FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549




(Mark One)
  X    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIES
       EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended September 29, 2001

	OR

_____  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(D) OF THE
       SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from __________________ to ________________.

Commission File No.  0-22416

KENTUCKY ELECTRIC STEEL, INC.
(Exact name of Registrant as specified in its charter)


            Delaware                                     61-1244541
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                         Identification
                                                           Number)

P. O. Box 3500, Ashland, Kentucky 41105-3500
(Address of principal executive office, Zip code)

(606) 929-1222
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share
(Title of Class)

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  ( )    No  (X)











(Cover Page 1 of 2 Pages)

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in  definitive proxy
or information statement incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  (X)

Aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the closing price on January 7, 2002:
$2,089,962.

Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of January 7, 2002:

4,100,285 shares of Common Stock, par value $.01 per share.




DOCUMENTS INCORPORATED BY REFERENCE


Portions of the registrant's Proxy Statement for the Annual
Meeting of Shareholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14(a) are incorporated herein by
reference in response to items 10 through 13 in Part III of this
report.







































(Cover Page 2 of 2 Pages)





KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY

FORM 10-K


TABLE OF CONTENTS


                                                                  Page

PART I ..........................................................   4

     Item 1.  Business ..........................................   4
     Item 2.  Properties ........................................   9
     Item 3.  Legal Proceedings .................................  10
     Item 4.  Submission of Matters to a Vote of Security Holders  10

PART II .........................................................  11

     Item 5.  Market for Registrant's Common Equity and Related
              Shareholder Matters ...............................  11
     Item 6.  Selected Financial Data ...........................  11
     Item 7.  Management's Discussion and Analysis of Financial
              Condition and Results of Operations ...............  12
     Item 7A. Qualitative and Quantitative Disclosure about
              Market Risk .......................................  20
     Item 8.  Financial Statements and Supplementary Data .......  20
     Item 9.  Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure ...............  20

PART III ........................................................  21


     Item 10. Directors and Executive Officers of the Registrant   21
     Item 11. Executive Compensation ............................  21
     Item 12. Security Ownership of Certain Beneficial
              Owners and Management .............................  21
     Item 13. Certain Relationships and Related Transactions ....  21

PART IV .........................................................  22


     Item 14. Exhibits, Financial Statement Schedules and
              Reports on Form 8-K ...............................  22

SIGNATURES ......................................................  25

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES  ....................  26












KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY

PART I


Item 1.	Business


General

Kentucky Electric Steel, Inc., a Delaware corporation
incorporated in August, 1993 (the "Company"), owns and operates a
steel mini-mill near Ashland, Kentucky. As a mini-mill producer of bar
flats, the Company recycles steel from scrap, a process designed to
result in lower production costs than those of integrated steel mills,
which produce steel by processing iron ore and other raw materials in
blast furnaces.  Bar flats are produced to a variety of specifications
and fall primarily into two general quality levels - merchant bar
quality steel bar flats ("MBQ Bar Flats") for generic types of
applications, and special bar quality steel bar flats ("SBQ Bar
Flats"), where more precise customer specifications require the use of
various alloys, customized equipment and special production procedures
to insure that the finished product meets critical end-use performance
characteristics.  The Company is a leading manufacturer of SBQ Bar
Flats for the cold drawn bar converter and truck trailer support beam
markets.

The Company manufactures over 2,600 different Bar Flat items
which are sold to a variety of relatively small volume niche markets,
including the leaf-spring suspension market for light and heavy-duty
trucks, mini-vans and utility vehicles, cold drawn bar converters,
certain specialty applications for steel service centers, truck
trailer manufacturers and other miscellaneous markets.  The Company's
mill was specifically designed to manufacture wider and thicker bar
flats up to three inches in thickness and twelve inches in width that
are required by these markets. In addition, the Company employs a
variety of specially designed equipment which is necessary to
manufacture SBQ Bar Flats to the specifications demanded by its
customers.  Although the Company specializes in SBQ Bar Flats,
particularly in the thicker and wider sections, it also, to a much
lesser extent, competes in the MBQ Bar Flat market.

The Company's business strategy is to increase its share of the
SBQ Bar Flat market and to expand into related niche market
applications where it can supply products for special customer needs.
The Company plans to expand its business primarily by increasing the
number of products it sells to existing customers and the development
of new customers.


Current Industry Conditions

During the past three years, market conditions within the
domestic steel industry have experienced significant downward economic
pressure largely due to market price and shipment volume declines.
These market conditions are a result of a number of factors including
a decline in the general economy of the United States, a decline in
the industries of the Company's customers, the increased cost of
production due to high electricity and natural gas costs and an
increase in competition from foreign steel companies.  These forces
have driven market prices to levels below the cost of production for
certain domestic producers, and as a result, many steel manufacturers
have curtailed production or ceased operations, and a number of steel
industry producers have sought protection under the United States
Bankruptcy Code.

As a result of these conditions, the Company has experienced
sharp declines in shipment volumes and operating margins during fiscal
2001, which impacted the Company's cash flows and produced a pre-tax
loss of approximately $9.6 million in fiscal 2001. Since March 31,
2001, the Company has failed to meet the fixed charge coverage ratio
covenant of its loan agreements which required the Company to maintain
a fixed charge coverage ratio of 2:1 for each rolling four quarter
period.  In addition to the default of the fixed charge coverage ratio
covenant, the Company failed to make a scheduled principal payment on
its unsecured senior notes of $3,333,333 due on November 1, 2001.

In response to these conditions, the Company has undertaken and
will continue to undertake certain cost control initiatives and was
successful in restructuring its long-term debt obligations and bank
credit facility in order to manage the Company's liquidity through
this difficult market environment.  Management anticipates that the
market conditions discussed above will continue to impact the
Company's operations through fiscal 2002 and negatively impact the
Company's financial performance.

Management believes that the Company has the ability to sustain
its operations and meet its commitments at least for the near-term
through effective management of its operations and the restructured
debt and bank credit facility.  However, should these negative market
conditions worsen or persist on a long-term basis, the Company's
ability to continue to manage its liquidity for the long-term may be
jeopardized.


Manufacturing Operations

The Company recycles steel by melting steel scrap in two 50-ton
electric arc furnaces.  The molten steel is then taken to the ladle
metallurgy facility where a variety of alloys are added to make
different grades of steel in accordance with customer specifications.
The refined molten steel is then poured into a continuous caster to
produce continuous strands of steel with cross-sectional dimensions
ranging from approximately 16 to 72 square inches. The Company can
utilize up to four continuous strands in producing certain sizes.  The
strands are cut to produce billets of specified length which are
reheated to approximately 2,300 degrees Fahrenheit at the Company's
rolling mill and fed through a series of roll stands to reduce their
size and form them into steel bar sections.  These sections emerge
from the rolling mill, are uniformly cooled on a cooling bed, and are
cut to lengths specified by the customer.  The cut bar flats are
stacked into bundles ready for shipment.

The production capacity of the Company for finished products is
330,000 tons per year.  The Company sold 181,500 tons of finished
goods in 2001 which constitutes 55% of its melting and casting
capacity.  In addition, the Company sold 1,700 billet tons (semi-
finished product) in 2001.

The Company transports its products by common carrier, generally
shipping by truck and by rail.  The Company has railroad sidings at
its facilities.


Capital Improvements and Expansion

Annual capital expenditures over the last five fiscal years have
averaged $2.2 million, which includes $.8 million expended in fiscal
year 2001.

The Board of Directors has currently authorized the use of $.5
million for capital expenditures in fiscal 2002, which includes
completion of various projects begun in fiscal 2001, as well as
equipment upgrades and replacements.  Additional capital expenditures,
which may be required, must be approved by the Board of Directors.


Primary Markets and Products

The Company is primarily a special bar quality ("SBQ") producer
of alloy and carbon steel bar flats.  Its primary markets are
manufacturers of leaf-spring suspensions, cold drawn bar converters,
flat bed truck trailer manufacturers and steel service centers.


Leaf-Spring Suspension Market.  High tensile SBQ spring steel is
produced to customer and industry specifications for use in leaf-
spring assemblies.  These assemblies are utilized in light, medium and
heavy duty trucks, trailers, mini-vans and four-wheel drive vehicles
with off-road capability.  The trend toward tapered leaf-spring
products and air-ride suspension continues.  These products use
somewhat less steel but they are manufactured from larger cross
section bar flats that match the Company's manufacturing strengths.


Cold Drawn Bar Converters Market.  The Company sells its expanded
range of SBQ hot rolled bar products to cold drawn bar manufacturers.
The Company's product range, 1/4" through 3" in thickness and 2"
through 12" in width, enables the Company to supply practically all
the sizes needed by the converters.  The converters remove the scale
from the hot rolled bar and draw it through a die.  The drawing
reduces the cross section, improves surface and internal properties,
and produces a more exacting tolerance bar.  The end product is sold
through distributors and directly to original equipment manufacturers.


Steel Service Centers Market.  Approximately 30% of all steel
shipments to the end-user are distributed through steel service
centers, making this the largest single market for steel
manufacturers.  The Company sells both MBQ and SBQ Bar Flats into this
market.


Truck Trailers Market.  The Company is a significant supplier of SBQ
Bar Flats for flat bed trailer support beam flange material.  This
material is engineered and produced to exacting specifications
consistent with trailer manufacturers' requirements.


Miscellaneous Markets.  The Company supplies other markets including
metal building, grader blades, agricultural equipment, construction/
fabricating, railroad and industrial chain manufacturers. The products
furnished to these markets are primarily SBQ Bar Flats along with a
mixture of MBQ Bar Flats.

Customers

The Company sells to over 350 customers. Several wholly-owned
subsidiaries of Republic Technologies International aggregated
approximately 10.1% of sales for fiscal 2001. No other customer
accounted for more than 10% of sales in fiscal 2001. The loss of a
principal customer could have a material adverse effect on the
Company's operations.

The Company's foreign sales as a percentage of total sales were
8.3% in fiscal 2001. These sales consisted primarily of shipments to
Canada and Mexico.


Marketing

Senior management of the Company is directly involved in sales
to new and existing customers.  Sales are nationwide and in certain
foreign markets. Sales efforts are primarily performed by in-house
sales personnel and augmented with manufacturers' representative
companies.  The efforts of these sales representatives are directed by
the Company's Vice President, Sales and Marketing.


Competition and Other Market Factors

The domestic and foreign steel industries are characterized by
intense competition.  The Company competes with domestic and foreign
producers, many of whom have financial resources substantially greater
than those available to the Company.  The Company has identified its
principal competition from the following sources:  (i) in its leaf-
spring suspension market, the Company faces competition from four
North American mills; (ii) in its cold drawn bar converters market,
the Company competes with five North American mills; (iii) in the
steel service center market, the Company encounters competition from
numerous North American mills; and (iv) in its truck trailer market,
the Company competes with three North American mills. The Company
believes that the principal competitive factors affecting its business
are quality, service, price and geographic location.


Backlog and Seasonality

As of September 29, 2001, the Company had firm orders for
approximately 37,500 tons representing approximately $16.0 million in
sales, as compared with approximately 51,600 tons representing
approximately $22.4 million in sales, at September 30, 2000.

The Company operates on a continuous basis with two scheduled
shutdowns for heavy maintenance work in July and December.  The
Company's operations are not subject to seasonal fluctuations in
operations or sales.


Raw Materials

The principal raw material used in the Company's steel mill is
ferrous scrap.  Ferrous scrap is derived from, among other sources,
discarded automobiles, appliances, structural steel, railroad cars and
machinery.  The purchase price of scrap is subject to market
conditions largely beyond the control of the Company.  The Company is
located in an area where scrap is generally available and typically
maintains less than one month of scrap supply.  Historically, price
fluctuations of scrap have had no material long-term impact on the
Company.  However, while the Company has generally been successful in
passing on scrap cost increases through price increases, the effect of
steel imports, market price competition and under-utilized industry
capacity has in the past, and could in the future, limit the Company's
ability to increase prices. Two scrap dealers supplied approximately
60% of the Company's scrap in fiscal 2001.  In an attempt to ensure an
adequate source of raw materials, however, the Company has identified,
inspected and purchased scrap from 25 dealers.

	The Company's manufacturing process consumes large amounts of
electricity, which the Company purchases from Kentucky Power Company,
d/b/a American Electric Power ("AEP").  An abundant regional supply of
coal, used in producing electricity, helps keep the Company's energy
costs relatively low.  Effective November 13, 1997, the Company and
AEP entered into a contract for Operating Reserve Interruptible
Electric Service ("1997 Contract") which will have a minimum term of
five years, or until an open competitive market exists, unless the
Company gives AEP at least one year's notice of termination.  The 1997
Contract limits AEP's right to interrupt service to only those
instances that an AEP unit goes offline or that AEP is responsible to
share reserves with other electrical generators pursuant to the East
Central Area Reliability Coordination Agreement (ECAR), and any such
interruption can be no more than 30 minutes in duration.
Interruptions in the Company's electric service under the 1997
Contract with AEP have been minimal in fiscal 2001 and did not
significantly impact the Company's operations.


Employees

As of September 29, 2001, the Company employed 346 people,
approximately 80% of whom are members of the United Steelworkers of
America.  The Company's current five-year collective bargaining
agreement expires in September 2004.  The Company believes that its
wage rates and benefits are competitive with other mini-mills.


Environmental and Regulatory Matters

The Company is subject to federal, state, and local
environmental laws and regulations concerning, among other matters,
wastewater discharge, air emissions and furnace dust disposal.  As
with similar mills in the industry, the Company's furnaces are
classified as generating hazardous waste (K061) because the furnaces
produce certain types of dust containing lead, chromium and cadmium
("Furnace Dust").

Between 1981 and 1983, the prior operator (the "Prior Operator")
disposed of Furnace Dust in the Cooksey Brother's landfill, in
Cannonsburg, Kentucky ("Cooksey Landfill"). Before 1981 the Prior
Operator disposed of Furnace Dust in other locations, including a
strip mine.  The Company did not assume any liability from the Prior
Operator for disposal at the Cooksey Landfill or such other sites.
The Cooksey Landfill is operating pursuant to a permit and bond issued
and approved by the Kentucky Division of Waste Management, and the
Company has no reason to believe that the Cooksey Landfill or other
sites are likely targets for listing as a Kentucky "uncontrolled site"
or Federal Superfund Site. On May 5, 1999, the Company was notified by
the Kentucky Division of Waste Management ("DWM") that as a result of
a RCRA Facility Assessment ("RFA") conducted in 1986 and 1987 while
the Company's mill was operated by the Prior Operator, that DWM
requests that the Company undertake a RCRA Facility Investigation
("RFI") and, if necessary, thereafter, a RCRA Corrective Measures
Study ("CMS") and, if necessary, thereafter, a RCRA Corrective
Measures Implementation ("CMI").  On June 8, 1999, the Company was
notified by DWM that the Company's mill had been listed with 32 other
sites in Kentucky as a high priority for clean-up on the RCRA
Corrective Action Baseline List of Facilities.  The Company has not
made a determination as to whether the Prior Operator released any
hazardous waste at its site, has submitted a confirmatory sampling
plan and is continuing negotiations with DWM.  The Company, however,
could incur investigation and/or clean-up expenses in the future with
respect to the operation of the Company's facility by the Prior
Operator with respect to the Cooksey Landfill or such other sites if
(1) the sites are listed as a Kentucky "Uncontrolled Site" or Federal
Superfund Site, (2) DWM required the Company to undertake an RFI, CMS
and CMI, and (3) the Company is not successful in obtaining full
indemnification from the Prior Operator.


	The Company's operations are subject to the Federal Clean Air
Act which provides for regulation, through state implementation of
federal requirements, of the emission of certain air pollutants. On
June 2, 1999, the Kentucky Division for Air Quality issued to the
Company its Title V Operating Permit ("Air Permit") with an expiration
date of June 2, 2004.  As with similar mills in the industry, the
Federal Clean Air Act required that the Permit include emission
limitations and standards as well as monitoring, recordkeeping,
reporting, inspection and entry requirements to assure compliance with
those limits.  Pursuant to the United States Environmental Protection
Agency (USEPA) Mini-mill Audit Initiative, the Company continues to
evaluate past compliance with applicable regulations.  The Company has
also agreed with the Kentucky Division for Air Quality to conduct a
stack test of emissions from its EAF/LMF baghouse to further evaluate
compliance with its Air Permit. Additionally, the Company does not
know whether it will be able to consistently comply with the Air
Permit without additional capital and/or operating expense.

	The Company's operations are also subject to the Federal Clean
Water Act which provides for regulation through state implementation
of federal requirements of the discharge of certain water pollutants.
On March 19, 1999, the Kentucky Division of Water ("DOW") issued the
Company its Kentucky Pollutant Discharge Elimination System Permit
("Water Permit") with an expiration date of May 31, 2002.  In its
application for the Water Permit, the Company requested that DOW re-
evaluate the temperature limits established in its prior permit.  DOW
agreed to determine allowable surface water temperatures on a site-
specific basis and included in the Water Permit a requirement that the
Company conduct a year-long thermal plume study to assess the impact
of the effluent temperature on the aquatic biota in the receiving
stream. The study has been completed and DOW will determine whether to
allow surface water temperatures on a site-specific basis utilizing
available data and the results of the thermal plume study.  The
Company, therefore, does not know whether it will be able to comply
with temperature limits without additional capital and/or operating
expense when the limits are determined by DOW.

Further, there can be no assurance that evolving federal and
state environmental requirements or discovery of unknown conditions
will not (1) require the Company to make material expenditures in the
future or (2) affect the Company's ability to obtain permits for its
existing operations or any future expansion. The Company will continue
to plan and budget, as appropriate, for any additional capital and
operating expenses that may be required to upgrade or install new or
additional pollution control equipment in order to comply with all
permits.

Except as otherwise indicated, the Company believes it is in
substantial compliance with applicable environmental laws and
regulations.  Notwithstanding such compliance, if damage to persons or
property or contamination of the environment has been or is caused by
the conduct of the Company's business or by hazardous substances or
wastes used, generated or disposed of by the Company (or possibly by
prior operators of the Company's mini-mill or by third parties), the
Company may be held liable for such damages and be required to pay the
cost of investigation and remediation of such contamination.  The
amount of such liability to the Company could be material.  Changes in
federal or state laws, regulations or requirements or discovery of
unknown conditions could require additional expenditures by the
Company.


Item 2.	Properties

The Company's operations are located on approximately 126 acres
of land near Ashland, Kentucky, next to an interstate highway and a
rail line.  The  Company believes that its facilities are well
maintained, in good condition and adequate and suitable for its
operating needs.  The Company has completed certain capital
expenditures with respect to its properties.  See Item 1 -
Business - "Manufacturing Operations" and "Capital Improvements and
Expansion."


Item 3.	Legal Proceedings

The Company is subject to various claims and lawsuits arising in
the ordinary course of business with respect to commercial, product
liability and other matters, which seek remedies or damages.  Based
upon its evaluation of available information, management does not
believe that any such matters are likely, individually or in the
aggregate, to have a material adverse effect upon the Company's
business, financial position, results of operations or cash flows.
See also Item 1 "Business - Environmental and Regulatory Matters."


Item 4.	Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of shareholders during
the fourth quarter of the fiscal year ended September 29, 2001.

      Executive Officers of the Registrant

Pursuant to General Instruction G(3) of Form 10-K, the following
list is included as an unnumbered Item in Part I of this report in
lieu of being included in the Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held February 26, 2002.

The names, ages and positions of all of the executive officers
of the Registrant as of September 29, 2001 are listed below with their
business experience with the Registrant for the past five years.
Officers are elected annually by the Board of Directors at the first
meeting of directors following the annual meeting of stockholders.
There are no family relationships among these officers, nor any
agreement or understanding between any officer and any other person
pursuant to which the officer was selected.

Charles C. Hanebuth, 57, has been President and Chief Executive
Officer of the Company since its formation in August 1993.  From
November 1990 to October 1993, Mr. Hanebuth was President and Chief
Operating Officer of Kentucky Electric Steel Corporation, a wholly-
owned subsidiary of NS Group, Inc.  Mr. Hanebuth has 22 years
management experience in the steel industry.  Mr. Hanebuth is a
advisory director of Fifth Third Bank Ohio Valley.

William J. Jessie, 51, a certified public accountant, has been Vice
President, Secretary, Treasurer and Chief Financial Officer of the
Company since its formation in August 1993.  Prior to August 1993, he
was Controller of Kentucky Electric Steel Corporation since 1986.  Mr.
Jessie has 21 years of public accounting experience with national and
local accounting firms.

Joseph E. Harrison, 57, has been Vice President of Sales and Marketing
of the Company since its formation in August 1993.  From February 1991
to August 1993 he was General Sales Manager of Kentucky Electric Steel
Corporation.  Mr. Harrison has over 31 years of sales experience in
the steel industry.

William H. Gerak, 56, has been Vice President of Administration of the
Company since January 1994.  From February 1988 to December 1993 he
was the Director of Human Resources and Labor Relations for Heekin
Can, Inc., a wholly-owned subsidiary of Ball Corporation, a producer
of steel food and aerosol containers, head-quartered in Cincinnati,
Ohio.  Mr. Gerak has over 27 years of human resource and
administrative experience.







PART II


Item 5.	Market for Registrant's Common Equity and Related
Shareholder Matters

Effective with the opening of the stock market on August 20,
2001, the Company's common stock trades on the NASDAQ Small Cap Market
under the symbol "KESI."  Prior to August 20, 2001, the Company's
common stock traded on the NASDAQ National Market under the symbol
"KESI." The following table sets forth, for the fiscal periods
indicated, the high and low closing prices of the stock on the NASDAQ
National or NASDAQ Small Cap Market:

                               Fiscal 2000            Fiscal 2001
                            High         Low        High        Low
      First Quarter      $ 4.000      $ 2.375    $ 2.500     $ 1.500
Second Quarter       2.625        1.750      1.875       1.250
      Third Quarter        2.781        1.875      1.900       1.280
      Fourth Quarter       2.500        1.625      1.370        .600


On January 7, 2002, there were approximately 800 beneficial
owners of the Company's common stock.

The Company currently intends to retain all earnings to support
the development of its business. Certain of the Company's debt
instruments currently prohibit the payment of dividends and the
repurchase of Company stock. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 6 of the
Notes to Consolidated Financial Statements of the Company.


Item 6.	Selected Financial Data

The selected financial data shown below for the five years in
the period ended September 29, 2001 are derived from the audited
financial statements of the Company.  The information set forth below
should be used in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Financial Statements and related notes thereto included elsewhere
herein.




















<table>
                                                   Year Ended
                           Sept. 27,   Sept. 26,   Sept. 25    Sept. 30,   Sept. 29,
                             1997         1998       1999        2000        2001
                                (In thousands, except share and per share data)

                        <c>         <c>         <c>         <c>         <c>
Income Statement Data:
  Net sales ............   $ 97,966    $113,676    $110,265    $120,585    $ 77,859
  Cost of goods sold ...     93,306     101,940     100,016     110,883      77,863
                            -------     -------     -------     -------     -------
    Gross profit (loss).      4,660      11,736      10,249       9,702          (4)
  Selling and admini-
    strative expenses ..      6,800       7,011       7,627       7,573       8,298
                            -------     -------     -------     -------     -------
    Operating income (loss)  (2,140)      4,725       2,622       2,129      (8,302)

  Interest expense .....     (2,125)     (2,395)     (2,274)     (2,528)     (2,051)
  Interest income and
    other ..............         34          80       1,234         911         909
  Loss on abandonment
    of assets ..........       -           -           -           -           (457)
  Gain on involuntary con-
    version of equipment       -           -           -           -            256
                            -------     -------     -------     -------     -------
    Income (loss) before
     income taxes ......     (4,231)      2,410       1,582         512      (9,645)
  Income taxes .........     (1,599)        916         604         195       5,624
                            -------     -------     -------     -------     -------
      Net income (loss)    $ (2,632)   $  1,494    $    978    $    317    $(15,269)

  Net income (loss)
    per common share -
    basic and diluted...   $   (.57)   $    .32    $    .24         .08    $  (3.74)

  Weighted average shares
    outstanding-basic     4,633,315   4,624,671   4,085,480   4,074,463   4,081,966

  Weighted average shares
    outstanding-diluted   4,633,315   4,630,920   4,089,219   4,074,463   4,081,966

Balance Sheet Data:
  Working capital .....    $ 11,335     $14,153     $15,718     $23,924     $15,935
  Total assets ........      78,770      80,251      82,941      76,954      60,014
  Long-term debt (1) ..      20,000      20,000      20,000      16,667      16,667
  Shareholders' equity       34,211      35,192      35,252      35,612      20,383
</table>
(1)	Net of current portion.


Item 7.	Management's Discussion and Analysis of Financial
Condition and Results of Operations

The following analysis of results of operations and financial
condition of the Company should be read in conjunction with "Selected
Financial Data" and Financial Statements and Supplementary Data
included elsewhere herein.

General

 The Company manufactures special bar quality alloy and carbon
steel bar flats to precise customer specification for sale in a
variety of niche markets.  Market conditions caused the Company to
experience sharp declines in shipment volumes and operating margins
during fiscal 2001, which impacted the Company's cash flows and
produced a pre-tax loss of approximately $9.6 million.  See "Current
Industry Conditions."

The Company's fiscal year ends on the last Saturday of
September.  The fiscal year normally consists of fifty-two weeks;
however, the fiscal year ended September 30, 2000 has fifty-three
weeks.  The fiscal year ended September 29, 2001 has fifty-two weeks.





Results of Operations

The following table sets forth the percentages of the Company's
net sales represented by certain income and expense items for the
periods indicated.

                                              Year Ended
                                   September   September   September
                                    25, 1999    30, 2000    29, 2001
    Net sales ....................   100.0%      100.0%      100.0%
    Cost of goods sold ...........    90.7        92.0       100.0
                                     -----       -----       -----
    Gross profit (loss) ..........     9.3         8.0          -
    Selling and administrative
      expenses ...................     6.9         6.3        10.7
                                     -----       -----       -----
    Operating income (loss) ......     2.4         1.7       (10.7)

    Interest expense .............    (2.1)       (2.1)       (2.6)
    Interest income and other ....     1.1          .8         1.2
    Loss on abandonment of assets       -           -          (.6)
    Gain on involuntary conversion
      of equipment ...............      -           -           .3
                                     -----       -----       -----
    Income (loss) before
      income taxes ...............     1.4          .4       (12.4)

    Income taxes  ................      .5          .1         7.2
                                     -----       -----       -----
    Net income (loss) ............      .9%         .3%      (19.6%)


Year Ended September 29, 2001 Compared with Year Ended September 30,
2000

	Net Sales.  Net sales for fiscal 2001 decreased by $42.7 million
(35.4%) to $77.9 million from $120.6 million in fiscal 2000.  The
decrease in net sales is attributable to a significant decrease in
shipments combined with a decrease in average selling price.  Finished
goods tons shipped decreased 31.5% from 264,800 tons in fiscal 2000 to
181,500 tons in fiscal 2001.  The decrease in finished goods tons
shipped reflects market conditions throughout the steel industry.  The
average selling price per finished goods shipped was down 3.9% in
fiscal 2001 as compared to fiscal 2000.  The decrease in average
selling price for fiscal 2001 is attributed to market price reductions
and a change in product mix.  In addition, fiscal 2001 shipments
included 1,700 tons of billets (semi-finished product) as compared to
11,800 tons of billets in fiscal 2000.

	Cost of Goods Sold.  Cost of goods sold for fiscal 2001
decreased by $33.0 million, or 29.8% to $77.9 million from $110.9
million in fiscal 2000.  As a percentage of net sales, cost of goods
sold increased from 92.0% in fiscal 2000 to 100% in fiscal 2001.  The
decrease in cost of goods sold reflects the decrease in shipments (as
discussed above) offset by an increase in the per ton cost of tons
shipped.  The increase in the per ton manufacturing costs of tons
shipped for fiscal 2001 resulted from lower production levels and
higher energy costs partially offset by lower scrap costs.  The
increase in cost of goods sold, as a percentage of net sales for
fiscal 2001, as compared to fiscal 2000, reflects lower selling prices
(as discussed above) and the increase in per ton manufacturing costs.





	Gross Profit (Loss).  As a result of the above, gross profit for
fiscal 2001 decreased by $9.7 million from $9.7 million in fiscal 2001
to ($4,000) in fiscal 2001.  As a percentage of net sales, gross
profit decreased from 8.0% in fiscal 2000 to 0% in fiscal 2001.

	Selling and Administrative Expenses.  Selling and administrative
expenses include salaries and benefits, corporate overhead, insurance,
sales commissions and other expenses incurred in the executive, sales
and marketing, shipping, human resources, and other administrative
departments.  Selling and administrative expenses for fiscal 2001
increased by $.7 million (9.6%) to $8.3 million from $7.6 million in
fiscal 2001.  As a percentage of net sales, such expenses increased
from 6.3% for fiscal 2000 to 10.7% for fiscal 2001.  The increase in
the percentage of selling and administrative expenses to net sales for
fiscal 2001, as compared to fiscal 2000, is due to the significant
decrease in net sales and the increase in actual expenses.  The
increase in selling and administrative expenses for fiscal 2001 as
compared to fiscal 2000 is primarily due to an increase in bad debt
expense.  The increase in bad debt expense is due to the bankruptcy of
a large customer which is currently in reorganization.

	Operating Income (Loss).  For the reasons described above,
operating income decreased by $10.4 million from $2.1 million in
fiscal 2000 to an operating loss of $(8.3) million in fiscal 2001.  As
a percentage of net sales, operating income decreased from 1.7% in
fiscal 2000 to (10.7%) in fiscal 2001.

	Interest Expense.  Interest expense decreased by $.4 million to
$2.1 million in fiscal 2001 from $2.5 million in fiscal 2000.  The
decrease in interest expense in fiscal 2001 is due to the decrease in
long-term debt and the decrease in the average amount outstanding on
the Company's line of credit.  To a lesser extent, the decrease in
interest expense reflects lower line of credit interest rates and the
fact that there was one less week in fiscal 2001.

	Interest Income and Other.  Interest and other income for fiscal
2001 and 2000 was $.9 million.  Fiscal 2001 and 2000 includes $.4
million and $.8 million, respectively, for a claim settlement
pertaining primarily to the Company's purchase of electrodes during
the years 1992 and 1997.  Interest income increased $.2 million in
fiscal 2001 due to the investment of proceeds from the sale and
leaseback transaction completed in September 2000.

	Loss on Abandonment of Assets.  During fiscal 2001, the Company
disposed of certain assets that were no longer in service.  The net
book value of the equipment abandoned was $.5 million which is
reflected as a loss in the financial statements for fiscal 2001.

	Gain on Involuntary Conversion of Equipment.  As a result of a
fire which destroyed an auxiliary building and certain equipment, the
Company received insurance proceeds of $448,000 for the replacement
cost of the building and equipment and other additional expenses
associated with the fire.  The net book value of the assets destroyed
was approximately $57,000 and the Company has incurred approximately
$135,000 in additional expenses associated with the fire and expended
$313,000 on the new building and equipment.  The excess of the
replacement cost over the net book value of the building and equipment
destroyed resulted in a gain of approximately $256,000.

	Provision (Credit) for Income Taxes.  The Company has recorded a
tax provision of approximately $5.6 million in fiscal 2001 which,
based on a pre-tax loss of approximately $9.6 million, results in a
negative effective tax rate of approximately 59%.  Due to the loss
incurred in fiscal 2001, continuing losses, related debt re-
structurings (see "Current Industry Conditions"), the potential
limitation of utilizing net operating losses under Section 382 of the
Internal Revenue Code (as discussed below) and management's current
belief that the available objective evidence creates sufficient
uncertainty regarding the realizability of previously recognized
deferred tax assets, the Company recorded a valuation allowance of
approximately $8.9 million during the fourth quarter of fiscal 2001
which fully offsets previously recognized deferred tax assets.  The
Financial Accounting Standards Board Statement No. 109 (SFAS 109)
"Accounting for Income Taxes", requires that the Company record a
valuation allowance when it is "more likely than not that some portion
or all of the deferred tax asset will not be realized."  The Company
will continue to provide a 100% valuation allowance for the deferred
tax asset in the future until the Company returns to an appropriate
level of cumulative financial accounting income.  The ultimate
realization of a future tax benefit related to net operating loss
carryforwards depends on the Company's ability to generate sufficient
taxable income in the future.  If the Company is able to generate
sufficient taxable income in the future, the Company will reduce the
valuation allowance through a reduction of income tax expense (and a
corresponding increase in shareholders' equity).

The realization of a benefit from net operating loss
carryforwards which can, and previously did, generate deferred tax
assets, may also be limited by Section 382 of the Internal Revenue
Code.  Section 382 of the Internal Revenue Code contains rules
designed to discourage persons from buying and selling the net
operating losses of companies.  These rules generally operate by
focusing on ownership changes among stockholders owning directly or
indirectly 5% or more of the common stock of a company or any change
in ownership arising from a new issuance of stock by a company.  In
general, Section 382 rules limit the ability of a company to utilize
net operating losses after a change of ownership of more than 50% of
its common stock over a three-year period.  Purchases of the Company's
common stock in amounts greater than specified levels could
inadvertently create a limitation on the Company's ability to utilize
its net operating losses for tax purposes in the future.

	Net Income (Loss).  As a result of the above, net income
decreased by $15.6 million from $.3 million in fiscal 2000 to a net
loss of $(15.3) million in fiscal 2001.  As a percentage of net sales,
net income (loss) decreased from .3% in fiscal 2000 to (19.6%) in
fiscal 2001.


Year Ended September 30, 2000 Compared with Year Ended September 25,
1999

	Net Sales.  Net sales for fiscal 2000 increased by $10.3 million
(9.4%) to $120.6 million from $110.3 million in fiscal 1999.  The
increase in net sales is attributable to an increase in shipments
offset by a decrease in average selling price.  Finished goods
shipments increased by 8.9% from 243,100 tons in fiscal 1999 to
264,800 in fiscal 2000.  The average selling price per finished goods
shipped was down 2.0% in fiscal 2000 as compared to fiscal 1999.  The
decrease in finished goods average selling price for fiscal 2000 is
primarily attributable to a change in product mix as the Company
increased its participation in lower priced products.  In addition,
fiscal 2000 shipments included 11,800 tons of billets (semi-finished
product) as compared to 800 tons of billets in fiscal 1999.

	Cost of Goods Sold. Cost of goods sold for fiscal 2000 increased
by $10.9 million, or 10.9% to $110.9 million from $100.0 million in
fiscal 1999.  As a percentage of net sales, cost of goods sold
increased from 90.7% in fiscal 1999 to 92.0% in fiscal 2000.  The
increase in cost of goods sold reflects the increase in shipments (as
discussed above) offset by a decrease in the per ton cost of tons
shipped.  The decrease in the per ton manufacturing costs of tons
shipped for fiscal 2000 resulted from lower conversion costs due to
increased productivity offset by higher scrap costs.  The increase in
cost of goods sold as a percentage of net sales for fiscal 2000, as
compared to fiscal 1999, reflects lower selling prices (as discussed
above) partially offset by lower per ton manufacturing costs.

	Gross Profit.  As a result of the above, gross profit for fiscal
2000 decreased by $.5 million from $10.2 million in fiscal 1999 to
$9.7 million in fiscal 2000.  As a percentage of net sales, gross
profit decreased from 9.3% in fiscal 1999 to 8.0% in fiscal 2000.

	Selling and Administrative Expenses. Selling and administrative
expenses include salaries and benefits, corporate overhead, insurance,
sales commissions and other expenses incurred in the executive, sales
and marketing, shipping, human resources, and other administrative
departments.  Selling and administrative expenses for fiscal 2000 and
1999 were $7.6 million with decreases in legal and professional fees
being offset by increases in the provision for bad debt expense, sales
commissions, and miscellaneous other items. As a percentage of net
sales, such expenses decreased from 6.9% for fiscal 1999 to 6.3% for
fiscal 2000.  The decrease in selling and administrative expenses as a
percentage of net sales for fiscal 2000, as compared to fiscal 1999,
is due to higher net sales in 2000.

	Operating Income. For the reasons described above, operating
income decreased by $.5 million (18.8%) from $2.6 million in fiscal
1999 to $2.1 million in fiscal 2000.  As a percentage of net sales,
operating income decreased from 2.4% in fiscal 1999 to 1.7% in fiscal
2000.
	Interest Expense. Interest expense increased by $.2 million to
$2.5 million in fiscal 2000 from $2.3 million in fiscal 1999.  The
increase in interest expense is due to an increase in both the average
interest rate and the average amount outstanding on the line of
credit.

	Provision (Credit) for Income Taxes. The Company has recorded a
tax provision of approximately $.2 million in fiscal 2000 as compared
to a tax provision of approximately $.6 million in fiscal 1999 at an
effective tax rate of 38% for both years.  As of September 30, 2000
the Company had net deferred tax assets of $5.7 million, which were
net of a $2.7 million valuation allowance.  Included in the $8.4
million of gross deferred tax assets was $5.4 million representing the
tax benefit of net operating tax loss carryforwards which expire
beginning in 2011.  The realization of the deferred tax assets is
dependent in part upon generation of sufficient future taxable income.
Management considered the levels of currently anticipated pre-tax
income in assessing the required level of the deferred tax asset
valuation allowance.  Taking into consideration historical pre-tax
income levels of operations for fiscal 1998, 1999, and 2000, and other
factors, management believed it was more likely than not that the net
deferred tax asset, after consideration of the valuation allowance
which has been established, would be realized.  The amount of the net
deferred tax asset considered realizable, however, could be reduced in
future years if estimates of future taxable income during the
carryforward period are reduced.

	Interest Income and Other. Interest and other income decreased
by $.3 million from $1.2 million in fiscal 1999 to $.9 million in
fiscal 2000.  Fiscal 2000 and fiscal 1999 include other income of $.8
million and $1.1 million, respectively, for a claim settlement
pertaining primarily to the Company's purchase of electrodes during
the years 1992 through 1997.

	Net Income.  As a result of the above, net income decreased by
$.7 million from $1.0 million in fiscal 1999 to $.3 million in fiscal
2000.  As a percentage of net sales, net income decreased from .9% in
fiscal 1999 to .3% in fiscal 2000.



Liquidity and Capital Resources

	The Company considers its level of cash, availability under its
line of credit, and its current ratio and working capital to be its
most important measures of short-term liquidity.  In terms of long-
term liquidity indicators, the Company believes its historical levels
of cash generated from operations and required debt repayments to be
the most important measures.

	Cash flows from operating activities amounted to $.7 million and
$6.2 million in fiscal 1999 and 2000, respectively.  Net cash used by
operating activities was $7,000 in fiscal 2001.  Fiscal 1999 operating
cash flows reflect net income of $1.0 million, depreciation and
amortization of $3.6 million and the decrease in the net deferred tax
asset of $.7 million.  Operating cash flows were negatively impacted
by increases in accounts receivable and inventories of $2.1 million
and $2.4 million, respectively.  Also, operating cash flows were
positively impacted by an increase of $1.2 million in trade accounts
payable.  The increase in inventories and accounts payable is
primarily due to an increase in scrap and billet inventory.  The
increase in accounts receivable reflects the higher sales level in the
latter part of fiscal 1999.

	Fiscal 2000 operating cash flows reflect net income of $.3
million and depreciation and amortization of $3.8 million.  Operating
cash flows were positively impacted by decreases in accounts
receivable and inventories of $3.3 million and $1.1 million,
respectively.  Operating cash flows were negatively impacted by a $1.9
million decrease in trade accounts payable.  The decrease in accounts
receivable reflects the lower sales level in the latter part of fiscal
2000.  The decrease in inventories is primarily due to a decrease in
billet inventories and a decrease in the carrying value of finished
good inventory offset by slightly higher scrap inventories.  The
decrease in the carrying value of finished goods inventory reflects
the lower conversion costs in fiscal 2000.  The decrease in accounts
payable is due to timing of payments on open accounts.

	Fiscal 2001 operating cash flows reflect the net loss of $15.3
million, the write-off of deferred tax assets of $5.7 million,
depreciation and amortization of $2.8 million and the loss on
abandonment of assets of $.5 million.  Operating cash flows were
positively impacted by decreases in inventories and accounts
receivable of $4.7 million and $2.3 million, respectively.  Also,
operating cash flows were negatively impacted by the decrease in trade
accounts payable of $.9 million.  The decrease in inventories is due
to a decrease in the tons of scrap, billets, and finished goods
inventory which reflects lower operating levels.  The decrease
inventory tonnage was offset somewhat by an increase in the carrying
value of billets and finished goods inventory.  The increase in the
carrying value of billets and finished goods inventory reflects higher
per ton cost due to lower production levels in fiscal 2001.  The
decrease in accounts receivable is due to the decrease in sales in
fiscal 2001.  The decrease in accounts payable is due to lower
operating levels.

	Cash flows used by investing activities consisted of capital
expenditures of $2.8 million in fiscal 1999.  Cash flows provided by
investing activities amounted to $7.2 million in fiscal 2000 and
consisted of proceeds from sale-leaseback transaction of $8.5 million
offset by capital expenditures of $1.3 million.  Cash flows used by
investing activities amounted to $.5 million in fiscal 2001 and
consisted of capital expenditures of $.8 million offset by proceeds
from involuntary conversion of $.3 million.

	Cash flows provided from financing activities amounted to $2.2
million in fiscal 1999 and reflects $3.1 million in advances on the
Company's line of credit facility offset by $1.0 million used to
purchase treasury stock.  Cash flows used in financing activities
amounted to $4.9 million and $.7 million in fiscal 2000 and 2001,
respectively.  The $4.9 million in fiscal 2000 reflects the $4.9
million in net repayments on the Company's line of credit facility.
The $.7 million in fiscal 2001 reflects the $3.3 million repayment of
long-term debt offset by the $2.6 million in advances on the Company's
line of credit facility.

	Working capital at September 29, 2001, was $15.9 million as
compared to $23.9 million at September 30, 2000.  The current ratio
was 1.7 to 1.0 at September 29, 2001 as compared to 2.0 to 1.0 at
September 30, 2000.

	The Company completed its 500,000 share buyback program during
fiscal 1998 and the Board of Directors authorized the repurchase of an
additional 500,000 shares of the Company's common stock.  During the
fiscal year ended September 29, 2001, the Company did not repurchase
any shares of its common stock leaving 60,515 authorized repurchase
shares remaining.

	The Company's primary ongoing cash requirements are for current
capital expenditures and ongoing working capital.  Since March 31,
2001, the Company has failed to meet the fixed charge coverage ratio
covenant which required the Company to maintain a fixed charge
coverage ratio of 2:1 for each rolling four quarter period.  In
addition to the default of the fixed charge coverage ratio covenant,
the Company failed to make a scheduled principal payment on the
unsecured senior notes of $3,333,333 due on November 1, 2001.  These
covenant violations were waived in connection with the debt
restructuring as discussed below.

	On January 14, 2002, the Company was successful in restructuring
its existing debt obligations.  As a result of this restructured
financing, the Company deferred its November 1, 2001 principal payment
and a portion of the scheduled November 1, 2002 principal payment
until November 1, 2005.  Annual maturities of the senior notes under
the restructured financing are $1,500,000 due on November 1, 2002,
$3,333,333 due on September 30, 2003, $3,333,333 due on November 1,
2004 and $8,500,000 due on November 1, 2005.  These notes bear
interest at the fixed rate of 9.00% per annum, with interest paid
monthly.

	The restructured financing also includes an $18 million secured
bank credit facility which expires on November 1, 2005.  Borrowings
are limited to defined percentages of eligible inventory and accounts
receivable.  Interest on borrowings accrue at the rate of prime plus
2.5%. As of January 14, 2002, approximately $10.0 million was
outstanding under the Company's line of credit, approximately $1.1
million was utilized to collateralize various letters of credit and
$4.2 million was available for additional borrowings.  In addition,
the Company had approximately $.7 million in cash.

	Under the terms of the restructured financing, both the senior
notes and the borrowings on the line of credit are secured by all
current and future assets of the Company, including, but not limited
to, accounts receivable, inventory, and all real property, plant and
equipment.

	The senior notes and bank credit facility in the restructured
financing contain restrictive covenants, which include, among other
requirements , the maintenance of minimum shareholders' equity;
minimum earnings before interest, taxes, depreciation, and
amortization (EBITDA); minimum interest coverage ratio; minimum debt
service coverage ratio; capital expenditure restrictions; and
prohibition on the payment of dividends.

	Though the Company will continue its aggressive working capital
management and cost reduction initiatives, continued losses similar to
those incurred in fiscal 2001 will severely limit the Company's
ability to provide future liquidity from operations and remain in
compliance with the new covenants of the restructured financing.
There can be no assurances that long-term cash requirements and
compliance with existing debt covenants will be met if the Company
continues to incur significant financial losses for an extended period
of time.

Recent Developments

	On March 15, 2001, the Company received a determination letter
from the Nasdaq Stock Market, Inc. indicating that, absent a
successful appeal by the Company, the Company's common stock would be
removed from listing on the Nasdaq National Market.  This
determination was made based on the Company's common stock failing to
maintain public float market value of $5,000,000 as required under
Nasdaq's National Market rules.  The Company requested a hearing on
the written record before a Nasdaq Listing Qualifications Panel to
appeal the staff's determination.  The Company's appeal was rejected
by the Nasdaq Listing Qualifications Panel.  The Panel agreed to
automatically transfer the Company's common stock to the Nasdaq Small
Cap Market effective with the opening of the market on August 20,
2001.

	See "Current Industry Conditions" for other recent developments.


Impact of Inflation and Changing Prices

While the Company has not experienced any material long-term
adverse effects on operations in recent years because of inflation,
margins have been affected by inflationary conditions.  The Company's
primary cost components are steel scrap, labor, and energy, all of
which are susceptible to domestic inflationary pressures.  Scrap costs
are frequently influenced by supply and demand factors as well as
general economic conditions.  Finished product prices are influenced
by nationwide economic trends, steel imports, and manufacturing
capacity within the steel industry.  While the Company has generally
been successful in passing on cost increases through price increases,
the effect of steel imports, market price competition and under-
utilized industry capacity has in the past, and could in the future,
limit the Company's ability to increase prices.  See "Business -
Competition and Other Market Factors," "Raw Materials," "Manufacturing
Operation" and "Employees."


Forward Looking Statements

The matters discussed or incorporated by reference in this
Report on Form 10-K that are forward-looking statements (as defined in
the Private Securities Litigation Reform Act of 1995) involve risks
and uncertainties.  These risks and uncertainties include, but are not
limited to: the reliance on truck and utility vehicle industry; excess
industry capacity; product demand and industry pricing; volatility of
raw material costs, especially steel scrap; intense foreign and
domestic competition; management's estimates of niche market data; the
cyclical and capital intensive nature of the industry; and cost of
compliance with environmental regulations.  These risks and
uncertainties could cause actual results of the Company to differ
materially from those projected or implied by such forward-looking
statements.


Impact of Recent Accounting Pronouncements

See Note 2 "Summary of Significant Accounting Policies" of the
Notes to Consolidated Financial Statements of the Company.



Item 7A.	Qualitative and Quantitative Disclosure about Market Risk

	The Company is exposed to certain market risks that are inherent
in financial instruments arising from transactions that are entered
into in the normal course of business.  The Company does not enter
into derivative financial instrument transactions to manage or reduce
market risk or for speculative purposes but is subject to interest
rate risk on its fixed interest rate secured senior notes.  The bank
credit facility has a variable interest rate which reduces the
potential exposure of interest rate risk from a cash flow perspective.
The fair value of debt with a fixed interest rate generally will
increase as interest rates fall given consistency in all other
factors.  Conversely, the fair value of fixed rate debt will decrease
as interest rates rise.

The Company is also subject to increases in the cost of energy,
supplies and steel scrap due to inflation and market conditions.


Item 8.	Financial Statements and Supplementary Data

The financial statements and schedules referenced in Item
14(a)(1) and (a)(2) hereof are included herein and are filed as part
of this report.


Item 9.	Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

None.



PART III


Item 10.	Directors and Executive Officers of the Registrant

The specified information required by this item is incorporated
by reference to the information under the heading "Proposal I:
Election of Directors" in the Proxy Statement as filed with the
Commission or is included under the heading "Executive Officers of the
Registrant" in Part I of this 10-K filing.  The disclosure required by
Item 405 of Regulation S-K is incorporated by reference to the
information under the heading "Compliance with Section 16(a)" of the
Proxy Statement.


Item 11.	Executive Compensation

The specified information required by this item is incorporated
by reference to the information under the heading "Executive
Compensation" in the Proxy Statement as filed with the Commission.


Item 12.	Security Ownership of Certain Beneficial Owners and
Management

The specified information required by this item is incorporated
by reference to the information in the table under the heading "Voting
Securities and Principal Holders Thereof" in the Proxy Statement as
filed with the Commission.


Item 13.	Certain Relationships and Related Transactions

	None.



PART IV


Item 14.	Exhibits, Financial Statement Schedules and Reports on
Form 8-K

  (a)1.     See Index to Financial Statements and Schedule

  (a)2.	See Index to Financial Statements and Schedule

  (a)3.     Exhibits

     3.1	Certificate of Incorporation of Kentucky Electric Steel,
Inc., filed as Exhibit 3.1 to Registrant's Registration
Statement on Form S-1 (No. 33-67140), and incorporated by
reference herein.

     3.2 	By-Laws of Kentucky Electric Steel, Inc., filed as Exhibit
3.2 to Registrant's Registration Statement on Form S-1
(No. 33-67140), and incorporated by reference herein.

     4.1	Senior Note Agreement between Registrant and a group of
institutional investors.  Filed as Exhibit 4.1 to
Registrant's Form 10-K for the fiscal year ended September
30, 1995, File No. 0-22416, and incorporated by reference
herein.

4.2	First Amendment Agreement to Senior Note Agreement between
Registrant and a group of institutional investors.  Filed
as Exhibit 4.4 to Registrant's Form 10-Q, No. 0-22416,
filed on February 11, 1997, and incorporated by reference
herein.

     4.3	Amended and Restated Loan Agreement between Registrant and
National City Bank of Kentucky dated January 14, 2002,
filed herewith.

4.4	Amendment No. 2 to Senior Note Agreement between
Registrant and a group of institutional investors, filed
herewith.


    10.1	Transfer Agreement between NS Group, Inc., Kentucky
Electric Steel Corporation, and Registrant, filed as
Exhibit 10.2 to Registrant's Form 10-K for the fiscal year
ended September 25, 1993, File No. 0-22416, and
incorporated by reference herein.

    10.2	Tax Agreement between NS Group, Inc., Kentucky Electric
Steel Corporation and Registrant, filed as Exhibit 10.3 to
Registrant's Form 10-K for the fiscal year ended September
25, 1993, File No. 0-22416, and incorporated by reference
herein.

    10.3	Form of Indemnification Agreement between Registrant and
Its Executive Officers and Directors, filed as Exhibit
10.4 to Amendment No. 1 to Registrant's Registration
Statement on Form S-1 (No. 33-67140), and incorporated by
reference herein.*

    10.4	Registration Rights Agreement between Registrant and NS
Group, Inc., filed as Exhibit 10.7 to Registrant's Form
10-K for the fiscal year ended September 25, 1993, File
No. 0-22416, and incorporated by reference herein.

10.5	Kentucky Electric Steel, Inc. 1993 Employee Stock Option/
Restricted Stock Plan, filed on Registrant's Form S-8 (No.
33-77598), filed on April 12, 1994, and incorporated by
reference herein.*

10.6	Kentucky Electric Steel, Inc. 1993 Transition Stock Option
Plan, filed on Registrant's Form S-8 (No. 33-77598), filed
on April 12, 1994, and incorporated by reference herein.

    10.7	The Kentucky Electric Steel, Inc. Salary Continuation
Plan, effective June 7, 1994, as amended, for the
benefit of the Company's eligible salaried employees,
filed as Exhibit 10.8 to Registrant's Form 10-Q, File
No. 0-22416, filed on August 6, 1999, and incorporated
by reference herein.*

    10.8 	The Kentucky Electric Steel, Inc. Executive Severance
Plan, effective June 7, 1994, as amended, for the benefit
of the Company's eligible Executive Officers, filed as
Exhibit 10.9 to Registrant's Form 10-Q, File No. 0-22416,
filed on August 6, 1999, and incorporated by reference
herein.*

    10.9	Employment Agreements dated June 7, 1994, as amended,
between Kentucky Electric Steel, Inc. and its four
Executive Officers, filed as Exhibit 10.10 to Registrant's
Form 10-Q, file No. 0-22416, filed on August 6, 1999 and
incorporated by reference herein.*

    10.10	Form of Salary Continuation Agreements entered into
between Kentucky Electric Steel, Inc. and its four
Executive Officers, filed as Exhibit 10.11 to Registrant's
Form 10-K for fiscal year ended September 25, 1999, File
No. 0-22416, and incorporated by reference herein.*

    10.11	The Kentucky Electric Steel, Inc. Key Employee Stock/Loan
Plan, effective February 2, 1995 for the benefit of the
Company's   Executive Officers, filed as Exhibit 10.14 to
Registrant's Form 10-Q, No. 0-22416, filed on February 9,
1995, and incorporated by reference herein.*




    10.12	Kentucky Electric Steel, Inc. 1994 Employee Stock Option/
Restricted Stock Plan, filed on Registrant's Form S-8 (No.
33-301218), filed on February 12, 1996, and incorporated
by reference herein.*

    10.13	Rights Agreement between Kentucky Electric Steel, Inc. and
EquiServe Trust Company, N.A., dated as of September 1,
1999, filed  as Exhibit 4.8 to Registrant's Form 8-K, File
No. 0-22416, filed on September 14, 1999 and incorporated
by reference herein.

10.14	The Kentucky Electric Steel, Inc. 1999 Share Plan for Non-
Employee Directors, filed as Exhibit 10.18 to Registrant's
Form 10-Q, No. 0-22416 filed on August 6, 1999 and
incorporated by reference herein.*

10.15	Form of Promissory Note dated October 6, 1999, between
Kentucky Electric Steel, Inc. and its four executive
officers, filed as Exhibit 10.19 to Registrant's From 10-K
for the fiscal year ended September 25, 1999, File No. 0-
22416, and incorporated by reference herein.*

10.16	Form of Loan Forgiveness Agreement dated October 6, 1999,
between Kentucky Electric Steel, Inc. and its four
executive officers, filed as Exhibit 10.20 to Registrant's
Form 10-K for the fiscal year ended September 25, 1999,
File No. 0-22416, and incorporated by reference herein.*

10.17	Trust Under Certain Kentucky Electric Steel Salary
Continuation Agreements dated October 14, 1999, filed as
Exhibit 10.21 to Registrant's Form 10-K for the fiscal
year ended September 25, 1999, File No. 0-22416, and
incorporated by reference herein.*

10.18    Master Equipment Lease for Manufacturing Equipment dated
September 30, 2000 with Fifth Third Bank, Ohio Valley,
filed as Exhibit 10.18 to Registrant's Form 10-K for
fiscal year ended September 30, 2000, File No. 0-22416,
and incorporated by reference herein.

10.19    Master Equipment Lease for Manufacturing Equipment dated
September 30, 2000 with Fifth Third Bank, Ohio Valley,
filed as Exhibit 10.19 to Registrant's Form 10-K for
fiscal year ended September 30, 2000, File No. 0-22416,
and incorporated by reference herein.

    10.20	Kentucky Electric Steel, Inc. 2001 Share Plan for Non-
Employee Directors, filed as Exhibit 10.22 to Registrant's
Form 10-Q, File No. 0-22416, filed on March 31, 2001, and
incorporated by reference herein.

    10.21	Amended and Restated Addendum A to Master Equipment Lease
for Manufacturing Equipment, dated January 14, 2002 with
Fifth Third Bank, Ohio Valley, filed herewith.


    23	Consent of Arthur Andersen LLP


     (b)    Reports on Form 8-K

There were no reports on Form 8-K filed during the quarter
ended September 29, 2001.

   *	Indicates management contracts or compensatory plans or
arrangements in which one or more Directors or Executive
Officers of the Company participate or is a party.










SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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.

                        KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY


January 16, 2002        By:  \s\Charles C. Hanebuth
                             Charles C. Hanebuth
                             President, Chief Executive
                             Officer and Chairman


Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.


<table>
Signatures                         Title                      Date

                          <c>                                   <c>

\s\Charles C. Hanebuth       President, Chief Executive Officer    January 16, 2002
Charles C. Hanebuth            and Chairman


\s\William J. Jessie         Vice President, Secretary,            January 16, 2002
William J. Jessie              Treasurer and Chief Financial
                               Officer
                               (Principal Financial and
                               Accounting Officer)

\s\Clifford R. Borland       Director                              January 16, 2002
Clifford R. Borland

\s\Carl E. Edwards, Jr.      Director                              January 16, 2002
Carl E. Edwards, Jr.

\s\J. Marvin Quin, II        Director                              January 16, 2002
J. Marvin Quin, II

\s\David C. Struve           Director                              January 16, 2002
David C. Struve

</table>







KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE



Financial Statements                                    Page(s)

Report of Independent Public Accountants ..............   F-1

Consolidated Balance Sheets - September 30, 2000 and
September 29, 2001 ....................................   F-2

Consolidated Statements of Operations - Years ended
September 25, 1999, September 30, 2000
and September 29, 2001 ................................   F-3

Consolidated Statements of Changes in Shareholders'
Equity - Years ended September 25, 1999, September 30,
2000, and September 29, 2001 ..........................   F-4

Consolidated Statements of Cash Flows - Years ended
September 25, 1999, September 30, 2000
and September 29, 2001 ................................   F-5

Notes to Consolidated Financial Statements ............   F-6


Financial Statement Schedule

      Report of Independent Public Accountants ..............   S-1

Schedule II  Valuation and Qualifying Accounts ........   S-2















REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To Kentucky Electric Steel, Inc. and Subsidiary:

	We have audited the accompanying consolidated balance sheets of
Kentucky Electric Steel, Inc. (a Delaware corporation) and Subsidiary as
of September 30, 2000 and September 29, 2001, and the related
consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended September
29, 2001.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.

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

	In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kentucky
Electric Steel, Inc. and Subsidiary as of September 30, 2000 and
September 29, 2001 and the results of their operations and their cash
flows for each of the three years in the period ending September 29, 2001
in conformity with accounting principles generally accepted in the United
States.





       Arthur Andersen LLP



Cincinnati, Ohio,
January 14, 2002


















<table>
KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)



                                                      September     September
                                                       30, 2000      29, 2001
                       ASSETS

                                                   <c>           <c>
   CURRENT ASSETS
     Cash and cash equivalents                        $  8,688       $  7,505
     Accounts receivable, less allowance for
       doubtful accounts and claims of $685
       in 2000 and $695 in 2001                         10,923          8,600
     Inventories                                        21,668         16,962
     Operating supplies and other current assets         5,295          5,128
     Refundable income taxes                               175           -
     Deferred tax assets                                 1,028           -
                                                       -------        -------
          Total current assets                          47,777         38,195
                                                       -------        -------
   PROPERTY, PLANT AND EQUIPMENT
     Land and buildings                                  5,604          5,881
     Machinery and equipment                            34,833         35,252
     Construction in progress                              946            162
     Less - accumulated depreciation                   (17,387)       (19,936)
                                                       -------        -------
          Net property, plant and equipment             23,996         21,359
                                                       -------        -------
   DEFERRED TAX ASSETS                                   4,636           -
                                                       -------        -------
   OTHER ASSETS                                            545            460
                                                       -------        -------
          Total assets                                $ 76,954       $ 60,014

        LIABILITIES AND SHAREHOLDERS' EQUITY
   CURRENT LIABILITIES
     Advances on line of credit                       $  9,572       $ 12,141
     Accounts payable                                    7,193          6,303
     Accrued liabilities                                 3,630          3,691
     Current maturities of long-term debt                3,458            125
                                                       -------        -------
          Total current liabilities                     23,853         22,260
                                                       -------        -------
   LONG-TERM DEBT                                       16,667         16,667
                                                       -------        -------
   DEFERRED GAIN FROM SALE-LEASEBACK                       822            704
                                                       -------        -------
          Total liabilities                             41,342         39,631
                                                       -------        -------
   COMMITMENTS AND CONTINGENCIES

   SHAREHOLDERS' EQUITY
     Preferred stock, $.01 par value, 1,000,000
       shares authorized, no shares issued                -              -
     Common stock, $.01 par value, 15,000,000 shares
       authorized, 5,022,544 and 5,051,566 shares
       issued, respectively                                 50             51
     Additional paid-in capital                         15,778         15,817
     Less treasury stock - 951,281 shares at cost       (4,309)        (4,309)
     Retained earnings                                  24,093          8,824
                                                       -------        -------
          Total shareholders' equity                    35,612         20,383
                                                       -------        -------
          Total liabilities and shareholders' equity  $ 76,954       $ 60,014


</table>




See notes to consolidated financial statements



KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share and Per Share Data)


                                             Year Ended
                                September    September    September
                                 25, 1999     30, 2000     29, 2001

NET SALES                        $110,265     $120,585     $ 77,859
COST OF GOODS SOLD                100,016      110,883       77,863
                                  -------      -------      -------
       Gross profit (loss)         10,249        9,702           (4)

SELLING AND ADMINISTRATIVE
  EXPENSES                          7,627        7,573        8,298
                                  -------      -------      -------
       Operating income (loss)      2,622        2,129       (8,302)

INTEREST EXPENSE                   (2,274)      (2,528)      (2,051)
INTEREST INCOME AND OTHER           1,234          911          909
LOSS ON ABANDONMENT OF ASSETS        -            -            (457)
GAIN ON INVOLUNTARY CONVERSION
  OF EQUIPMENT                       -            -             256
                                  -------      -------      -------
       Income (loss) before
         income taxes               1,582          512       (9,645)

PROVISION FOR INCOME TAXES            604          195        5,624
                                  -------      -------      -------
       Net income (loss)         $    978     $    317     $(15,269)

NET INCOME (LOSS) PER
  COMMON SHARE
  -  BASIC AND DILUTED           $    .24     $    .08     $  (3.74)


WEIGHTED AVERAGE SHARES
  OUTSTANDING -  BASIC          4,085,480    4,074,463    4,081,966


WEIGHTED AVERAGE SHARES
  OUTSTANDING -  DILUTED        4,089,219    4,074,463    4,081,966


















See notes to consolidated financial statements


KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Years in the Period Ended
September 29, 2001


(Dollars in Thousands)

<table>
                                         Addi-                        De-
                                         tional                     ferred
                          Common Stock   Paid-In    Treasury Stock  Compen- Retained
                         Shares  Amount  Capital   Shares    Amount sation  Earnings  Total


                      <c>     <c>     <c>       <c>       <c>    <c>     <c>       <c>

BALANCE, Sept. 26, 1998 4,985,937  $50  $15,671  (526,996) $(3,254)  $(73) $22,798  $35,192
  Amortization of
    deferred comp-
    ensation                 -       -     -         -         -       43     -          43
  Issuance of Stock        17,937    -       57      -         -       -      -          57
  Purchases of treasury
    stock                    -       -     -     (405,585)  (1,018)    -      -      (1,018)
  Net income                 -       -     -         -         -       -       978      978
                        ---------   --   ------   -------    -----    ---   ------   ------

BALANCE, Sept. 25, 1999 5,003,874   50   15,728  (932,581)  (4,272)   (30)  23,776   35,252
  Amortization of
    deferred comp-
    ensation                 -       -     -         -         -       30     -          30
  Issuance of Stock        18,670    -       50      -         -       -      -          50
  Purchases of treasury
    stock                    -       -     -      (18,700)     (37)    -      -         (37)
  Net income                 -       -     -         -         -       -       317      317
                        ---------   --   ------   -------    -----    ---   ------   ------

BALANCE, Sept. 30, 2000 5,022,544   50   15,778  (951,281)  (4,309)    -    24,093   35,612
  Issuance of Stock        29,022    1       39      -         -       -      -          40
  Net loss                   -       -     -         -         -       -   (15,269) (15,269)
                        ---------   --   ------   -------    -----    ---   ------   ------

BALANCE, Sept. 29, 2001 5,051,566  $51  $15,817  (951,281) $(4,309)  $ -   $ 8,824  $20,383
</table>


























See notes to consolidated financial statements

KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)


                                                Year Ended

                                       September  September  September
                                        25, 1999   30, 2000   29, 2001

Cash Flows From Operating Activities:
  Net income (loss)                      $   978   $   317  $(15,269)
  Adjustments to reconcile net income
    (loss) to net cash flows from
    operating activities:
      Depreciation and amortization        3,636     3,827     2,790
      Loss on abandonment of assets         -         -          457
      Gain on involuntary conversion
        of equipment                        -         -         (256)
      Change in deferred taxes               737       617     4,636
      Change in other                         23      (430)       65
      Changes in current assets and
        current liabilities:
          Accounts receivable             (2,143)    3,257     2,323
          Inventories                     (2,388)    1,083     4,706
          Operating supplies and other
            current assets                   (88)       (1)      167
          Refundable income taxes           (315)      140       175
          Deferred tax assets                (35)     (345)    1,028
          Accounts payable                 1,153    (1,873)     (890)
          Accrued liabilities                154      (358)       61
          Environmental liabilities         (982)     -         -
                                          ------    ------    ------
Net cash flows from operating activities     730     6,234        (7)
                                          ------    ------    ------
Cash Flows From Investing Activities:
  Capital expenditures                    (2,848)   (1,341)     (752)
  Proceeds from sale-leaseback              -        8,536      -
  Proceeds from involuntary conversion      -         -          300
                                          ------    ------    ------
Net cash flows from investing activities  (2,848)    7,195      (452)
                                          ------    ------    ------
Cash Flows From Financing Activities:
  Repayment of long-term debt               -         -       (3,333)
  Net advances (repayments)on
    line of credit                         3,113    (4,938)    2,569
  Issuance of common stock                    57        50        40
  Purchases of treasury stock             (1,018)      (37)     -
                                          ------    ------    ------
Net cash flows from financing activities   2,152    (4,925)     (724)
                                          ------    ------    ------
Net increase (decrease)in cash
  and cash equivalents                        34     8,504    (1,183)
Cash and Cash Equivalents -
  Beginning of Period                        150       184     8,688
                                          ------    ------    ------
Cash and Cash Equivalents -
  End of Period                          $   184   $ 8,688   $ 7,505

Interest Paid                            $ 2,262   $ 2,472   $ 2,144

Income Taxes Paid (Received)             $   216   $    80   $  (175)

See notes to consolidated financial statements

KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)	Nature of Operations

	Kentucky Electric Steel, Inc. (KESI or the Company), a
Delaware corporation, owns and operates a steel mini-mill near
Ashland, Kentucky.  The Company manufactures special bar quality
alloy and carbon steel bar flats to precise customer
specifications for sale in a variety of niche markets.

During the past three years, market conditions within the
domestic steel industry have experienced significant downward economic
pressure largely due to market price and shipment volume declines.
These market conditions are a result of a number of factors including
a decline in the general economy of the United States, a decline in
the industries of the Company's customers, the increased cost of
production due to high electricity and natural gas costs and an
increase in competition from foreign steel companies.  These forces
have driven market prices to levels below the cost of production for
certain domestic producers, and as a result, many steel manufacturers
have curtailed production or ceased operations, and a number of steel
industry producers have sought protection under the United States
Bankruptcy Code.

As a result of these conditions, the Company has experienced sharp
declines in shipment volumes and operating margins during fiscal 2001,
which impacted the Company's cash flows and produced a pre-tax loss of
approximately $9.6 million in fiscal 2001.  Since March 31, 2001, the
Company has failed to meet the fixed charge coverage ratio covenant of
its loan agreements which required the Company to maintain a fixed
charge coverage ratio of 2:1 for each rolling four quarter period.  In
addition to the default of the fixed charge coverage ratio covenant,
the Company failed to make a scheduled principal payment on the
unsecured senior notes of $3,333,333 due on November 1, 2001.
However, the Company is current on all interest payments.

In response to these conditions, the Company has undertaken and
will continue to undertake certain cost control initiatives and
subsequent to September 29, 2001, the Company was successful in
restructuring its long-term debt obligations and bank credit facility
in order to manage the Company's liquidity through this difficult
market environment. Management anticipates that the market conditions
discussed above will continue to impact the Company's operations
through fiscal 2002 and negatively impact the Company's financial
performance.

Management believes that the Company has the ability to sustain
its operations and meet its commitments at least for the near-term
through effective management of its operations and the restructured
debt and bank credit facility.  However, should these negative market
conditions worsen or persist on a long-term basis, the Company's
ability to continue to manage its liquidity for the long-term may be
jeopardized.

(2)	Summary of Significant Accounting Policies

	Principles of Consolidation
	The consolidated financial statements include the accounts of
Kentucky Electric Steel, Inc. and its wholly-owned subsidiary, KESI
Finance Company, which was formed in October 1996 to finance the
ladle metallurgy facility.  All significant intercompany accounts
and transactions have been eliminated.  On September 28, 2001, the
Company dissolved KESI Finance Company as a separate legal entity.

	Accounting Estimates
	The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period.  Actual results could differ from
those estimates.

	Reclassifications
	Certain reclassifications of previously reported amounts
have been made to conform with current classifications.

 	Cash and Cash Equivalents
	Cash includes currency on-hand and deposits with financial
institutions.  Cash equivalents consist of investments with
original maturities of three months or less.  Amounts are stated
at cost, which approximates market value.  Cash and cash
equivalents as of September 30, 2000 includes the proceeds from
the sale-leaseback transaction.

	Inventories
	Inventory costs include material, labor and manufacturing
overhead.  Inventories are valued at the lower of average cost or
market.

	Property, Plant and Equipment and Depreciation
	Property, plant and equipment is recorded at cost, less
accumulated depreciation. For financial reporting purposes,
depreciation is provided on the straight-line method over the
estimated useful lives of the assets, generally 3 to 12 years for
machinery and equipment and 15 to 30 years for buildings and
improvements.  Depreciation for income tax purposes is computed using
accelerated methods.  Expenditures for maintenance and repairs are
charged to expense as incurred.  Expenditures for equipment renewals,
which extend the useful life of any asset, are capitalized.  The
Company assesses its long-lived assets for impairment when events and
circumstances indicate the assets may be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than
their carrying amounts.

	Revenue Recognition
	The Company recognizes revenue from sales at the time of
shipment.

	Income Taxes
	The Company accounts for income taxes pursuant to the asset and
liability method. Deferred tax assets and liabilities are recognized
based upon the estimated increase or decrease in taxes payable or
refundable in future years expected to result from reversal of
temporary differences and utilization of carryforwards which exist at
the end of the current year.  Temporary differences represent the
differences between the financial statement carrying amount of assets
and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates scheduled to
apply to taxable income in the years in which the temporary
differences are expected to be settled, and are adjusted in the period
of enactment for the effect of a change in tax law or rates.
Valuation allowances are provided against deferred tax assets for
which it is "more likely than not" the assets will not be realized.
The valuation allowance was increased to $11.5 million as a result of
the uncertainty of the recoverability of such tax benefits.  (See Note
9 to the Consolidated Financial Statements)

	Fiscal Year End
	The Company's fiscal year ends on the last Saturday of
September.  The fiscal year normally consists of fifty-two weeks,
however, the fiscal year ending September 30, 2000 consisted of fifty-
three weeks.  The fiscal year ending September 29, 2001 consisted of
fifty-two weeks.

	Segment Information
	Operating segments are defined as components of an enterprise
about which separate financial information is available that is
evaluated regularly by the decision-making group in deciding how to
allocate resources.  The Company has one business unit.

New Accounting Pronouncements

SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities"
	In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (SFAS No. 133) "Accounting for Derivative Instruments
and Hedging Activities".  SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure
those instruments at fair value.  The Company adopted SFAS No. 133
effective as of the beginning of the first quarter of fiscal 2001.
The Company does not currently have any derivative financial
instruments; therefore, SFAS No. 133 does not currently apply.

	SFAS No. 141 "Business Combinations"
	In July 2001, the Financial Accounting Standards Board issued
Statement No. 141 (SFAS 141) "Business Combinations".  This standard
eliminates the pooling of interest method of accounting for business
combinations.  This standard is effective for all business
combinations initiated after June 30, 2001.  As the Company has not
completed any business combinations or mergers in the current year,
this standard currently does not apply.

	SFAS No. 142 "Goodwill and Other Intangible Assets"
	In July 2001, the Financial Accounting Standards Board issued
Statement No. 142 (SFAS 142) "Goodwill and Other Intangible Assets".
SFAS 142 establishes accounting and reporting standards for acquired
goodwill and other intangible assets.  It requires that an entity
cease amortization of goodwill and intangible assets and establishes
an annual requirement to test these assets for impairment.  This
standard is required to be adopted for fiscal years beginning after
December 15, 2001.  As such, the Company is not required to adopt this
standard until the fiscal year beginning September 29, 2002.  Early
application of this standard is permitted for entities with fiscal
years beginning after March 15, 2001.  The Company did not early adopt
this standard.  Management does not believe that the adoption of this
standard will have a material impact on the financial position or
results of operations of the Company.

	SFAS No. 143 "Accounting for Asset Retirement Obligations"
	In August 2001, the Financial Accounting Standards Board issued
Statement No. 143 (SFAS 143) "Accounting for Assets Retirement
Obligations".  SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs.  This standard is
required to be adopted for fiscal years beginning after June 15, 2002.
As such, the Company is not required to adopt this standard until the
fiscal year beginning September 29, 2002.  Management does not believe
that the adoption of this standard will have a material impact on the
financial position or results of operations of the Company.

	SFAS No. 144 "Accounting for the Impairment or Disposal of Long-
Lived Assets
	In October 2001, the Financial Accounting Standards Board issued
Statement No. 144 (SFAS 144) "Accounting for the Impairment or
Disposal of Long-Lived Assets".  SFAS 144 addresses financial
accounting impairment or disposal of long-lived assets and requires
that one accounting model be used for long-lived assets to be disposed
of by sale and broadens the presentation of discontinued operations to
include more disposal transactions.  This standard is required to be
adopted for fiscal years beginning after December 15, 2001.  As such,
the Company is not required to adopt this standard until the fiscal
year beginning September 28, 2002.  Management does not believe that
the adoption of this standard will have a material impact on the
financial position or results of operations of the Company.

(3)	Inventories

	Inventories at September 30, 2000 and September 29, 2001 consist
of the following ($000's):
                                              2000         2001
        Raw materials                       $ 3,181      $ 2,113
        Semi-finished and finished goods     18,487       14,849
        Total inventories                   $21,668      $16,962


(4)	Accrued Liabilities

	Accrued liabilities at September 30, 2000 and September 29, 2001
consist of the following ($000's):
                                                      2000      2001
     Accrued payroll and related liabilities       $ 1,293   $ 1,095
     Accrued insurance and workers' compensation       880     1,050
     Accrued interest payable                          770       677
     Other                                             687       869
                                                   $ 3,630   $ 3,691

(5)	Involuntary Conversion Due to Fire

	The Company experienced a fire which destroyed an auxiliary
building and certain equipment during the first quarter of fiscal
2001.  This fire did not interrupt the Company's operations. The
resulting damage and replacement costs were covered by the Company's
insurance carrier, subject to a $100,000 deductible.  The Company
completed construction of new facilities during the fourth quarter of
fiscal 2001.  The net book value of the assets destroyed was
approximately $57,000 and the Company incurred approximately $135,000
in additional expenses associated with the fire and expended $313,000
on the new building and equipment.  The excess of the replacement cost
over the net book value of the building and equipment destroyed
resulted in a gain of approximately $256,000. The insurance company
advanced the Company $300,000 related to this claim.  The financial
statements as of September 29, 2001 include a receivable from the
insurance company of approximately $148,000.

(6)	Advances on Line of Credit and Long-Term Debt

	Long-term debt of the Company at September 30, 2000 and September
29, 2001, as restructured, consists of the following ($000's):

                                                   2000         2001
      Secured senior notes, due in annual
        installments from November 2000
        through 2005, interest at 9.00%         $ 20,000     $ 16,667
      Other                                          125          125
                                                  20,125       16,792
      Less - Current portion                      (3,458)        (125)
                                                $ 16,667     $ 16,667

	At September 29, 2001, before the debt restructuring, the
Company had outstanding borrowings of $16.7 million on the unsecured
senior notes. These notes bore interest at a fixed rate of 7.66% per
annum, with interest paid semi-annually.

	Additionally, the Company had a $24.5 million unsecured bank
credit facility which expired on January 31, 2002.  Borrowings were
limited to defined percentages of eligible inventory and accounts
receivable.  Interest on borrowings accrued at the rate of LIBOR plus
1.35% or the prime rate minus 1/2%.  As of September 29, 2001,
approximately $12.1 million was outstanding under the old bank credit
facility, approximately $1.1 million was utilized to collateralize
various letters of credit.  The weighted average interest rate on
short-term borrowings as of September 30, 2000 and September 29, 2001
were 8.2% and 5.5%, respectively.  The maximum and average borrowings
for the year ended September 29, 2001 were $13,210,000 and
$10,587,000, respectively.

	The senior notes and the bank credit facility contained
restrictive covenants, which include, among other restrictions, a
maximum ratio of total funded debt to total capitalization, a minimum
fixed charge coverage ratio, a minimum net worth requirement and
restrictions on the payment of dividends.

	Since March 31, 2001, the Company failed to meet the fixed
charge coverage ratio covenant which required the Company to maintain
a fixed charge coverage ratio of 2:1 for each rolling four quarter
period. In addition to the default of the fixed charge coverage ratio
covenant, the Company failed to make the scheduled principal payment
of $3,333,333 due on November 1, 2001.  These covenant violations were
waived in connection with the debt restructuring as discussed below.

	On January 14, 2002, the Company was successful in obtaining
restructured financing of its existing debt obligations.  As a result
of this restructured financing, the Company deferred its November 1,
2001 principal payment and a portion of the scheduled November 1, 2002
principal payment until November 1, 2005.  Annual maturities of the
senior notes under the restructured financing are $1,500,000 due on
November 1, 2002, $3,333,333 due on September 30, 2003, $3,333,333 due
on November 1, 2004 and $8,500,000 due on November 1, 2005.  These
notes bear interest at the fixed rate of 9.00% per annum, with
interest paid monthly.

	The restructured financing also includes an $18 million secured
bank credit facility which expires on November 1, 2005.  Borrowings
are limited to defined percentages of eligible inventory and accounts
receivable.  Interest on borrowings accrue at the rate of prime plus
2.5%.  As of January 14, 2002, approximately $12.1 million was
outstanding under the Company's line of credit, approximately $1.1
million was utilized to collateralize various letters of credit.  In
addition, the Company had approximately $3.7 million in cash.

	Under the terms of the restructured financing, both the senior
notes and the borrowings on the line of credit are secured by all
current and future assets of the Company, including, but not limited
to, accounts receivable, inventory, and all real property, plant and
equipment.

	The senior notes and bank credit facility in the restructured
financing contain restrictive covenants, which include, among other
requirements, the maintenance of minimum shareholders' equity; minimum
earnings before interest, taxes, depreciation, and amortization
(EBITDA); minimum interest coverage ratio; minimum debt service
coverage ratio; capital expenditure restrictions; and prohibition on
the payment of dividends.

	The estimated fair value of the Company's secured senior notes is
estimated using discounted cash flow analysis, based upon the estimated
market rate as of September 29, 2001.  The fair value of the secured
senior notes was approximately $17.7 million as of September 29, 2001 and
$19.8 million as of September 30, 2000.

(7)   Sale-Leaseback Transaction

	In September 2000, the Company entered into a sale-leaseback
transaction for its ladle metallurgy facility and certain other of its
machinery and equipment for approximately $8.5 million, resulting in a
deferred gain of $.8 million, to be amortized over the seven year term
of the lease.  Lease expense for the ladle metallurgy facility and
certain other machinery and equipment was $1,318,000.

	The Company has an early buyout option for a certain portion of the
leased assets at the end of 5 years, and another early buyout option for
all the leased assets at the end of 6-1/2 years at an amount
approximating the estimated fair value of the assets.  The Company also
has a purchase option at the end of the lease term at an amount equal to
the equipment's then fair market value.  If the purchase option is not
exercised, the lease automatically renews for a term and rate to be
negotiated by the Company and the lessor.  The lease has been accounted
for as an operating lease.

	The future minimum lease payments are as follows ($000's):

		     2002	$1,448
		  2003	 1,360
		  2004	 1,297
		  2005	 1,275
		  2006	 1,210
		  thereafter	 1,310
		  Total	$7,900

(8)	Significant Customers and Foreign Sales

	The Company grants trade credit to customers within the markets
it serves. Sales to the leaf-springs suspension market represented
12.5%, 16.7%, and 13.8% of total sales for fiscal 1999, 2000 and 2001,
respectively.

	One company, through several wholly-owned subsidiaries, which
are customers of the Company, represented 13.5%, 11.2%, and 10.1% of
net sales in fiscal 1999, 2000, and 2001, respectively.  Another
customer, through two wholly-owned subsidiaries, which are customers
of the Company, accounted for 11.0%, 8.0%, and 6.8% of net sales in
fiscal 1999, 2000, and 2001, respectively.  No other customer
accounted for more than 10% of net sales.

	The Company's foreign sales represented 8.6%, 12.7%, and 8.3% of
total sales for 1999, 2000 and 2001, respectively.

(9)	Income Taxes

 	The provision (credit) for income taxes consists of the following
($000's):
                                         1999      2000       2001
          Current:
            Federal                   $   (98)   $  (76)    $   775
            State                          -         -          103
                                          (98)      (76)        878
          Deferred:
            Federal                       626       249       3,142
            State                          76        22       1,604
                                          702       271       4,746
          Total provision (credit)
            for income taxes          $   604    $  195     $ 5,624

	The provision (credit)for income taxes differs from the amount
computed by applying the statutory federal income tax rate to income
before income taxes for the following reasons ($000's):

                                         1999      2000       2001
      Income tax provision (credit)
        at statutory tax rate of 34%  $   538     $ 174     $(3,312)
      State income taxes, net of
        federal effect                     50        15        (311)
      Change in valuation allowance       -         -         8,865
      Other, net                           16         6         382
                                      $   604     $ 195     $ 5,624

	The components of the net deferred tax asset at September 30,
2000 and September 29, 2001 are as follows ($000's):

                                          Sept. 30,    Sept. 29,
                                            2000         2001
      Deferred tax components:
        Property, plant and equipment     $(1,671)     $(2,228)
        Intangibles                         1,684        1,472
        AMT credit carryforwards              992          951
        NOL carryforward                    5,362        9,509
        Other                               1,978        1,842
                                            8,345       11,546
        Valuation allowance                (2,681)     (11,546)
           Net deferred tax assets        $ 5,664      $     0

	For Federal income tax purposes the Company has alternative minimum
tax credit carryforwards of approximately $1.0 million, which are not
limited by expiration dates.  The Company also has gross operating tax
loss carryforwards of approximately $27.9 million, which expire beginning
in 2011.  The Company has recorded deferred tax assets related to these
carryforwards.

	The realization of deferred tax assets is dependent in part upon
generation of sufficient future taxable income.  Management has
considered the levels of currently anticipated pre-tax income in
assessing the required level of the deferred tax asset valuation
allowance.  After taking into consideration historical pre-tax income
levels, the results of operations from fiscal 1999, 2000 and 2001, the
potential limitation of net operating losses under Section 382 of the
Internal Revenue Code and other available objective evidence, the
realization of the deferred tax asset is no longer more likely than
not.  Therefore, the valuation allowance was increased to fully
reserve the net deferred tax asset.

Also, realization of deferred tax assets may be limited by
Section 382 of the Internal Revenue Code.  Section 382 of the Internal
Revenue Code contains rules designed to discourage persons from buying
and selling the net operating losses of companies.  These rules
generally operate by focusing on ownership changes among stockholders
owning directly or indirectly 5% or more of the common stock of a
company or any change in ownership arising from a new issuance of
stock by a company.  In general, Section 382 rules limit the ability
of a company to utilize net operating losses after a change of
ownership of more than 50% of its common stock over a three-year
period.  Purchases of our common stock in amounts greater than
specified levels could inadvertently create a limitation on our
ability to utilize our net operating losses for tax purposes in the
future.

(10)	Profit Sharing Plans

	The Company has established profit sharing plans for its
bargaining unit (hourly) and salaried employees.  Generally, the plans
require mandatory contributions of five percent of pretax profits
(with a guaranteed minimum based on hours worked) for the hourly
employees, and an additional discretionary contribution set by the
Board of Directors for salaried employees.  Expense for contributions
was approximately $219,000, $225,000 and $175,000 in fiscal 1999, 2000
and 2001, respectively.


(11)  Earnings Per Share

	Statement of Financial Accounting Standards No. 128 (SFAS No.
128) related to earnings per share requires dual presentation of basic
and diluted earnings per share on the face of the income statement for
all entities with complex capital structures. The following is the
reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations.

Net Income ($000's)

                      For the Year Ended         For the Year Ended
                      September 25, 1999         September 30, 2000
                                       Per                       Per
                      Net             Share      Net            Share
                    Income  Shares    Amount   Income  Shares   Amount
Amounts for Basic
  Earnings
  Per Share        $   978  4,085,480 $ .24   $ 317   4,074,463  $.08

Effect of Dilutive
  Securities Options   -        3,739    -       -        -        -

Amounts for Diluted
  Earnings
  Per Share        $   978  4,089,219 $ .24   $ 317   4,074,463  $.08


	                        For the Year Ended
                              September 29, 2001
                                                 Per
                           Net                  Share
                         (Loss)      Shares     Amount
Amounts for Basic
  Earnings Per Share    $(15,269)   4,081,966   $(3.74)

Effect of Dilutive
  Securities Options        -            -         -

Amounts for Diluted
  Earnings Per Share    $(15,269)   4,081,966   $(3.74)

The following options were not included in the computation of diluted
earnings per share because to do so would have been antidilutive for
the applicable period:

					       1999        2000        2001
	Transition stock options      56,061	50,951	26,633
	Employee stock options	     378,668     561,052     601,744
					     434,729     612,003     628,377

See Note 12 for further information regarding options outstanding.

(12)	Stock Option/Restricted Stock Plan

	The Company has Employee Stock Option/Restricted Stock Plans
which provide shares of common stock for awards to eligible employees
in the form of stock options and restricted stock.  Awards under the
Plans may be made to any officer or other key employees of the
Company.  The options become exercisable on a pro rata basis over a
period of four years beginning one year after the grant date, except
for options issued in conjunction with the initial public offering,
which became exercisable over a three-year period, which began upon
approval by the stockholders of the 1993 Employee Stock
Option/Restricted Stock Plan in February 1994.  All unexercised
options expire ten years after the date of grant.  Option prices range
from $1.50 to $12.31 per share.

	The Plans also provide for the issuance of restricted stock.
The restricted shares vest three years after the grant date.  During
1994 in connection with the initial public offering, 18,000 restricted
shares were granted and issued, and vested on a pro rata basis over a
period of four years beginning one year after the grant date.

	A summary of transactions in the above plans for fiscal 1999,
2000, and 2001 are as follows:
<table>
                                1999                  2000                 2001
                                   Weighted-            Weighted-           Weighted-
                                   Average               Average               Average
                          Stock    Exercise     Stock   Exercise    Stock     Exercise
                         Options     Price     Options    Price    Options     Price
  
                    <c>       <c>         <c>       <c>       <c>        <c>
  Options outstanding,
    beginning of year    386,668    $ 9.15     469,860   $ 7.97    561,052     $ 8.99
  Options granted         91,192      3.03      91,192     2.53     85,192       1.50
  Options forfeited       (8,000)     8.66        -         -      (44,500)      4.72
  Options outstanding,
    end of year          469,860    $ 7.97     561,052   $ 7.09    601,744     $ 6.47

  Options exercisable,
    end of year          318,022    $ 9.72     380,916   $ 8.99    423,559     $ 8.28
  Restricted shares
    granted                 -                     -                    -
  Options and restricted
    shares available
    for grant            191,041                99,849              59,157
</table>
	The 1993 Transition Stock Option Plan (the "Transition Plan") was
approved by the shareholders in 1994.  The Transition Plan was designed
to substitute KESI stock options for previously issued NS Group stock
options. KESI incentive stock options for 186,539 shares of Common Stock
were issued in 1994, with exercise prices varying from $8.76 per share
to $20.86 per share.  All options outstanding at September 29, 2001 have
ten year terms and expire in 2003.  A summary of transactions in the plan
for fiscal 1999, 2000, and 2001 are as follows:

<table>
                               1999                 2000                   2001
                                  Weighted-            Weighted-              Weighted-
                                   Average              Average                Average
                         Stock    Exercise     Stock   Exercise     Stock     Exercise
                        Options     Price     Options    Price     Options      Price
  
                   <c>       <c>         <c>      <c>         <c>        <c>

  Options outstanding,
    beginning of year    92,335   $ 10.84      56,061   $  8.93      50,951     $ 8.86
  Options granted          -          -          -          -         -            -
  Options forfeited      (6,340)    11.01      (4,755)     8.86     (10,640)      8.86
  Options expired       (29,934)    14.40        (355)    19.57     (13,678)      9.05
  Options outstanding,
    end of year          56,061   $  8.93      50,951   $  8.86      26,633     $ 8.76
  Options exercisable,
    end of year          56,091   $  8.93      50,951   $  8.86      26,633     $ 8.76
</table>
	The Company accounts for its stock-based compensation plans using
the intrinsic value method in accordance with APB Opinion No. 25 and
related interpretations. Under this method, no compensation cost has been
recognized for the Company's Employee Stock Option Plan for fiscal years
1999, 2000, and 2001.  Had compensation cost for the stock option plans
been determined based on the fair value of the options at the grant
dates, under those plans consistent with the fair value method, pro forma
net income and basic and diluted earnings per share would have been net
income of $.9 million and $.21 per share for fiscal 1999, net income of
$.2 million or $.05 per share for fiscal 2000, and net loss of $15.3
million and ($3.74) per share for fiscal 2001. The weighted-average fair
value of options granted in fiscal 1999, 2000 and 2001 was $1.64, $1.48
and $.83 per share, respectively. The fair value of each option is
estimated on the date of grant using the Black-Scholes options pricing
model with the following assumptions: weighted average risk free interest
rate of 5.1% for fiscal 1999, 6.78% for fiscal 2000 and 5.17% for fiscal
2001, weighted average volatility of 39.4% for fiscal 1999, 40.4% for
fiscal 2000 and 40.95% for fiscal 2001, expected life of eight years and
zero dividends.

	The following table summarizes information about stock options
outstanding at September 29, 2001 under the Employee Stock
Option/Restricted Stock Plans and the Transition Plan:
<table>
                               Options Outstanding             Options Exercisable
                                   Weighted-
                                   Average      Weighted-                  Weighted-
                         Number    Remaining    Average        Number      Average
      Range of        Outstanding  Contractual  Exercise     Exercisable   Exercise
    Exercise Prices    at 9/29/01    Life        Price       at 9/29/01     Price
    
               <c>           <c>         <c>          <c>           <c>
    Employee Stock Option/Restricted Stock Plans:
    $ 9.13 - 12.31      208,784    2.97 Years    $11.11        208,784     $11.11
      5.56 -  7.63      153,884    5.11 Years      6.57        153,884       5.11
      1.50 -  3.03      239,076    8.36 Years      2.36         60,891       2.86
    $ 1.50 - 12.31      601,744    5.66 Years    $ 6.47        423,559     $ 8.28

    Transition Plan:
    $ 8.76 -  8.76       26,633    1.39 Years    $ 8.76         26,633     $ 8.76
</table>
	The Company has a key employees' stock loan plan which provides
for the granting of loans to eligible employees for the purchase of
the Company's common stock in the open market.  Under the terms of the
plan, the loans are forgiven, and the related amounts expensed, on a
pro-rata basis over a five-year period of service beginning at the
date of grant.  The stock loan was fully amortized as of September 30,
2000.  In fiscal 2000, the Company recognized approximately $30,000 of
compensation expense related to the plan.

	During 1997, the Board of Directors established the Kentucky
Electric Steel, Inc. Share Plan for Non-Employee Directors (the
"Plan"), which provides for the issuance of stock in lieu of cash for
director services.  Under the Plan, 25,000 shares were authorized for
issuance.  In May 1999, the Board of Directors approved the 1999 Share
Plan for Non-Employee Directors, which authorized 25,000 of additional
shares to be used for Directors' compensation.  In February 2001, the
stockholders of the Company approved the 2001 Share Plan for Non-
Employee Directors, which authorized 100,000 of additional shares to
be used for Directors' compensation.  The Plan provides for issuance
of common stock for at least 60% of the fees payable with respect to
the applicable meeting for each Non-Employee Director.  During fiscal
2000, 18,670 shares were issued at stock prices ranging from $1.97 to
$3.72 per share.  During fiscal 2001, 29,022 shares were issued at
stock prices ranging from $1.25 to $2.25.

(13)	Shareholders' Equity

	Each share of common stock outstanding (and each share of common
stock issued prior to the occurrence of certain events) carries with
it one Preferred Stock Purchase Right (a Right) to purchase at a price
of $40, one-hundredth of a share of Series A Junior Participating
Preferred Stock.  The Rights are exercisable only if a person or group
acquires or announces a tender offer which would result in ownership
of 20% or more of the common stock.  The Company can redeem the Rights
for $.01 per Right at any time prior to the time a person or group
acquires 20% or more of the Company's shares.

	Following the acquisition of 20% or more of the Company's common
stock by a person or group, the holders of the Rights will be entitled
to purchase additional shares of Company common stock at one-half the
then current market price, and, in the event of a subsequent merger or
other acquisition of the Company, to buy shares of common stock of the
acquiring entity at one-half of the market price of those shares. In
neither event, however, would the acquiring person or group be
entitled to purchase shares at the reduced price.

	In connection with the shareholder rights plan, which was
adopted by the Board of Directors on February 27, 1996 and amended and
restated as of September 1, 1999, 150,000 shares of the Company's
1,000,000 authorized shares of preferred stock have been designated as
Series A Junior Participating Preferred Stock.  No shares of the
Series A Junior Participating Preferred Stock have been issued.


(14)  Commitments and Contingencies

	The Company has various commitments for the purchase of
materials, supplies and energy arising in the ordinary course of
business.

	The Company is subject to various claims, lawsuits and
administrative proceedings arising in the ordinary course of business
with respect to commercial, product liability, environmental and other
matters, which seek remedies or damages.  Costs to be incurred in
connection with environmental matters are accrued when the prospect of
incurring costs for testing or remedial action is deemed probable and
such amounts can be estimated.  The Company maintains reserves which
it believes are adequate related to testing, consulting fees and minor
remediation.  However, new information or developments with respect to
known matters or unknown conditions could result in the recording of
accruals in the periods in which they become known.  The Company
believes that any liability that may ultimately be determined with
respect to commercial, product liability, environmental or other
matters will not have a material effect on its financial condition or
results of operations.


(15)  Quarterly Financial Data (Unaudited)

	Quarterly results of operations (in thousands, except share and
per share amounts) for fiscal 2000 and fiscal 2001 are as follows:

<table>
                                      First       Second        Third       Fourth
                                     Quarter      Quarter      Quarter      Quarter
         2000
     
                             <c>          <c>          <c>          <c>
     Net sales                     $  30,715     $  31,171    $  32,629    $  26,070
     Gross profit                  $   1,619     $   3,058    $   3,246    $   1,779
     Net income (loss)             $    (620)    $     362    $     920    $    (345)
     Net income (loss) per
       common share -
       basic and diluted           $    (.15)    $     .09    $     .23    $    (.08)(A)
     Weighted average shares
       outstanding - basic         4,073,979     4,077,771    4,075,760    4,070,405
     Weighted average shares
       outstanding - diluted       4,073,979     4,077,771    4,075,760    4,070,405


	  2001

     Net sales                     $  17,279     $  22,737    $  19,442    $  18,401
     Gross profit (loss)           $     273     $     490    $      34    $    (801)
     Net income (loss)             $  (1,224)    $  (1,407)   $  (1,346)   $ (11,292)
     Net income (loss) per
       common share -
       basic and diluted           $    (.30)    $    (.35)   $    (.33)   $   (2.76)(A)
     Weighted average shares
       outstanding - basic         4,072,476     4,076,545    4,085,150    4,093,694
     Weighted average shares
       outstanding - diluted       4,072,476     4,076,545    4,085,150    4,093,694


	(A)  The sum of the quarters may not equal the annual amounts due to rounding.
</table>









REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS





To Kentucky Electric Steel, Inc. and Subsidiary:


	We have audited in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements
included in Kentucky Electric Steel, Inc. and Subsidiary's annual
report on Form 10-K, and have issued our report thereon dated January
14, 2002.  Our audit was made for the purpose of forming an opinion on
those statements taken as a whole.  The schedule listed in item 14(a)2
is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's
rules and regulations and is not part of the basic financial
statements.  This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial
data required to be set forth therein in relation to the basic
financial statements taken as a whole.



      Arthur Andersen LLP


Cincinnati, Ohio,
January 14, 2002

































                                                           SCHEDULE II



KENTUCKY ELECTRIC STEEL, INC. AND SUBSIDIARY

VALUATION AND QUALIFYING ACCOUNTS

(Dollars in Thousands)


                                         Reserves Deducted
                                                      from Assets in
                                                       Balance Sheets
                                                      Allowance for
                                                         Doubtful
                                                       Accounts (1)



  BALANCE, September 26, 1998 .......................       460
    Additions:
      Charged to costs and expenses .................       (30)
    Deductions:
      Net charge-off of accounts deemed uncollectible        -
                                                            ---
  BALANCE, September 25, 1999 .......................    $  430
    Additions:
      Charged to costs and expenses .................       324
    Deductions:
      Net charge-off of accounts deemed uncollectible       (69)
                                                            ---
  BALANCE, September 30, 2000 .......................    $  685
    Additions:
      Charged to costs and expenses .................       719
    Deductions:
      Net charge-off of accounts deemed uncollectible      (709)
                                                            ---
  BALANCE, September 29, 2001 .......................    $  695











(1) Deducted from accounts receivable.