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

The following  discussion and analysis  should be read in  conjunction  with the
Selected Consolidated  Financial Data and the Company's  Consolidated  Financial
Statements  and notes thereto  included  herein.  In addition to the  historical
information  contained  herein,  the following  discussions  may contain forward
looking  statements that involve risks and  uncertainties.  The Company's actual
results could differ materially from those discussed herein.

Results of Operations

The  following  table  sets  forth,  for  the  periods  indicated,  consolidated
statement of income data as a percentage of net sales.

                             YEAR ENDED DECEMBER 31,

                                       1999     1998     1997
                                       ----     ----     ----

Net Sales                             100.0%   100.0%   100.0%
Cost of Sales                          74.1%    71.6%    69.7%
Gross Profit                           25.9%    28.4%    30.3%
Selling, General & Administrative      14.8%    13.2%    15.0%
Operating Income                       11.1%    15.2%    15.2%
Income Before Taxes                    11.1%    15.2%    15.2%
Income Taxes                            4.3%     5.8%     5.9%
Net Income                              6.8%     9.4%     9.3%

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Net Sales.  The Company had an  approximate  7.3%  decrease in net sales in 1999
compared to 1998. This was partially due to  approximately a $2 million decrease
in shipments in the second  quarter,  caused by  engineering  and  manufacturing
demands  brought  about  by the  introduction  of the  new  PGA  TOUR(R)  group.
Efficiencies  dropped  further in the second half of the year, as shipments were
down  approximately $3.7 million compared to the same period in 1998. Partly due
to the tightening job market, employee turnover for the Company increased by 45%
compared  to 1998.  Training  of a large  percentage  of new  employees  was the
primary  factor in the reduction in  efficiencies.  Actual orders  received were
down 4.3% from 1998,  partially due to not getting  follow-up  orders because of
the delayed shipments.

The Company  forecasts  an  increase of orders for 2000  compared to 1999 but it
cannot clearly be estimated until  improvements in efficiencies  occur. In order
to increase  Year 2000  orders,  the  concentration  will be in growing  current
product sales in current accounts,  adding new product introductions to existing
dealers,  opening new  accounts,  reviewing  new channels of  distribution,  and
introducing  a new product style  category in the Fall.  Key factors will be the
improvement  of sales for the PGA TOUR(R)  Group as well as the addition of iron
pieces  to  the  current  Chestnut  Creek  and  Colonial  Heirloom  dining  room
collections.

Returns & allowances have decreased from 1.96% in 1998 to 1.71% in 1999. This is
the second  consecutive  year for a  decrease.  The  reduction  is a result of a
continuous  improvement  effort to increase the quality of Keller products going
to the customer.

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<PAGE>

Cost of Sales.  Cost of sales as a percent  of net sales  increased  to 74.1% in
1999  compared  to 71.6% in 1998 due mainly to the cost of  materials.  Material
costs, as a percent of net sales, increased from 23.9% in 1998 to 26.4% in 1999.
Lumber costs recognized provided one of the reasons for the increase in material
costs.  Though lumber prices for oak have actually  decreased  from 1998 average
costs, it has taken approximately nine months for all of the lumber in inventory
from 1998 to cycle through. There has also been an increase in the purchasing of
dimension  stock for 1999.  Part of this is due to the  introduction  of the PGA
TOUR(R) group.  Also, some key parts are now being purchased in rough dimensions
to help  improve  yield.  Parts such as tops and items with  longer  lengths are
difficult to cut in certain packages in the cutting lines. The length mixes make
it  difficult  to  maintain   established   yield   standards.   Another  factor
contributing to the increase was cardboard packing materials which had two price
increases for 1999.  There was a total price increase of  approximately  11% for
the year.

Selling,   General   and   Administrative   Expenses.   Selling,   General   and
Administrative  Expenses  increased  from 13.2% of net sales in 1998 to 14.8% in
1999.  Administrative  expenses had the largest increase of  approximately  $0.4
million.  This was an  increase  as a percent  of net sales from 2.6% in 1998 to
3.5%  in  1999.   Professional  support  fees  for  implementation  of  the  EMS
Information  System  accounted  for half of the  increase.  Costs for making the
Company Y2K compliant ran higher than  originally  anticipated.  The other major
administrative  expense  increase  was for costs,  such as legal and audit fees,
related to the Company  registering its stock under the Securities  Exchange Act
of 1934 as required by SEC regulations.

Selling  expenses,  as a percent of net sales,  increased  from 10.4% in 1998 to
11.0% in 1999. Even though actual expenses were down  approximately $0.2 million
from 1998,  there were certain  costs locked in,  based on sales  forecasts  for
1999. There were marketing  programs put into place at the beginning of the year
as well as PGA  promotions  that were  incurred  before the Company  experienced
production problems and reduced shipments.

Net Income. As a result of the above factors,  the Company recognized net income
of approximately  $3.8 million in 1999 compared to approximately $5.7 million in
1998. Net income decreased 33.2% from 1998,  which had a 2.9% increase  compared
to 1997. This was the first decrease in net income for the Company since 1990.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Net Sales.  The Company had an approximate  2.4% increase in net sales from 1997
to 1998,  and a 2.9% increase in the  Company's net income for this period.  The
1998 increase in net sales is less than the 1997 increase of 8.4%.  This is due,
in part, to the decrease in Haverty's orders.

Cost of Sales.  Cost of sales as a percentage of net sales increased to 71.6% in
1998 from 69.7% in 1997 due mainly to  increases  in the cost of raw  materials.
Total material costs increased by  approximately  $1.7 million in 1998,  largely
due to a 15 % increase in the cost of lumber. Labor costs were relatively steady
with an annual  raise  approximately  equal to the rate of  inflation.

Selling,General and Administrative Expenses. Selling, General and Administrative
expenses decreased from 15.0% of net sales in 1997 to 13.2% in 1998. There was a
total  decrease of  approximately  $0.9 million  from 1997 to 1998.  There was a
reduction of approximately $0.3 million in expenditures involving implementation
of the EMS  Information  System.  These expenses  included  consulting  fees and
training of employees in using the new system. Other factors contributing to the
reduction in 1998 were the recognition of approximately  $0.3 million flood loss
in 1997, and a $70,000 reduction in bad debt expense.

Net Income. As a result of the above factors,  the Company recognized net income
for 1998 of approximately $5.7 million,  compared to net income of approximately
$5.5 million in 1997.


                                       3
<PAGE>

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. The cash account has decreased slightly over $1 million
in 1999 compared to 1998,  while accounts  receivable  increased  slightly.  One
reason  for the  reduction  in cash was due to an  increase  in  inventories  of
approximately  $1.6  million.  Due to the  problems  in  manufacturing,  certain
bottlenecks occurred in key mill departments. This in turn caused an increase of
work in process.

The  other  significant  factor  causing  the  reduction  in cash was due to the
repurchase of approximately $2.2 million in Keller stock by the Company in 1999.
This was  approximately a $2 million increase  compared to stock  repurchased in
1998.

The  Company's   liquidity  ratio  (cash  and  cash  equivalents  plus  accounts
receivable  divided  by current  liabilities)  increased  to 2.22 in 1999.  This
compares  to 1.95 in 1998  and 1.60 in  1997.  The  other  factors  causing  the
increase in liquidity  ratio was a significant  decrease of nearly $1 million in
current  liabilities.  There were  decreases in accruals of  approximately  $0.4
million  each for the  Multi  Media  Plan  and  employee  bonuses  as well as an
approximate $0.2 million decrease in accounts payable. The drop in sales for the
year was the root cause for the large decreases in these accounts.

Total capital expenditures for the Company were approximately $1.9 million, $2.6
million  and $2.2  million  for  1999,  1998  and  1997,  respectively.  Capital
expenditures include purchases of equipment,  hardware or software, expansion of
facilities,  and purchase of buildings.  Major  expenditures for the Company are
tracked  separately for each of the three locations.  The largest single capital
expenditure for 1997 was for Phase I of a dust collection  system at Corydon for
approximately $0.4 million. Also in 1997, Culpeper purchased a planer sander for
approximately  $0.2 million,  and New Salisbury  purchased a moulder and grinder
for approximately  $0.2 million and installed  approximately $0.2 million on the
EMS computers and software.  In 1998, the largest  expenses related to Corydon's
purchases of Phase II and III of the dust  collection  system for  approximately
$0.4 million. Corydon also purchased a Computer Numerical Control Machine Center
("CNC Machine  Center") for  approximately  $0.3 million and New Salisbury spent
approximately  $0.3  million  on  construction  of a new  kiln.  There  were  no
significant projects at Culpeper in 1998.

In 1999, the largest capital  expenditure was  approximately  $0.1 million for a
rough planer at Corydon. Modifications for the sorter line are being implemented
as well but were  not  completed  in 1999.  Corydon  purchased  a paint  storage
building  for  $71,000.  This was a proactive  measure for future  environmental
regulation compliance.  At New Salisbury,  $90,000 was spent on replacement of a
fire reservoir liner for the sprinkler system.  An additional  $76,000 was spent
for a mezzanine in the shipping  department for more storage area. The tempering
room was not expanded as originally planned,  rather, some adjustments were made
in the kilns.  This allowed  dried lumber to still be stored but at a much lower
capital  expense.  There were no significant  projects  completed at Culpeper in
1999.

The estimated  expenditures for 2000 are approximately $2.2 million,  consisting
mainly of new equipment  purchases for the three manufacturing  facilities.  The
largest single  expenditure  planned is approximately $0.6 million to expand the
warehouse  facilities at New Salisbury.  The CNC Machine Center at New Salisbury
is expected to be completed in 2000 at a cost of approximately $0.3 million.  At
Corydon, a finish planer will be purchased at an estimated cost of approximately
$0.2 million. A moulder will be purchased for the Culpeper facility at a cost of
approximately  $0.2  million.  The EMS  Information  System  is  expected  to be
completed  in 2000  at a cost  of  less  than  $150,000  for  the  three  plants
cumulatively.

The product turnover ratio (net sales divided by inventories) decreased from 3.7
in 1998 to 3.2 in 1999. This was due to a 7.3% decrease in net sales and a 10.1%
increase in inventory.  The product turnover ratio decreased to 3.7 in 1998 from
3.9 in 1997. As mentioned  previously,  there was a reduction in productivity in
1999 due to a combination of  inefficiencies  with the  introduction  of the PGA
TOUR(R) Group and the increase in employee turnover for the Company. The Company
expects  efficiencies  to improve  with the  emphasis of getting  new  employees
trained  better and faster.  The goal is to improve the product  turnover  ratio
compared to recent years prior to 1999.

                                       4
<PAGE>

After having three fairly level years of selling expenses, there was an increase
to 11.0% of net sales  for 1999.  It was 10.4% of net sales in 1998 and 10.6% in
1997. There will be a review of selling expenses before mid-year to evaluate how
sales and shipment  levels are doing.  Programs will be spread out over a longer
period throughout the year and will be adjusted  according to sales and shipment
results. Advertisement has been done primarily at the regional level rather than
the national level.  The Multi-Media  Plan introduced last year will continue to
focus  on  regional  advertising.   The  Company  also  plans  to  continue  its
sponsorship of the PGA TOUR(R) through 2000, and its displays at the trade shows
held at High Point,  North  Carolina and one at San  Francisco,  California  for
January 2000 only.

The key area of focus for 2000 is to improve  efficiencies  and try to return to
previous  levels.  Training of new  employees  will be an area of  importance in
making this happen.  The number of employees with less than one year  experience
is at its highest level in several years.  Training these employees properly and
quickly is of major importance.

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  Company's
total price  increase for the years of 1997,  1998 and 1999 was 7.5% compared to
cumulative  inflation  of 5.5% for the  same  three  year  period.  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.

The Company has had no material short term or long term debt since 1994 compared
to a 1998 16.8% Industry  average of long term debt in relation to net worth(2).
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 funding its growth
strategy with cash generated from operations.  Construction of a new facility is
not currently part of the Company's growth strategy but the further  utilization
of current facilities through  additional shifts is currently  contemplated.  As
mentioned previously,  there will be an expansion to the New Salisbury warehouse
facilities at an approximate cost of $0.6 million.

The Company has available lines of credit totaling $5.0 million. This includes a
$3.0 million line of credit with Union  Planters Bank of Corydon,  Indiana which
expires  July 31,  2000.  Interest  is charged at the prime  lending  rate.  The
Company  also has a $2.0  million  line of  credit  available  with  Bank One of
Louisville,  Kentucky which expires July 31, 2000.  Interest is charged at LIBOR
plus 2%.  These lines are not  collateralized.  As of December  31, 1999 , these
lines of credit were unused.

Inflation

To date,  the  Company  believes  that the effects of  inflation  have not had a
material adverse effect on its business, operations or financial condition.

---------------------------------------------
(2) Dun & Bradstreet  Business Scope Report.  November 23, 1999. The information
regarding the furniture  manufacturing  industry contained in this report was as
of December 31, 1998.

                                       5
<PAGE>

Year 2000

The Company  experienced  no disruptions or problems of any kind due to any Year
2000 computer problems.  All components of the Company's  information system and
other  digitally  controlled  equipment  performed  as  expected.  There were no
interruptions  of supplies  from any vendors.  All Year 2000 hardware and system
installations  were completed as of December 31, 1999 as  forecasted.  Since all
Y2K actions  have been  completed,  no further Y2K costs will be  incurred.  The
total cost of Year 2000  preparations  was  approximately  $0.5 million.  Of the
total,  approximately  $0.3 million was for capital costs and approximately $0.2
million was for programming and consulting expenses.

Risk Factors

The business,  financial  condition,  results of operations and prospects of the
Company  are subject to a number of risks,  including  those  identified  below.
Reviewers of this report should read  carefully the  information on risk factors
set forth below as well as the other information set forth in this report and in
the Company's filings with the Securities and Exchange Commission, a copy of any
of which will be provided by the Company upon request.

1.       Competition

         The furniture industry is characterized by highly intense  competition.
         The Company  competes with many  nationally  recognized and financially
         successful manufacturers of high quality furniture. Many companies with
         which  the  Company   competes,   both   domestic  and  foreign,   have
         substantially larger production  capacities,  distribution networks and
         greater financial resources than the Company.

         The furniture industry is a segmented industry whereby design,  quality
         and price place each manufacturer  into one or more competitive  market
         niches.  The  Company  competes  in the  middle to  upper-middle  price
         market, which normally requires a larger number of items in the product
         line, smaller production lot sizes and higher inventory requirements to
         maintain  a  competitive  delivery  cycle.  Certain  of  the  Company's
         competitors  may have greater  financial and other  resources  than the
         Company in particular  industry segments.  Competition could materially
         adversely  affect  the  Company's  operating  results  by forcing it to
         reduce its sales prices, offer enhanced credit terms, increase customer
         discounts or incentives, increase spending for co-operative advertising
         arrangements with customers or provide other services.

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.

         The Company experienced unusually high employee turnover in 1999, which
         caused inefficiencies in the manufacturing process and contributed to a
         decline in  shipments.  While the Company has  implemented  programs to
         address  issues raised by employee  turnover  there can be no guarantee
         that the Company will not experience  significant  employee turnover in
         2000 and  thereafter,  which  could  materially  adversely  affect  the
         Company's financial condition, results of operations and prospects.

                                       6
<PAGE>

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  controls.  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.  The Company has not
         been  assessed with any material  violations  of any federal,  state or
         local  environmental  regulations  through  the year 1999.  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,  Inc.  in
         Louisville,  Kentucky,  making a market in the Company's shares.  There
         can be no  guarantee  that this firm will  continue to make a market in
         the Company's  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   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  operating   performance  of
         particular  companies.  These market  fluctuations  may have a material
         adverse effect on the market price of the Common Shares.

7.       Dividend Policy.

         The  Board  of  Directors  has  established,  in  2000,  four  (4) cash
         dividends per year to holders of its common shares. The amount of these
         dividends  for 1998 and 1999 is reflected in Market Price and Dividends
         on the  Registrants  Common  Equity and  Related  Stockholder  Matters,
         herein.  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.

                                       7