeemable at any time thereafter at par, plus accrued and
unpaid interest. Holders of the Notes will have the option to require Kaydon to
purchase their Notes at par for one day each at the end of 5, 10, and 15 years
after issuance. In addition, the holders have the right to require redemption
of the Notes before the specified maturity dates in the event of a change of
control of the Company, as identified in the Notes Indenture.

In addition, the Company is deducting for tax purposes an amount of interest
expense that is greater than the stated coupon rate on the Notes. The
deductibility for tax
purposes of the additional interest beyond the stated coupon rate may have to
be recaptured, in part or in whole, if the Notes are redeemed for cash instead
of converted into Company common stock. Redemption of the Notes for cash may
cause volatility in tax payments, cash flows and the liquidity of the Company.

Net proceeds received from the Notes in May 2003 were $194.0 million. The
Company used $72.2 million of the net proceeds to repay the full amount
outstanding on the Companys $300.0 million revolving credit facility. The
revolving credit facility was then cancelled. Net proceeds were also used to
repurchase 2.0 million shares of Company common stock for $43.5 million,
concurrent with the offering of the Notes. The remaining proceeds of $78.3
million will be utilized for general corporate purposes.

Note issuance costs of approximately $6.4 million are being amortized as a
component of net interest expense over a five-year period. $6.0 million of
these costs are included in other assets in the Consolidated Condensed Balance
Sheet as of September 27, 2003.

In connection with the May issuance of the Notes, the Company received ratings
during the third quarter of 2003 from both Standard and Poors and Moodys.
Standard and Poors assigned an issuer rating of BB+, and rated the Companys
Notes BB-. Moodys assigned an issuer rating of Ba2, and rated the Companys
Notes Ba3.

On July 28, 2003, the Company entered into a new three-year $200.0 million
unsecured revolving credit facility with seven banks. The new revolving credit
facility provides for borrowings and issuance of letters of credit by the
Company and its subsidiaries in various currencies for general corporate
purposes including acquisitions. Interest expense incurred on borrowings under
the new revolving credit facility will be based on the London Interbank Offered
Rate (LIBOR). The revolving credit facility contains restrictive financial
covenants on a consolidated basis including a leverage ratio and an interest
coverage ratio. Under the leverage ratio restriction, the Company may not
allow the ratio of total indebtedness, net of domestic cash in excess of $15.0
million, to adjusted earnings before interest expense, taxes, depreciation and
amortization to exceed 3.00 to 1.00. Under the interest coverage ratio
restriction, the Company may not allow the ratio of adjusted

22



---



##### 



earnings before
interest expense and taxes to interest expense to be less than 3.00 to 1.00.
The Company is in compliance with all restrictive covenants contained in the
revolving credit facility at September 27, 2003. After consideration of the
facilitys covenants and $2.6 million of letters of credit issued under the
facility, the Company has available credit under its revolving credit facility
of $197.4 million at September 27, 2003.

Fees paid in connection with the revolving credit facility of approximately
$0.8 million are being amortized as a component of net interest expense over a
three-year period and are included in other assets in the Consolidated
Condensed Balance Sheet as of September 27, 2003.

Working capital was $302.8 million at September 27, 2003, reflecting a current
ratio of 7.4 to 1 compared to $203.6 million and a current ratio of 6.0 to 1 at
year-end 2002.

Cash flow from operations during the third quarter of 2003 was $19.6 million
compared to $18.7 million during the third quarter last year. During the third
quarter 2003, the Company repurchased 81,532 shares of Company common stock for
$2.1 million, paid common stock dividends of $3.4 million and invested $1.8
million in net capital expenditures. Also, in connection with employees
exercise of stock options, during the third quarter 2003 the Company issued
205,700 shares of Company common stock for $5.1 million.

Cash flow from operations during the first three quarters of 2003 was $42.5
million compared to cash flow from operations of $45.3 million in 2002s first
three quarters, which included a tax refund of $10.1 million. During the first
three quarters of 2003, the Company repurchased a total of 2,414,432 shares of
Company common stock for $51.8 million (including the 2.0 million shares
repurchased concurrent with the Notes offering), paid common stock dividends of
$10.6 million, and invested $7.2 million in net capital expenditures.

Cash and cash equivalents totaled $244.7 million at the end of the third
quarter of 2003 as compared to $146.3 million at the end of 2002. Total debt
outstanding equaled $200.3 million at the end of the third quarter of 2003 as
compared to $72.5 million at the end of 2002.

Management expects that the Companys planned capital requirements, which
consist of capital expenditures, dividend payments and its stock repurchase
program, will be financed by operations and existing cash balances.

Outlook

The Companys backlog was $94.7 million at the end of the third quarter 2003 as
compared to $88.3 million at the end of 2002, and $94.4 million at the end of
the second quarter 2003. The Company remains cautious about the timing of a
broad-

23



---



##### 



based economic recovery, although the Company has seen increases in order
entry levels and positive indications from customers versus a year ago.
Expected operating cash flows coupled with the Companys current cash reserves
will provide substantial resources to fund the Companys ongoing business
development efforts which include internal and external growth initiatives as
well as selected stock repurchases.

Critical Accounting Policies and Estimates

The Companys consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires the use of estimates, judgments, and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented.

The Company continually evaluates the estimates, judgments, and assumptions
used to prepare the consolidated financial statements. In general, the
Companys estimates are based on historical experience, on information from
third party professionals and on various other judgments and assumptions that
are believed to be reasonable under the current facts and circumstances.
Actual results could differ from the current estimates made by the Company.
The Company has identified certain accounting policies and estimates, described
below, that are the most critical to the portrayal of the Companys current
financial condition and results of operations.

Loss Contingencies and Legal
Costs- The Company records loss contingencies as
a liability when it is probable that a liability has been incurred and the
amount of the loss is reasonably estimable. Estimated legal costs expected to
be incurred in connection with loss contingencies are accrued in the
consolidated financial statements.

The Company believes the accounting estimates related to loss contingencies and
legal costs to be a critical accounting estimate as contingent liabilities are
often resolved over long time periods and estimation of probable losses and
costs to litigate requires forecasts that often depend on judgments from third
party experts and are based on potential actions by other third parties such as
plaintiffs, juries, and regulators.

To better understand this accounting policy and its historic impact on the
Company, readers should refer to the Notes to Consolidated Condensed Financial
Statements (Note 7) in this quarterly report on Form 10-Q as well as the
Companys Notes to Consolidated Financial Statements (Note 11) in the 2002
Annual Report on Form 10-K for additional information regarding loss
contingencies and legal costs.

24



---



##### 



Impairment of Goodwill and
Indefinite-Lived Intangible Assets - The Company
annually, or more frequently if events or changes in circumstances indicate a
need, tests the carrying amounts of goodwill and indefinite-lived intangible
assets for impairment.

The Company identifies impairment of goodwill by comparing the fair value of
each of the Companys reporting units with the reporting units carrying
amount. The fair value of each of the Companys reporting units is derived
from an estimate of future discounted cash flows including an estimate for
terminal value. Potential goodwill impairment is identified if a reporting
units carrying amount is more than a reporting units fair value. If this
occurs, a third-party valuation specialist is utilized to assist the Company in
determining the implied fair value of the reporting units goodwill. The
amount of any actual impairment loss is calculated by comparing the implied
fair value of the reporting units goodwill with the carrying amount of the
reporting units goodwill.

A trademark is the Companys only indefinite-lived intangible asset. The
Company identifies impairment of this trademark by comparing its fair value to
its carrying amount. The fair value of the trademark is calculated based on an
estimate of future discounted cash flows including an estimate for terminal
value related to the net
amount of royalty expense avoided due to the existence of the trademark.

The Company believes the accounting estimates related to impairment of goodwill
and indefinite-lived intangible assets to be critical accounting estimates
because: the estimate of future discounted cash flows and terminal values,
while based on reasonable and supportable assumptions and projections, requires
the Companys subjective judgments; the time periods for estimating future cash
flows is often lengthy which increases the sensitivity to assumptions made;
projected outcomes based on the assumptions made can vary; and the calculation
of implied fair value is inherently subject to estimates.

To better understand this accounting policy and its impact on the Company,
readers should refer to Notes to Consolidated Condensed Financial Statements
(Note 8) in this quarterly report on Form 10-Q as well as the Companys Notes
to Consolidated Financial Statements (Note 12) in the 2002 Annual Report on
Form 10-K for additional information regarding goodwill and intangible assets.

Impairment of Long-Lived
Assets - The Company continually evaluates whether
events and circumstances have occurred that indicate the remaining estimated
useful lives of long-lived assets including fixed assets and amortizable
intangible assets may warrant revision or that remaining balances may not be
recoverable. When factors indicate that such costs should be evaluated for
possible impairment, the Company uses an estimate of future undiscounted cash
flows over the remaining lives of the long-lived assets that are compared to
the carrying value of the asset to evaluate whether the asset costs are
recoverable.

25



---



##### 



The Company believes the accounting estimates related to long-lived asset
impairment to be a critical accounting estimate because: the estimate of future
undiscounted cash flows, while based on reasonable and supportable assumptions
and projections, requires the Companys subjective judgments; the time periods
for estimating future cash flows is often lengthy which increases the
sensitivity to assumptions made; and projected outcomes based on the
assumptions made can vary.

To better understand this accounting policy and its impact on the Company,
readers should refer to Notes to Consolidated Condensed Financial Statements
(Note 8) in this quarterly report on Form 10-Q as well as the Companys Notes
to Consolidated Financial Statements (Note 1 and Note 12) in the 2002 Annual
Report on Form 10-K for additional information regarding long-lived assets.

Retirement
Benefits - The Companys employee pension and postretirement benefit
costs and obligations recorded in the financial statements are dependent on the
Companys estimates provided to and used by the Companys actuaries in
calculating such amounts.

The Company believes the accounting estimates related to retirement benefits to
be critical accounting estimates because of the wide range of assumptions used
in deriving the amounts recorded for retirement benefits in the Companys
financial
statements. Significant assumptions include judgments regarding discount
rates, health care cost trend rates, inflation rates, salary growth rates,
long-term return on plan assets, retirement rates, mortality rates and other
factors.

The Company has developed estimates based on historical experience, on
information from third party professionals and on various other judgments and
assumptions that are believed to be reasonable under the current facts and
circumstances. Discount rate assumptions are based on investment yields
available on long-term bonds. Health care cost trend assumptions are developed
based on historical data, the near-term outlook, and on an assessment of likely
long-term trends. Inflation assumptions are based on an evaluation of external
market indicators. Salary growth assumptions reflect the Companys long-term
experience, the near-term outlook and assumed inflation. Retirement and
mortality rates are based primarily on actual plan experience and mortality
tables.

Actual results that differ from the Companys assumptions are accumulated and
amortized over future periods and, therefore, generally affect the Companys
recognized expense and recorded obligation in such future periods. While the
Company believes that the assumptions used are appropriate, significant
differences in actual experience or significant changes in assumptions would
affect the Companys pension and postretirement benefits costs and obligations.

To better understand this accounting policy and its historic impact on the
Company, readers should refer to the Companys Notes to Consolidated Financial
Statements

26



---



##### 



(Note 8) in the 2002 Annual Report on Form 10-K for additional
information regarding costs, obligations, and assumptions for employee pension
and postretirement benefits.

4% Contingent Convertible Senior
Subordinated Notes - In May of 2003, the
Company completed the sale of $200.0 million of 4% Contingent Convertible
Senior Subordinated Notes due 2023 (the Notes). The Notes are convertible
into a total of 6,858,710 shares of Company common stock at a conversion price
of $29.16 per share, provided certain contingencies are met including that
Kaydon common stock has traded above $34.99 for 20 out of 30 trading days for
specified periods of time. Unless and until this contingency or other
conversion contingencies are met, the above mentioned shares of the Companys
common stock underlying the Notes will not be included in the Companys basic
or diluted earnings per share calculations. Should this contingency be met,
diluted earnings per share would, depending on the relationship between the
interest on the Notes and the earnings per share of Kaydon common stock, be
expected to decrease as a result of the inclusion of the underlying shares in
the diluted earnings per share calculation.

In addition, the Company is deducting for tax purposes an amount of interest
expense that is greater than the stated coupon rate on the Notes. The
deductibility for tax purposes of the additional interest beyond the stated
coupon rate may have to be recaptured, in part or in whole, if the Notes are
redeemed for cash instead of converted into Company common stock. Should this
happen, depending on other factors, tax payments may increase.

The Company believes that the current and potential future impact the Notes
have on the accounting for the Companys diluted earnings per share
calculations, and tax-related account balances as discussed above are critical
to the understanding of the Companys current financial condition and results
of operations. Volatility in the Companys stock price could cause the
underlying shares to be included in the diluted earnings per share calculation
in one quarter, and not in a subsequent quarter. Redemption of the Notes for
cash may cause volatility in tax payments, cash flows and the liquidity of the
Company.

To better understand the Notes and their impact on the Companys financial
reporting, readers should refer to Notes to Consolidated Condensed Financial
Statements (Note 4 and Note 6) as well as the Liquidity and Capital Resources
section of this Managements Discussion and Analysis of Financial Condition and
Results of Operations in this quarterly report on Form 10-Q.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934 regarding the Companys plans, expectations,

27



---



##### 



estimates and beliefs. Forward-looking statements are typically identified by
words such as believes, anticipates, estimates, expects, intends,
will, may and other similar expressions. These forward-looking statements
may include, among other things, projections of the Companys financial
performance, anticipated growth, characterization of and the Companys ability
to control contingent liabilities, and anticipated trends in the Companys
businesses. These statements are only predictions, based on the Companys
current expectation about future events. Although the Company believes the
expectations reflected in the forward-looking statements are reasonable, it
cannot guarantee future results, performance or achievements or that
predictions or current expectations will be accurate. These forward-looking
statements involve risks and uncertainties, including those specifically listed
below, that could cause the Companys actual results, performance or
achievements to differ materially from those expressed or implied by the
forward-looking statements.

In addition, the Company or persons acting on its behalf may from time to time
publish or communicate other items that could also be construed to be
forward-looking statements. Statements of this sort are or will be based on
the Companys estimates, assumptions, and projections and are subject to risks
and uncertainties, including those specifically listed below, that could cause
actual results to differ materially from those included in the forward-looking
statements. Kaydon does not undertake any responsibility to update its
forward-looking statements or risk factors to reflect future events or
circumstances. The following risk factors could affect the Companys operating
results.

The Companys customers economic cycles may affect Kaydons operating results.

Many of the Companys customers are in industries that are cyclical in nature
and sensitive to changes in general economic conditions and other factors,
including capital spending levels. Such industries include commercial and
military aerospace, semiconductor manufacturing, power generation, off-road and
heavy industrial equipment, and other capital equipment manufacturing. As a
result, the demand for the Companys products by these customers depends, in
part, upon general economic conditions. Downward economic cycles have reduced
customers demand for the Companys products, thereby reducing sales of the
Companys products and resulting in reductions to the Companys revenues and
net earnings.

Increased competition in the Companys key markets could result in a reduction
in Kaydons revenues and earnings and adversely affect the Companys financial
condition.

The industries in which the Company operates are fragmented and the Company
faces competition from multiple companies across its diverse product lines.
Kaydon expects competitive pressures from new products and aggressive pricing
to increase, which may cause the Company to lose market share or compel the
Company to reduce prices to remain competitive, which could result in reduced

28



---



##### 



levels of revenues and earnings. The Companys competitors include U.S. and
non-U.S. companies, some of which benefit from lower labor costs and fewer
regulatory burdens. In addition, certain competitors, including Perkin Elmer,
Timken, SKF, and INA/FAG, are larger than Kaydon and may have access to greater
financial, technical, development, marketing, manufacturing, sales and
distribution services and other resources. Increased competition with these
companies or new entrants to the Companys key markets could prevent price
increases for the Companys products or could require price reductions for the
Companys products, which could adversely affect the Companys financial
condition, results of operations, growth or liquidity.

Future acquisitions may require Kaydon to incur costs and liabilities which may
adversely affect the Companys operating results.

In addition to internal growth, Kaydons current strategy involves growth
through acquisitions of complementary businesses as well as acquisitions that
diversify the Companys product offerings. Like other companies with similar
growth strategies, Kaydon may be unable to continue to implement its growth
strategy, and this strategy may be ultimately unsuccessful. A portion of the
Companys expected future growth in revenues may result from acquisitions. The
Company frequently engages in evaluations of potential acquisitions and
negotiations for possible acquisitions, certain of which, if consummated, could
be significant to the Company. Although it is the Companys policy only to
acquire companies in transactions which are accretive to both earnings and cash
flow, any potential acquisitions may result in material transaction expenses,
increased interest and amortization expense, increased depreciation expense and
increased operating expense, any of which could have a material adverse effect
on the Companys operating results. Acquisitions may entail integration and
management of the new businesses to realize economies of scale and control
costs. In
addition, acquisitions may involve other risks, including diversion of
management resources otherwise available for ongoing development of our
business and risks associated with entering new markets. The Company may not
be able to identify suitable acquisition candidates in the future, obtain
acceptable financing or consummate any future acquisitions. In addition, as a
result of the Companys acquisitions of other businesses, the Company may be
subject to the risk of unanticipated business uncertainties or legal
liabilities relating to those acquired businesses for which the sellers of the
acquired businesses may not indemnify the Company. Future acquisitions may
also result in potentially dilutive issuances of securities.

Political, economic and regulatory conditions inherent in the international
markets in which Kaydon participates could adversely affect the Companys
financial condition.

Sales of the Companys products from the Companys foreign subsidiaries and
from the Companys domestic subsidiaries selling to foreign locations accounted
for approximately 29.9% of net sales for the fiscal year ended December 31,
2002. These foreign sales could be adversely affected by changes in various
foreign countries political and economic conditions, trade protection
measures, differing

29



---



##### 



intellectual property rights and changes in regulatory
requirements that restrict the sales of the Companys products or increase the
Companys costs.

The Company generates significant revenues outside the United States. Currency
fluctuations between the U.S. dollar and the currencies in which those
customers do business may have an impact on the demand for the Companys
products in foreign countries where the U.S. dollar has increased in value
compared to the local currency. The Company cannot predict the effects of
exchange rate fluctuations upon the Companys future operating results because
of the number of currencies involved, the variability of currency exposure and
the potential volatility of currency exchange rates.

Relationships with customers and effective terms of sale frequently vary by
country, often with longer-term receivables than are typical in the United
States.

Kaydons manufactured critical performance products expose the Company to
potential litigation-related costs which may adversely affect the Companys
financial position and operating results.

As a provider of critical performance products in a variety of industries
including aerospace, defense, construction, marine, medical, material handling,
machine tool positioning and other industrial applications, the Company faces a
risk of exposure to claims in the event that the failure, use or misuse of the
Companys products results, or is alleged to result, in bodily injury and/or
property damage. The Company, along with certain other companies, are named as
a defendant in a lawsuit arising from an August 2000 fatal accident involving a
MH53E helicopter manufactured by Sikorsky Aircraft Corporation. The Company
believes that the alleged damages claimed in this lawsuit, and the associated
legal costs, will be covered under the Companys insurance policy, but it is
possible that such costs will not be covered by insurance and, if so, the
Company will incur unknown additional direct costs. These claims have not been
finally resolved or settled.

In the past, costs related to legal proceedings and settlements have had a
material effect on the Companys business, financial condition, results of
operations and liquidity. The Company cannot assure you that the ultimate cost
of current known or future unknown litigation and claims will not exceed
managements current expectations and it is possible that such costs could have
a material adverse effect on the Company. In addition, litigation is time
consuming and could divert management attention and resources away from the
Companys business.

The Transactions Lawsuit could materially adversely affect the Company if the
trial courts dismissal of the claims in such suit is reversed on appeal and if
an adverse ruling is entered on appeal.

As described in the Companys Annual Report on Form 10-K, the Company, along
with certain other companies, was a defendant in a lawsuit filed in 1996
asserting claims for fraudulent conveyance and successor liability relating to
the Companys acquisition of certain assets in 1983 and the Companys 1984
spin-off from

30



---



##### 



Bairnco Corporation (the Transactions Lawsuit). The plaintiffs
in the Transactions Lawsuit alleged and sought damages of $700 million, plus
interest and punitive damages against the defendants collectively. As
previously disclosed, the plaintiffs claims were dismissed with prejudice by
the trial court on March 14, 2003. On April 14, 2003, the plaintiffs filed a
notice of appeal. Briefing on the appeal currently is underway, and
the appeal is expected to be heard by the Court of Appeals during the
first or second quarter of 2004. If an unfavorable outcome were to occur, the impact could be
material to the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to certain market risks which exist as part of its
ongoing business operations including interest rates and foreign currency
exchange rates. The exposure to market risk for changes in interest rates
relates primarily to investments in cash and cash equivalents. All highly
liquid investments, including highly liquid debt and investment instruments
purchased with an original maturity of three months or less, are considered
cash equivalents. The Company places its investments in cash equivalents with
high credit quality issuers and limits the amount of exposure to any one
issuer. A 10 basis point decrease in interest rates (10 percent of the
Companys weighted average investment interest rate for the third quarter of
2003) would have an immaterial impact on the Companys pre-tax earnings. The
Company conducts business in various foreign currencies, primarily in Europe,
Canada, Mexico, and Japan. Therefore, changes in the value of currencies of
these countries affect the Companys financial position and cash flows when
translated into U.S. dollars. The Company has mitigated and will continue to
mitigate a portion of its currency exposure through operation of decentralized
foreign operating companies in which many costs are local currency based. In
addition, periodically the Company enters into derivative
financial instruments in the form of forward foreign exchange contracts to
reduce the effect of fluctuations in foreign exchange rates. A 10 percent
change in the value of all foreign currencies would have an immaterial effect
on the Companys financial position and cash flows.

31



---



##### 



ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Companys
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the Companys disclosure controls and procedures
pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon
that evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures provide
reasonable assurance that the material information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 are recorded, processed, summarized and reported within
the time periods specified in the Commissions rules and forms. There have been
no changes in the Companys internal controls over financial reporting that
occurred during the registrants most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the registrants
internal control over financial reporting.

32



---



##### 



|        |  |                                                                                                                                                             
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|PART II |  | OTHER INFORMATION                                                                                                                                           
|        |  |                                                                                                                                                             
|Item 1. |  | Legal Proceedings See the discussion in
Notes to Consolidated Condensed Financial
Statements (Note 7), which discussion is
incorporated herein by reference.
|        |  |                                                                                                                                                             
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                                                            

| |  |                                                                                                                                                                                                                                    |  |                     |  |                                                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (a)                                                                                                                                                                                                                                |  | Exhibit No.         |  | Description                                                                                                                                          
| |  |                                                                                                                                                                                                                                    |  |                     |  |                                                                                                                                                      
| |  |                                                                                                                                                                                                                                    |  | 31                  |  | Certification Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
| |  |                                                                                                                                                                                                                                    |  |                     |  |                                                                                                                                                      
| |  |                                                                                                                                                                                                                                    |  | 32                  |  | Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002                               
| |  |                                                                                                                                                                                                                                    |  |                     |  |                                                                                                                                                      
| |  | (b)                                                                                                                                                                                                                                |  | Reports on Form 8-K
|
| |  | The Company filed a current report on Form 8-K pursuant to Items 7 and 9,
dated
July 28, 2003, reporting that the Company issued a press release
reporting increased second quarter 2003 results and announcing a
conference call.
|
| |  | The Company filed a current report on Form 8-K pursuant to Items 5 and 7,
dated July 29, 2003, reporting the completion of a new $200 million
unsecured three-year revolving credit agreement.                                    

33



---



##### 



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.

|                  |  |                                                                                                                                       
|----------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|                  |  | KAYDON CORPORATION                                                                                                                    
|                  |  |                                                                                                                                       
|November 10, 2003 |  | /s/ Brian P. Campbell                                                                                                                 
|                  |  |                                                                                                                                       
|                  |  | Brian P. Campbell                                                                                                                     
|                  |  | Chairman, President, Chief Executive
Officer and Chief Financial Officer
(Principal Executive Officer and Principal
Financial Officer)
|                  |  |                                                                                                                                       
|November 10, 2003 |  | /s/ Kenneth W. Crawford                                                                                                               
|                  |  |                                                                                                                                       
|                  |  | Kenneth W. Crawford
Vice President and Corporate Controller
(Principal Accounting Officer)                                            

34



---



##### 



EXHIBIT INDEX

| |  |             |  |                                                                                                                                                      
| |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Exhibit No. |  | Description                                                                                                                                          
| |  |             |  |                                                                                                                                                      
| |  | 31          |  | Certification Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
| |  |             |  |                                                                                                                                                      
| |  | 32          |  | Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002