KellerFurnitureThe Keller Manufacturing Company, Inc.

# Annual Report2002

# TO OUR SHAREHOLDERS

---

On behalf of our employees, managers, officers and directors, I report to you on
fiscal year 2002.

The year 2002 was a very  difficult  and  frustrating  one for Keller.  The weak
economic environment coupled with increased  competition from imported furniture
has eroded our net sales for the second straight year. We took dramatic steps to
reduce costs, but as you have seen throughout this year these reductions did not
occur  soon  enough  to help our  profitability  in  2002.  The  closure  of our
Culpeper,  Virginia  Plant on November 22 will  accelerate the reduction of cost
and  overhead in 2003.  This year we lost $0.79 a share  versus a loss of $.40 a
share in 2001. Our net loss was approximately  $4.3 million versus a net loss of
approximately  $2.3 million in 2001.  Our net sales for the year ended  December
31, 2002 decreased by approximately 17% to $35.9 million down from approximately
$43.3 million during the year ended December 31, 2001.

We move  forward into 2003 with a much lower cost  structure,  with both Indiana
plants  running at 80% to 85%  capacity.  We  anticipate  that this reduced cost
structure will allow us the opportunity to improve our profitability in 2003. We
continue to integrate the lean manufacturing  concept at both of our
remaining manufacturing facilities. Our goal is to operate more efficiently with
fewer  operations.   This  is  an  ongoing  transformation  that  will  continue
throughout 2003.

During  the year  2002,  changes  were  made so we could  focus our  efforts  on
achieving  the  goals  we had  set.  Scott  Armstrong  has  taken  over the sole
responsibility  for sales and has created five  regional  teams of five salesmen
who are working  together to increase sales. I am also taking a much more active
roll in sales and product development.  Generating sales continues to be our top
priority for 2003.

We launched  many exciting new products to the Keller Line in 2002. At the April
High Point Market we introduced a new collection, Synergy, made from
solid  sycamore  and  designed to capture a younger  consumer  with a more urban
appeal.  The  collection  was well received and because of its excellent  design
made the cover of FURNITURE STYLE Magazine.  In October we introduced  New
Traditions,   a  solid   cherry   traditional   collection   that   was  a
million-dollar  seller at the  October  Market  and will be shipped in the first
quarter of 2003. This thirty-piece  collection of dining, bedroom and occasional
furniture  expanded  our styling  into the solid  cherry  Traditional  Category.
Consumer  research  conducted in  Minneapolis,  Minnesota and  Charlotte,  North
Carolina  provided us with the specific  details that consumers are  requesting.
Consumer  research  continues to be a valuable tool in developing  new products.

The erosion of our market share by increased  competition  from import furniture
continues to hinder  order  generation.  While we are  committed to the domestic
production of furniture,  we are  researching  ways to implement  imported parts
and/or  products to compliment  our current line, as well as possibly  expanding
our price point  ranges to broaden the dealer base to which we  currently  sell.

Our goals for 2003 are to control our production costs, produce a budgeted plan,
and  grow our  sales by  following  our  order  generation  plan  for  2003.  We
appreciate  your  support  and your  commitment  to  Keller.  We are  very  much
encouraged at our prospects and opportunities for 2003.

| | Sincerely,
/s/ Steven W. Robertson
Steven W. Robertson
President/CEO
| | --------------------------------------------------------------------

## Selected Financial Data

The following  table sets forth selected  financial data as of and for the years
ended  December 31, 2002,  2001,  2000,  1999, and 1998 and are derived from the
audited,  consolidated  financial  statements  of the  Company.  These  selected
financial data are not covered by the auditors report and are qualified in
their  entirety  by  reference  to,  and  should  be read in  conjunction  with,
Managements  Discussion  and  Analysis of  Financial  Condition  and
Results of  Operations,  and the Consolidated  Financial Statements of the
Company and the related notes thereto included herein.

`YEAR ENDED December 31,
                                          ----------------------------------------------------------------------------------
                                               2002              2001              2000              1999             1998
                                               ----              ----              ----              ----             ----
Statements of Income Data:
Net Sales                                 $ 35,868,888      $ 43,283,395      $ 55,215,495     $ 55,751,215     $ 60,144,243
Cost of Goods Sold                          34,579,571        38,649,281        43,406,132       41,670,927       43,459,950
                                          ------------      ------------      ------------     ------------     ------------
Gross Profit                                 1,289,317         4,634,114        11,809,363       14,080,288       16,684,293
Selling, General and Administrative          7,484,338         8,237,089         8,547,902        8,282,022        7,965,041
Restructuring Charges                          695,759
Other Income, Net                               78,644            75,846           142,674          359,997          451,503
                                          ------------      ------------      ------------     ------------     ------------
Income (Loss) Before Income Taxes           (6,812,136)       (3,527,129)        3,404,135        6,158,263        9,170,755
Income Taxes (Benefit)                      (2,545,876)       (1,276,718)        1,382,046        2,377,494        3,514,750
                                          ------------      ------------      ------------     ------------     ------------
Net Income (Loss)                         $ (4,266,260)     $ (2,250,411)     $  2,022,089     $  3,780,769     $  5,656,005
                                          ============      ============      ============     ============     ============

Net Income (Loss) Per Share Of
Common Stock - (Basic and Dilutive)       $      (0.79)     $      (0.40)     $       0.36     $       0.66     $       0.97
Weighted Average Number of
Shares Outstanding                           5,385,493         5,565,780         5,611,354        5,753,211        5,853,954
Cash Dividends Declared Per
Common Share                              $      0.105      $       0.14      $       0.14     $       0.14     $       0.18

                                                                               December 31,
                                              2002              2001              2000              1999             1998
                                              ----              ----              ----              ----             ----
Balance Sheet Data:
Working Capital(1)                        $ 17,294,090      $ 21,235,613      $ 23,994,084     $ 23,531,588     $ 22,158,510
Property, Plant and Equipment             $  8,490,457      $ 10,050,750      $ 10,898,743     $ 10,045,302     $  9,798,174
Investment Securities  Available
For Sale                                  $  1,253,437                                                          $    500,000
Other Assets                              $    661,048      $  1,775,509      $  1,851,928     $  1,835,335     $  1,760,759
Total Assets                              $ 30,555,808      $ 35,983,056      $ 41,913,198     $ 39,688,056     $ 39,471,045
Long Term Debt                            $        ---      $        ---      $        ---     $        ---     $        ---`

|1 | Reflects the excess of current  assets over current  liabilities as set forth in
the Consolidated Financial Statements
|- | ----------------------------------------------------------------------------------------------------------------------

RECLASSIFICATIONS  - Certain  Reclassifications  have been made to 2000 and 2001
amounts to conform to the 2002 Classifications.

 1 

Management's  Discussion  and Analysis of Financial  Condition and Results of
Operations

Certain  Items of this Annual  Report  contain  certain  statements  that are
forward-looking statements  within the meaning of Section 27A of the
Securities  Act and  Section  21E of the  Securities  Exchange  Act of 1934,  as
amended.  Those  statements  appear in a number of places in this Report and may
include statements  regarding the intent,  belief or current expectations of the
Company or its officers with respect to (i) the Companys  strategic plans,
(ii) the policies of the Company regarding capital  expenditures,  financing and
other matters, and (iii) industry trends affecting the Companys  financial
condition or results of  operations.  Readers of this Report are cautioned  that
reliance on any  forward-looking  statement  involves  risks and  uncertainties.
Although  The  Keller  Manufacturing  Company,  Inc.  (the  Company)
believes that the assumptions on which the forward-looking  statements contained
herein are based are  reasonable,  any of those  assumptions  could  prove to be
inaccurate   given  the  inherent   uncertainties   as  to  the   occurrence  or
nonoccurrence  of future  events.  There can be no  assurance  that the  forward
looking  statements  contained  in this  Report will prove to be  accurate.  The
inclusion  of a  forward-looking  statement  herein  should not be regarded as a
representation  by the  Company  that  the  Companys  objectives  will  be
achieved.

## Recent Accounting Pronouncements

In December 2002, the Financial  Accounting  Standards Board  (FASB)
issued Statement of Financial Accounting Standards  (SFAS)  No. 148,
Accounting   for   Stock-Based    Compensation      Transition   and
Disclosures.  This  statement  amends SFAS No. 123,  Accounting  for
Stock-Based Compensation, to provide alternative methods of transition for
a voluntary  change to the fair value based method of accounting for stock-based
employee  compensation.   In  addition,  SFAS  No.  148  amends  the  disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim  financial  statements  about the method of accounting  for  stock-based
employee compensation and the effect of the method used on reported results. The
Company  implemented,  effective for year ended December 31, 2002, the prominent
disclosure  requirements  of  SFAS  No.  148.  The  Company  has  a  stock-based
compensation  plan,  which is described more fully in Note 9 to the consolidated
financial statements.

In June  2002,  the  FASB  issued  SFAS  No.  146,  Accounting  for  Costs
Associated  with  Exit or  Disposal  Activities.  SFAS No.  146  addresses
financial  accounting and reporting for costs  associated  with exit or disposal
activities and nullifies  Emerging  Issues Task Force  (EITF)  Issue
No. 94-3,  Liability  Recognition  for Certain  Employee  Termination
Benefits and Other Costs to Exit an Activity  (including  Certain Costs Incurred
in a Restructuring). The Company will adopt SFAS No. 146 effective January
1, 2003.  Management  has  concluded  that the adoption of SFAS No. 146 will not
have a material effect on the  Companys  financial  position or results of
operations.

The  Company  implemented,  effective  January 1, 2002,  the  consensus  opinion
reached by the EITF in EITF 01-9,  Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendors Products).
EITF 01-9 requires the Company to reclassify certain promotion costs, previously
classified as selling,  general and administrative,  as a reduction in net sales
or an  increase  in cost of goods sold and did not have an impact on net income.
Operating  results for 2001 and 2000 have been restated to conform to the income
statement characterization requirements of EITF 01-9.

In August 2001, the FASB issued SFAS No. 144,  "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial  accounting and
reporting  for the  impairment  or disposal of  long-lived  assets.  The Company
adopted SFAS No. 144 effective January 1, 2002. The Company determined that with
the  adoption of SFAS No. 144,  there was no  material  impact on its  financial
position or results of operations.

 2 

In June 2001, the FASB issued SFAS No. 141,  "Business  Combinations,"  and SFAS
No. 142,  "Goodwill and Other Intangible  Assets." SFAS No. 141 and SFAS No. 142
require the use of the purchase method to account for all business  combinations
and broadens the criteria for recording acquired intangible assets separate from
goodwill.  SFAS No. 141 and No.  142 also do not allow  goodwill  or  intangible
assets with indefinite  lives,  such as trademarks,  to be amortized and require
companies to test goodwill for impairment at least annually. The Company adopted
these statements effective January 1, 2002. The Company determined that with the
adoption  of SFAS No.  141 and No.  142,  there  was no  material  impact on its
financial position or results of operations.

## Critical Accounting Policies and Estimates

The  Companys   financial  statements  are  prepared  in  accordance  with
accounting  principles  that are  generally  accepted  in the  United  States of
America.  The preparation of these financial  statements  requires management to
make  estimates  and  judgments  that  affect  the  reported  amounts of assets,
liabilities,  revenue and  expenses,  as well as the  disclosure  of  contingent
assets and  liabilities.  Management  evaluates  its  estimates  and  judgments,
including  those  related  to  revenue  recognition,   allowances  for  doubtful
accounts,  inventory valuation allowances,  useful lives of property,  plant and
equipment,  derivative contracts,  pension benefits and income taxes. Management
bases its estimates and  judgments on  historical  experience  and other factors
that are believed to be reasonable under the  circumstances.  Actual results may
differ from these  estimates  under  different  conditions or based on different
assumptions.  The Company  believes  that the following  significant  accounting
policies  are very  complex  and their  application  involves  a high  degree of
judgment.

Revenue    Recognition.    The   Company   recognizes
revenue when title  transfers to the customer and all  requirements  of the sale
are  complete.  The timing of the sale and transfer of ownership  depends on the
individual customer and is agreed to before order acceptance.  Typically,  title
transfers  are  completed  when  product  leaves one of the  Company's  domestic
warehouses.

Allowance  for  Doubtful  Accounts.      The  Company
maintains an allowance  for doubtful  accounts for  estimated  losses that might
result from its customers failing to make required  payments.  The Company bases
its  allowances on the  likelihood of recovery of accounts  receivable  based on
past experience and current  collection trends. If economic or specific industry
trends  worsen beyond the Company's  estimates,  the Company would  increase its
allowance for doubtful accounts by recording additional expense.

Pension  Benefits.    The  amounts  recognized in the
financial  statements related to pension benefits are determined on an actuarial
basis,  the  calculation  of which  requires  many  assumptions.  A  significant
assumption  used in  determining  the Company's net pension cost is the expected
long-term  rate of  return on plan  assets.  Based on input  from the  Company's
actuarial firm, the Company assumed an expected long-term rate of return on plan
assets of 7.50% for both fiscal 2002 and 2001. Another significant estimate that
affects  the  Company's  pension  cost is the  discount  rate used in the annual
actuarial  valuation  of pension  benefit.  The  discount  rate  represents  the
interest  rate that is used to determine  the present value of future cash flows
required to settle the pension  obligations.  Based on input from the  Company's
actuarial firm, the Company assumed a discount rate of 6.50% and 7.25% in fiscal
2002 and 2001, respectively.

Income  Taxes.    The  Company  records  deferred tax
assets and  liabilities  using  enacted  tax rates for the  effect of  temporary
differences between the book and tax basis of assets and liabilities. If enacted
tax rates  change,  the  Company  would  adjust  its  deferred  tax  assets  and
liabilities  through the provision for income taxes.  The Company  evaluates the
need  for a  valuation  allowance  of  its  deferred  tax  assets  based  on the
likelihood of expected future benefits. The Company does not believe a valuation
allowance is necessary;  however, if the expected level of future taxable income
changes or certain tax planning strategies become unavailable, the Company would
record a  valuation  allowance  through  income  tax  expense  in the period the
valuation allowance is deemed necessary.

 3 

## Facility Closure and Restructuring Plan

The Company  ceased  production,  effective  November 22, 2002, at its Culpeper,
Virginia  facility.  The product lines that were being produced in Culpeper were
consolidated in the Companys New Salisbury,  Indiana and Corydon,  Indiana
facilities.

In connection with the restructuring plan for the Culpeper facility, the Company
recorded a restructuring  charge of approximately  $696,000,  primarily for stay
bonuses,  severance,  and legal and other costs necessary to close the facility.

This decision was part of a  comprehensive  plan to consolidate  production into
the two Indiana  facilities.  It was with much regret that these actions,  which
affected  approximately 120 employees,  had to be taken. The Company anticipates
that future  growth will be based on  expansion of our New  Salisbury  facility.

Another phase of our restructuring  plan was to eliminate all obsolete inventory
in order to make room for new product  introductions.  This not only complements
and  accelerates  our  efficiency  improvements,  it also allows us to eliminate
excess  inventory  of the PGA Tour  group for which the  license  agreement  has
expired.  We disposed of  approximately  $1.2 million of excess inventory during
the fourth quarter of 2002.

## Results of Operations

The  following  table  sets  forth,  for  the  periods  indicated,  consolidated
statements of operations as a percentage of net sales.

`YEAR ENDED DECEMBER 31,
                                                     -----------------------
                                             2002       2001       2000       1999
                                             ----       ----       ----       ----

Net Sales                                   100.0%     100.0%     100.0%     100.0%
Cost of Sales                                96.4%      89.3%      78.6%      74.7%
Gross Profit                                  3.6%      10.7%      21.4%      25.3%
Selling, General and Administrative          20.9%      18.9%      15.2%      14.8%
Restructuring charges                         1.9%

Operating Income (Loss)                     (19.2%)     (8.1%)      6.1%      10.5%

Income Before Taxes  (Benefit)              (19.0%)     (8.1%)      6.1%      11.1%
Income Taxes (Benefit)                       (7.1%)     (2.9%)      2.5%       4.3%
Net Income  (Loss)                          (11.9%)     (5.2%)      3.6%       6.8%`

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Net  Sales.    The  Company had an approximate  17.1%
decrease  in net  sales in 2002  compared  to 2001.  This  was  mostly  due to a
continued  decrease  in orders due to reduced  dealer  response  in a  weakening
economy.

 4 

Orders received in 2002 decreased by  approximately  18.8% compared to 2001, due
to the weak  economy of the last two years.  This  compares  to an  increase  of
approximately 4.0% for the industry.

Cost of  Sales.    Cost  of sales as a percentage  of
net sales  increased to 96.4% in 2002 compared to 89.3% in 2001.  Actual cost of
sales decreased from approximately  $38.6 million in 2001 to approximately $34.6
million in 2002.  In 2002,  the decline in net sales  resulted in higher cost of
sales as a percentage of sales.  Employee benefit costs have also contributed to
increased  costs, due to rising health care costs,  workers  compensation,
and increased pension contributions. The Company offset rising health care costs
by raising  co-pay of  prescription  drugs.  Material cost and direct labor cost
remained approximately the same as that of 2001.

Selling,               General               and               Administrative
Expenses.    Selling,    general   and    administrative
expenses  decreased in 2002 by  approximately  $0.8 million from $8.3 million in
2001 to $7.5  million in 2002.  The  decrease  was largely due to a reduction in
sales  commissions  which resulted from the decline in sales. As a percentage of
net sales, selling,  general and administrative expenses increased from 18.9% in
2001 to 20.9% in 2002.

Net  Income.    As a result of the above factors, the
net loss for 2002 was  approximately  $4.3  million as  compared  to net loss of
approximately $2.3 million in 2001.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Net  Sales.    The  Company had an approximate  21.7%
decrease  in net  sales in 2001  compared  to 2000.  This  was  mostly  due to a
decrease in orders due to reduced dealer response in a weakening economy.

Orders  received in 2001  decreased  by 9.0%  compared to 2000,  due to the weak
economy  of  the  last  fourteen   months.   This  compares  to  a  decrease  of
approximately 15.0% for the industry.

Cost of  Sales.    Cost  of sales as a percentage  of
net sales  increased to 89.1% in 2001 compared to 78.4% in 2000.  Actual cost of
sales decreased from approximately  $43.4 million in 2000 to approximately $38.6
million in 2001.  In the  previous  two years,  employee  turnover  resulted  in
inefficiencies  in the  manufacturing  process,  creating  higher cost of sales.
However,  in 2001,  the  decline  in net  sales  resulted  in  higher  cost as a
percentage of sales.  Employee  benefit  costs have also  continued to increase,
largely due to increased health care costs. The Company had health care costs of
approximately  $1.6 million in 2001,  compared to approximately  $1.4 million in
2000.  During  2001,  the  Company  offset  rising  health care costs by raising
employee  premiums.  Material cost and direct labor cost remained  approximately
the same as that of 2000.

Selling,               General               and               Administrative
Expenses.    Selling,    general   and    administrative
expenses  decreased in 2001 by  approximately  $0.4 million from $8.7 million in
2000 to $8.3  million in 2001.  The  decrease  was largely due to a reduction in
salesmen  commissions  which resulted from the decline in sales. As a percentage
of net sales, selling,  general and administrative expenses increased from 15.5%
in 2000 to 19.0% in 2001. Selling, general and administrative expenses increased
as a  percentage  of  net  sales  primarily  due to the  decline  in net  sales.

Net  Income.    As a result of the above factors, the
net loss for 2001 was  approximately  $2.3  million as compared to net income of
approximately $2.0 million in 2000.

## Liquidity and Capital Resources

The  Companys  principal  source of cash is income  from  operations.  The
Company  has no  material  outstanding  debt and is not  expecting  to incur any
significant  debt in the near future.  Cash and cash equivalents and investments
held for sale have increased  over $1.8 million in 2002 compared to 2001,  while
accounts  receivable  decreased by  approximately  $1.7 million and  inventories
decreased by approximately $4.0 million.

 5 

The  Companys  liquidity  ratio (cash and cash  equivalents  plus accounts
receivable  and  investments  held  for sale  divided  by  current  liabilities)
decreased  to 2.0 in 2002,  compared  to ratios of 2.8 and 1.7 in 2001 and 2000,
respectively.  The  decrease  in the  liquidity  ratio  was  primarily  due to a
significant increase of nearly $1.2 million in current liabilities.

There  was a 50%  reduction  in  quarterly  dividends  paid out to  shareholders
starting July 2002. The Board of Directors  agreed that dividends being paid out
should be reduced due to the  continued  downturn  in business  and the 18 month
period of  reporting a loss on  operations.  The Company also  implemented  only
modest wage  increases to our employees and no profit sharing for our management
team for this same reason.

Total capital  expenditures were approximately $0.5 million and $0.6 million for
2002  and  2001,  respectively.   Capital  expenditures  included  purchases  of
equipment,  hardware or  software,  and  expansion  of  facilities.  All capital
expenditures  for the  Company  are  tracked  separately  for each of the  three
locations.

In 2002,  approximately  $0.2 million was spent for capital  expenditures at the
Corydon  facility.  The largest  expenditures  were for a profiler  and tenoner.
Approximately  $0.1  million  of  capital  expenditures  were made for stock and
assembly  layout changes at the Culpeper  facility.  Capital  expenditures  were
approximately $0.2 million at the New Salisbury facility,  and expenditures were
for a Dodds  dovetailer,  lifts in assembly,  and sewing and cutting  equipment.

In 2001,  approximately  $0.2  million was spent in capital  expenditures  for a
Planer/Sander,  Tenoner  and  paint  booth  filters  at the  Culpeper  facility.
Approximately  $0.2 million was also spent for a concrete paint storage area and
storage bin at the Culpeper facility.  The largest capital  expenditures for New
Salisbury were for stock and layout changes.  Total capital  expenditures at New
Salisbury were approximately $0.2 million for the year.

The product turnover ratio (net sales divided by inventories) increased from 3.1
in 2001 to 3.7 in 2002.  This was due to a 17.1 %  decrease  in net  sales and a
29.2%  decrease in  inventory  between  2001 and 2002.  There was a reduction in
productivity  in 2002  due to a slow  down in  orders  as a  result  of the weak
economy.

The Company has had no material short term or long term debt since 1994 compared
to  2002s  16.9%  industry  average of long term debt in  relation  to net
worth,  according  to Dun &  Bradstreets  Business  Scope Report dated
January  7,  2003.  This has  helped  the  Company  maintain  its cash  flow and
liquidity levels. Because of Kellers financial stability, the Company does
not currently  anticipate the need to issue any new stock other than stock bonus
awards or  pursuant  to the  exercise of  employee  stock  options.  The Company
anticipates  continuing  to fund its growth  strategy with cash  generated  from
operations.  Construction  of a new  facility  is  not  currently  part  of  the
Companys growth strategy.

In 2002, the Company  invested  $3,000,000 of its excess cash flow with Hilliard
& Lyons for an improved return on its cash balance.

## Inflation

The Company  believes that it cannot afford to increase  prices by a margin much
more than the rate of inflation and still remain competitive. The price increase
for the years 2001 and 2002 were approximately 2.9% and 0.0%, respectively, with
inflation for the same period at 2.8% and 2.4% as reported in the Consumer Price
Index.  The Company  believes  that this  pricing  policy has not had a material
adverse effect on its net sales and has  contributed to the Company  remaining a
viable competitor.

 6 

To date,  the Company  believes that the effects of inflation due to health care
expenses,  property,  casualty and workers  compensation insurance premium
increases have had an effect on its business.

## Risk Factors

|1. | Competition
Competition in the furniture industry is now a global arena. Imports from China,
Taiwan,  Vietnam,  as well as other  countries  make up 40% of the sales of wood
furniture in the United States. Keller now must consider several of these import
companies direct  competitors even though their products cannot be considered to
be solid  wood.  Some of these companies that are now in competition
with Keller for floor space are  A-America,  Aico,  Legacy,  and Rivers Edge. In
addition to the import companies,  direct competitors in solid  wood
include Kincaid, Durham, Sumter, and Mobel.
Keller is  focused on  differentiating  our  products  from our  competitors  by
educating  the retail floor sales people and the end consumer on the  advantages
of:
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (1) | Solid Wood
| |  | --- | ----------

| |  | (2) | Made In America
| |  | --- | ---------------

| |  | (3) | Quality Construction/Protective Finish
| |  | --- | --------------------------------------

| |  | (4) | Reliable Delivery
| |  | --- | -----------------

| |  | (5) | Keller History and Longevity
| |  | --- | ----------------------------

|2. | Industry Conditions.
The furniture  industry  historically has been cyclical,  with operating results
fluctuating  sharply with the business  cycle of the  national  economy.  During
economic downturns, the furniture industry tends to experience longer periods of
recession  and  greater  declines  than does the  general  economy.  The Company
believes that the industry is influenced  significantly  by economic  conditions
generally and more specifically by consumer  behavior and confidence,  the level
of personal discretionary spending, housing activity,  interest rates and credit
availability.  These  factors  affect not only the ultimate  consumer,  but also
furniture retailers,  the industrys primary direct customers. The cyclical
nature of the industry  has  contributed  historically  to  fluctuations  in the
Companys  results of operations,  and such fluctuations can be expected to
occur in the future.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Employee Turnover.
With the slowdown in the economy, we have noticed a decrease in overall employee
turnover for 2002.  The Corydon plant  experienced a 19.5%  decrease in turnover
and the New  Salisbury  plant a 10.5%  decrease.  While  the  Company  has  also
implemented programs to address issues raised by employee turnover, there can be
no guarantee that the Company will not experience  significant employee turnover
in the  future  which  could  materially  adversely  affect  the  Companys
financial condition, results of operations and prospects.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

 7 

|4. | Governmental Regulations and Environmental Considerations.
The  Companys  operations  must meet  extensive  federal,  state and local
regulatory standards in the areas of safety, health and environmental pollution.
Historically,  these  standards  have not had a material  adverse  effect on the
Companys  sales or  operations.  Under the provisions of the Clean Air Act
Amendments of 1990 (the  CAA),  in December  1995, the United States
Environmental Protection Agency promulgated hazardous air emission standards for
the wood furniture industry.  These regulations,  known as the National Emission
Standards  for  Hazardous  Air  Pollutants  (NESHAPs),  require  the
Company to reduce emissions of certain volatile  organic  compounds.  Procedural
and record  keeping  improvements  have been put in place to prevent air quality
violations. Other environmental projects completed in 2001 included construction
of a finish material  storage  structure at the Culpeper  plant,  which has been
closed, and installation of improved  monitoring  equipment on the New Salisbury
sewage  treatment  plant.  The Company expects these  regulations to become even
more  stringent  in the future and  cannot  predict  the costs of effects on its
operations    which   will    result    from   its    compliance    with   these
regulations.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | Fluctuations in Price and Supply of Raw Materials.
The Company is  dependent  upon  outside  suppliers  for all of its raw material
needs and,  therefore,  is subject to price  increases  and delays in  receiving
supplies  of such  materials.  An  increase  in demand for raw  materials  could
increase  delivery times for supplies and possibly  further  affect  prices.  No
assurance  can be  given  that  the  Company  will  continue  to have  available
necessary  raw  materials  at a  reasonable  price or that any  increases in raw
material   costs   would   not   have  a   material   adverse   effect   on  the
Company.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | Potential Stock Price Volatility.
Currently there is one brokerage firm,  Hilliard Lyons in Louisville,  Kentucky,
making a market in the Companys  common shares.  There can be no guarantee
that this  firm will  continue  to make a market  in the  Companys  common
shares,  nor can there be any  assurances  that an active  trading  market  will
develop or be sustained in its absence.
The  market  price of the  Companys  common  shares has  experienced  some
significant  fluctuations  in response to variations  in operating  results from
quarter to quarter, changes in earnings estimates by analysts, market conditions
in the industry and general economic conditions.  Furthermore,  the stock market
has  experienced  significant  price and volume  fluctuations  unrelated  to the
operatingperformance of particular companies. These market fluctuations may have
a material  adverse  effect on the  market  price of the  Companys  common
shares.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. | Dividend Policy.
The Board of Directors has  traditionally  approved four (4) cash  dividends per
year to holders of its Common  Shares.  The amount of these  dividends for 2000,
2001,  and  2002  is  reflected  in  Market  Price  and  Dividends  on the
Registrants  Common Equity and Related  Stockholder  Matters,  below.  The
Board  of  Directors,  however  is not  bound in any  manner  to  continue  such
dividends.  Any future determination as to the payment of dividends will be made
at  the  discretion  of  the  Board  of  Directors  and  will  depend  upon  the
Companys  operating results,  financial condition,  capital  requirements,
general  business  conditions  and such other  factors as the Board of Directors
deems relevant.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

 8 

Market  Price and  Dividends  on the  Registrants  Common  Equity and Related
Stockholder Matters

The  Companys  common  stock has been  traded on the NASDAQ  Stock  Market
over-the-counter  bulletin board (OTC:BB)  through Hilliard Lyons in Louisville,
Kentucky.  The following  prices have been provided by Hilliard Lyons based upon
actual trades (selling price during the applicable  period).  As of December 31,
2002, there were 481 record shareholders of Keller Common Stock.

`1st Qtr.               2nd Qtr.               3rd Qtr.              4th Qtr.
                     --------               --------               --------              --------
                  High       Low          High      Low         High       Low        High       Low
                  ----       ---          ----      ---         ----       ---        ----       ---
  2000            6.125     4.438        6.000     4.375        4.130     3.380       3.750     3.060
  2001            3.750     3.380        3.732     3.250        3.700     3.150       3.150     2.620
  2002            3.300     3.000        3.750     3.000        3.450     2.200       3.150     2.300


                              Quarterly Dividends Per Share
                              -----------------------------
                      1st Qtr.     2nd Qtr.     3rd Qtr.    4th Qtr.     Total
                      --------     --------     --------    --------     -----
            2000        .0350       .0350        .0350        .0350      .140
            2001        .0350       .0350        .0350        .0350      .140
            2002        .0350       .0350        .0175        .0175      .105`

 9 

## INDEPENDENT AUDITORS REPORT

Board of Directors
The Keller Manufacturing Company, Inc. and Subsidiary
Corydon, Indiana

We have  audited  the  accompanying  consolidated  balance  sheets of The Keller
Manufacturing Company, Inc. and subsidiary (the Company) as of December 31, 2002
and 2001,  and the related  consolidated  statements of  operations,  changes in
stockholders  equity,  and cash  flows for each of the three  years in the
period  ended   December  31,  2002.   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 of  America.  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,  such consolidated  financial  statements present fairly, in all
material   respects,   the  consolidated   financial   position  of  The  Keller
Manufacturing Company, Inc. and subsidiary as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2002 in conformity with  accounting  principles
generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

February 19, 2003
Louisville, Kentucky

 10 

THE KELLER MANUFACTURING COMPANY, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETSDECEMBER 31, 2002 AND 2001

`2002             2001
                                                                      ----             ----

ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                        $ 3,172,234      $ 2,591,312
  Investments available for sale                                     1,253,437
  Accounts receivable, less allowance for doubtful
  accounts of $420,000 (2002) and $287,000 (2001)                    3,807,817        5,477,814
  Inventories                                                        9,788,948       13,826,149
  Current deferred tax asset                                           897,451          527,210
  Income taxes receivable                                            2,301,639        1,576,296
  Other current assets                                                 182,777          158,016
                                                                   -----------      -----------

           Total                                                    21,404,303       24,156,797
                                                                   -----------      -----------

PROPERTY, PLANT AND EQUIPMENT - net                                  8,490,457       10,050,750

NET FIXED ASSETS AVAILABLE FOR SALE                                    661,048

PREPAID PENSION COSTS                                                                 1,775,509
                                                                   -----------      -----------

TOTAL                                                              $30,555,808      $35,983,056
                                                                   ===========      ===========


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                 $   660,165      $   524,919
  Commissions, salaries and withholdings                               436,889          513,127
  Accrued vacation                                                     547,895          643,699
  Accrued pension liability                                            450,647
  Allowance for sales returns                                          347,981          245,000
  Restructuring reserve                                                242,299
  Other current liabilities                                          1,424,337          994,439
                                                                   -----------      -----------

           Total                                                     4,110,213        2,921,184
                                                                   -----------      -----------

LONG-TERM LIABILITIES:
  Accrued pension liability                                          1,339,255
  Deferred tax liability                                               241,989        1,267,005
  Other long-term liabilities                                          107,890
                                                                   -----------      -----------

           Total                                                     1,689,134        1,267,005
                                                                   -----------      -----------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Common stock - no par value, authorized, 40,000,000 shares         1,710,350        1,746,646
  Retained earnings                                                 24,921,025       30,048,221
  Accumulated other comprehensive loss                              (1,874,914)
                                                                   -----------      -----------

           Total                                                    24,756,461       31,794,867
                                                                   -----------      -----------

TOTAL                                                              $30,555,808      $35,983,056
                                                                   ===========      ===========`

See notes to consolidated financial statements.

 11 

THE KELLER MANUFACTURING COMPANY, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONSYEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

`2002             2001            2000
                                                                       ----             ----            ----

NET SALES                                                          $35,868,888      $43,283,395      $55,215,495

COST OF SALES                                                       34,579,571       38,649,281       43,406,132
                                                                   -----------      -----------      -----------

GROSS PROFIT                                                         1,289,317        4,634,114       11,809,363

SELLING, GENERAL AND ADMINISTRATIVE                                  7,484,338        8,237,089        8,547,902

RESTRUCTURING CHARGE                                                   695,759
                                                                   -----------      -----------      -----------

OPERATING INCOME (LOSS)                                             (6,890,780)      (3,602,975)       3,261,461

OTHER INCOME (EXPENSE):
  Interest income                                                       57,307           33,490           92,593
  Interest expense                                                      (3,730)         (14,371)         (52,956)
  Other                                                                 25,067           56,727          103,037
                                                                   -----------      -----------      -----------
    Other income, net                                                   78,644           75,846          142,674
                                                                   -----------      -----------      -----------

INCOME (LOSS) BEFORE INCOME TAXES                                   (6,812,136)      (3,527,129)       3,404,135

INCOME TAXES (BENEFIT)                                              (2,545,876)      (1,276,718)       1,382,046
                                                                   -----------      -----------      -----------

NET INCOME (LOSS)                                                  $(4,266,260)     $(2,250,411)     $ 2,022,089
                                                                   ===========      ===========      ===========


NET INCOME (LOSS) PER SHARE OF COMMON STOCK,
  Basic and dilutive -
    based on weighted average number of shares
      outstanding of 5,385,493 (2002), 5,565,780 (2001),
      and 5,611,354 (2000),                                        $     (0.79)     $     (0.40)     $      0.36
                                                                   ===========      ===========      ===========`

See notes to consolidated financial statements.

 12 

THE KELLER MANUFACTURING COMPANY, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYYEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

`Common Stock
                                                   -------------------------                          Accumulated
                                                                                                         Other
                                                                                    Retained          Comprehensive
                                                    Shares         Amount           Earnings        Loss, Net of Tax        Total
                                                    ------         ------           --------        ----------------        -----

BALANCE, JANUARY 1, 2000                           5,619,363     $ 1,712,638      $ 32,503,370                           $ 34,216,008

  Net income                                                                         2,022,089                              2,022,089
  Cash dividends declared ($.14 per share)                                            (787,030)                              (787,030)
  Stock issued under employee
    incentive plan                                     2,863          17,357                                                   17,357
  Redemptions of common stock                        (12,069)         (1,482)          (59,499)                               (60,981)
                                                   ---------     -----------      ------------         ------------      ------------

BALANCE, DECEMBER 31, 2000                         5,610,157       1,728,513        33,678,930                             35,407,443

  Net loss                                                                          (2,250,411)                            (2,250,411)
  Cash dividends declared ($.14 per share)                                            (781,052)                              (781,052)
  Stock issued as awards                               1,000           3,380                                                    3,380
  Stock issued under employee
    incentive plan                                    22,954          77,585                                                   77,585
  Redemptions of common stock                       (220,000)        (62,832)         (599,246)                              (662,078)
                                                   ---------     -----------      ------------         ------------      ------------

BALANCE, DECEMBER 31, 2001                         5,414,111       1,746,646        30,048,221                             31,794,867

  Net loss                                                                          (4,266,260)                            (4,266,260)
  Other comprehensive loss:
    Minimum pension liability adjustment,
       net of tax of $1,099,724                                                                        $ (1,874,914)       (1,874,914)
                                                                                                                         ------------
    Total Comprehensive loss                                                                                               (6,141,174)

    Cash dividends declared ($.105 per share)                                         (567,197)                              (567,197)
    Redemptions of common stock                     (112,500)        (36,296)         (293,739)                              (330,035)
                                                   ---------     -----------      ------------         ------------      ------------

BALANCE, DECEMBER 31, 2002                         5,301,611     $ 1,710,350      $ 24,921,025         $ (1,874,914)     $ 24,756,461
                                                   =========     ===========      ============         ============      ============`

See notes to consolidated financial statements.

 13 

THE KELLER MANUFACTURING COMPANY, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

`2002           2001           2000
                                                                                  ----           ----           ----

OPERATING ACTIVITIES:
  Net income (loss)                                                           $(4,266,260)   $(2,250,411)   $ 2,022,089
  Adjustments to reconcile net income (loss) to net cash provided
   by operating activities:
    Loss (gain) on disposal of property, plant, and equipment                      15,214        (10,000)          (600)
    Depreciation                                                                1,333,504      1,471,428      1,589,293
    Deferred income taxes                                                        (295,533)        23,629       (378,119)
    Common stock awards                                                                           80,965         17,357
    Changes in assets and liabilities:
      Accounts receivable                                                       1,669,997      2,918,624     (1,736,958)
      Inventories                                                               4,037,201      5,749,008     (1,881,725)
      Income taxes receivable/payable                                            (725,343)    (1,835,347)       689,496
      Other current assets                                                        (24,761)         5,584        (81,712)
      Prepaid pension costs/accrued pension liability                             590,773         76,419        (16,593)
      Accounts payable                                                            135,246     (1,051,060)       (94,370)
      Commissions, salaries and withholdings and accrued vacation                (172,042)      (256,263)      (155,297)
      Restructuring reserve                                                       242,299
      Allowance for sales returns                                                 102,981       (711,903)       956,903
      Other liabilities                                                           537,788         31,018        (73,675)
                                                                              -----------    -----------    -----------

           Net cash provided by operating activities                            3,181,064      4,241,691        856,089
                                                                              -----------    -----------    -----------

INVESTING ACTIVITIES:
  Purchases of property, plant and equipment                                     (450,473)      (623,435)    (2,442,734)
  Proceeds from sale of property, plant, and equipment                              1,000         10,000            600
  Purchases of investments available for sale                                  (1,253,437)
                                                                              -----------    -----------    -----------

           Net cash used in investing activities                               (1,702,910)      (613,435)    (2,442,134)
                                                                              -----------    -----------    -----------

FINANCING ACTIVITIES:
  Redemptions of common stock                                                    (330,035)      (662,078)       (60,981)
  Dividends paid                                                                 (567,197)      (781,052)      (787,030)
                                                                              -----------    -----------    -----------

           Net cash used in financing activities                                 (897,232)    (1,443,130)      (848,011)
                                                                              -----------    -----------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              580,922      2,185,126     (2,434,056)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                    2,591,312        406,186      2,840,242
                                                                              -----------    -----------    -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                                        $ 3,172,234    $ 2,591,312    $   406,186
                                                                              ===========    ===========    ===========

CASH PAID DURING THE YEAR FOR:
  Interest                                                                    $     3,700    $    11,000    $    52,000
                                                                              ===========    ===========    ===========
  Income taxes paid (refunded)                                                $(1,525,000)   $   535,000    $ 1,131,000
                                                                              ===========    ===========    ===========`

See notes to consolidated financial statements.

 14 

THE KELLER MANUFACTURING COMPANY, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTSYEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

## 1.    BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation  The  consolidated financial
statements include the accounts of The Keller  Manufacturing  Company,  Inc. and
its  wholly-owned  subsidiary,  Keller  Dedicated  Transportation  Company  (the
Company).  All significant  intercompany  transactions  and balances
have been eliminated.

Business  The  Company  operates  in one  business
segment, which is the manufacturing of dining room and bedroom furniture.  Sales
are made to  retailers  located  in  approximately  30 states  across the United
States on an unsecured basis.

Restructuring  charge  On  November 22, 2002,  the
Company ceased operations at its Culpeper,  Virginia facility. The product lines
that were produced at Culpeper have been consolidated in the  Companys New
Salisbury,  Indiana and Corydon,  Indiana  facilities.  In  connection  with the
restructuring   plan  for  the  Culpeper   facility,   the  Company  recorded  a
restructuring charges primarily for stay bonuses, severance, and legal and other
costs  necessary  to close the facility as follows:

| | Restructuring charges recorded in 2002 | $  696,000
| | -------------------------------------- | ----------

| | Amounts paid in 2002 | (438,000)
| | -------------------- | ---------

| | Amounts charged against restructuring liability | (16,000)
| | ----------------------------------------------- | --------

| | Balance as of December 31, 2002 | $  242,000
| | ------------------------------- | ----------

The plant facility and some identified equipment totaling approximately $661,000
have been classified as held for sale on the Consolidated Balance Sheets.

Significant   Customers  The   Company   had   one
significant  customer,  which  accounted  for  approximately  $3,481,000  (10%),
$6,307,000  (15%), and $8,592,000 (16%) of net sales and percentage of total net
sales in 2002,  2001,  and 2000,  respectively.  At December  31, 2002 and 2001,
accounts receivable from the significant customer totaled  approximately $52,000
and $781,000, respectively.

Cash   and   Cash   Equivalents  Cash   and   cash
equivalents  is  defined  as cash in banks  and  investment  instruments  having
maturities of three months or less from their acquisition date.

Investments  Investments    in   marketable   debt
securities  are  classified as available for sale and are recorded at fair value
with any unrealized holding gains or losses, net of tax, included as a component
of other  comprehensive  income.  At December 31, 2002, cost  approximates  fair
value.

Inventories  Inventories  are  stated at the lower
of cost (first-in, first-out method) or market.

Property, Plant, and  Equipment  Property,  plant,
and   equipment  are  recorded  at  cost.   Depreciation   is  provided  by  the
straight-line  method over the estimated useful lives of the depreciable assets.
Estimated  lives are 10-45 years for  buildings and  leasehold  improvements,  3
20 years for land improvements and 3-15 years for machinery and equipment.

 15 

Stock-Based  Compensation  In  December  2002, the
Financial  Accounting  Standards Board  (FASB)  issued  Statement of
Financial Accounting Standards  (SFAS) No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosures. This statement
amends SFAS No. 123,  Accounting  for Stock-Based  Compensation,  to
provide  alternative  methods of transition  for a voluntary  change to the fair
value based method of  accounting  for  stock-based  employee  compensation.  In
addition, this Statement amends the disclosure requirements of Statement No. 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for  stock-based  employee  compensation  and the
effect  of the  method  used  on  reported  results.  The  Company  implemented,
effective  for  year  ended   December  31,  2002,   the  prominent   disclosure
requirements of this statement. The Company has a stock-based compensation plan,
which is  described  more  fully in Note 9. The  Company  measures  compensation
expense using the  intrinsic-value-based  method in accordance  with  Accounting
Principle Board No. 25, Accounting for Stock Issued to Employees. No
stock-based  compensation expense is recorded upon the issuance of stock options
as the  exercise  price of all options  granted  equals the market  value of the
underlying  common stock on the date of grant.  The following table  illustrates
the effect on net income (loss) and earnings (loss) per share if the Company had
applied the fair value recognition provisions of SFAS No. 123:

`2002              2001              2000
                                                                ----              ----              ----

Net income (loss), as reported                            $ (4,266,260)     $ (2,250,411)      $ 2,022,089
Deduct stock - based compensation determined
  under fair value based method, net of related
  tax effects                                                  (18,807)          (31,456)          (64,084)
                                                          ------------      ------------       -----------
Pro forma net income (loss)                               $ (4,285,067)     $ (2,281,867)      $ 1,958,005
                                                          ============      ============       ===========

Net income (loss) per share of common stock:
  Basic and diluted earnings (loss) per share:

     As reported                                          $      (0.79)     $      (0.40)      $      0.36
     Additional stock option compensation,
     net of tax effects                                          (0.01)            (0.01)            (0.01)
                                                          ------------      ------------       -----------
Pro forma                                                 $      (0.80)     $      (0.41)      $      0.35
                                                          ============      ============       ===========`

Fair  value  was  calculated  using  the  Black-Scholes  option  pricing  model.
Assumptions used to determine the fair value are as follows:

`2002        2001          2000
                                                            ----        ----          ----

Weighted average fair value of options granted            $ 0.74        $ .99        $ 1.95
Assumptions used to determine fair value:
  Dividend yield                                          1%            1%           1%
  Expected volatility                                     37%           40%          68%
  Risk-free rate of return                                2.30%         3.75%        6.00%
  Expected life of options                                4 years       4 years      4 years`

Revenue Recognition  Sales are recorded when goods
are  delivered to the  customer.  The Company  provides for  estimated  customer
returns and allowances by reducing sales in the period of the sale.

Shipping  Costs  Shipping  costs are  recorded  in
cost of sales.

Research, Development, and  Engineering  Research,
development,  and engineering  expenditures  for the creation and application of
new  and  improved  products  and  manufacturing  processes  were  approximately
$503,000,  $380,000,  and  $370,000  in  2002,  2001,  and  2000,  respectively.
Research,  development  and  engineering  costs are  charged  to  operations  as
incurred.

 16 

Income  Taxes  The  Company  follows  SFAS No. 109
Accounting  for Income  Taxes,  which  requires the  recognition  of
deferred tax assets and liabilities for the expected future tax  consequences of
events that have been  recognized in the  consolidated  financial  statements or
income tax return.

Fair  Value  of  Financial  Instruments  The  fair
values of the Companys current assets and current liabilities  approximate
their reported carrying values, due to their short-term maturities.

Recent  Accounting  Pronouncements  In  June 2002,
the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal  Activities.  This statement addresses  financial  accounting and
reporting for costs  associated  with exit or disposal  activities and nullifies
Emerging   Issues   Task   Force    (EITF)    Issue   No. 94-3,
Liability  Recognition for Certain Employee Termination Benefits and Other
Costs  to  Exit  an   Activity   (including   Certain   Costs   Incurred   in  a
Restructuring). The Company will adopt this statement effective January 1,
2003. Management has concluded that the adoption of this statement will not have
a  material  effect on the  Companys  financial  position  or  results  of
operations.

The  Company  implemented,  effective  January 1, 2002,  the  consensus  opinion
reached by the EITF in EITF 01-9,  Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendors Products).
The EITF requires the Company to reclassify certain promotion costs,  previously
classified as selling,  general and administrative,  as a reduction in net sales
or an  increase  in cost of goods sold and did not have an impact on net income.
Operating  results for 2001 and 2000 have been restated to conform to the income
statement characterization requirements of EITF 01-9 as follows:

`2001               2000
                                                                     ----               ----

Net sales before reclassification                                $43,363,064        $55,391,644
Reclassification in accordance with EITF 01-9                        (79,669)          (176,149)
                                                                 -----------        -----------

Net sales as reported in the Consolidated Statements
  of Operations                                                  $43,283,395        $55,215,495
                                                                 ===========        ===========

Selling, general and administrative expenses
  before reclassifications                                       $ 8,316,758        $ 8,724,051
Reclassification in accordance with EITF 01-9                        (79,669)          (176,149)
                                                                 -----------        -----------

Selling, general and administrative as reported in the
  Consolidated Statements of Operations                          $ 8,237,089        $ 8,547,902
                                                                 ===========        ===========`

In  August  2001,  the  FASB  issued  SFAS  No.  144,  Accounting  for the
Impairment  or Disposal of Long-Lived  Assets.  This  Statement  addresses
financial  accounting and reporting for the impairment or disposal of long-lived
assets.  The Company  adopted  this  statement  effective  January 1, 2002.  The
Company  determined  that with the adoption of this new  standard,  there was no
material impact on its financial position or results of operations.

 17 

In June 2001, the FASB issued SFAS No. 141,  Business  Combinations,
and SFAS No.  142,  Goodwill  and  Other  Intangible  Assets.  These
statements  require the use of the  purchase  method to account for all business
combinations and broadens the criteria for recording acquired  intangible assets
separate from goodwill.  The statements also do not allow goodwill or intangible
assets with indefinite  lives,  such as trademarks,  to be amortized and require
companies to test goodwill for impairment at least annually. The Company adopted
these statements effective January 1, 2002. The Company determined that with the
adoption of these new standards,  there was no material  impact on its financial
position or results of operations.

Disclosure        of       Certain       Significant       Risks       and
Uncertainties  The  preparation of financial  statements
in conformity with accounting principles generally accepted in the United States
of America  requires  management to make certain  estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities  at the date of the  consolidated  financial
statements,  and the  reported  amounts  of  revenues  and  expenses  during the
reporting  period.  Actual  results  could  differ  from  these  estimates.  The
Companys  periodic  filings with the  Securities  and Exchange  Commission
include, where applicable, disclosures of estimates, assumptions,  uncertainties
and concentrations in products,  sources of supply and markets that could affect
the   consolidated   financial   statements   and  future   operations   of  the
Company.

## 2.    INVENTORIES

`2002               2001
                                                 ----               ----

                 Raw materials                $ 3,122,773        $ 4,653,468
                 Work in process                3,653,633          6,126,523
                 Finished goods                 3,012,542          3,046,158
                                              -----------        -----------

                 Total                        $ 9,788.948        $13,826,149
                                              ===========        ===========`

## 3.    PROPERTY, PLANT AND EQUIPMENT

`2002               2001
                                                              ----               ----

Land                                                     $   337,535         $   337,535
Land improvements                                            599,644             876,528
Buildings and leasehold improvements                       5,740,162           8,016,808
Machinery and equipment                                   10,337,893          15,084,334
Construction in progress                                       5,513              72,282
                                                         -----------         -----------
Total                                                     17,020,747          24,387,487
Less accumulated depreciation                             (8,530,290)        (14,336,737)
                                                         -----------         -----------
Net                                                      $ 8,490,457         $10,050,750
                                                         ===========         ===========`

 18 

## 4.    INCOME TAXES

Income tax expense (benefit) consists of:

`2002              2001              2000
                                                           ----              ----              ----

Currently payable (receivable):
  Federal                                              $(1,896,282       $(1,138,788)      $1,569,882
  State                                                   (354,061)         (161,559)         190,283
                                                       -----------       -----------       ----------
     Total currently payable (receivable)               (2,250,343)       (1,300,347)       1,760,165
                                                       -----------       -----------       ----------

Deferred:
  Federal                                                 (258,305)           30,047         (471,910)
  State                                                    (37,228)           (6,418)          93,791
                                                       -----------       -----------       ----------
     Total deferred                                       (295,533)           23,629         (378,119)
                                                       -----------       -----------       ----------

Total                                                  $(2,545,876)      $(1,276,718)      $1,382,046
                                                       ===========       ===========       ==========`

The  components  of deferred  tax assets and  liabilities  at December 31 are as
follows:

`2002             2001
                                                             ----             ----

Deferred tax current assets:
  Allowance for sales returns                               $63,815        $   93,970
  Accrued vacation                                          169,813           200,185
  Accrued severance                                          97,539
  Restructuring accrual                                      93,872
  Allowance for doubtful accounts                           159,331           110,319
  Other                                                     313,081           122,736
                                                           --------        ----------

Total deferred tax current assets                          $897,451        $  527,210
                                                           ========        ==========
Deferred tax noncurrent assets:
  Pension costs                                            $518,856
  Other                                                      54,494        $   54,929
                                                           --------        ----------
Total deferred tax noncurrent assets                        573,350            54,929
                                                           --------        ----------
Deferred tax long-term liabilities:
  Pension costs                                                               680,998
  Depreciation                                              700,524           578,734
  Other                                                     114,815            62,202
                                                           --------        ----------

Total deferred tax long-term liabilities                    815,339         1,321,934
                                                           --------        ----------
Net deferred tax long-term liabilities                     $241,989        $1,267,005
                                                           ========        ==========`

 19 

The difference  between taxes computed at the federal statutory tax rate and the
Companys effective tax rate are as follows:

`2002          2001       2000
                                                             ----          ----       ----

Statutory federal income tax rate                            34.0 %       34.0%       34.0%
State taxes, net of federal income tax benefit                3.8          2.9         5.6
Other                                                        (0.4)        (0.7)        1.0
                                                             ----         ----        ----

Effective income tax rate                                    37.4%        36.2%       40.6%
                                                             ====         ====        ====`

## 5.    PENSION PLANS

The Company has a defined  benefit plan that  provides  retirement  benefits for
substantially all employees.  Annual contributions to the plan are sufficient to
satisfy legal funding requirements.  The changes in benefit obligations and plan
assets,  as well as the funded  status of the plan at December 31, 2002 and 2001
were as follows:

`2002               2001
                                                                   ----               ----

Change in benefit obligation:
  Benefit obligation at beginning of year                       $11,997,813        $11,459,375
  Service cost                                                      398,868            385,009
  Interest cost                                                     848,759            838,227
  Benefits paid                                                    (624,058)          (974,665)
  Actuarial loss                                                    970,234            289,867
                                                                -----------        -----------
     Benefit obligation at end of year                          $13,591,616        $11,997,813
                                                                ===========        ===========

Change in plan assets:
  Fair value of plan assets at beginning of year                $10,809,410        $10,992,239
  Actual return on plan assets                                      178,002            371,688
  Employer contributions                                                               420,138
  Benefits paid                                                    (624,058)          (974,655)
                                                                -----------        -----------
     Fair value of plan assets at end of year                   $10,363,354        $10,809,410
                                                                ===========        ===========

  Funded status                                                 $(3,228,262)       $(1,188,403)
  Unrecognized net actuarial loss                                 4,418,125          2,985,144
  Unrecognized prior service cost                                    (5,127)           (21,232)
                                                                -----------        -----------
    Net amount recognized                                       $ 1,184,736        $ 1,775,509
                                                                ===========        ===========

Amounts recognized in the balance sheet consist of:
  Accrued pension liability - current                           $  (450,647)
  Accrued pension liability - long term                          (1,339,255)
  Accumulated other comprehensive loss                            2,974,638
  Prepaid benefit cost                                                             $ 1,775,509
                                                                -----------        -----------
    Net amount recognized                                       $ 1,184,736        $ 1,775,509
                                                                ===========        ===========`

The plan assets consist primarily of debt securities.

 20 

The  following   weighted-average   assumptions   were  used  to  determine  the
Companys obligations under the plan:

`2002       2001
                                                             ----       ----

Weighted-average assumptions as of December 31:
  Discount rate                                              6.50%      7.25%
  Expected return on plan assets                             7.50%      7.50%
  Rate of compensation increase                              3.50%      3.50%`

The components of net pension expense are as follows:

`2002             2001             2000
                                                                     ----             ----             ----

  Service cost - benefits earned during the year                  $ 398,868        $ 385,009        $ 395,226
  Interest cost on projected benefit obligation                     848,759          838,227          809,897
  Expected return on plan assets                                   (789,554)        (796,761)        (799,399)
  Net amortization and deferral                                     133,641           70,082            6,457
                                                                  ---------        ---------        ---------
    Net pension expense                                           $ 591,714        $ 496,557        $ 412,181
                                                                  =========        =========        =========`

The  Company  has  implemented  a defined  contribution  savings  plan under the
provisions  of  Section  401(k)  of the  Internal  Revenue  Code  that  provides
retirement   benefits  to  substantially  all  employees.   The   Companys
contributions,  which are based upon the salary redirection contributions of the
eligible employees, totaled approximately $25,000, $23,000, and $30,000 in 2002,
2001, and 2000, respectively.

## 6.    LEASE COMMITMENTS

The Company has operating lease  agreements for marketing  showroom and trucking
equipment.  The equipment  leases  require  additional  rentals based upon miles
driven at  varying  fixed  rates per mile and  require  the  Company  to pay for
maintenance, tires, taxes, licenses and permits.

Minimum annual rental payments are as follows:

`Year Ended
            December 31
               2003                         $  743,769
               2004                            623,474
               2005                            405,816
               2006                             54,023
               2007                             38,876
               2008 and thereafter              12,616
                                            ----------
               Total                        $1,878,574
                                            ==========`

Total  rental  expense  was  approximately   $787,000   (including  $121,000  of
contingent  rentals)  for  2002,  $815,000  (including  $111,000  of  contingent
rentals) for 2001, and $843,000  (including  $127,000 of contingent rentals) for
2000.

 21 

## 7.    EMPLOYEE INCENTIVE AND AWARD PROGRAMS

The Company has  incentive  programs for  executives  and key middle  management
personnel.  The  programs  provide  for payment of profit  sharing,  in cash and
common stock,  in amounts not to exceed 12% of the annual pre-tax profits of the
Company  before  interest  expense  and  incentive   expense.   As  the  Company
experienced a net loss in 2002 and 2001,  there was no profit  sharing  accrued.
The profit sharing accrued for 2000 was approximately $457,000, which represents
the   fair   value   of   22,954   shares   of   common   stock   and  the  cash
incentive.

Additionally,  the Company has award programs which involve the  distribution of
common stock to employees based on outstanding service. The cost of these awards
for 2001 was  approximately  $3,000  which  represents  the fair  value of 1,000
shares  of  common  stock  issued.   No  such  awards  were  given  in  2002  or
2000.

## 8.    EMPLOYEE HEALTH PLAN

The Company has a medical indemnity plan providing  comprehensive  major medical
benefits  for  eligible  employees  and  members  of  their  immediate  families
(participants). The Plan is subject to the provisions of the Employee Retirement
Income Security Act of 1974. The Companys  contributions,  which are based
upon the  contributions  of currently  employed  participants and any additional
amounts  required  to  pay  benefits  for  participants,  totaled  approximately
$1,190,000, $1,491,000, and $1,322,000 in 2002, 2001, and 2000, respectively.

## 9.    STOCK OPTION PLAN

In January 1999, a stock option plan for eligible  employees was approved by the
Company. Under the terms of the plan, the Company is authorized to grant options
of common  shares,  not to exceed  200,000  shares,  to eligible  employees  and
members of the Board of Directors. Options outstanding are generally exercisable
immediately upon grant date. All options expire four years after the date of the
grant.

The following is a summary of the option transactions under the plan:

`Weighted average
                                                                      exercise
                                                    Shares            per share
                                                    ------            ---------

Balance at December 31, 1999                        33,850              8.00
Granted                                             32,800              3.50
Forfeited                                           (2,700)             7.50
                                                   -------
Balance at December 31, 2000                        63,950              5.72
Granted                                             31,700              3.00
Forfeited                                           (6,100)             5.43
                                                   -------
Balance at December 31, 2001                        89,550              4.78
Granted                                             25,300              2.55
Forfeited                                          (23,300)             4.59
                                                   -------
Balance at December 31, 2002                        91,550              4.21
                    === ====                       =======`

A total of 86,700,  84,300,  and 58,450  shares at an average  option  price per
share of $4.31,  $4.89,  and $5.93 were  exercisable at December 31, 2002, 2001,
and 2000, respectively.  At December 31, 2002, 108,450 shares were available for
future grants.

Stock options  totaling 91,550 and 89,550 in 2002 and 2001,  respectively,  were
excluded  from the  computation  of  diluted  earnings  per  share  due to their
antidilutive effect.

 22 

The following table summarizes  information  about stock options  outstanding at
December 31, 2002:

`Options outstanding                                   Options Exercisable
----------------------------------------------------          ----------------------------
                    Number            Remaining                                Number
  Exercise       Outstanding       Contractual Life           Exercise       Exercisable
   Price        at 12/31/2002          (Years)                  Price       at 12/31/2002
   -----        -------------          -------                  -----       -------------

   $ 8.00          22,200               0.70                   $ 8.00           22,200
   $ 3.50          21,900               1.71                   $ 3.50           21,900
   $ 3.00          23,150               2.71                   $ 3.00           23,150
   $ 2.55          24,300               3.70                   $ 2.55           19,450`

## 10.    RELATED PARTY TRANSACTIONS

At December 31, 2002,  the Company had a payable of  approximately  $90,000 to a
board member for consulting services.

11.    SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

`Three months ended
                                        ----------------------------------------------------------------
                                        Mar. 31, 2002    June 30, 2002    Sept. 30, 2002   Dec. 31, 2002         Total
                                        -------------    -------------    --------------   -------------     ------------
For the year ended December 31, 2002
Net sales                                $ 9,682,467      $ 9,859,784      $ 8,302,862      $ 8,023,775      $ 35,868,888
Gross profit (loss)                          754,162        1,019,964          622,961       (1,107,770)        1,289,317
Net loss                                    (692,064)        (450,932)        (855,245)      (2,268,019)       (4,266,260)
Net loss per common share
 basic and dilutive                            (0.13)           (0.08)           (0.16)           (0.42)            (0.79)
Dividends per common share                     0.035            0.035           0.0175           0.0175             0.070

                                                                 Three months ended
                                        ----------------------------------------------------------------
                                        Mar. 31, 2001    June 30, 2001    Sept. 30, 2001   Dec. 31, 2001         Total
                                        -------------    -------------    --------------   -------------     ------------
For the year ended December 31, 2001
Net sales                               $ 11,432,886      $10,921,316      $11,664,114      $ 9,265,079      $ 43,283,395
Gross profit (loss)                        2,528,704        2,764,537        3,147,767       (3,806,894)        4,634,114
Net income (loss)                            364,826          524,906          651,769       (3,791,912)       (2,250,411)
Net income (loss) per common share
 basic and dilutive                             0.06             0.09             0.12            (0.67)            (0.40)
Dividends per common share                     0.035            0.035            0.035            0.035              0.14`

During the fourth quarter of 2002, the Company discontinued a product line which
resulted in a charge of approximately  $1.2 million ($732,000 after tax) for the
write down of the  inventory.  On November  22,  2002,  the  Company  closed the
Culpeper, Virginia facility and recorded a restructuring charge of approximately
$0.7 million ($425,000 after tax).

During  the  fourth  quarter  of  2001,   the  Company   recorded  a  charge  of
approximately  $4.3  million  ($2.8  million  after  tax) for the  writedown  of
inventory as a result of a physical  inventory count conducted during the fourth
quarter. The Company also adjusted accruals for sales returns,  health insurance
claims not yet paid and accrued  vacation  totaling  approximately  $1.3 million
($.8 million after tax).

The  Company is unable to  determine  the  impact,  if any, of the write down of
inventory and other charges to previous  quarters and accordingly,  has recorded
the amounts in the fourth quarter of 2001.

 23 

## CORPORATE DATA

|CORPORATE HEADQUARTERS
701 N. WATER ST.
CORYDON, IN 47112PRODUCTION FACILITIES
701 NORTH WATER ST., CORYDON, IN 47112
1010 KELLER DR., NEW SALISBURY, IN 46161 | GENERAL COUNSEL
ICE MILLER
LEGAL & BUSINESS ADVISORS
INDIANAPOLIS, INTRANSFER AGENT
FIFTH THIRD BANK
CORPORATE TRUST SERVICES
38 FOUNTAIN SQ. PLAZA
CINCINNATI, OH 45202
(800) 837-2755AUDITORS
DELOITTE & TOUCHE LLP
LOUISVILLE, KY
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# THE KELLER MANUFACTURING COMPANY, INC.

|BOARD OF DIRECTORS
AND OFFICERS |  | EXECUTIVE OFFICERS |  | BOARD OF DIRECTORS
|------------------------------- |  | ------------------ |  | ------------------

|Robert W. Byrd
Chairman of the Board
Steven W. Robertson
President and Chief Executive Officer
Danny L. Utz
Vice President of Finance,
Secretary and Treasurer
Scott A. Armstrong
Sr. Vice President of Sales and
Marketing |  | David Jenkins
Vice President of Engineering |  | John C. Schenkenfelder
First Vice President
of Investments
UBS Paine Webber, Inc.
Bradford T. Ray
Vice Chairman and Chief
Executive Officer
Steel Technologies, Inc.
Ronald W. Humin
Chief Executive Officer
Flexible Materials, Inc.
Philip L. Jacobs
President
Evans Furniture Showrooms
Larry Roy
Executive Vice President of
Execut Finance and CFO
Kentucky Manufacturing Company
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Form 10-KA copy of the Company's Form 10-K Annual Report, filed with the Securities and
Exchange
Commission, is available upon written request to Danny L. Utz at The
Keller Manufacturing
Company, Inc., P.O. Box 8, Corydon, Indiana, 47112. The
10-K and 10-Q reports can also be
accessed on the Internet at
http://www.freedgar.com