<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 --------------

                                    FORM 10-Q

(Mark One)

/X/   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2001

                                       Or

/ /   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934

                        Commission File Number 333-58675
                                               ---------

                               KEY COMPONENTS, LLC
                               -------------------
             (Exact name of Registrant as Specified in its charter)

                Delaware                              04-3425424
                --------                              ----------
    (State or Other Jurisdiction of        (IRS Employer Identification No.)
     Incorporation or Organization)

  200 White Plains Road, Tarrytown NY                      10591
  -----------------------------------                      -----
(Address of Principal Executive Offices)                (Zip Code)

                                 (914) 332-8088
                                 --------------
              (Registrant's Telephone Number, Including Area Code)

                          KEY COMPONENTS FINANCE CORP.
                          ----------------------------
             (Exact name of Registrant as specified in its charter)

                Delaware                                  14-1805946
                --------                                  ----------
    (State or Other Jurisdiction of            (IRS Employer Identification No.)
     Incorporation or Organization)

  200 White Plains Road, Tarrytown NY                        10591
  -----------------------------------                        -----
(Address of Principal Executive Offices)                  (Zip Code)

                                 (914) 332-8088
                                 --------------
              (Registrant's Telephone Number, Including Area Code)

     Indicate by check mark whether registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                                                             /X/ Yes / / No

     As of August 14, 2001, all of the membership interests in Key Components,
LLC was owned by Key Components, Inc. a privately held New York corporation. All
of the shares of common stock of Key Components Finance Corp. were owned by Key
Components, LLC.

================================================================================


<PAGE>


                               KEY COMPONENTS, LLC

                                 Form 10-Q Index

                                  June 30, 2001
<TABLE>
<CAPTION>
                                                                                              Page
                                                                                             Number
                                                                                             ------
<S>                                                                                         <C>
PART I

Item 1.--    Consolidated Financial Statements:

             Balance Sheets.............................................................        2
             Statements of Income.......................................................        3
             Statements of Cash Flows...................................................        4
             Notes to Consolidated Financial Statements.................................        5

Item 2. --   Management's Discussion and Analysis of Financial Condition
             and Results of Operations..................................................       12

Item 3.--    Quantitative and Qualitative Disclosures about Market Risk.................       23

PART  II

Item 6.--    Exhibits and Reports on Form 8-K...........................................       23

Signatures   ...........................................................................       24
</TABLE>


                                       1

<PAGE>

                         PART I -- FINANCIAL INFORMATION

Item 1 -- Consolidated Financial Statements

                      KEY COMPONENTS, LLC AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                        June 30,     December 31,
                                                                          2001           2000
                                                                      ------------   ------------
                                                                       (unaudited)
<S>                                                                   <C>            <C>
Assets:
Current
   Cash and cash equivalents                                          $    885        $  3,775
   Accounts receivable, net of allowance for doubtful accounts
     of $893 and $808 at June 30, 2001 and December 31, 2000,
     respectively                                                       29,154          29,129
  Inventories                                                           35,362          35,337
  Prepaid expenses and other current assets                              2,149           2,158
  Prepaid income taxes                                                   2,086           3,699
  Deferred income taxes                                                  4,883           3,614
  Assets held for sale                                                   3,322           9,842
                                                                      --------        --------
     Total current assets                                               77,841          87,554

Property and equipment, net                                             28,646          27,864
Goodwill, net                                                          117,738         118,455
Deferred financing costs, net                                            6,163           6,675
Intangibles, net                                                           529             752
Prepaid pension cost                                                     4,346           4,190
Other assets                                                             1,171           1,060
                                                                      --------        --------
                                                                      $236,434        $246,550
                                                                      ========        ========

Liabilities and Member's Equity:
Current
  Current portion of long-term debt and other long-term
     obligations                                                      $  9,471        $  8,227
  Accounts payable                                                       8,799          11,552
  Accrued compensation                                                   3,751           3,979
  Accrued expenses                                                       6,678           6,458
  Accrued acquisition costs                                              2,809           3,767
  Accrued interest                                                         731             904
                                                                      --------        --------
      Total current liabilities                                         32,239          34,887

Long term debt                                                         165,792         174,516
Accrued lease costs                                                        533             553
Deferred income taxes                                                    4,982           4,982
Other long-term liabilities                                              2,827           3,762
                                                                      --------        --------
     Total liabilities                                                 206,373         218,700

Commitments

Member's equity                                                         30,061          27,850
                                                                      --------        --------
                                                                      $236,434        $246,550
                                                                      ========        ========
</TABLE>


                 The accompanying notes are an integral part of
                          these financial statements.

                                       2

<PAGE>

                      KEY COMPONENTS, LLC AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                            (Unaudited, in thousands)

<TABLE>
<CAPTION>
                                                     For the Six Months          For the Three Months
                                                       Ended June 30,                Ended June 30,
                                                   -----------------------     -----------------------
                                                      2001          2000           2001         2000
                                                   ---------     ---------     -----------    --------

<S>                                                <C>           <C>           <C>           <C>
Net sales                                          $ 100,868     $  80,483     $  50,071     $  40,640
Cost of goods sold                                    63,925        46,383        31,658        23,290
                                                   ---------     ---------     ---------     ---------
      Gross profit                                    36,943        34,100        18,413        17,350

Selling, general and administrative expenses          22,998        16,620        11,105         8,357
SAR Compensation and other expense                         7         1,800             7         2,000
Acme Aerospace division cumulative adjustment           (721)           --          (721)           --
                                                   ---------     ---------     ---------     ---------
      Income from operations                          14,659        15,680         8,022         6,993

Other income                                             146           264            60           175
Reorganization expense                                    --        (7,316)           --        (7,316)
Interest expense                                      (9,129)       (7,319)       (4,246)       (3,673)
                                                   ---------     ---------     ---------     ---------
      Income (loss) before provision for income
         taxes                                         5,676         1,309         3,836        (3,821)
Provision for income taxes                             2,600         1,026         1,846           723
                                                   ---------     ---------     ---------     ---------
      Income (loss) from continuing operations         3,076           283         1,990        (4,544)
                                                   ---------     ---------     ---------     ---------
Loss from discontinued operations:
Loss from operations of the inverter business             --          (208)           --          (185)
Loss on disposal of Heart and Cruising                    --        (3,317)           --          (262)
                                                   ---------     ---------     ---------     ---------
      Loss from discontinued operations                   --        (3,525)           --          (447)
                                                   ---------     ---------     ---------     ---------
      Net income (loss)                            $   3,076     $  (3,242)    $   1,990     $  (4,991)
                                                   =========     =========     =========     =========

</TABLE>


                 The accompanying notes are an integral part of
                          these financial statements.

                                       3

<PAGE>

                      KEY COMPONENTS, LLC AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Unaudited, in thousands)

<TABLE>
<CAPTION>

                                                                         For the Six Months Ended June 30,
                                                                        ---------------------------------
                                                                            2001                  2000
                                                                         ---------             ----------
<S>                                                                      <C>                  <C>
Cash flows from operating activities:
     Net income (loss)                                                   $  3,076             ($ 3,242)
     Adjustments to reconcile net income to net cash provided
        by operating activities:
        Loss of discontinued operations                                        --                3,525
        Depreciation and amortization                                       4,175                3,348
        Stock appreciation rights compensation                                 --                1,556
        Compensation charge for exercised options                              --                   45
        Amortization of deferred finance costs                                513                  471

        Changes in assets and liabilities:
            Accounts receivable                                             1,091               (2,454)
            Inventories                                                     2,321               (2,937)
            Prepaid expenses and other assets                               1,461                  378
            Accounts payable                                               (3,496)               1,665
            Accrued expenses                                               (3,161)               5,105
                                                                         --------             --------
            Net cash provided by continuing operations                      5,980                7,460
            Net cash used in discontinued operations                           --                 (163)
                                                                         --------             --------
          Net cash provided by operating activities                         5,980                7,297
                                                                         --------             --------

Cash flows from investing activities:
     Proceeds from divestitures                                                --                8,390
     Net proceeds from assets held for sale                                 1,737                   --
     Capital expenditures                                                  (2,256)              (1,735)
                                                                         --------             --------
          Net cash (used in) provided by investing activities                (519)               6,655
                                                                         --------             --------

Cash flows from financing activities:
     Payments of long-term debt and capital lease obligations             (10,286)              (3,145)
     Proceeds from debt issued                                              2,800                   --
     Payment of stock appreciation rights                                      --               (7,454)
     Deferred financing costs                                                  --                 (418)
     Member contributions                                                      --                7,111
     Member withdrawals                                                      (865)              (2,350)
                                                                         --------             --------
         Net cash used in financing activities                             (8,351)              (6,256)
                                                                         --------             --------
Net (decrease) increase in cash and cash equivalents                       (2,890)               7,696
Cash and cash equivalents, beginning of period                              3,775                4,171
                                                                         --------             --------
Cash and cash equivalents, end of period                                 $    885             $ 11,867
                                                                         ========             ========
</TABLE>


                 The accompanying notes are an integral part of
                          these financial statements.

                                       4

<PAGE>

                      KEY COMPONENTS, LLC AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
1.       Basis of Presentation

The consolidated financial statements include the financial statements of Key
Components, LLC ("KCLLC"), and subsidiaries, all of which are wholly owned
(collectively the "Company"). All significant intercompany transactions have
been eliminated. Key Components, Inc. ("KCI"), a New York corporation and
KCLLC's sole member, holds no other assets other than its investment in KCLLC
and has no operations.

The Company manufactures and sells custom engineered essential componentry in a
diverse array of end use markets. Through its two business segments, electrical
components and mechanical engineered components, the Company targets its
products primarily to original equipment manufacturers. The Company's electrical
components business products include power conversion products, specialty
electrical components and high-voltage utility switches, which are manufactured
by its subsidiaries Acme Electric Corporation ("Acme"), Marine Industries, LLC,
Atlantic Guest, Inc. ("Guest") and Turner Electric, LLC. The Company's
mechanical engineered components business products primarily consist of medium
security lock products and accessories, flexible shaft and remote valve control
components and turbo-charger actuators, which are manufactured by Hudson Lock,
LLC, ESP Lock Products, LLC, B.W. Elliott Manufacturing, LLC and Gits
Manufacturing, LLC.

The accompanying unaudited financial statements of the Company contain all
adjustments that are, in the opinion of management, necessary for a fair
statement of results for the interim periods presented. While certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted, the Company
believes that the disclosures herein are adequate to make the information not
misleading. The results of operations for the interim periods are not
necessarily indicative of the results for full years. These financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 2000 included in the Company's
Annual Report on Form 10-K.

Certain reclassifications were made to conform the prior periods to the current
year presentation.

                                       5

<PAGE>


2.       Acquisitions and Dispositions

During the years ended December 31, 2000 and 1999, the Company acquired the
entities described below, which were accounted for under the purchase method of
accounting. The results of the operations of the acquired entities have been
included in the consolidated financial statements since their respective dates
of acquisition.

Acme Electric Corporation

On November 21, 2000, the Company acquired all of the outstanding shares of Acme
for a purchase price of approximately $47.3 million and assumed liabilities of
approximately $24.2 million. In conjunction with the acquisition, the Company
repaid approximately $10.4 million of Acme's outstanding long-term debt out of
the approximately $24.2 million of assumed liabilities . The Company recorded
the estimated excess purchase price over net assets acquired of approximately
$28.9 million as goodwill. The Company ascribed a thirty-five year useful life
to the goodwill.

At the time of the Acme acquisition, the Company decided to sell the Acme
Aerospace ("Aerospace") and the Acme Electronics ("Electronics") divisions.
Aerospace manufactures lightweight high power battery chargers and related power
systems for aerospace applications. Electronics designs and manufactures custom
power supplies and power integration systems for data storage,
telecommunications and medical electronic applications. In accordance with
Emerging Issues Task Force ("EITF") Bulletin 87-11, "Allocation of Purchase
Price to Assets to be Sold," the Company recorded the anticipated net proceeds
from the sale of these subsidiaries adjusted for the anticipated net cash
inflows during the holding period (date of acquisition to date of sale) as
assets held for sale. In addition, the net earnings from these businesses during
the holding period are excluded from the operations of the Company, in
accordance with EITF 87-11. Such results from operations of the businesses held
for sale, estimated sale proceeds plus the estimated net cash inflows related to
these businesses during the holding periods have been included in goodwill. Any
difference between the estimated and actual cash flows will also be included in
goodwill. In recording the purchase of Acme, the Company recorded assets held
for sale of approximately $9.8 million at December 31, 2000.

Based on the strength of the operating performance of Aerospace, which
management believes is sustainable, on June 1, 2001, the Company decided to
retain rather than divest Aerospace. On that date and in accordance with EITF
90-6, "Accounting for Certain Events Not Addressed in Issue No. 87-11 Relating
to an Acquired Operating Unit to be Sold," the Company reallocated the purchase
price of Acme as if Aerospace had never been held for sale and recorded a
cumulative adjustment for the results of operations of Aerospace from the date
of acquisition through May 31, 2001 of $721,000 comprised of the following:

     (In thousands)
     Net sales                                                     $4,988
     Cost of goods sold (including depreciation of $75)             3,367
                                                                   ------
          Gross profit                                              1,621

     Selling, general and administrative expenses
          (including depreciation of $33)                             900
                                                                   ------
         Income from operations                                    $  721
                                                                   ======


                                       6

<PAGE>




The Company has retained an independent appraiser to evaluate the fair market
value of Aerospace's long-term assets. This investigation will be completed
prior to September 30, 2001 and the impact of any adjustment relating to the
purchase price of Acme will be recorded to goodwill.

For the six months ended June 30, 2001, the assets held for sale of Electronics
provided cash of approximately $1.7 million. The Company estimates that
Electronics will be sold between September and October 2001.

As part of the Company's plan of integrating Acme into its existing operations,
the Company accrued approximately $2.0 million of severance costs and $290,000
of lease exit costs related to the closing Acme's corporate office, of which
$745,000 of severance payments were made against the severance accrual and no
payments were made against the lease exit cost accrual through June 30, 2001.
The Company estimates that Acme's corporate office will be closed by September
15, 2001. The amount of assets held for sale and the accrued costs represent
significant estimates and are subject to change based on actual results.

Valley Forge Corporation

On January 19, 1999, the Company acquired all of the outstanding shares of
Valley Forge Corporation ("VFC"). In November 1999, management of the Company
decided to withdraw from the business of manufacturing and selling power
inverters and related instrumentation by selling its interests in Heart
Interface Corporation ("Heart"), Cruising Equipment Company ("Cruising") and
Mastervolt International B.V. ("Mastervolt"), all of which were acquired as part
of the VFC acquisition. In accordance with Accounting Principles Board Opinion
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," the Company recorded the net assets of Heart,
Cruising, and Mastervolt as net assets of discontinued operations and reported
the results of operations as a loss from discontinued operations.

In April 2000, the Company consummated the sale of Heart and Cruising. The
Company received approximately $9.0 million in proceeds before any transaction
related expenses. Of the $9.0 million proceeds received, $600,000 was placed in
escrow in accordance with the agreement. The Company recorded a loss on disposal
of Heart and Cruising of approximately $3.3 million at June 30, 2000. To the
extent that cash is released from escrow, which is to terminate in April 2002,
such funds will be recorded as a gain at that time. In July 2001, the Company
received notice of a claim against the escrow, the merits of which the Company
is currently investigating at this time.

The Company sold its interest in Mastervolt on December 29, 2000 for
approximately $2.3 million before related expenses and recorded a loss on the
disposal of approximately $525,000.

The summary of the operations of the power inverter business for the six and
three months ended June 30, 2000:

<TABLE>
<CAPTION>
(In thousands)                                  Six Months ended   Three Months ended
                                                 June 30,  2000      June 30, 2000
                                                ----------------   ------------------

<S>                                             <C>                 <C>
Net sales                                            $ 6,573             $   781
                                                     =======             =======

Loss from operations of the inverter business           (208)               (185)
Loss on disposal of Heart and Cruising                (3,317)               (262)
                                                     -------             -------
Net loss of discontinued operations                  $(3,525)            $  (447)
                                                     =======             =======

</TABLE>

                                       7
<PAGE>




3.   Operating Segments

The Company conducts its operations through two businesses. The electrical
components business produces an array of electrical componentry items for
recreational and industrial applications and switches for utility companies,
which are utilized in industrial markets. The mechanical engineered components
business manufactures flexible shaft products, specialty locks and related
accessories and turbo charger actuators and related componentry.

The Company evaluates performance and allocates resources based on profit or
loss from operations before interest, taxes and depreciation and amortization
("EBITDA"). In its calculation of EBITDA, certain charges that management
determines as non-recurring are excluded. Segment information for the six and
three months ended June 30, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>

(In thousands)                                                     Mechanical
                                                Electrical         Engineered
                                                Components         Components             Total
                                              --------------    ----------------    -----------------
<S>                                           <C>               <C>                 <C>
Six months ended June 30, 2001:
   Net sales from external customers            $ 60,895            $ 39,973            $100,868
   Intersegment net sales                             --                  65                  65
   Segment profit - EBITDA                        10,621              11,499              22,120
   Segment assets                                121,628             103,552             225,180
   Depreciation and amortization                   1,379               2,069               3,448

Six months ended June 30, 2000:
   Net sales from external customers            $ 35,004            $ 45,479            $ 80,483
   Intersegment net sales                             --                 118                 118
   Segment profit - EBITDA                         7,706              14,912              22,618
   Segment assets                                 53,978             108,456             162,434
   Depreciation and amortization                   1,039               2,286               3,325

Three months ended June 30, 2001:
   Net sales from external customers            $ 31,180            $ 18,891            $ 50,071
   Intersegment net sales                             --                  39                  39
   Segment profit - EBITDA                         5,947               5,651              11,598
   Segment assets                                121,628             103,552             225,180
   Depreciation and amortization                     722               1,034               1,756

Three months ended June 30, 2000:
   Net sales from external customers            $ 18,076            $ 22,564            $ 40,640
   Intersegment net sales                             --                  57                  57
   Segment profit - EBITDA                         4,063               7,575              11,638
   Segment assets                                 53,978             108,456             162,434
   Depreciation and amortization                     519               1,120               1,639

December 31, 2000:
   Segment assets                               $116,749            $108,883            $225,632

</TABLE>

                                       8
<PAGE>




Reconciliation of Selected Segment Information to the Company's Consolidated
Totals:

<TABLE>
<CAPTION>
(In thousands)                                         Six Months Ended June 30,            Three Months Ended June 30,
                                                 ----------------------------------    ---------------------------------------
                                                      2001               2000               2001                 2000
                                                 ---------------     --------------    ---------------    --------------------
Profit or loss:
<S>                                              <C>                 <C>               <C>                <C>
  Total profit from reportable segments            $ 22,120             $ 22,618             $ 11,598             $ 11,638
  Reconciling items:
     Corporate expenses                              (2,311)                (991)              (1,062)                (504)
     Depreciation and amortization                   (4,175)              (3,348)              (2,107)              (1,656)
     Interest expense                                (9,129)              (7,319)              (4,246)              (3,673)
     Management fee                                    (632)                (535)                (307)                (310)
     Non-recurring expense                             (197)              (9,116)                 (40)              (9,316)
                                                   --------             --------             --------             --------
Total consolidated income before taxes             $  5,676             $  1,309             $  3,836             ($ 3,821)
                                                   ========             ========             ========             ========

<CAPTION>
                                                    June 30,          December 31,
                                                      2001               2001
                                                 ---------------     --------------
<S>                                              <C>                 <C>
Assets:
   Total assets for reportable segments            $225,180            $225,632
   Corporate assets                                   7,932              11,076
   Assets held for sale                               3,322               9,842
                                                   --------            --------
 Total consolidated assets                         $236,434            $246,550
                                                   ========            ========

<CAPTION>

                                                     Six Months Ended June 30,              Three Months Ended June 30,
                                                 ----------------------------------    --------------------------------------
Geographical Sales Information:                       2001               2000               2001                 2000
                                                 ---------------     --------------    ---------------    -------------------

<S>                                              <C>                 <C>               <C>                <C>
  United States                                    $ 90,692            $ 72,739            $ 45,182            $ 36,438
  Canada                                              1,978               2,319                 887               1,389
  China                                               1,930                 615               1,065                 374
  England                                             1,577               1,329                 804                 514
  Mexico                                              1,786                 814                 879                 283
  Other                                               2,905               2,667               1,254               1,642
                                                   --------            --------            --------            --------
Total                                              $100,868            $ 80,483            $ 50,071            $ 40,640
                                                   ========            ========            ========            ========
</TABLE>


                                       9
<PAGE>



4.   Inventories

Inventories consist of the following:


(In thousands)                     June 30,          December 31,
                                     2001                2000
                                 -----------       --------------

Raw materials                       $18,423            $17,070
Work-in-process                       8,488              7,857
Finished goods                        8,451             10,410
                                    -------            -------
         Total inventory            $35,362            $35,337
                                    =======            =======



5.   Provision for Income Taxes

For the six months ended June 30, 2001, the Company's provision for income taxes
primarily relates to the federal and state income taxes of its sole member, KCI.
Deferred income taxes have been recorded to reflect the tax consequences on
future years of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts at year-end. Valuation
allowances are recorded when necessary to reduce deferred tax assets to the
amounts expected to be realized.

For the six and three months ended June 30, 2000, the Company's provision for
income taxes related primarily to Guest, which was not converted to limited
liability company ("LLC") status during 1999. Through May 22, 2000, no provision
for taxes on the consolidated income of the Company was recorded, other than for
the income of Guest and certain state taxes, due to the LLC status of the
remainder of the entities comprising the Company, which required the members of
the Company to be responsible for the taxes due on the income of the Company.
Prior to May 22, 2000, KCI, the majority member of KCLLC, was an S corporation,
which required the shareholders of KCI to be personally responsible for the
taxes on the income of KCLLC and subsidiaries that was allocated to KCI. On May
22, 2000, the S corporation status of KCI terminated and KCI became a C
corporation for tax reporting purposes. Upon conversion to a C corporation KCI
became responsible for taxes on its income. Beginning May 23, 2000 the tax
provision provides for the tax liabilities incurred by KCI.


6.       Member's Equity

In May 2001, the Company's sole member, KCI, made a capital withdrawal of
approximately $865,000. The capital withdrawal was used to repurchase the
shareholder interest in KCI of an employee who was no longer employed by the
Company.

                                       10
<PAGE>




7.       New Accounting Pronouncements

On January 1, 2001, the Company adopted Financial Accounting Standard ("FAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement did not have a material impact on the Company's consolidated financial
statements.

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives. The Company will apply the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter of 2002. Application of the non-amortization provisions of the
statement is not expected to have a material effect on the Company's financial
statements. The Company will perform the first of the required impairment tests
of goodwill as of January 1, 2002 and has not yet determined what the effect, if
any, of these tests will be on the earnings and financial position of the
Company.





                                       11


<PAGE>




Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations

Introduction

The Company is a leading manufacturer of custom engineered essential componentry
for application in a diverse array of end-use products. The Company targets
original equipment manufacturer ("OEM") markets where the Company believes its
value-added engineering and manufacturing capabilities, along with its timely
delivery, reliability and customer service, enable it to differentiate the
Company from its competitors and enhance profitability. The Company conducts its
operations through its two businesses, its electrical components ("EC") business
and its mechanical engineered components ("MEC") business. EC's products include
power conversion products, specialty electrical wiring devices and connectors
and high-voltage utility switches. MEC's products consist primarily of medium
security lock products and accessories, flexible shaft and remote valve control
components and turbo-charger components.

Six Months Ended June 30, 2001 compared to Six  Months Ended June 30, 2000

Net Sales: Net sales increased by approximately $20.4 million, or 25.3%, from
approximately $80.5 million for the six months ended June 30, 2000 to
approximately $100.9 million for the six months ended June 30, 2001. Net sales
of the EC business increased by approximately $25.9 million, or 74.0%, from
approximately $35.0 million for the six months ended June 30, 2000 to
approximately $60.9 million for the six months ended June 30, 2001. Net sales of
the MEC business decreased by approximately $5.5 million, or 12.1%, from
approximately $45.5 million for the six months ended June 30, 2000 to
approximately $40.0 million for the six months ended June 30, 2001.

The growth within the EC business was primarily due to the inclusion of the
results of operations of the transformer product line for the six months ended
June 30, 2001. The transformer product line, which contributed approximately
$27.2 million in revenues during the six months ended June 30, 2001, was
acquired in November 2000 when the Company completed the acquisition of Acme
Electric Corporation ("Acme"). The specialty electrical component product line
of the EC business experienced a decline in sales of approximately $3.3 million
for the six months ended June 30, 2001 as compared to the six months ended June
30, 2000. This decline in sales is attributable to reduced customer demand
across the major markets served by the specialty electrical product line.

The decrease in net sales in the MEC business is primarily related to the
decline in sales of the Company's lock and turbocharger product lines, as
compared to the six months ended June 30, 2000, which were impacted by the
downturn in the domestic economy that resulted in a reduction in customer
demand.

Gross Profit: Gross profit increased by approximately $2.8 million, or 8.3%,
from approximately $34.1 million for the six months ended June 30, 2000 to
approximately $36.9 million for the six months ended June 30, 2001. Gross profit
for the EC business increased by approximately $6.2 million, or 40.2%, from
approximately $15.5 million for the six months ended June 30, 2000 to
approximately $21.7 million for the six months ended June 30, 2001. Gross profit
for the MEC business decreased by approximately $3.4 million, or 18.3%, from
approximately $18.6 million for the six months ended June 30, 2000 to
approximately $15.2 million for the six months ended June 30, 2001.

Gross profit, as a percentage of net sales, decreased 5.8%, from 42.4% for the
six months ended June 30, 2000 to 36.6% for the six months ended June 30, 2001.
Gross profit, as a percentage of net sales, for the EC business decreased 8.5%,
from 44.2% for the six months ended June 30, 2000 to 35.7% for the six months
ended June 30, 2001. Gross profit, as a percentage of net sales, for the MEC
business decreased 2.9%, from 40.9% for the six months ended June 30, 2000 to
38.0% for the six months ended June 30, 2001.

                                       12
<PAGE>


The increase in gross profit is primarily related to an increase in the gross
profit of the EC business which resulted from the addition of Acme's transformer
product line to that business, which was mostly offset by the decline in gross
profit of the MEC business. The decline in gross profit of the MEC business is
primarily due to the decline in sales in the MEC business for the six months
ended June 30, 2001.

The increase in gross profit of the EC business is primarily related to the
inclusion of the results of operations of the transformer product line, which
was acquired in November 2000 as part of the acquisition of Acme. The
transformer product line contributed approximately $7.8 million in gross profit
for the six months ended June 30, 2001. This increase was partially offset by an
approximate $2.1 million decline in gross profit from the specialty electrical
components product line of the EC business for the six months ended June 30,
2001 as compared to the six months ended June 30, 2000. The decline in gross
profit of the specialty electrical components product line was primarily driven
by a decline in sales.

The decrease in gross profit as a percentage of the EC business was primarily
the result of the inclusion of the transformer product line in the results of
the EC business for the six months ended June 30, 2001. The transformer product
is a high volume business that results in margins that are lower than those
experienced by the remainder of the EC business. The decrease in gross profit
percentage of the MEC business is primarily related to product mix.

Selling, General and Administrative ("SG&A") Expenses: SG&A expenses increased
by approximately $6.4 million, or 38.4%, from approximately $16.6 million for
the six months ended June 30, 2000 to approximately $23.0 million for the six
months ended June 30, 2001. SG&A expenses for the EC business increased by
approximately $4.7 million, or 52.8%, from approximately $8.8 million for the
six months ended June 30, 2000 to approximately $13.5 million for the six months
ended June 30, 2001. SG&A expenses for the MEC business decreased by
approximately $271,000, or 4.5%, from approximately $6.1 million for the six
months ended June 30, 2000 to approximately $5.8 million for the six months
ended June 30, 2001.

SG&A expenses, as a percentage of net sales, increased by 2.2%, from 20.7% for
the six months ended June 30, 2000 to 22.8% for the six months ended June 30,
2001. SG&A expenses, as a percentage of net sales, for the EC business decreased
by 3.1%, from 25.2% for the six months ended June 30, 2000 to 22.1% for the six
months ended June 30, 2001. SG&A expenses, as a percentage of net sales, for the
MEC business increased by 1.1%, from 13.4% for the six months ended June 30,
2000 to 14.5% for the six months ended June 30, 2001.

The increase in SG&A expenses for the six months ended June 30, 2001 is
primarily related to the acquisition of Acme, which resulted in the Company
integrating the transformer and aerospace product lines of Acme into the EC
business. The transformer product line added approximately $4.9 million of SG&A
expenses for the six months ended June 30, 2001. In addition, the corporate
office of Acme continues to provide support to the transformer and aerospace
product lines as well as to the electronics division of Acme that is currently
held for sale. The operations of the corporate office of Acme resulted in
approximately $1.6 million in SG&A expenses for six months ended June 30, 2001.
In addition, approximately $400,000 of amortization expense for the six months
ended June 30, 2001 related to goodwill amortization resulting from the purchase
of Acme. The Company estimates that the corporate office of Acme will be closed
by September 15, 2001. Upon the close of the Acme corporate office all remaining
related expenses of that office will terminate.

The increase in SG&A expenses and decrease in the SG&A expenses as a percentage
of net sales for the EC business are primarily related to the inclusion of the
results of operations of the transformer product line. As a percentage of sales,
the transformer product line is supported at an expense level that is lower than
the remainder of the EC business. Currently the corporate office of Acme
performs certain administrative functions on behalf of the transformer product
line. Those responsibilities and related expenses are being transferred to the
North Carolina facility of the transformer product line. As a percentage of
sales, the operations and related expenses that are being transferred are not
considered material.


                                       13
<PAGE>

SAR Valuation Compensation and other: For the six months ended June 30, 2000,
the Company recorded a charge of approximately $1.6 million related to
outstanding stock appreciation rights. The stock appreciation rights ("SAR's")
were issued in conjunction with the Valley Forge Corporation ("VFC")
acquisition, which was completed in January 1999, in lieu of cash consideration
for the purchase of equity held by VFC line management who continued with the
Company. The Company was required to report any change in the valuation of the
SAR's as a charge against earnings. In connection with the Recapitalization (see
Liquidity and Capital Resources), the SARs were exercised and the holders of the
SARs purchased Key Components, Inc. ("KCI") Common Stock with a substantial
portion of the after-tax proceeds of such exercise.

Acme Aerospace Division Cumulative Adjustment: Based on the strength of the
operating performance of the aerospace business of Acme ("Aerospace"), which
management believes is sustainable, on June 1, 2001, the Company decided to
retain rather than divest Aerospace, which had been previously held for sale. On
that date and in accordance with EITF 90-6, "Accounting for Certain Events Not
Addressed in Issue No. 87-11 Relating to an Acquired Operating Unit to be Sold",
the Company reallocated the purchase price as if Aerospace had never been held
for sale and recorded a cumulative adjustment for the results of operations of
Aerospace from the date of acquisition through May 31, 2001 of $721,000 which
had been excluded from the results of operations of the Company and had been
included in goodwill.

Income from Operations: Income from operations decreased approximately $1.0
million, or 6.5%, from approximately $15.7 million for the six months ended June
30, 2000 to approximately $14.7 million for the six months ended June 30, 2001.
This decrease is the result of the increase in gross profit of approximately
$2.8 million, offset by the net increase in SG&A other expenses (income) of
approximately $3.9 million for the reasons discussed above.

Recapitalization fees: In connection with the Recapitalization (see Liquidity
and Capital Resources) consummated in May 2000, the Company incurred
approximately $7.3 million of transaction fees during the six months ended June
30, 2000.

Interest Expense: Interest expense increased by approximately $1.8 million, or
24.7%, from approximately $7.3 million for the six months ended June 30, 2000 to
approximately $9.1 million for the six months ended June 30, 2001. This increase
is primarily due to higher levels of outstanding borrowings during the six
months ended June 30, 2001 as compared to the six months ended June 30, 2000,
primarily due to the additional borrowings used to finance the acquisition of
Acme in November 2000 (see Liquidity and Capital Resources below). The impact of
the higher debt levels, however, has been partially offset by the reduced rates
of interest charged on the outstanding principal on the term loan and revolving
credit facility due to declining interest rates of the past six months.

Provision for Income Taxes: The provision for income taxes increased by
approximately $1.6 million, or 153.4%, from approximately $1.0 million for the
six months ended June 30, 2000 to approximately $2.6 million for the six months
ended June 30, 2001. This increase is primarily related to the conversion of KCI
to a C corporation in May 2000. KCI had previously been an S corporation for tax
purposes, which required the shareholders of KCI to be responsible for the taxes
due on the income of the Company, apart from income from any subsidiaries that
were C corporations. Upon the termination of the S election in May 2000, KCI
became responsible for taxes on its income. For the six months ended June 30,
2000, the provision for income taxes was primarily related to Atlantic Guest,
Inc. ("Guest"), a subsidiary that remained a C corporation for tax purposes. The
decrease in the effective tax rate from the six months ended June 30, 2000 is
primarily attributable to the non-deductibility of the Recapitalization
expenses. Such expenses are an adjustment to the KCI shareholder basis for tax
purposes.

Income from continuing operations: Income from continuing operations increased
by approximately $2.8 million, from approximately $283,000 for the six months
ended June 30, 2000 to approximately $3.1 million for the six months ended June
30, 2001. This increase is the result of the decrease in Recapitalization fees
of approximately $7.3 million offset by the sum of a decrease in income from
operations of approximately $1.0 million, an increase in interest expense of
approximately $1.8 million a decrease in other income of $118,000 and an
increase in the provision for income taxes of approximately $1.6 million, due to
the factors discussed above.

                                       14
<PAGE>

Loss from discontinued operations: Loss from discontinued operations was
approximately $3.5 million for the six months ended June 30, 2000. In April
2000, the Company consummated the sale of Heart Interface Corporation ("Heart")
and Cruising Equipment Company ("Cruising"). The Company received approximately
$9.0 million in proceeds before any transaction related expenses. Of the $9.0
million of proceeds, $600,000 was placed in escrow in accordance with the
agreement. The Company recorded a loss on disposal of Heart and Cruising of
approximately $3.3 million. To the extent that cash is released from the escrow,
which is to terminate in April 2002, such funds will be recorded as a gain at
that time. In July 2001, the Company received notice of a claim against the
escrow, the merits of which the Company is currently investigating.

Net Income (loss): Net income increased by approximately $6.3 million, or
194.9%, from a net loss of approximately $3.2 million for the six months ended
June 30, 2000 to approximately $3.1 million for the six months ended June 30,
2001. The decrease is the result of the sum of an increase in income from
continuing operations of approximately $2.8 million and a decrease in loss from
discontinued operations of approximately $3.5 million, as discussed above.

Three Months Ended June 30, 2001 compared to Three Months Ended June 30, 2000

Net Sales: Net sales increased by approximately $9.4 million, or 23.2%, from
approximately $40.6 million for the three months ended June 30, 2000 to
approximately $50.1 million for the three months ended June 30, 2001. Net sales
of the EC business increased by approximately $13.1 million, or 72.5%, from
approximately $18.1 million for the three months ended June 30, 2000 to
approximately $31.1 million for the three months ended June 30, 2001. Net sales
of the MEC business decreased by approximately $3.7 million, or 16.3%, from
approximately $22.6 million for the three months ended June 30, 2000 to
approximately $18.9 million for the three months ended June 30, 2001.

The growth within the EC business was primarily due to the inclusion of the
results of operations of the transformer product line for the three months ended
June 30, 2001. The transformer product line, which contributed approximately
$13.1 million in revenues during the three months ended June 30, 2001, was
acquired in November 2000 when the Company completed the acquisition of Acme
Electric Corporation ("Acme"). The specialty electrical component product line
of the EC business experienced a decline in sales of approximately $1.7 million
for the three months ended June 30, 2001 as compared to the three months ended
June 30, 2000. This decline in sales is attributable to customer demand across
the major markets served by the specialty electrical product line.

The decrease in net sales in the MEC business is primarily related to the
decline in sales of the Company's lock and turbocharger product lines, which
were impacted by the downturn in the domestic economy that resulted in a
reduction in customer demand.

Gross Profit: Gross profit increased by approximately $1.1 million, or 6.1%,
from approximately $17.4 million for the three months ended June 30, 2000 to
approximately $18.4 million for the three months ended June 30, 2001. Gross
profit for the EC business increased by approximately $3.0 million, or 38.0%,
from approximately $8.0 million for the three months ended June 30, 2000 to
approximately $11.0 million for the three months ended June 30, 2001. Gross
profit for the MEC business decreased by approximately $2.0 million, or 20.9%,
from approximately $9.4 million for the three months ended June 30, 2000 to
approximately $7.4 million for the three months ended June 30, 2001.

Gross profit, as a percentage of net sales, decreased 5.9%, from 42.7% for the
three months ended June 30, 2000 to 36.8% for the three months ended June 30,
2001. Gross profit, as a percentage of net sales, for the EC business decreased
8.8%, from 44.1% for the three months ended June 30, 2000 to 35.3% for the three
months ended June 30, 2001. Gross profit, as a percentage of net sales, for the
MEC business decreased 2.3%, from 41.6% for the three months ended June 30, 2000
to 39.3% for the three months ended June 30, 2001.

                                       15
<PAGE>

The increase in gross profit, is primarily related to an increase in the gross
profit of the EC business which resulted from the addition of the transformer
product line of Acme to that business, partially offset by the decline in gross
profit of the specialty electrical component product line of the EC business and
the MEC business. The decline in gross profit of the specialty electrical
component product line and the MEC business is primarily due to the declines in
sales of the specialty electrical component product line and the MEC business
for the three months ended June 30, 2001.

The increase in gross profit of the EC business for the three months ended June
30, 2001 is primarily related to the inclusion of the results of operations of
the transformer product line, which was acquired in November 2000 as part of the
acquisition of Acme. The transformer product line contributed approximately $3.5
million in gross profit for the three months ended June 30, 2001. The specialty
electrical components product line of the EC business experienced a decline in
gross profit of approximately $1.1 million for the three months ended June 30,
2001 as compared to the three months ended June 30, 2000. The decline in gross
profit of the specialty electrical components product line was primarily driven
by a decline in sales.

The decrease in gross profit as a percentage of the EC business was primarily
the result of the inclusion of the transformer product line in the results of
the EC business for the three months ended June 30, 2001. The transformer
product is a high volume, low gross margin business that results in margins that
are lower than those experienced by the remainder of the EC business. The
decrease in gross profit percentage of the MEC business for the three months
ended June 30, 2001 is primarily related to product mix.

Selling, General and Administrative ("SG&A") Expenses: SG&A expenses increased
by approximately $2.7 million, or 32.9%, from approximately $8.4 million for the
three months ended June 30, 2000 to approximately $11.1 million for the three
months ended June 30, 2001. SG&A expenses for the EC business increased by
approximately $2.2 million, or 48.1%, from approximately $4.4 million for the
three months ended June 30, 2000 to approximately $6.6 million for the three
months ended June 30, 2001. SG&A expenses for the MEC business decreased by
approximately $153,000, or 5.2%, from approximately $3.0 million for the three
months ended June 30, 2000 to approximately $2.8 million for the three months
ended June 30, 2001.

SG&A expenses, as a percentage of net sales, increased by 1.6%, from 20.6% for
the three months ended June 30, 2000 to 22.2% for the three months ended June
30, 2001. SG&A expenses, as a percentage of net sales, for the EC business
decreased by 3.5%, from 24.5% for the three months ended June 30, 2000 to 21.0%
for the three months ended June 30, 2001. SG&A expenses, as a percentage of net
sales, for the MEC business increased by 1.8%, from 13.1% for the three months
ended June 30, 2000 to 14.9% for the three months ended June 30, 2001.

The increase in SG&A expenses for the three months ended June 30, 2001 is
primarily related to the acquisition of Acme, which resulted in the Company
integrating the transformer and aerospace product lines of Acme into the EC
business. The transformer product line added approximately $2.4 million of SG&A
expenses for the three months ended June 30, 2001. In addition, the corporate
office of Acme continues to provide support to the transformer and aerospace
product lines as well as to the electronics division of Acme that is currently
held for sale. The operations of the corporate office of Acme resulted in
approximately $752,000 in SG&A expenses for three months ended June 30, 2001. In
addition, approximately $177,000 of amortization expense for the three months
ended June 30, 2001 related to goodwill amortization resulting from the purchase
of Acme. The Company estimates that the corporate office of Acme will be closed
by September 15, 2001. Upon the close of the Acme corporate office all remaining
related expenses of that office will terminate.


                                       16
<PAGE>

The increase in SG&A expenses and decrease in the SG&A expenses as a percentage
of net sales for the EC business are primarily related to the inclusion of the
results of operations of the transformer product line. The transformer product
line is supported at an expense level that is lower than the remainder of the EC
business. Currently the corporate office of Acme performs certain administrative
functions on behalf of the transformer product line. Those responsibilities and
related expenses are being transferred to the North Carolina facility of the
transformer product line. As a percentage of sales, the operations and related
expenses that are being transferred are not considered material.

SAR Valuation Compensation and other: During the three months ended June 30,
2000, the Company recorded a charge of approximately $1.6 million related to
outstanding SAR's. The SAR's were issued in conjunction with the VFC
acquisition, which was completed in January 1999, in lieu of cash consideration
for the purchase of equity held by VFC line management who continued with the
Company. The Company is required to report any change in the valuation of the
SAR's as a charge against earnings. In connection with the Recapitalization (see
Liquidity and Capital Resources), the SARs were exercised and the holders of the
SARs purchased KCI Common Stock with a substantial portion of the after-tax
proceeds of such exercise.

Acme Aerospace Division Cumulative Adjustment: Based on the strength of the
operating performance of Aerospace, which management believes is sustainable, on
June 1, 2001, the Company decided to retain rather than divest Aerospace, which
had been previously held for sale. On that date and in accordance with EITF 90-6
the Company reallocated the purchase price as if Aerospace had never been held
for sale and recorded a cumulative adjustment for the results of operations of
Aerospace from the date of acquisition through May 31, 2001 of $721,000 which
had been excluded from the results of operations of the Company and had been
included in goodwill.

Income from Operations: Income from operations increased by approximately $1.0
million, or 14.7%, from approximately $7.0 million for the three months ended
June 30, 2000 to approximately $8.0 million for the three months ended June 30,
2001. This increase is the result of the increase in gross profit of
approximately $1.1 million, offset by net increase in SG&A and other expenses of
approximately $34,000 for the reasons discussed above.

Recapitalization fees: In connection with the Recapitalization (see Liquidity
and Capital Resources) consummated in May 2000, the Company incurred
approximately $7.3 million of transaction fees during the three months ended
June 30, 2000.

Interest Expense: Interest expense increased by approximately $573,000, or
15.6%, from approximately $3.7 million for the three months ended June 30, 2000
to approximately $4.2 million for the three months ended June 30, 2001. This
increase is primarily due to higher levels of outstanding borrowings during the
three months ended June 30, 2001 as compared to the three months ended June 30,
2000, primarily due to the additional borrowings used to finance the acquisition
of Acme in November 2000 (see Liquidity and Capital Resources below). The impact
of the higher debt levels, however, has been partially offset by the reduced
rates of interest charged on the outstanding principal on the term loan and
revolving credit facility due to declining interest rates of the past three
months.

Provision for Income Taxes: The provision for income taxes increased by
approximately $1.1 million, or 155.3%, from approximately $723,000 for the three
months ended June 30, 2000 to approximately $1.8 million for the three months
ended June 30, 2001. This increase is primarily related to the conversion of KCI
to a C corporation in May 2000. KCI had previously been an S corporation for tax
purposes, which required the shareholders of KCI to be responsible for the taxes
due on the income of the Company, apart from income from any subsidiaries that
were C corporations. Upon the termination of the S election on May 22, 2000, KCI
became responsible for taxes on its income. For the three months ended June 30,
2000, the provision for income taxes was primarily related to the tax provision
on the consolidated income of the Company from May 23, 2000 to June 30, 2000 and
the April 1, 2000 to May 22, 2000 income of Guest, which had remained a C
corporation for tax purposes prior to May 23, 2000. The reduction in the
effective tax rate from the three months ended June 30, 2000 to the three months
June 30, 2001 is primarily attributable to the non-deductibility of the
Recapitalization fees recorded during the three months ended June 30, 2000. Such
expenses are an adjustment to shareholder basis for tax purposes.

                                       17
<PAGE>

Income (loss) from continuing operations: Income from continuing operations
increased by approximately $6.5 million, or 143.8%, from a loss from continuing
operations of approximately $4.5 million for the three months ended June 30,
2000 to income from continuing operations of approximately $2.0 million for the
three months ended June 30, 2001. This increase is the result of the sum of an
increase in income from operations of approximately $1.0 million, a decrease in
Recapitalization fees of approximately $7.3 million offset by a decrease in
other income of $116,000 plus increases in interest expense and provision for
income taxes of approximately $573,000 and $1.1 million, respectively, due to
the factors discussed above.

Loss from discontinued operations: Loss from discontinued operations was
approximately $447,000 for the three months ended June 30, 2000. In April 2000,
the Company consummated the sale of Heart and Cruising. The Company received
approximately $9.0 million in proceeds before any transaction related expenses.
Of the $9.0 million of proceeds, $600,000 was placed in escrow in accordance
with the agreement. The Company recorded a loss on disposal of Heart and
Cruising of approximately $3.3 million. To the extent that cash is released from
escrow, which is to terminate in April 2002, such funds will be recorded as a
gain at that time. In July 2001, the Company received notice a of claim against
the escrow, the merits of which the Company is currently investigating.

Net Income (loss): Net income increased by approximately $7.0 million, or
139.9%, from a net loss of approximately $5.0 million for the three months ended
June 30, 2000 to net income of approximately $2.0 million for the three months
ended June 30, 2001. The increase is the result of the sum of a increase in
income from continuing operations of approximately $6.5 million and a decrease
in loss from discontinued operations of approximately $447,000, as discussed
above.



                                       18
<PAGE>

Liquidity and Capital Resources

The Company has historically generated funds from its operations and its working
capital requirements generally have not materially fluctuated from quarter to
quarter. The Company's other main sources of liquidity have historically been
the Company's $80 million of unsecured 10.5% senior notes due 2008 and its
outstanding credit facilities. In November 2000, the Company closed on a new
credit facility, which replaced the Company's previous credit facility. The new
credit facility provides for a six-year $40 million revolving credit facility
and a six-year $100 million term loan facility. The new credit agreement,
guaranteed by the Company's subsidiaries and KCI, is collateralized by all of
the capital stock of the subsidiaries, receivables, inventories, equipment and
certain intangible property. There were no amounts outstanding under the
revolving credit facility at June 30, 2001. The term loan is payable in
quarterly installments through September 2006. Both the term loan and revolving
credit facility bear interest at fluctuating interest rates determined by
reference to a base rate or the London interbank offered rate ("LIBOR") plus an
applicable margin which will vary from 1.0% to 2.75% and require the payment of
a commitment fee of 0.50% on the unused portion of the facility as well as
quarterly commitment fees. The credit facility also allows for up to $5.0
million of outstanding letters of credit. In addition, the new credit agreement
contains certain covenants and restrictions which require the maintenance of
financial ratios, and restrict or limit dividends and other shareholder
distributions, transactions with affiliates, capital expenditures, rental
obligations and the incurrence of indebtedness. At June 30, 2001, the Company
was in compliance with the covenants of the credit agreement. The Company used
the proceeds from the new credit facility to repay the previous borrowing
facility as well as finance the acquisition of Acme.

The Company's remaining liquidity demands will be for capital expenditures,
general corporate purposes, and principal and interest payments on its
outstanding debt. The Company's senior notes require semiannual interest
payments on the outstanding principal. The term loan requires quarterly
principal payments. Principal payments for the year ending December 31, 2001
will be approximately $9.4 million. Under the revolving credit facility and term
loan, the Company has the option to lock in a specified interest rate by
entering into a contract, for different periods which cannot exceed 180 days. As
the underlying contract comes up for renewal, the interest associated with the
contract becomes due. As of June 30, 2001, the Company had no outstanding
commitments for capital expenditures and anticipates capital expenditures of
approximately $3.5 million for the balance of calendar year 2001. The
expenditures are primarily needed to maintain its facilities and expand its
production capacity in order to take advantage of profitable market
opportunities. To the extent cash flow from operations is insufficient to cover
the Company's capital expenditures, debt service and other general requirements,
the Company would seek to utilize its borrowing availability under its existing
revolving credit facility.

In connection with the Company's desire to continue to grow through acquisition
and be a leading supplier of essential componentry, in May 2000, KCI and its
shareholders consummated a Recapitalization of KCI with affiliates of Kelso &
Company ("Kelso") pursuant to which, among other things:


         o    KCI was recapitalized with Common Stock and Preferred Stock;

         o    KCI shareholders exchanged approximately 862,000 shares of their
              Common Stock for Preferred Stock and KCI optionholders exercised
              options to purchase 20,533 shares of Common Stock, all of which
              were then exchanged for shares of Preferred Stock. All such
              Preferred Stock was immediately sold to Kelso for cash at
              approximately $117 per share;

                                       19
<PAGE>

         o    SGC Partners II LLC ("SG"), which owned all of the stock of
              Keyhold, Inc. ("Keyhold"), which owned approximately 11.1% of the
              membership interests of KCLLC prior to the Recapitalization,
              exchanged all of its Keyhold stock for shares of Preferred Stock
              which were immediately sold to Kelso for cash at approximately
              $117 per share, terminating Keyhold's right to require KCLLC to
              repurchase Keyhold's outstanding investment in KCLLC at the then
              current market value thereof;

         o    Holders of KCI SARs exercised their SARs and with a substantial
              portion of their after-tax proceeds from the exercise, purchased
              Common Stock;

         o    Kelso purchased an aggregate of approximately 35,000 shares of
              Preferred Stock from KCI at approximately $117 per share.

At the closing of the Recapitalization, KCI, Kelso and certain shareholders of
KCI entered into a Shareholders Agreement and a Registration Rights Agreement
and KCI and Kelso entered into an Advisory Agreement.

Effective upon the consummation of the Recapitalization, Kelso owns all of the
Preferred Stock. The Preferred Stock is not entitled to vote for the election of
directors but is entitled to designate two members of KCI's seven member Board
of Directors. In addition, the Preferred Stock has certain approval rights and
is convertible into Common Stock at the holder's option (upon conversion the
Preferred Stock would constitute over 60% of the total outstanding common equity
of KCI on a fully diluted basis). The Preferred Stock has a liquidation
preference equal to its purchase price plus accrued dividends, bears a 1% annual
dividend payable in kind and is redeemable at the option of the holder after
June 2, 2009. All of the outstanding Common Stock and options to purchase Common
Stock of KCI continue to be held by parties that held such securities prior to
the Recapitalization and by the parties who purchased Common Stock with the
after-tax proceeds from the exercise of their SARs. The aggregate purchase price
of the Preferred Stock paid by Kelso was approximately $105.0 million of which
approximately $4.1 million was paid to KCI. The Company paid fees in connection
with the Recapitalization of $7.3 million during the six months ended June 30,
2000. All proceeds received by KCI from the Recapitalization were contributed to
KCLLC for additional membership interest.

Cash flows from operating activities provided approximately $6.0 million and
$7.3 million for the six months ended June 30, 2001 and 2000, respectively. The
net decrease of $1.3 million from the six months ended June 30, 2000 is the sum
of a decrease in cash provided by continuing operations of approximately $1.5
million and a decrease in cash used by discontinued operations of approximately
$163,000. The decrease in cash provided by continuing operations primarily
relates to an increase in net income and non-cash charges of approximately $2.1
million plus a net decrease in accounts receivable and inventories of
approximately $3.5 million and $5.3 million, respectively, offset by a net
decrease in accounts payable and accrued expenses and other liabilities of
approximately $5.2 million and $8.3 million, respectively. The increase in net
income and non-cash charges is primarily related to the increase in net income,
which increased approximately $6.3 million during the six months ended June 30,
2001, as compared to the six months ended June 30, 2000. The increase in net
income was the result of the factors above. Heightened focus on reducing the
Company's working capital account levels (accounts receivable and inventory) as
well as the downturn in the Company's business drove the net decreases in
accounts receivable and inventory. The net decrease in accounts payable was
principally due to the downturn in the Company's business. The reduction in
accrued expenses and other liabilities is primarily related to reduced interest
expense accruals associated with the timing of the underlying LIBOR contracts
covering the Company's outstanding term borrowings.

Cash flows from investing activities used approximately $519,000 during the six
months ended June 30, 2001 and provided approximately $6.7 million for the six
months ended June 30, 2000. The decrease in cash provided by investing
activities is primarily related to proceeds of approximately $8.4 million that
the Company realized during the six months ended June 30, 2000 from the sale of
Heart and Cruising. For the six months ended June 30, 2001, the assets held for
sale provided net cash of approximately $1.7 million. Capital expenditures for
the six months ended June 30, 2001 and 2000 were approximately $2.3 million and
$1.7 million, respectively.

                                       20
<PAGE>


Cash flows from financing activities used net cash of approximately $8.4 million
and $6.3 million during the six months ended June 30, 2001 and 2000,
respectively. The $2.1 million net increase in cash used by financing activities
is primarily attributable to payments made under the Company's new credit
facility. The Company made net principal payments during the six months ended
June 30, 2001 of approximately $7.5 million relating to outstanding amounts
under the Company's current revolving and term loan agreement. During the six
months ended June 30, 2000, the Company paid approximately $3.1 million of
long-term debt, primarily related to payment on its outstanding term loan. The
Company also realized proceeds from capital contributions of approximately $7.1
million during the six months ended June 30, 2000. The member contributions
during the six months ended June 30, 2000 were received in connection with the
Recapitalization. During the six months ended June 30, 2001 and 2000 the Company
paid member withdrawals of approximately $865,000 and $2.4 million,
respectively. The member distribution during the six months ended June 30, 2001
was used by KCI to repurchase a shareholder interest of an employee who had left
the Company. The member withdrawals during the six months ended June 30, 2000
primarily related to member tax distributions. In connection with the
divestitures of Glendinning Marine Products, Inc, Heart and Cruising, the
Company paid, during the six months ended June 30, 2000, approximately $420,000
related to outstanding vested SARs with certain members of operating management
of these divestitures. In connection with the Recapitalization, the Company paid
approximately $7.1 million to the holders of the Company's SARs, who had
exercised all their outstanding SARs and purchased KCI Common Stock with a
substantial portion of their after-tax proceeds from the exercise.

Management believes that the Company's cash flow from operations, together with
its borrowing availability under its existing credit facilities, will be
adequate to meet its anticipated capital requirements for the foreseeable
future.

Inflation

Inflation has not been material to the Company's net sales or income from
continuing operations for the periods presented.

Backlog

The Company's backlog of orders as of June 30, 2001 was approximately $42.5
million. The Company includes in its backlog only those orders for which it has
accepted purchase orders. However, backlog is not necessarily indicative of
future sales. A substantial portion of the Company's sales have a three-to-
eight-week lead time and, therefore, only a small number of orders, in
proportion to the annual sales of the Company, are in backlog at any point in
time. In addition, customers can generally cancel purchase orders at any time
without penalty.

New Accounting Pronouncements

On January 1, 2001, the Company adopted Financial Accounting Standard ("FAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement did not have a material impact on the Company's consolidated financial
statements.

                                       21
<PAGE>

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives. The Company will apply the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter of 2002. Application of the non-amortization provisions of the
statement is not expected to have a material effect on the Company's financial
statements. The Company will perform the first of the required impairment tests
of goodwill as of January 1, 2002 and has not yet determined what the effect, if
any, of these tests will be on the earnings and financial position of the
Company.

Forward-Looking Statements

This report contains forward-looking statements based on current expectations
that involve a number of risks and uncertainties. Generally, forward-looking
statements include words or phrases such as "management anticipates," "the
Company believes," "the Company anticipates," and words and phrases of similar
impact, and include but are not limited to statements regarding future
operations and business environment. The forward-looking statements are made
pursuant to safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. The factors that could cause actual results to differ materially
from the forward-looking statements include the following: (i) industry
conditions and competition, (ii) operational risks and insurance, (iii)
environmental liabilities which may arise in the future and are not covered by
insurance or indemnity, (iv) the impact of current and future laws and
government regulations, and (v) the risks described from time to time in the
Company's reports to the Securities and Exchange Commission.


                                       22
<PAGE>

Item 3 -- Quantitative and Qualitative Disclosures about Market Risk

The Company's primary exposure to market risk is related to the variability in
interest rates associated with the Company's outstanding term loan and the $40.0
million revolving credit facility. Under both the term loan and the revolving
credit facility, the Company has the option to lock in a certain interest rate
based on either the agent's base rate, which is equivalent to prime, or LIBOR
plus an applicable margin specified in the credit agreement. The $94.4 million
of outstanding borrowings under the term loan and revolving credit facility as
of June 30, 2001 are locked in at approximately 6.3% until the end of August
2001, when the underlying LIBOR contract is up for renewal.

The senior notes bear a fixed rate of interest and therefore are not subject to
market risk. The Company does not hold derivative financial instruments or
believe that material imbedded derivatives exist within its contracts.


                           Part II - Other Information

Item 6 -- Exhibits and Reports on Form 8-K

              (a) Exhibits

                    None.

              (b) Reports on Form 8-K

                    None


                                       23
<PAGE>

                                   Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                        KEY COMPONENTS, LLC


Date: August 14, 2001                   By: /s/ Clay B. Lifflander
                                           -------------a----------
                                           Clay B. Lifflander
                                           Chief Executive Officer


Date: August 14, 2001                   By:  /s/ Robert. B. Kay
                                           --------------------
                                           Robert B. Kay
                                           President


Date: August 14, 2001                   By: /s/ Keith A. McGowan
                                           ---------------------
                                           Keith A. McGowan
                                           Chief Financial Officer




                                                             Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                         KEY COMPONENTS FINANCE CORP.


Date: August 14, 2001                    By: /s/ Clay B. Lifflander
                                            -----------------------
                                            Clay B. Lifflander
                                            Chief Executive Officer


Date: August 14, 2001                    By:  /s/ Robert. B. Kay
                                            --------------------
                                            Robert B. Kay
                                            President

Date: August 14, 2001                    By: /s/ Keith A. McGowan
                                            ---------------------
                                            Keith A. McGowan
                                            Chief Financial Officer