##### Table of Contents



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 28, 2002 |  | Commission File No. 0-12640
|                                     |  |                            

KAYDON CORPORATION

---

(Exact name of registrant as
specified in its charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 13-3186040
(I.R.S. Employer Identification No.)

|                                                          |  |  |  |           
|--------------------------------------------------------- |  |  |  | ----------
|315 E. Eisenhower Parkway, Suite 300, 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 o

Common Stock Outstanding at October 25, 2002  30,032,469 shares, $.10 par value.





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TABLE OF CONTENTS



|                                |                                                                                                                                |  |  |  |  |  |  | 
|------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|Part I  Financial Information:
|                                | Item 1. Financial Statements                                                                                                  
|                                | Consolidated Condensed Balance Sheets  September 28, 2002 and December 31, 2001                                              
|                                | Consolidated Condensed Statements of Income  Quarter and First Three Quarters Ended September 28, 2002 and September 29, 2001
|                                | Consolidated Condensed Statements of Cash Flows  First Three Quarters Ended September 28, 2002 and September 29, 2001        
|                                | Notes to Consolidated Condensed Financial Statements                                                                          
|                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                 
|                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                            
|                                | Item 4. Controls and Procedures                                                                                               
|Part II  Other Information:   
|                                | Item 1.  Legal Proceedings                                                                                                   
|                                | Item 6.  Exhibits and Reports on Form 8-K                                                                                    
|                                | Signatures                                                                                                                    
|                                | Certification                                                                                                                 
|Certification                  



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##### Table of Contents



KAYDON CORPORATION FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 28, 2002

INDEX

|          |  |                                                                                                                                |          |      
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------ | -------- | -----
|          |  |                                                                                                                                | Page No.
|          |  |                                                                                                                                |         
|Part I -  |  | Financial Information:                                                                                                         |          |      
|          |  |                                                                                                                                |          |      
|          |  | Item 1. Financial Statements                                                                                                   |          |      
|          |  |                                                                                                                                |          |      
|          |  | Consolidated Condensed Balance Sheets -
September 28, 2002 and December 31, 2001                                               |          | 1    
|          |  |                                                                                                                                |          |      
|          |  | Consolidated Condensed Statements of Income -
Quarter and First Three Quarters Ended
September 28, 2002 and September 29, 2001 |          | 2    
|          |  |                                                                                                                                |          |      
|          |  | Consolidated Condensed Statements of Cash Flows -
First Three Quarters Ended September 28, 2002 and
September 29, 2001         |          | 3    
|          |  |                                                                                                                                |          |      
|          |  | Notes to Consolidated Condensed Financial Statements                                                                           |          | 4-16 
|          |  |                                                                                                                                |          |      
|          |  | Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations                                  |          | 17-22
|          |  |                                                                                                                                |          |      
|          |  | Item 3. Quantitative and Qualitative Disclosures About
Market Risk                                                             |          | 22-23
|          |  |                                                                                                                                |          |      
|          |  | Item 4. Controls and Procedures                                                                                                |          | 23   
|          |  |                                                                                                                                |          |      
|Part II - |  | Other Information:                                                                                                             |          |      
|          |  |                                                                                                                                |          |      
|          |  | Item 1.  Legal Proceedings                                                                                                    |          | 24   
|          |  |                                                                                                                                |          |      
|          |  | Item 6.  Exhibits and Reports on Form 8-K                                                                                     |          | 24   
|          |  |                                                                                                                                |          |      
|          |  | Signatures                                                                                                                     |          | 25   
|          |  |                                                                                                                                |          |      
|          |  | Certification                                                                                                                  |          | 26   





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##### Table of Contents












ITEM 1. FINANCIAL STATEMENTS
KAYDON CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS

|                                                                       |  |                    |              |   |                   |   |              |  
|---------------------------------------------------------------------- |  | ------------------ | ------------ | - | ----------------- | - | ------------ | -
|                                                                       |  | September 28, 2002 |              |   | December 31, 2001 |  
|                                                                       |  |                    |              |   |                   |  
|                                                                       |  | (Unaudited)        |              |   |                   |   |             
|Assets:                                                                |  |                    |              |   |                   |   |              |  
|Cash and cash equivalents                                              |  | $                  | 135,547,000  |   |                   | $ | 152,570,000  |  
|Accounts receivable, net                                               |  |                    | 42,743,000   |   |                   |   | 38,432,000   |  
|Inventories, net                                                       |  |                    | 49,917,000   |   |                   |   | 55,066,000   |  
|Other current assets                                                   |  |                    | 16,336,000   |   |                   |   | 15,706,000   |  
|                                                                       |  |                    |              |   |                   |  
|Total current assets                                                   |  |                    | 244,543,000  |   |                   |   | 261,774,000  |  
|                                                                       |  |                    |              |   |                   |  
|Property, plant and equipment, net                                     |  |                    | 84,472,000   |   |                   |   | 84,273,000   |  
|Cost in excess of net assets of
purchased businesses, net
(Goodwill) |  |                    | 108,145,000  |   |                   |   | 121,708,000  |  
|Other intangible assets                                                |  |                    | 9,954,000    |   |                   |   | 11,066,000   |  
|Other assets                                                           |  |                    | 22,861,000   |   |                   |   | 18,977,000   |  
|                                                                       |  |                    |              |   |                   |  
|Total assets                                                           |  | $                  | 469,975,000  |   |                   | $ | 497,798,000  |  
|                                                                       |  |                    |              |   |                   |  
|Liabilities and Shareholders Equity:                                  |  |                    |              |   |                   |   |              |  
|Accounts payable                                                       |  | $                  | 9,578,000    |   |                   | $ | 10,117,000   |  
|Accrued expenses                                                       |  |                    | 39,579,000   |   |                   |   | 21,528,000   |  
|                                                                       |  |                    |              |   |                   |  
|Total current liabilities                                              |  |                    | 49,157,000   |   |                   |   | 31,645,000   |  
|                                                                       |  |                    |              |   |                   |  
|Long-term debt                                                         |  |                    | 72,152,000   |   |                   |   | 112,194,000  |  
|Long-term liabilities                                                  |  |                    | 49,105,000   |   |                   |   | 50,155,000   |  
|                                                                       |  |                    |              |   |                   |  
|Total long-term liabilities                                            |  |                    | 121,257,000  |   |                   |   | 162,349,000  |  
|                                                                       |  |                    |              |   |                   |  
|Shareholders equity:                                                  |  |                    |              |   |                   |   |              |  
|Common stock                                                           |  |                    | 3,693,000    |   |                   |   | 3,691,000    |  
|Paid-in capital                                                        |  |                    | 45,091,000   |   |                   |   | 45,017,000   |  
|Retained earnings                                                      |  |                    | 400,571,000  |   |                   |   | 408,058,000  |  
|Less  treasury stock, at cost                                         |  |                    | (135,207,000 | ) |                   |   | (135,782,000 | )
|Less  restricted stock awards                                         |  |                    | (9,075,000   | ) |                   |   | (9,619,000   | )
|Accumulated other comprehensive loss                                   |  |                    | (5,512,000   | ) |                   |   | (7,561,000   | )
|                                                                       |  |                    |              |   |                   |  
|                                                                       |  |                    | 299,561,000  |   |                   |   | 303,804,000  |  
|                                                                       |  |                    |              |   |                   |  
|Total liabilities and shareholders equity                             |  | $                  | 469,975,000  |   |                   | $ | 497,798,000  |  
|                                                                       |  |                    |              |   |                   |  

See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)

|                                                                               |         |   |                |            |  |                            |             |            |                |   |             |                |   |   |             |            |  
|------------------------------------------------------------------------------ | ------- | - | -------------- | ---------- |  | -------------------------- | ----------- | ---------- | -------------- | - | ----------- | -------------- | - | - | ----------- | ---------- | -
|                                                                               |         |   | Quarter Ended  |            |  | First Three Quarters Ended |            
|                                                                               |         |   |                |            |  |                            |            
|                                                                               |         |   | Sept. 28, 2002 |            |  | Sept. 29, 2001             |             |            | Sept. 28, 2002 |   |             | Sept. 29, 2001 |  
|                                                                               |         |   |                |            |  |                            |             |            |                |   |             |                |  
|Net sales                                                                      |         | $ | 68,529,000     |            |  | $                          | 68,173,000  |            |                | $ | 207,917,000 |                |   | $ | 218,843,000 |           
|Cost of sales                                                                  |         |   | 44,477,000     |            |  |                            | 44,461,000  |            |                |   | 137,006,000 |                |   |   | 141,284,000 |           
|                                                                               |         |   |                |            |  |                            |             |            |                |   |             |               
|Gross profit                                                                   |         |   | 24,052,000     |            |  |                            | 23,712,000  |            |                |   | 70,911,000  |                |   |   | 77,559,000  |           
|Selling, general, and
administrative expenses                                  |         |   | 11,222,000     |            |  |                            | 14,693,000  |            |                |   | 37,684,000  |                |   |   | 38,844,000  |           
|Unusual litigation related charge                                              |         |   |               |            |  |                            |            |            |                |   | 7,500,000   |                |   |   |            |           
|                                                                               |         |   |                |            |  |                            |             |            |                |   |             |               
|Operating income from
continuing operations                                    |         |   | 12,830,000     |            |  |                            | 9,019,000   |            |                |   | 25,727,000  |                |   |   | 38,715,000  |           
|Interest income (expense), net,
from continuing operations                     |         |   | 187,000        |            |  |                            | (394,000    | )          |                |   | 376,000     |                |   |   | (124,000    | )         
|                                                                               |         |   |                |            |  |                            |             |            |                |   |             |               
|Income from continuing
operations before income taxes                          |         |   | 13,017,000     |            |  |                            | 8,625,000   |            |                |   | 26,103,000  |                |   |   | 38,591,000  |           
|Provision for income taxes                                                     |         |   | 4,686,000      |            |  |                            | 3,191,000   |            |                |   | 9,397,000   |                |   |   | 14,278,000  |           
|                                                                               |         |   |                |            |  |                            |             |            |                |   |             |               
|Income from continuing
operations                                              |         |   | 8,331,000      |            |  |                            | 5,434,000   |            |                |   | 16,706,000  |                |   | $ | 24,313,000  |           
|                                                                               |         |   |                |            |  |                            |             |            |                |   |             |               
|(Loss) from operations of
discontinued segment                                 |         |   |               |            |  |                            | (43,601,000 | )          |                |   |            |                |   |   | (46,762,000 | )         
|(Credit) for income taxes                                                      |         |   |               |            |  |                            | (13,781,000 | )          |                |   |            |                |   |   | (14,950,000 | )         
|                                                                               |         |   |                |            |  |                            |             |            |                |   |             |               
|(Loss) from discontinued
operations                                            |         |   |               |            |  |                            | (29,820,000 | )          |                |   |            |                |   |   | (31,812,000 | )         
|                                                                               |         |   |                |            |  |                            |             |            |                |   |             |               
|Income (loss) before
cumulative effect of accounting
change                    |         |   | 8,331,000      |            |  |                            | (24,386,000 | )          |                |   | 16,706,000  |                |   |   | (7,499,000  | )         
|Cumulative effect of accounting
change, net of income tax
credit of $3,544,000 |         |   |               |            |  |                            |            |            |                |   | (13,222,000 | )              |   |   |            |           
|                                                                               |         |   |                |            |  |                            |             |            |                |   |             |               
|Net Income (loss)                                                              |         | $ | 8,331,000      |            |  | $                          | (24,386,000 | )          |                | $ | 3,484,000   |                |   | $ | (7,499,000  | )         
|                                                                               |         |   |                |            |  |                            |             |            |                |   |             |               
|Weighted Average Common Shares:                                                |         |   |                |            |  |                            |             |            |                |   |             |                |   |   |             |           
|                                                                               | Basic   |   |                | 29,997,000 |  |                            |             | 29,942,000 |                |   |             | 29,987,000     |   |   |             | 29,948,000 |  
|                                                                               | Diluted |   |                | 30,016,000 |  |                            |             | 29,942,000 |                |   |             | 30,006,000     |   |   |             | 29,948,000 |  
|Earnings Per Share-Continuing
Operations                                       |         |   |                |            |  |                            |             |            |                |   |             |                |   |   |             |           
|                                                                               | Basic   |   | $              | 0.28       |  |                            | $           | .18        |                |   | $           | 0.56           |   |   | $           | .81        |  
|                                                                               | Diluted |   | $              | 0.28       |  |                            | $           | .18        |                |   | $           | 0.56           |   |   | $           | .81        |  
|(Loss) Per Share  Discontinued
Operations                                     |         |   |                |            |  |                            |             |            |                |   |             |                |   |   |             |           
|                                                                               | Basic   |   |                |           |  |                            | $           | (1.00      | )              |   |             |               |   |   | $           | (1.06      | )
|                                                                               | Diluted |   |                |           |  |                            | $           | (1.00      | )              |   |             |               |   |   | $           | (1.06      | )
|(Loss) Per Share  Cumulative effect of
accounting change                      |         |   |                |            |  |                            |             |            |                |   |             |                |   |   |             |           
|                                                                               | Basic   |   |                |           |  |                            |             |           |                |   | $           | (0.44          | ) |   |             |           |  
|                                                                               | Diluted |   |                |           |  |                            |             |           |                |   | $           | (0.44          | ) |   |             |           |  
|Earnings (Loss) Per Share                                                      |         |   |                |            |  |                            |             |            |                |   |             |                |   |   |             |           
|                                                                               | Basic   |   | $              | 0.28       |  |                            | $           | (0.81      | )              |   | $           | 0.12           |   |   | $           | (0.25      | )
|                                                                               | Diluted |   | $              | 0.28       |  |                            | $           | (0.81      | )              |   | $           | 0.12           |   |   | $           | (0.25      | )
|Dividends per share                                                            |         | $ | 0.12           |            |  | $                          | 0.12        |            |                | $ | 0.36        |                |   | $ | 0.36        |           

See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                             |            |   |                            |             |   |               |             |            |  
|------------------------------------------------------------ | ---------- | - | -------------------------- | ----------- | - | ------------- | ----------- | ---------- | -
|                                                             |            |   | First Three Quarters Ended |            
|                                                             |            |   |                            |            
|                                                             |            |   | Sept. 28, 2002             |             |   | Sept. 29,2001 |            
|                                                             |            |   |                            |             |   |               |            
|Cash flows from operating activities                         |            | $ | 45,306,000                 |             |   | $             | 32,116,000  |           
|Cash flows used in investing activities:                     |            |   |                            |             |   |               |             |           
|Capital expenditures, net                                    |            |   | (6,588,000                 | )           |   |               | (7,857,000  | )         
|Acquisitions of businesses, net                              |            |   | (4,401,000                 | )           |   |               | (70,584,000 | )         
|                                                             |            |   |                            |             |   |              
|Cash used in investing activities                            |            |   | (10,989,000                | )           |   |               | (78,441,000 | )         
|                                                             |            |   |                            |             |   |              
|Cash flows from (used in) financing activities:              |            |   |                            |             |   |               |             |           
|Long-term debt:                                              |            |   |                            |             |   |               |             |           
|                                                             | Issuance   |   |                            |            |   |               |             | 70,750,000 |  
|                                                             | Retirement |   |                            | (40,052,000 | ) |               |             | (6,053,000 | )
|Dividends paid                                               |            |   | (10,959,000                | )           |   |               | (10,943,000 | )         
|Proceeds from issuance of common stock                       |            |   | 475,000                    |             |   |               | 1,107,000   |           
|Purchase of treasury stock                                   |            |   | (20,000                    | )           |   |               | (1,655,000  | )         
|                                                             |            |   |                            |             |   |              
|Cash from (used in) financing activities                     |            |   | (50,556,000                | )           |   |               | 53,206,000  |           
|Cash (used in) discontinued operations                       |            |   |                           |             |   |               | (1,546,000  | )         
|Effect of exchange rate changes on cash and
cash equivalents |            |   | (784,000                   | )           |   |               | 1,000       |           
|                                                             |            |   |                            |             |   |              
|Net increase (decrease) in cash and cash equivalents         |            |   | (17,023,000                | )           |   |               | 5,336,000   |           
|Cash and cash equivalents  Beginning of period              |            |   | 152,570,000                |             |   |               | 114,965,000 |           
|                                                             |            |   |                            |             |   |              
|Cash and cash equivalents  End of period                    |            | $ | 135,547,0000               |             |   | $             | 120,301,000 |           
|                                                             |            |   |                            |             |   |              
|Cash expended for income taxes                               |            | $ | 7,786,000                  |             |   | $             | 14,505,000  |           
|                                                             |            |   |                            |             |   |              
|Cash expended for interest                                   |            | $ | 1,464,000                  |             |   | $             | 3,618,000   |           
|                                                             |            |   |                            |             |   |              

See accompanying notes to consolidated condensed financial statements.

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KAYDON CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS



|(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,
2001.                                           
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards (SFAS) No. 142 Goodwill and Other
Intangible Assets. This pronouncement amends the accounting for goodwill
and intangible assets. SFAS No. 142 no longer permits amortization of
goodwill and indefinite-lived intangible assets. Separable intangible
assets that are not deemed to have an indefinite life will continue to be
amortized over their useful lives. In addition, SFAS No. 142 establishes
a new method of testing goodwill for impairment by using a fair-value
approach. The amortization provisions of SFAS No. 142 apply to goodwill
and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, Kaydon, as
required, adopted the pronouncement in the fiscal year beginning January
1, 2002. Please refer to Notes to Consolidated Condensed Financial
Statements (Note 9) in this quarterly report Form 10-Q for additional
information on the implementation status of SFAS No. 142 at Kaydon.
|   
|(2) |  | Inventories are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                |  |                |            |  |                   |   |            | 
|--------------- |  | -------------- | ---------- |  | ----------------- | - | ---------- | 
|                |  | Sept. 28, 2002 |            |  | December 31, 2001 |  
|                |  |                |            |  |                   |  
|Raw Material    |  | $              | 19,089,000 |  |                   | $ | 17,482,000 | 
|Work in Process |  |                | 11,863,000 |  |                   |   | 11,227,000 | 
|Finished Goods  |  |                | 18,965,000 |  |                   |   | 26,357,000 | 
|                |  |                |            |  |                   |  
|                |  | $              | 49,917,000 |  |                   | $ | 55,066,000 | 
|                |  |                |            |  |                   |  



|(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 of net income, foreign currency translation adjustments,
minimum pension liability adjustments and unrealized loss on derivative
financial instruments. Other comprehensive income (loss), net of tax, was
approximately $(.4) million and $1.6 million, resulting in comprehensive
income (loss) of $7.9 million and $(22.8) million for the quarters ended
September 28, 2002 and September 29,
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|    |  | 2001. For the first three quarters, other comprehensive income (loss),
net of tax, was approximately $2.0 million and $(.6) million, resulting
in year to date comprehensive income (loss) of $5.5 million and $(8.1) million
for the first three quarters ended September 28, 2002 and September 29,
2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(4) |  | The following table reconciles the numerators and denominators used in
the calculation of basic and diluted earnings per share from continuing
operations for the periods presented.                                                                                                                       

|                                               |                                                                                                                  |   |                |            |  |                |     |            | 
|---------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | - | -------------- | ---------- |  | -------------- | --- | ---------- | 
|                                               |                                                                                                                  |   | Quarter Ended  |           
|                                               |                                                                                                                  |   |                |           
|                                               |                                                                                                                  |   | Sept. 28, 2002 |            |  | Sept. 29, 2001 |    
|                                               |                                                                                                                  |   |                |            |  |                |    
|Numerators:                                    |                                                                                                                  |   |                |            |  |                |     |           
|                                               | Numerators for both basic and
diluted earnings per share,
income from continuing operations                      |   | $              | 8,331,000  |  |                | $   | 5,434,000  | 
|                                               |                                                                                                                  |   |                |            |  |                |    
|Denominators:                                  |                                                                                                                  |   |                |            |  |                |     |           
|                                               | Denominators for basic earnings
per share from continuing
operations, weighted average
common shares outstanding |   |                | 29,997,000 |  |                |     | 29,942,000 | 
|                                               | Potential dilutive shares resulting
from stock options and
restricted stock awards                               |   |                | 19,000     |  |                |     |           | 
|                                               |                                                                                                                  |   |                |            |  |                |    
|                                               | Denominators for dilutive
earnings per share from
continuing operations                                          |   |                | 30,016,000 |  |                |     | 29,942,000 | 
|                                               |                                                                                                                  |   |                |            |  |                |    
|Earnings per share from continuing
operations: |                                                                                                                  |   |                |            |  |                |     |           
|Basic                                          |                                                                                                                  | $ | .28            |            |  | $              | .18 |           
|                                               |                                                                                                                  |   |                |            |  |                |    
|Diluted                                        |                                                                                                                  | $ | .28            |            |  | $              | .18 |           
|                                               |                                                                                                                  |   |                |            |  |                |    

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|                                               |                                                                                                                  |   |                            |            |  |                |     |            | 
|---------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | - | -------------------------- | ---------- |  | -------------- | --- | ---------- | 
|                                               |                                                                                                                  |   | First Three Quarters Ended |           
|                                               |                                                                                                                  |   |                            |           
|                                               |                                                                                                                  |   | Sept. 28, 2002             |            |  | Sept. 29, 2001 |    
|                                               |                                                                                                                  |   |                            |            |  |                |    
|Numerators:                                    |                                                                                                                  |   |                            |            |  |                |     |           
|                                               | Numerators for both basic and
diluted earnings per share,
income from continuing operations                      |   | $                          | 16,706,000 |  |                | $   | 24,313,000 | 
|                                               |                                                                                                                  |   |                            |            |  |                |    
|Denominators:                                  |                                                                                                                  |   |                            |            |  |                |     |           
|                                               | Denominators for basic earnings
per share from continuing
operations, weighted average
common shares outstanding |   |                            | 29,987,000 |  |                |     | 29,948,000 | 
|                                               | Potential dilutive shares resulting
from stock options and
restricted stock awards                               |   |                            | 19,000     |  |                |     |           | 
|                                               |                                                                                                                  |   |                            |            |  |                |    
|                                               | Denominators for dilutive
earnings per share from
continuing operations                                          |   |                            | 30,006,000 |  |                |     | 29,948,000 | 
|                                               |                                                                                                                  |   |                            |            |  |                |    
|Earnings per share from continuing
operations: |                                                                                                                  |   |                            |            |  |                |     |           
|Basic                                          |                                                                                                                  | $ | .56                        |            |  | $              | .81 |           
|                                               |                                                                                                                  |   |                            |            |  |                |    
|Diluted                                        |                                                                                                                  | $ | .56                        |            |  | $              | .81 |           
|                                               |                                                                                                                  |   |                            |            |  |                |    



|    |  | 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. Options to purchase
414,200 shares of common stock at prices ranging from $24.25 to $33.3125
per share were outstanding during the third quarter of 2001, 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.                                                                                                                                                                                                                                                                                                  
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In accordance with the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share, potential dilutive shares
resulting from stock option plans used in the calculation of dilutive
earnings per share are based on an average of the potential dilutive
shares resulting from stock option plans for the periods presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(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. 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
continuing reportable segments. Prior to the fourth quarter of 2001 the
Company aggregated its operating segments into a single

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| |  | reportable segment referred to as Custom-Engineered Products. Due to
changes in economic conditions affecting certain operating segments,
during the fourth quarter of 2001 the Company changed the way it
aggregates operating segments for purposes of reporting segment
information. Prior year amounts have been reclassified to reflect the
current year presentation.                                
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company has three continuing reportable segments and one discontinued
reportable segment engaged in the manufacture and sale of the following:                                                                                                                                                                                                                                                         
|
| |  | Specialty Metal Formed Products complex metal products used in
specialized industrial and aerospace equipment applications. Products
include anti-friction bearings, split roller bearings, specialty balls,
industrial shock absorbers and metal retaining devices.                                                                                                                                      
|
| |  | Ring, Seal and Filtration Products complex and standard ring, seal and
filtration products used in demanding industrial, aerospace, medical,
electronic and marine equipment applications. Products include engine
rings, sealing rings, shaft seals, slip-rings, slip-ring assemblies,
fiber optic rotary joints, filter elements and filtration systems.                                                
|
| |  | Fluid Power Products standard and custom-made hydraulic cylinders used
in heavy industrial equipment applications. The Fluid Power Products
business was sold on December 31, 2001. Its results have been presented
separately in the consolidated financial statements in accordance with
the requirements of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.            
|
| |  | 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 depreciation of
corporate fixed assets, 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.

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|                                     |                    |                         |            |                |            |   |                            |            |            |                |             |             |                |   |             |             |             | 
|------------------------------------ | ------------------ | ----------------------- | ---------- | -------------- | ---------- | - | -------------------------- | ---------- | ---------- | -------------- | ----------- | ----------- | -------------- | - | ----------- | ----------- | ----------- | 
|                                     |                    |                         |            | Quarter Ended  |            |   | First Three Quarters Ended |           
|                                     |                    |                         |            |                |            |   |                            |           
|                                     |                    |                         |            | Sept. 28, 2002 |            |   | Sept. 29, 2001             |            |            | Sept. 28, 2002 |             |             | Sept. 29, 2001 |  
|                                     |                    |                         |            |                |            |   |                            |            |            |                |             |             |                |  
|Net Sales                            |                    |                         |            |                |            |   |                            |            |            |                |             |             |                |   |             |            
|Specialty Metal Formed Products      |                    |                         |            |                |            |   |                            |            |            |                |             |             |                |   |             |            
|                                     | External customers |                         | $          | 42,037,000     |            |   | $                          | 38,623,000 |            |                | $           | 123,280,000 |                |   | $           | 130,152,000 |            
|                                     | Intersegment       |                         |            | 99,000         |            |   |                            | 137,000    |            |                |             | 243,000     |                |   |             | 368,000     |            
|                                     |                    |                         |            |                |            |   |                            |            |            |                |             |            
|                                     |                    |                         | 42,136,000 |                |            |   | 38,760,000                 |            |            |                | 123,523,000 |             |                |   | 130,520,000 |            
|Ring, Seal and Filtration Products   |                    |                         |            |                |            |   |                            |            |            |                |             |             |                |   |             |            
|                                     | External customers |                         |            | 21,526,000     |            |   |                            | 21,818,000 |            |                |             | 68,048,000  |                |   |             | 67,374,000  |            
|                                     | Intersegment       |                         |            | (99,000        | )          |   |                            | (137,000   | )          |                |             | (243,000    | )              |   |             | (368,000    | )          
|                                     |                    |                         |            |                |            |   |                            |            |            |                |             |            
|                                     |                    |                         | 21,427,000 |                |            |   | 21,681,000                 |            |            |                | 67,805,000  |             |                |   | 67,006,000  |            
|Fluid Power Products                 |                    |                         |           |                |            |   | 10,475,000                 |            |            |                |            |             |                |   | 40,759,000  |            
|Other Metal Products                 |                    |                         | 4,966,000  |                |            |   | 7,732,000                  |            |            |                | 16,589,000  |             |                |   | 21,317,000  |            
|                                     |                    |                         |            |                |            |   |                            |            |            |                |             |            
|                                     |                    | Total segment net sales |            |                | 68,529,000 |   |                            |            | 78,648,000 |                |             |             | 207,917,000    |   |             |             | 259,602,000 | 
|Net sales of discontinued
operations |                    |                         |           |                |            |   | (10,475,000                | )          |            |                |            |             |                |   | (40,759,000 | )          
|                                     |                    |                         |            |                |            |   |                            |            |            |                |             |            
|Total consolidated net sales         |                    | $                       | 68,529,000 |                |            | $ | 68,173,000                 |            |            | $              | 207,917,000 |             |                | $ | 218,843,000 |            
|                                     |                    |                         |            |                |            |   |                            |            |            |                |             |            

|                                                                |  |                |            |   |                            |   |            |                |  |   |                |   |  |   |            |  
|--------------------------------------------------------------- |  | -------------- | ---------- | - | -------------------------- | - | ---------- | -------------- |  | - | -------------- | - |  | - | ---------- | -
|                                                                |  | Quarter Ended  |            |   | First Three Quarters Ended |  
|                                                                |  |                |            |   |                            |  
|                                                                |  | Sept. 28, 2002 |            |   | Sept. 29, 2001             |   |            | Sept. 28, 2002 |  |   | Sept. 29, 2001 |  
|                                                                |  |                |            |   |                            |   |            |                |  |   |                |  
|Operating income (loss)                                         |  |                |            |   |                            |   |            |                |  |   |                |   |  |   |            |  
|Specialty Metal Formed Products                                 |  | $              | 8,781,000  |   |                            | $ | 5,589,000  |                |  | $ | 21,303,000     |   |  | $ | 28,453,000 |  
|Ring, Seal and Filtration Products                              |  |                | 2,433,000  |   |                            |   | 3,288,000  |                |  |   | 8,751,000      |   |  |   | 9,863,000  |  
|Fluid Power Products                                            |  |                |           |   |                            |   | (5,658,000 | )              |  |   |               |   |  |   | (8,819,000 | )
|Other Metal Products                                            |  |                | 314,000    |   |                            |   | 581,000    |                |  |   | 1,222,000      |   |  |   | 1,505,000  |  
|                                                                |  |                |            |   |                            |   |            |                |  |   |                |  
|Total segment operating income                                  |  |                | 11,528,000 |   |                            |   | 3,800,000  |                |  |   | 31,276,000     |   |  |   | 31,002,000 |  
|State income tax provision
included in segment operating
income |  |                | 435,000    |   |                            |   | 16,000     |                |  |   | 1,187,000      |   |  |   | 501,000    |  
|Items not allocated to segment
operating income                 |  |                | 867,000    |   |                            |   | (455,000   | )              |  |   | 764,000        |   |  |   | (1,607,000 | )
|Unusual litigation related charge                               |  |                |           |   |                            |   |           |                |  |   | (7,500,000     | ) |  |   |           |  
|Interest expense                                                |  |                | (424,000   | ) |                            |   | (1,443,000 | )              |  |   | (1,464,000     | ) |  |   | (4,014,000 | )
|Interest income                                                 |  |                | 611,000    |   |                            |   | 1,049,000  |                |  |   | 1,840,000      |   |  |   | 3,890,000  |  
|Operating loss of discontinued
operations                       |  |                |           |   |                            |   | 5,658,000  |                |  |   |               |   |  |   | 8,819,000  |  
|                                                                |  |                |            |   |                            |   |            |                |  |   |                |  
|Income from continuing operations
before income taxes           |  | $              | 13,017,000 |   |                            | $ | 8,625,000  |                |  | $ | 26,103,000     |   |  | $ | 38,591,000 |  
|                                                                |  |                |            |   |                            |   |            |                |  |   |                |  

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|                                                                          |  |                |           |  |                            |   |            |                |  |   |                |  |  |   |            |  
|------------------------------------------------------------------------- |  | -------------- | --------- |  | -------------------------- | - | ---------- | -------------- |  | - | -------------- |  |  | - | ---------- | -
|                                                                          |  | Quarter Ended  |           |  | First Three Quarters Ended |  
|                                                                          |  |                |           |  |                            |  
|                                                                          |  | Sept. 28, 2002 |           |  | Sept. 29, 2001             |   |            | Sept. 28, 2002 |  |   | Sept. 29, 2001 | 
|                                                                          |  |                |           |  |                            |   |            |                |  |   |                | 
|Depreciation and amortization                                             |  |                |           |  |                            |   |            |                |  |   |                |  |  |   |            |  
|Specialty Metal Formed Products                                           |  | $              | 1,945,000 |  |                            | $ | 2,347,000  |                |  | $ | 7,150,000      |  |  | $ | 7,350,000  |  
|Ring, Seal and Filtration Products                                        |  |                | 740,000   |  |                            |   | 773,000    |                |  |   | 2,334,000      |  |  |   | 2,460,000  |  
|Fluid Power Products                                                      |  |                |          |  |                            |   | 1,448,000  |                |  |   |               |  |  |   | 4,369,000  |  
|Other Metal Products                                                      |  |                | 140,000   |  |                            |   | 439,000    |                |  |   | 417,000        |  |  |   | 1,221,000  |  
|Corporate                                                                 |  |                | 263,000   |  |                            |   | 314,000    |                |  |   | 744,000        |  |  |   | 659,000    |  
|                                                                          |  |                |           |  |                            |   |            |                |  |   |                | 
|                                                                          |  |                | 3,088,000 |  |                            |   | 5,321,000  |                |  |   | 10,645,000     |  |  |   | 16,059,000 |  
|Depreciation and amortization of
discontinued operations                  |  |                |          |  |                            |   | (1,448,000 | )              |  |   |               |  |  |   | (4,369,000 | )
|                                                                          |  |                |           |  |                            |   |            |                |  |   |                | 
|Total consolidated depreciation and
amortization of continuing operations |  | $              | 3,088,000 |  |                            | $ | 3,873,000  |                |  | $ | 10,645,000     |  |  | $ | 11,690,000 |  
|                                                                          |  |                |           |  |                            |   |            |                |  |   |                | 

|                                                                                           |  |                |           |  |                            |   |           |                |  |   |                |  |  |   |            |  
|------------------------------------------------------------------------------------------ |  | -------------- | --------- |  | -------------------------- | - | --------- | -------------- |  | - | -------------- |  |  | - | ---------- | -
|                                                                                           |  | Quarter Ended  |           |  | First Three Quarters Ended |  
|                                                                                           |  |                |           |  |                            |  
|                                                                                           |  | Sept. 28, 2002 |           |  | Sept. 29, 2001             |   |           | Sept. 28, 2002 |  |   | Sept. 29, 2001 | 
|                                                                                           |  |                |           |  |                            |   |           |                |  |   |                | 
|Additions to net property, plant and
equipment                                             |  |                |           |  |                            |   |           |                |  |   |                |  |  |   |            |  
|Specialty Metal Formed Products                                                            |  | $              | 1,582,000 |  |                            | $ | 1,045,000 |                |  | $ | 3,610,000      |  |  | $ | 4,387,000  |  
|Ring, Seal and Filtration Products                                                         |  |                | 472,000   |  |                            |   | 915,000   |                |  |   | 2,463,000      |  |  |   | 2,014,000  |  
|Fluid Power Products                                                                       |  |                |          |  |                            |   | 87,000    |                |  |   |               |  |  |   | 1,764,000  |  
|Other Metal Products                                                                       |  |                | 13,000    |  |                            |   | 63,000    |                |  |   | 160,000        |  |  |   | 231,000    |  
|Corporate                                                                                  |  |                | 42,000    |  |                            |   | 102,000   |                |  |   | 355,000        |  |  |   | 1,225,000  |  
|                                                                                           |  |                |           |  |                            |   |           |                |  |   |                | 
|                                                                                           |  |                | 2,109,000 |  |                            |   | 2,212,000 |                |  |   | 6,588,000      |  |  |   | 9,621,000  |  
|Additions to net property, plant and
equipment of discontinued
operations                  |  |                |          |  |                            |   | (87,000   | )              |  |   |               |  |  |   | (1,764,000 | )
|                                                                                           |  |                |           |  |                            |   |           |                |  |   |                | 
|Total consolidated additions to net
property, plant and equipment of
continuing operations |  | $              | 2,109,000 |  |                            | $ | 2,125,000 |                |  | $ | 6,588,000      |  |  | $ | 7,857,000  |  
|                                                                                           |  |                |           |  |                            |   |           |                |  |   |                | 

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|                                   |                           |   |                |             |  |               |             |             | 
|---------------------------------- | ------------------------- | - | -------------- | ----------- |  | ------------- | ----------- | ----------- | 
|                                   |                           |   | Period Ended   |            
|                                   |                           |   |                |            
|                                   |                           |   | Sept. 28, 2002 |             |  | Dec. 31, 2001 |            
|                                   |                           |   |                |             |  |               |            
|Total Assets                       |                           |   |                |             |  |               |             |            
|Specialty Metal Formed Products    |                           | $ | 210,381,000    |             |  | $             | 211,769,000 |            
|Ring, Seal and Filtration Products |                           |   | 77,425,000     |             |  |               | 71,285,000  |            
|Other Metal Products               |                           |   | 25,412,000     |             |  |               | 45,723,000  |            
|Corporate                          |                           |   | 156,757,000    |             |  |               | 169,021,000 |            
|                                   |                           |   |                |             |  |              
|                                   | Total consolidated assets |   | $              | 469,975,000 |  |               | $           | 497,798,000 | 
|                                   |                           |   |                |             |  |              



|(6) |  | At September 28, 2002, borrowings under the Companys revolving credit
facility totaled $72.2 million. The revolving credit facility permits the
Company to borrow under several different interest rate options. The
interest rate on borrowings equaled a weighted average 2.3 percent during
the third quarter of 2002 based on the London Interbank Offered Rate
(LIBOR). The revolving credit facility contains certain restrictive
covenants. The Company is in compliance with all restrictive covenants
contained in the revolving credit facility at September 28, 2002. After
consideration of the facilitys covenants, the Company has additional
available credit under its revolving credit facility of $95.6 million at
September 28, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(7) |  | On March 1, 2001, the Company purchased for $70.6 million, all of
the outstanding stock of ACE Controls, Inc. and its affiliated company
ACE Controls International, Inc. (collectively, ACE) headquartered in
Farmington Hills, Michigan, with additional facilities in Germany, the
United Kingdom and Japan. ACE manufacturers a wide range of linear
deceleration products serving various industrial markets. The Company
utilized its revolving credit facility to finance the acquisition. The
acquisition has been accounted for using the purchase method of
accounting and accordingly the results of operations have been included
in the financial statements since the effective acquisition date.                                         
|   
|    |  | On a pro forma, unaudited basis, as if the ACE acquisition had occurred
as of January 1, 2001, net sales, income from continuing operations,
basic earnings per share from continuing operations and diluted earnings
per share from continuing operations for the first three quarters of 2001
would have been $225.0 million, $24.4 million, $.82 and $.82.                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(8) |  | As previously reported, the Company, along with certain other companies,
is a defendant in a lawsuit filed in 1995 and pending in the United States
District Court for the Southern District of New York captioned Richard A.
Lippe, et al. v. Bairnco Corporation, et al.(the Transactions
Lawsuit). The Transactions Lawsuit seeks damages alleged by plaintiffs to
be an amount of $700 million, plus interest and punitive damages against
the defendants collectively. The                                                                                                                                                                                                                                                                         

10



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| |  | current status of the Transactions Lawsuit is that fact depositions and
discovery were completed during April 2002, and expert discovery was
completed in May 2002. On July 15, 2002, the Company filed a motion for
summary judgment dismissing all the claims against it. This motion will
not be fully briefed before November 29, 2002. The Court has set March
31, 2003 as the trial date for the entire action. Management continues
to believe that it has meritorious defenses to the claims pending against
it in this litigation. Accordingly, no provision has been reflected in
the consolidated financial statements for any alleged damages.
Expenditures to litigate this matter equaled $0.9 million in 1999, $2.8
million in 2000, $3.9 million in 2001, and $3.9 million during the first
three quarters of 2002. During the second quarter of 2002, a $7.5 million
provision was recorded in order to support the Companys most current and
best estimate of the cost to continue to litigate the Transactions
Lawsuit. The change in the estimate during the second quarter resulted
from recent spending levels and new information regarding forecasted
spending levels to complete the trial phase. As of September 28, 2002, a
$8.1 million accrual is recorded as a current liability in the
consolidated financial statements, reflecting the estimated costs to
litigate this matter through the trial phase. While management currently
believes the amount of the ultimate liability, if any, with respect to
this action will not materially affect the financial condition, results
of operations, or liquidity of the Company, management realizes that the
ultimate outcome of this litigation is uncertain. Were an unfavorable
outcome to occur, the impact could be material to the Company.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | As previously reported, in April 2001, the Company reached a settlement
with the U.S. government regarding its grand jury investigation of
inspection and product certification procedures at the Companys
Muskegon, Michigan facility. The settlement included the payment of $7.5
million to the U.S. government, including a $1.0 million fine. The
payment to the U.S. government was completed during April 2001 and was
offset by previously recorded provisions without any impact on year 2001
earnings. In addition to the U.S. government settlement, Kaydon entered
into a three-year agreement with the U.S. Department of Navy, on behalf
of the U.S. Department of Defense, which confirms that Kaydon is
presently eligible to contract with the U.S. government, insures that
Kaydon has, and will continue to have, a program of acceptable
contracting policies and procedures, and establishes and implements a
program of compliance reviews, audits and reports.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | 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. Kaydons portion of the settlement payment was offset by
amounts previously recorded to litigate this legal matter. 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 litigation related to this matter between
Kaydon and Kaydons insurance provider will not have a material effect on
the Companys consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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|    |  | 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, in the United States District Court for the
Southern District of Texas. Currently, the Companys insurance provider
is in the process of responding to the claim. 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 inspectors and Sikorsky Aircraft
Corporation. 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. An accrual is
recorded in the consolidated financial statements equal to the Companys
most current and best estimates to litigate these legal actions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(9) |  | As required, on January 1, 2002, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 142 Goodwill and Other
Intangible Assets. As a result, Kaydon is no longer amortizing
goodwill and indefinite-lived intangible assets beginning in 2002, but
is required to subject these assets to an annual impairment analysis.
During the first quarter of 2002, intangible assets deemed to have
indefinite useful lives were tested for impairment as of January 1,
2002, with no impairment loss being realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | During the second quarter of 2002, the Company completed the first step
of the two-step transitional goodwill impairment test required by SFAS
No. 142. Step one is designed to identify potential impairment by
comparing the fair value of the Companys reporting units, as that term
is defined by SFAS No. 142, with the reporting units carrying amount. As
required by SFAS No. 142, the comparison was done as of January 1, 2002.
Fair values of the reporting units were estimated using the expected
present value of future cash flows. As a result of completing step one,
the Company identified two reporting units whose carrying amount exceeded
their fair value, which indicates potential goodwill impairment. Both
reporting units are part of the Companys Other Metal Products
reporting segment. The aggregate total carrying amount of goodwill at
these two reporting units was $19.3 million as of January 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | During the third quarter of 2002, the Company engaged a valuation
specialist to assist it in completing step two of the transitional
goodwill impairment test, which measures the amount of any impairment
loss by comparing the implied fair value                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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| |  | of the reporting units goodwill with the carrying amount of that
goodwill. As a result of completing step two of the transitional
goodwill impairment test, the Company determined that the implied fair
value of the goodwill of the two aforementioned reporting units equaled
$2.5 million. Therefore, under SFAS No. 142, the Company incurred a
pre-tax, non-cash goodwill impairment loss of $16.8 million as of January
1, 2002. The two reporting units are expected to generate positive
future cash flows, but under the provisions of SFAS No. 142 the present
values of those cash flows (reporting unit fair value) resulted in the
implied fair value of goodwill being significantly less than the carrying
amount. Under previous guidance, specifically Accounting Principles
Board Opinion No. 17, goodwill was tested for impairment using an
undiscounted cash flow (recoverability) approach. In accordance with
SFAS No. 142, the $16.8 million goodwill impairment loss ($13.2 million
or $.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. Therefore, previously reported quarter and cumulative year-to-date
results have been restated to reflect the goodwill impairment loss.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the second quarter of 2002 the Company acquired the net assets of
a small, privately-held manufacturing company for $4.4 million, of which
$0.2 million was assigned to a patent acquired and $1.8 million was
recognized as goodwill. The patent is being amortized over its estimated
useful life of 10 years. The goodwill is being reported as part of the
Companys Ring, Seal and Filtration Products reporting segment, and
will not be amortized, but will be subject to annual impairment testing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |  | The changes in the carrying amount of goodwill for the first three quarters
ended September 28, 2002, are as follows:
| |  | ---------------------------------------------------------------------------------------------------------------------

|                                                 |  |                 |        |  |                     |   |        |                      |  |   |         |   |  |   |         |  
|------------------------------------------------ |  | --------------- | ------ |  | ------------------- | - | ------ | -------------------- |  | - | ------- | - |  | - | ------- | -
|                                                 |  | Specialty Metal |        |  | Ring, Seal and      |   |        |                      |  |   |         |   |  |  
|                                                 |  | Formed Products |        |  | Filtration Products |   |        | Other Metal Products |  |   | Total   |  
|                                                 |  |                 |        |  |                     |   |        |                      |  |   |         |  
|Balance as of
January 1, 2002                    |  | $               | 68,873 |  |                     | $ | 21,295 |                      |  | $ | 31,540  |   |  | $ | 121,708 |  
|Goodwill acquired
during the period              |  |                 |       |  |                     |   | 1,843  |                      |  |   |        |   |  |   | 1,843   |  
|Impairment losses                                |  |                 |       |  |                     |   |       |                      |  |   | (16,766 | ) |  |   | (16,766 | )
|Effect of foreign
currency exchange
rate changes |  |                 | 1,360  |  |                     |   |       |                      |  |   |        |   |  |   | 1,360   |  
|                                                 |  |                 |        |  |                     |   |        |                      |  |   |         |  
|Balance as of
September 28,
2002                 |  | $               | 70,233 |  |                     | $ | 23,138 |                      |  | $ | 14,774  |   |  | $ | 108,145 |  
|                                                 |  |                 |        |  |                     |   |        |                      |  |   |         |  



| |  | For comparability purposes, the following table is presented as if
goodwill and indefinite lived intangible assets were no longer amortized
as January 1, 2001:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                      |  |                |           |  |                            |   |           |                |  |   |                |  |  |   |            | 
|------------------------------------------------------------------------------------- |  | -------------- | --------- |  | -------------------------- | - | --------- | -------------- |  | - | -------------- |  |  | - | ---------- | 
|                                                                                      |  | Quarter Ended  |           |  | First Three Quarters Ended |  
|                                                                                      |  |                |           |  |                            |  
|                                                                                      |  | Sept. 28, 2002 |           |  | Sept. 29, 2001             |   |           | Sept. 28, 2002 |  |   | Sept. 29, 2001 | 
|                                                                                      |  |                |           |  |                            |   |           |                |  |   |                | 
|Income from continuing operations:                                                    |  |                |           |  |                            |   |           |                |  |   |                |  |  |   |            | 
|Reported income from continuing operations                                            |  | $              | 8,331,000 |  |                            | $ | 5,434,000 |                |  | $ | 16,706,000     |  |  | $ | 24,313,000 | 
|Goodwill amortization from continuing operations,
net of tax                          |  |                |          |  |                            |   | 618,000   |                |  |   |               |  |  |   | 1,658,000  | 
|Indefinite-lived intangible asset amortization from
continuing operations, net of tax |  |                |          |  |                            |   | 20,000    |                |  |   |               |  |  |   | 46,000     | 
|                                                                                      |  |                |           |  |                            |   |           |                |  |   |                | 
|Adjusted income from continuing operations                                            |  | $              | 8,331,000 |  |                            | $ | 6,072,000 |                |  | $ | 16,706,000     |  |  | $ | 26,017,000 | 
|                                                                                      |  |                |           |  |                            |   |           |                |  |   |                | 
|Basic earnings per share from continuing operations:                                  |  |                |           |  |                            |   |           |                |  |   |                |  |  |   |            | 
|Reported income from continuing operations                                            |  | $              | 0.28      |  |                            | $ | 0.18      |                |  | $ | 0.56           |  |  | $ | 0.81       | 
|Goodwill amortization from continuing operations,
net of tax                          |  |                |          |  |                            |   | 0.02      |                |  |   |               |  |  |   | 0.06       | 
|Indefinite-lived intangible asset amortization from
continuing operations, net of tax |  |                |          |  |                            |   |          |                |  |   |               |  |  |   |           | 
|                                                                                      |  |                |           |  |                            |   |           |                |  |   |                | 
|Adjusted income from continuing operations                                            |  | $              | 0.28      |  |                            | $ | 0.20      |                |  | $ | 0.56           |  |  | $ | 0.87       | 
|                                                                                      |  |                |           |  |                            |   |           |                |  |   |                | 
|Diluted earning per share from continuing operations:                                 |  |                |           |  |                            |   |           |                |  |   |                |  |  |   |            | 
|Reported income from continuing operations                                            |  | $              | 0.28      |  |                            | $ | 0.18      |                |  | $ | 0.56           |  |  | $ | 0.81       | 
|Goodwill amortization from continuing operations,
net of tax                          |  |                |          |  |                            |   | 0.02      |                |  |   |               |  |  |   | 0.06       | 
|Indefinite-lived intangible asset amortization from
continuing operations, net of tax |  |                |          |  |                            |   |          |                |  |   |               |  |  |   |           | 
|                                                                                      |  |                |           |  |                            |   |           |                |  |   |                | 
|Adjusted income from continuing operations                                            |  | $              | 0.28      |  |                            | $ | 0.20      |                |  | $ | 0.56           |  |  | $ | 0.87       | 
|                                                                                      |  |                |           |  |                            |   |           |                |  |   |                | 

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|                                                           |  |                |           |  |                            |   |             |                |  |   |                |  |  |   |            |  
|---------------------------------------------------------- |  | -------------- | --------- |  | -------------------------- | - | ----------- | -------------- |  | - | -------------- |  |  | - | ---------- | -
|                                                           |  | Quarter Ended  |           |  | First Three Quarters Ended |  
|                                                           |  |                |           |  |                            |  
|                                                           |  | Sept. 28, 2002 |           |  | Sept. 29, 2001             |   |             | Sept. 28, 2002 |  |   | Sept. 29, 2001 | 
|                                                           |  |                |           |  |                            |   |             |                |  |   |                | 
|Net income (loss):                                         |  |                |           |  |                            |   |             |                |  |   |                |  |  |   |            |  
|Reported net income (loss)                                 |  | $              | 8,331,000 |  |                            | $ | (24,386,000 | )              |  | $ | 3,484,000      |  |  | $ | (7,499,000 | )
|Goodwill amortization, net of tax                          |  |                |          |  |                            |   | 826,000     |                |  |   |               |  |  |   | 2,282,000  |  
|Indefinite-lived intangible asset amortization, net of
tax |  |                |          |  |                            |   | 20,000      |                |  |   |               |  |  |   | 46,000     |  
|                                                           |  |                |           |  |                            |   |             |                |  |   |                | 
|Adjusted net income (loss)                                 |  | $              | 8,331,000 |  |                            | $ | (23,540,000 | )              |  | $ | 3,484,000      |  |  | $ | (5,171,000 | )
|                                                           |  |                |           |  |                            |   |             |                |  |   |                | 
|Basic earnings (loss) per share:                           |  |                |           |  |                            |   |             |                |  |   |                |  |  |   |            |  
|Reported net income (loss)                                 |  | $              | 0.28      |  |                            |   | ($0.81      | )              |  | $ | 0.12           |  |  |   | ($0.25     | )
|Goodwill amortization, net of tax                          |  |                |          |  |                            |   | 0.03        |                |  |   |               |  |  |   | 0.08       |  
|Indefinite-lived intangible asset amortization, net of
tax |  |                |          |  |                            |   |            |                |  |   |               |  |  |   |           |  
|                                                           |  |                |           |  |                            |   |             |                |  |   |                | 
|Adjusted net income (loss)                                 |  | $              | 0.28      |  |                            | $ | (0.78       | )              |  | $ | 0.12           |  |  |   | ($0.17     | )
|                                                           |  |                |           |  |                            |   |             |                |  |   |                | 
|Diluted earnings (loss) per share:                         |  |                |           |  |                            |   |             |                |  |   |                |  |  |   |            |  
|Reported net income (loss)                                 |  | $              | 0.28      |  |                            |   | ($0.81      | )              |  | $ | 0.12           |  |  |   | ($0.25     | )
|Goodwill amortization, net of tax                          |  |                |          |  |                            |   | 0.03        |                |  |   |               |  |  |   | 0.08       |  
|Indefinite-lived intangible asset amortization, net of
tax |  |                |          |  |                            |   |            |                |  |   |               |  |  |   |           |  
|                                                           |  |                |           |  |                            |   |             |                |  |   |                | 
|Adjusted net income (loss)                                 |  | $              | 0.28      |  |                            |   | ($0.78      | )              |  | $ | 0.12           |  |  |   | ($0.17     | )
|                                                           |  |                |           |  |                            |   |             |                |  |   |                | 

Other intangible assets are summarized as follows:

|                            |  |                      |            |  |                          |   |           |        |                |   |              |             |  |   |           | 
|--------------------------- |  | -------------------- | ---------- |  | ------------------------ | - | --------- | ------ | -------------- | - | ------------ | ----------- |  | - | --------- | 
|                            |  | As of Sept. 28, 2002 |            |  | As of December 31, 2001  |  
|                            |  |                      |            |  |                          |  
|                            |  | Gross Carrying       |            |  |                          |   |           |        | Gross Carrying |   |              | Accumulated | 
|Amortized Intangible Assets |  | Amount               |            |  | Accumulated Amortization |   |           | Amount |                |   | Amortization |            
|                            |  |                      |            |  |                          |   |           |        |                |   |              |            
|Customer lists              |  | $                    | 8,140,000  |  |                          | $ | 1,625,000 |        |                | $ | 8,140,000    |             |  | $ | 862,000   | 
|Patents                     |  |                      | 1,553,000  |  |                          |   | 510,000   |        |                |   | 1,353,000    |             |  |   | 395,000   | 
|Other                       |  |                      | 950,000    |  |                          |   | 950,000   |        |                |   | 950,000      |             |  |   | 516,000   | 
|                            |  |                      |            |  |                          |   |           |        |                |   |              |            
|                            |  | $                    | 10,643,000 |  |                          | $ | 3,085,000 |        |                | $ | 10,443,000   |             |  | $ | 1,773,000 | 
|                            |  |                      |            |  |                          |   |           |        |                |   |              |            

|                              |  |                 |           |  |                 |   |           | 
|----------------------------- |  | --------------- | --------- |  | --------------- | - | --------- | 
|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 September 28, 2002 |  | $ | 1,312,000 | 

|                                                 |  |           
|------------------------------------------------ |  | ----------
|Estimated Intangible Assets Amortization Expense |  |           
|                                                 |  |           
|For the year ending December 31, 2002            |  | $1,522,000
|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  
|                                                 |  |           

``

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|(10) |  | During the second quarter of 2002, the Company entered into derivative
financial instruments in the form of foreign exchange contracts to reduce the
effect of fluctuations in foreign exchange rates on short-term, foreign
currency denominated intercompany transactions. 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 28, 2002, forward foreign exchange contracts
representing a notional amount of $1.1 million were outstanding with maturities
of less than one year. The currency hedged by the Company as of September 28,
2002 is the European Euro. The forward foreign exchange contracts entered into
by the Company are accounted for as cash flow hedges. The fair value of these
foreign exchange contracts recorded on the consolidated balance sheet as of
September 28, 2002 was a liability of approximately ($0.1) million. As of
September 28, 2002, the net loss related to the derivative instrument and
hedging activities recorded in accumulated other comprehensive income was $0.1
million. The Company was not a party to any
derivative financial instruments for the quarter or three quarters ended
September 29, 2001.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Results of Operations

During the third quarter of 2002, Kaydon Corporation and subsidiaries (the
Company) achieved sales from continuing operations of $68.5 million, as
compared to $68.2 million in the third quarter of 2001. While certain markets
have improved when compared to the third quarter of 2001, Company sales figures
continue to be negatively impacted by inventory liquidations and the general
economic slowdown in industrial manufacturing activity in this country and
abroad.

Specifically, Kaydon experienced increased demand during the third quarter of
2002 compared to the third quarter of last year for various products sold by
our Specialty Metal Formed Products reporting segment. Sales of this
reporting segment of $42.1 million during the third quarter of 2002 increased
$3.4 million from third quarter 2001 sales of $38.8 million or 8.7 percent as a
result of increased demand for custom-engineered bearings in the specialty
electronic and construction markets. Increases to these markets were partially
offset by reduced demand for specialty ball products.

Our Ring, Seal and Filtration Products reporting segment achieved sales of
$21.4 million during the third quarter of 2002, down $.3 million from the third
quarter 2001 sales achieved of $21.7 million. Stronger demand for certain
slip-ring products in the airport security, military and industrial markets,
were more than offset by reduced demand for various filtration systems and ring
products as compared to the third quarter of 2001.

The Other Metal Products reporting segment achieved sales of $5.0 million
during the third quarter of 2002, which was down $2.8 million from the third
quarter 2001 sales figure of $7.7 million, or 35.8 percent. Reduced demand for
metal forming equipment and metal alloy products contributed to the decline in
sales.

Gross profit during the third quarter of 2002 of $24.1 million was 35.1 percent
of sales, compared with $23.7 million or 34.8 percent of sales in the third
quarter of 2001. Compared to the third quarter of 2001, the third quarter 2002
gross margin was impacted by favorable sales mix via increased sales of our
Specialty Metal Formed Products.

Selling, general and administrative expenses during the third quarter of 2002,
were $11.2 million or 16.4 percent of sales as compared to $14.7 million or
21.6 percent of sales during the third quarter of 2001. The reduction in
selling, general and administrative expenses during the third quarter of 2002
as compared to the third quarter of 2001 is due to reductions in goodwill
amortization and indefinite-lived intangible asset amortization during the
quarter of $1.0 million due to the adoption of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.
In addition, third quarter 2001 selling, general and administrative expenses
include $.7 million of severance related charges at our Cooper UK facility and
$.8 million of additional salary bonus expense as compared to the third quarter
of 2002.

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Operating income from continuing operations during the third quarter, was $12.8
million or 18.7 percent of sales as compared to $9.0 million or 13.2 percent of
sales in the third quarter of 2001.

Specifically, on a reporting segment basis, operating income from our
Specialty Metal Formed Products reporting segment was $8.8 million during the
third quarter of 2002 as compared to $5.6 million during the comparable period
last year. The increase in operating income is primarily reflective of the
increased top-line in this reporting segment as the profit metrics for this
segment are very volume sensitive. Excluding goodwill and indefinite-lived
intangible asset amortization, third quarter 2001 operating income from our
Specialty Metal Formed Products reporting segment would have been $6.1
million.

Our Ring, Seal, and Filtration Products reporting segment contributed $2.4
million to the Companys operating income during the third quarter of 2002 as
compared to $3.3 million during the comparable period last year. Excluding
goodwill and indefinite-lived intangible asset amortization, third quarter 2001
operating income from our Ring, Seal, and Filtration Products reporting
segment would have been $3.4 million.

Also, our Other Metal Products reporting segment contributed $.3 million
during the third quarter of 2002 as compared to $.6 million during the
comparable period last year. Excluding goodwill and indefinite-lived
intangible asset amortization, third quarter 2001 operating income from our
Other Metal Products reporting segment would have been $.9 million.

The effective income tax rate in the third quarter of 2002 was 36.0 percent as
compared to a 37.0 percent tax rate realized during 2001. This slight
reduction relates primarily to the adoption of SFAS 142 as goodwill is no
longer amortized for book purposes. The decrease in the effective tax rate was
minimized as the majority of goodwill amortization expense is deductible for
tax purposes. The Company expects the effective tax rate for the 2002 year,
before the cumulative effect of a change in accounting principle, to remain
approximately 36 percent.

Third quarter 2002 income from continuing operations and diluted earnings per
share from continuing operations were $8.3 million and $.28. Third quarter
2001 income from continuing operations and diluted earnings per share from
continuing operations were $5.4 million and $.18. Excluding goodwill and
indefinite-lived intangible asset amortization, third quarter 2001 income from
continuing operations and diluted earnings per share from continuing operations
would have been $6.1 million and $.20.

Sales from continuing operations for the first three quarters of 2002 were
$207.9 million, a decrease of 5.0 percent over last years first three quarters
sales of $218.8 million. Excluding the positive impact of the ACE Controls,
Inc. acquisition completed in March 2001, sales during the first three quarters
of 2002 for the remaining Kaydon divisions were down 7.4 percent from the first
three quarters of 2001 reflecting the broad based slowdown in industrial
manufacturing activity. As a result of the lower

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sales volume and mix of products sold, gross profit for the first three
quarters of 2002 decreased to $70.9 million or 34.1 percent of sales as
compared to $77.6 million or 35.4 percent of sales during the first three
quarters of 2001. Operating income including the pre-tax $7.5 million
provision for litigation costs recorded during the second quarter of 2002, was
$25.7 million or 12.4 percent of sales. Operating income for the first three
quarters of 2001, was $38.7 million or 17.7 percent of sales.

Income from continuing operations and diluted earnings per share from
continuing operations during the first three quarters of 2002, including the after tax
effect ($4.8 million or $.16 per share on a diluted basis) of the $7.5 million
provision for litigation costs, were $16.7 million and $.56. Income from
continuing operations and diluted earnings per share from continuing operations
during the first three quarters of 2001 were $24.3 million and $.81. Excluding
goodwill and indefinite-lived intangible asset amortization, income from
continuing operations and diluted earnings per share from continuing operations
during the first three quarters of 2001 would have been $26.0 million and $.87.

As required, on January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets.
As a result, Kaydon is no longer amortizing goodwill and indefinite-lived
intangible assets beginning in 2002, but is required to subject these assets to
an annual impairment analysis. During the first quarter of 2002, intangible
assets deemed to have indefinite useful lives were tested for impairment as of
January 1, 2002, with no impairment loss being realized.

During the second quarter of 2002, the Company completed the first step of the
two-step transitional goodwill impairment test required by SFAS No. 142. Step
one is designed to identify potential impairment by comparing the fair value of
the Companys reporting units, as that term is defined by SFAS No. 142, with
the reporting units carrying amount. As required by SFAS No. 142, the
comparison was done as of January 1, 2002. Fair values of the reporting units
were estimated using the expected present value of future cash flows. As a
result of completing step one, the Company identified two reporting units whose
carrying amount exceeded their fair value, which indicates potential goodwill
impairment. Both reporting units are part of the Companys Other Metal
Products reporting segment. The aggregate total carrying amount of goodwill
at these two reporting units was $19.3 million as of January 1, 2002.

During the third quarter of 2002, the Company engaged a valuation specialist to
assist it in completing step two of the transitional goodwill impairment test,
which measures the amount of any impairment loss by comparing the implied fair
value of the reporting units goodwill with the carrying amount of that
goodwill. As a result of completing step two of the transitional goodwill
impairment test, the Company determined that the implied fair value of the
goodwill of the two aforementioned reporting units equaled $2.5 million.
Therefore, under SFAS No. 142, the Company incurred a pre-tax, non-cash
goodwill impairment loss of $16.8 million as of January 1, 2002. The two
reporting units are expected to generate positive future cash flows, but under
the provisions of SFAS No. 142 the present values of those cash flows
(reporting unit fair value) resulted in the implied fair value of goodwill
being significantly less than the carrying amount. Under previous guidance,
specifically Accounting Principles Board Opinion No. 17, goodwill

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was tested for impairment using an undiscounted cash flow (recoverability)
approach. In accordance with SFAS No. 142, the $16.8 million goodwill
impairment loss ($13.2 million or $.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. Therefore, previously reported quarter and
cumulative year-to-date results have been restated to reflect the goodwill
impairment loss.

As previously disclosed in Kaydons Annual Report on Form 10-K, during the
third quarter of 2001, the Company recorded a special non-cash charge of $38.1
million pre-tax to write-down the value of the assets of its Fluid Power
Products reporting segment. The majority of the special charge, $34.6
million, resulted from the write-down of certain non-current intangible and
fixed assets to estimated fair value. The remaining $3.5 million comprised
reductions in the carrying amount of certain current assets including inventory
in the amount of $2.0 million and accounts receivable in the amount of $1.5
million. The special $38.1 million charge and the normal operating results of
the Fluid Power Products reporting segment comprise the third quarter 2001
year-to-date pre-tax loss of $46.8 million ($31.8 million or $1.06 per share on
an after tax, diluted basis) reported as discontinued operations in the
consolidated condensed statements of income.

Net income and diluted earnings per share during the first three quarters of
2002, including the after tax effect ($4.8 million or $.16 per share on a
diluted basis) of the $7.5 million provision for litigation costs, and
including the after tax effect ($13.2 million or $.44 per share on a diluted
basis) of the $16.8 million cumulative effect of an accounting change, were
$3.5 million and $.12. Net loss and diluted loss per share during the first
three quarters of 2001, including the after tax effect ($31.8 million or $1.06
per share on a diluted basis) of the results from discontinued operations, were
($7.5) million and ($.25).

Liquidity and Capital Resources

Working capital was $195.4 million at September 28, 2002 reflecting a current
ratio of 5.0 to 1 compared to $230.1 million and a current ratio of 8.3 to 1 at
year-end 2001. The reduction in working capital is primarily due to a $40.0
million debt reduction payment that lowered the Companys cash and cash
equivalents balance during the first quarter. Cash flow from continuing
operations during the first three quarters of 2002, including a tax refund of
$10.1 million relating to the Fluid Power Products Group disposition completed
at year-end 2001, was $45.3 million compared to cash flow from continuing
operations of $32.1 million achieved during the first three quarters of last
year. Cash flow during the first three quarters of 2001 was reduced by a $7.5
million payment to the U.S. Government related to the previously disclosed
Sikorsky Matter.

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Depreciation and amortization for the first three quarters of 2002 totaled
$10.6 million compared to $11.7 million in the first three quarters of 2001.
There was a decrease of $1.7 million due to the elimination of goodwill and
indefinite-lived asset amortization during the first three quarters, partially
offset by increases in other intangible amortization, as well as increases in
depreciation primarily due to the ACE Controls, Inc. acquisition completed in
March 2001.

Cash and cash equivalents equaled $135.5 million at September 28, 2002 as
compared to the year-end 2001 balance of $152.6 million. Operating cash flow
during the first three quarters, including the tax receipt of $10.1 million,
was offset by debt reduction payments of $40.0 million, dividend payments of
$11.0 million, net capital expenditures of $6.6 million, and a product line
acquisition of $4.4 million. The debt reduction payment in the first quarter
of 2002 was in response to an increasing negative spread between the interest
rate on debt and the interest rate on invested cash.

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

Outlook

The Companys backlog at September 28, 2002 was $90.0 million compared to $91.6
million at the end of 2001. Based upon current business indications, including
quoting activity and future business forecasts for Kaydon customers
end-markets, management believes that the Company, along with most industrial
companies, has seen or is near the bottom of the recent economic downturn that
has been evident in the United States and abroad. Management expects orders in
the fourth quarter of 2002 to be relatively consistent with levels achieved
during the third quarter 2002. Expected operating cash flows coupled with the
Companys current cash reserves and available credit under the Companys $300.0
million revolving credit facility 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.

New Accounting Standards

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets.
This pronouncement amends the accounting for goodwill and intangible assets.
SFAS No. 142 no longer permits amortization of goodwill and indefinite-lived
intangible assets. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. In
addition, SFAS No. 142 establishes a new method of testing goodwill for
impairment by using a fair-value approach. The amortization provisions of SFAS
No. 142 apply to goodwill and intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired prior to July 1, 2001,
Kaydon, as required, adopted the pronouncement in the fiscal year beginning
January 1, 2002. Please refer to Notes to Consolidated Condensed Financial
Statements (Note 9) in this quarterly report Form 10-Q for additional
information on the implementation of SFAS No. 142.

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Forward-Looking Statements

This form 10-Q contains forward-looking statements within the meaning of the
federal securities laws. While the Company believes any forward-looking
statements made are reasonable, actual results could differ materially since
the statements are based on our current expectations, estimates, forecasts and
projections about the markets in which the Company operates, managements
beliefs, and assumptions made by management. Words such as expects,
anticipates, intends, plans, believes, seeks, estimates, should,
going forward, and variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions (Business Risks), which are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements.

Business Risks include increasing price and product competition by foreign and
domestic competitors, including new entrants; the Companys ability to continue
to introduce competitive new products on a timely, cost-effective basis; the
mix of products; the achievement of lower costs and expenses; the reliance on
large customers; the cyclical nature of the markets served by the Company; the
outcome of pending and future litigation and governmental proceedings; the
accuracy of estimated legal costs; and continued availability of financing and
financial resources in the amounts, at the times and on the terms required to
support the Companys future business and growth strategies. These are
representative of the Business Risks that could affect the outcome of the
forward-looking statements. In addition, such forward-looking statements could
be affected by general industry and market conditions, including interest rate
fluctuations and other Business Risks. The Company does not undertake, and
expressly disclaims any obligation, to update or alter its forward-looking
statements whether as a result of new information, future events or otherwise,
except as required by applicable law. Readers are cautioned to consider these
factors when relying on such forward-looking information.




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 the Companys long-term debt borrowings under the
revolving credit facility and investments in cash and cash equivalents. The
interest rate on the long-term debt borrowings under the credit facility is
variable and is based on the London Interbank Offered Rate (LIBOR). A 23 basis
point increase in interest rates (10 percent of the Companys weighted average
long-term debt interest rate for the third quarter of 2002) would have an
immaterial effect on the Companys pre-tax earnings. All highly liquid
investments, including highly liquid debt 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. An 18 basis point
decrease in interest rates (10 percent of the

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Companys weighted average investment interest rate for the third quarter of
2002) would have an immaterial impact on the Companys pre-tax earnings. The
Company conducts business in various foreign currencies, primarily in Europe,
Canada, 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 all costs are local currency based. 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. In addition, please
see the discussion in Notes to Consolidated Condensed Financial Statements
(Note 10) in this quarterly report on Form 10-Q for a discussion of the current
derivative and hedging activity of the Company.




ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
Within 90 days prior to the date of this report (the Evaluation Date), the
Companys Chief Executive and Chief Financial Officer carried out an evaluation
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based
on that evaluation, the Chief Executive and Chief Financial Officer concluded
that as of the Evaluation Date, the Companys disclosure controls and
procedures were effective.

Changes in Internal Controls
There have been no significant changes in the Companys internal controls or in
other factors that could significantly affect these controls subsequent to the
Evaluation Date.










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

|   |  |                                                                                             |      |  |             |                                                                                                                        
|-- |  | ------------------------------------------------------------------------------------------- | ---- |  | ----------- | -----------------------------------------------------------------------------------------------------------------------
|A. |  | Exhibit No.                                                                                 |      |  | Description
|   |  |                                                                                             |      |  |            
|   |  |                                                                                             | 99.1 |  |             | 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                                                                        
|  
|   |  | No reports on Form 8-K were filed during the third quarter period
ended September 28, 2002.

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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 8, 2002 |  | /s/ Brian P. CampbellBrian P. Campbell                                                                                                
|                
|                 |  | Chairman, President, Chief Executive
Officer and Chief Financial Officer
(Principal Executive Officer and
Principal Financial Officer)
|                
|                 |  |                                                                                                                                       
|                
|November 8, 2002 |  | /s/ Kenneth W. CrawfordKenneth W. Crawford
Vice President and Corporate Controller
(Principal Accounting Officer)                     

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CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATIONS

I, Brian P. Campbell, certify that:



|1) |  | I have reviewed this quarterly report on Form 10-Q of Kaydon Corporation;                                                                                                                                                                                                                                                                                                         
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2) |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;                                                    
|  
|3) |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                                                                       
|  
|4) |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                                                                            
|  
|a) |  | designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;                                                                                   
|  
|b) |  | evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                                                                                                     
|  
|c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                                                                                                           
|  
|5) |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):                                                                                                                                   
|  
|a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and                                                                                    
|  
|b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                                                                                                            
|  
|6) |  | The registrants other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

|                 |  |                                                                        
|---------------- |  | -----------------------------------------------------------------------
|November 8, 2002 |  | /s/Brian P. CampbellChief Executive Officer and
Chief Financial Officer

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Exhibit Index

|            |  |                                                                                                                         | 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------- | 
|Exhibit No. |  | Description                                                                                                            
|            |  |                                                                                                                        
|99.1        |  | Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.

27