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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period June 30, 2003
-------------

Commission file number 1-3919
------

Keystone Consolidated Industries, Inc.
(Exact name of registrant as specified in its charter)


Delaware 37-0364250
- --------------------------------------------- --------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)

5430 LBJ Freeway, Suite 1740, Three Lincoln Centre, Dallas, TX 75240-2697
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)


Registrant's telephone number, including area code: (972) 458-0028
-----------------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No
--- ---

Indicate by check mark whether the Registrant is an accelerated Filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes No X
--- ---

Number of shares of common stock outstanding at August 14, 2003: 10,068,450









KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

INDEX


Page
number

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets - December 31, 2002
and June 30, 2003 3-4

Consolidated Statements of Operations - Three months
and six months ended June 30, 2002 and 2003 5-6

Consolidated Statements of Cash Flows - Six months
ended June 30, 2002 and 2003 7

Consolidated Statement of Stockholders'
Deficit - Six months ended June 30, 2003 8

Notes to Consolidated Financial Statements 9-23

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24-35

Item 4. Controls and Procedures 36


PART II. OTHER INFORMATION

Item 1. Legal Proceedings 37

Item 6. Exhibits and Reports on Form 8-K 37






KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)




December 31, June 30,
ASSETS 2002 2003
------------ -------

Current assets:

Notes and accounts receivable .................. $ 22,578 $ 43,550
Inventories .................................... 50,089 39,945
Prepaid expenses and other ..................... 893 2,385
-------- --------

Total current assets ........................ 73,560 85,880
-------- --------

Property, plant and equipment .................... 373,833 374,594
Less accumulated depreciation .................... 253,849 261,735
-------- --------

Net property, plant and equipment ........... 119,984 112,859
-------- --------

Other assets:
Restricted investments ......................... 5,730 5,773
Unrecognized net pension obligation ............ 11,852 11,852
Deferred financing costs ....................... 2,319 1,963
Goodwill ....................................... 752 752
Other .......................................... 1,298 1,219
-------- --------

Total other assets .......................... 21,951 21,559
-------- --------

$215,495 $220,298
======== ========









KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)




LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31, June 30,
2002 2003
------------ -------

Current liabilities:
Notes payable and current maturities of

long-term debt ............................... $ 33,935 $ 77,696
Accounts payable ............................... 23,696 25,233
Accounts payable to affiliates ................. 1,448 2,253
Accrued OPEB cost .............................. 11,372 11,385
Accrued preferred stock dividends .............. 4,683 7,653
Other accrued liabilities ...................... 40,216 41,092
--------- ---------

Total current liabilities .................. 115,350 165,312
--------- ---------

Noncurrent liabilities:
Long-term debt ................................. 63,306 32,258
Accrued OPEB cost .............................. 102,717 105,020
Accrued pension costs .......................... 48,571 51,971
Other .......................................... 20,337 18,329
--------- ---------

Total noncurrent liabilities ............... 234,931 207,578
--------- ---------

Minority interest ................................ 2 334
--------- ---------

Redeemable Series A preferred stock .............. 2,112 2,112
--------- ---------

Stockholders' deficit:
Common stock ................................... 10,798 10,798
Additional paid-in capital ..................... 48,388 45,418
Accumulated other comprehensive loss -
pension liabilities ........................... (170,307) (170,307)
Accumulated deficit ............................ (25,767) (40,935)
Treasury stock, at cost ........................ (12) (12)
--------- ---------

Total stockholders' deficit ................ (136,900) (155,038)
--------- ---------

$ 215,495 $ 220,298
========= =========









KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



Three months ended Six months ended
June 30, June 30,
2002 2003 2002 2003
---- ---- ---- ----


Net sales $ 99,005 $ 96,749 $189,446 $177,838
Cost of goods sold 88,194 92,924 169,902 172,575
-------- -------- -------- --------
Gross margin 10,811 3,825 19,544 5,263
-------- -------- -------- --------

Selling expense 1,735 2,305 3,574 4,534
General and administrative 5,324 3,618 10,523 7,835
Defined benefit pension expense (credit)
(750) 1,700 (1,500) 3,400
-------- -------- -------- --------
6,309 7,623 12,597 15,769
-------- -------- -------- --------

Operating income (loss) 4,502 (3,798) 6,947 (10,506)
-------- -------- -------- --------

General corporate income (expense):
Corporate expense (1,488) (1,034) (2,204) (2,341)
Interest expense (953) (1,090) (3,647) (2,082)
Interest income 21 5 41 20
Gain on early extinguishment of
debt - - 54,739 -
Other income (expense), net 36 58 37 73
-------- -------- -------- --------
(2,384) (2,061) 48,966 (4,330)
-------- -------- -------- --------

Income (loss) before income taxes
and cumulative effect of change
in accounting principle 2,118 (5,859) 55,913 (14,836)

Provision for income taxes - - 21,622 -

Minority interest in after-tax
earnings 114 303 274 332
-------- -------- -------- --------

Income (loss) before cumulative
effect of change in accounting
principle 2,004 (6,162) 34,017 (15,168)

Cumulative effect of change in
accounting principle - - 19,998 -
-------- -------- -------- -----

Net income (loss) 2,004 (6,162) 54,015 (15,168)

Dividends on preferred stock 1,713 1,485 1,713 2,970
-------- -------- -------- --------

Net income (loss) available for
common shares $ 291 $ (7,647) $ 52,302 $(18,138)
======== ======== ======== ========







KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

(In thousands, except per share data)



Three months ended Six months ended
June 30, June 30,
2002 2003 2002 2003
---- ---- ---- ----

Basic earnings (loss) per share available for common shares:

Income (loss) before cumulative
effect of change in accounting

principle $ .03 $ (.76) $ 3.21 $ (1.80)

Cumulative effect of change in
accounting principle - - 1.99 -
-------- -------- -------- ---------

Net income (loss) $ .03 $ (.76) $ 5.20 $ (1.80)
======== ======== ======== ========

Basic shares outstanding 10,068 10,068 10,066 10,068
======== ======== ======== ========

Diluted earnings (loss) per share available for common shares:

Income (loss) before cumulative
effect of change in accounting
principle $ .03 $ (.76) $ 1.94 $ (1.80)

Cumulative effect of change in
accounting principle - - 1.14 -
-------- -------- -------- ---------

Net income (loss) $ .03 $ (.76) $ 3.08 $ (1.80)
======== ======== ======== ========

Diluted shares outstanding 10,068 10,068 17,491 10,068
======== ======== ======== ========










KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)



Six months ended
June 30,
2002 2003
---- ----

Cash flows from operating activities:

Net income (loss) .................................... $ 54,015 $(15,168)
Depreciation and amortization ........................ 8,931 8,516
Amortization of deferred financing costs ............. 334 371
Deferred income taxes ................................ 21,622 --
Non-cash defined benefit pension expense (credit) .... (1,500) 3,400
Non-cash OPEB expense ................................ 2,192 2,316
Gain on early extinguishment of debt ................. (54,739) --
Cumulative effect of change in accounting principle .. (19,998) --
Other, net ........................................... 124 34
Change in assets and liabilities:
Notes and accounts receivable ...................... (15,369) (21,034)
Inventories ........................................ 3,107 10,144
Accounts payable ................................... 378 2,342
Other, net ......................................... 6,452 (2,308)
-------- --------

Net cash provided (used) by operating activities . 5,549 (11,387)
-------- --------

Cash flows from investing activities:
Capital expenditures ................................. (3,271) (1,523)
Collection of notes receivable ....................... 1,127 75
Other, net ........................................... 273 137
-------- --------

Net cash used by investing activities ............ (1,871) (1,311)
-------- --------

Cash flows from financing activities:
Revolving credit facilities, net ..................... (15,980) 13,714
Other notes payable and long-term debt:
Additions .......................................... 15,066 58
Principal payments ................................. (299) (1,059)
Deferred financing costs paid ...................... (2,465) (15)
-------- --------

Net cash provided (used) by financing activities . (3,678) 12,698
-------- --------

Net change in cash and cash equivalents ................ -- --

Cash and cash equivalents, beginning of period ......... -- --
-------- --------

Cash and cash equivalents, end of period ............... $ -- $ --
======== ========

Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized ................ $ 1,835 $ 1,486
Income taxes ....................................... 108 52








KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

Three months ended June 30, 2003
(In thousands)




Accumulated
other
comprehensive
Additional loss -
Common paid-in pension Accumulated Treasury
stock capital liabilities deficit stock Total
------- -------- ----------- -------- -------- -------


Balance - December 31, 2002 $10,798 $ 48,388 $(170,307) $(25,767) $(12) $(136,900)

Net loss .................. -- -- -- (15,168) -- (15,168)

Preferred stock dividends . -- (2,970) -- -- -- (2,970)
------- -------- --------- -------- ---- ---------

Balance - June 30, 2003 ... $10,798 $ 45,418 $(170,307) $(40,935) $(12) $(155,038)
======= ======== ========= ======== ==== =========











KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and basis of presentation:

The consolidated balance sheet of Keystone Consolidated Industries, Inc.
("Keystone" or the "Company") at December 31, 2002 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2003 and the consolidated statements of
operations and cash flows for the interim periods ended June 30, 2002 and 2003,
and the consolidated statement of common stockholders' deficit for the interim
period ended June 30, 2003, have each been prepared by the Company, without
audit, in accordance with accounting principles generally accepted in the United
States of America ("GAAP"). In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary to present fairly the
consolidated financial position, results of operations and cash flows, have been
made. However, it should be understood that accounting measurements at interim
dates may be less precise than at year end. The results of operations for the
interim periods are not necessarily indicative of the operating results for a
full year or of future operations.

Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted, and certain prior year
amounts have been reclassified to conform to the current year presentation. The
accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002 (the "Annual Report").

At June 30, 2003, Contran Corporation ("Contran") and other entities
related to Mr. Harold C. Simmons, beneficially owned approximately 50% of the
outstanding common stock of the Company. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Mr. Simmons, of which Mr. Simmons is sole
trustee. Keystone may be deemed to be controlled by Contran and Mr. Simmons. At
June 30, 2003, Contran also owned 54,956 shares of the 59,399 shares of the
Company's outstanding Redeemable Series A Preferred Stock. Effective March 15,
2003, each share of Series A Preferred Stock is convertible, at the option of
the holder, into 250 shares of the Company's common stock (equivalent to a $4.00
per share exchange rate).

Although Keystone management expects to report a net loss for the year
ending December 31, 2003, management currently believes its available credit
facilities will be sufficient to fund the anticipated needs of the Company's
operations and capital expenditures for the year ending December 31, 2003.
However, such expectation is based on various operating assumptions and goals.
Failure to achieve these goals could have a material adverse effect on the
Company's ability to achieve its intended business objectives and may result in
cash flow needs in excess of its current borrowing availability under existing
credit facilities. See Note 4.

Employee stock options. As disclosed in the Annual Report, Keystone
accounts for stock-based employee compensation in accordance with Accounting
Principles Board Opinion ("APBO") No. 25, Accounting for Stock Issued to
Employees, and its various interpretations. Under APBO No. 25, no compensation
cost is generally recognized for fixed stock options in which the exercise price
is equal to or greater than the market price on the grant date. Compensation
cost related to stock options recognized by the Company in accordance with APBO
No. 25 was not significant during the interim periods ended June 30, 2002 and
2003.

The following table presents what the Company's consolidated net income
(loss) available for common shares, and related per share amounts, would have
been if Keystone would have elected to account for its stock-based employee
compensation related to stock options in accordance with the fair value-based
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
for all awards granted subsequent to January 1, 1995.




Three months ended Six months ended
June 30, June 30,
------------------------ -----------------------------
2002 2003 2002 2003
---- ---- ---- ----
(In thousands)

Net income (loss) available for

common shares as reported $291 $ (7,647) $52,302 $(18,138)
Adjustments, net of applicable
income tax effects:
Stock-based employee compensation
expense under APBO No. 25 - - - -
Stock-based employee compensation
expense under SFAS No. 123 (46) (1) (99) (25)
---- -------- ------- --------

Pro forma net income (loss)
available for common shares $245 $ (7,648) $ 52,203 $(18,163)
==== ======== ======== ========

Basic net income (loss) available for common shares per share:
As reported $.03 $ (.76) $ 5.20 $ (1.80)
Pro forma $.03 $ (.76) $ 5.19 $ (1.80)

Diluted net income (loss) available for common shares per share:
As reported $.03 $ (.76) $ 3.08 $ (1.80)
Pro forma $.03 $ (.76) $ 3.07 $ (1.80)


Note 2 - Business Segment Information:

Keystone's operating segments are defined as components of consolidated
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is Mr. David L. Cheek, President and Chief Executive Officer of
Keystone. Each operating segment is separately managed, and each operating
segment represents a strategic business unit offering different products. During
2003, the Company expanded the composition of its reportable segments. The
corresponding segment information for prior periods has been restated to conform
to the current year presentation. In addition, the information below also
provides disclosure of segment information with respect to each year in the
three-year period ended December 31, 2002.

The Company's operating segments are organized along its manufacturing
facilities and include three reportable segments: (i) Keystone Steel and Wire
("KSW") which manufacturers and sells wire rod, wire and wire products for
agricultural, industrial, construction, commercial, original equipment
manufacturers and retail consumer markets, (ii) Engineered Wire Products ("EWP")
which manufactures and sells welded wire reinforcement in both roll and sheet
form that is utilized in concrete construction products including pipe, pre-cast
boxes and applications for use in roadways, buildings and bridges, and (iii)
Garden Zone which distributes wire, plastic and wood lawn and garden products to
retailers. Keystone owns 51% of Garden Zone. See Note 10. Keystone also operates
three businesses that do not constitute reportable business segments. These
businesses sell wire and wire products for agricultural, industrial,
construction, commercial, original manufacturers and retail consumer markets.
The results of operations of these businesses are aggregated and included under
the "All Other" heading in the following tables.

Keystone is also engaged in a scrap recycling joint venture through its 50%
interest in Alter Recycling Company, L.L.C. ("ARC"), an unconsolidated equity
affiliate.

KSW's products and EWP's products are distributed primarily in the
Midwestern, Southwestern and Southeastern United States. Garden Zone's products
are distributed primarily in the Southeastern United States.





Business Segment Principal entities Location

Keystone Steel & Wire Keystone Steel & Wire Peoria, Illinois

Engineered Wire Products Engineered Wire Products Upper Sandusky, Ohio

Garden Zone Garden Zone (1) Charleston, South
Carolina

All other Sherman Wire Sherman, Texas
Sherman Wire
of Caldwell, Inc. Caldwell, Texas
Keystone Fasteners Springdale, Arkansas


(1) 51.0% subsidiary.

Keystone evaluates segment performance based on segment operating income,
which is defined as income before income taxes and interest expense, exclusive
of certain items (such as gains or losses on disposition of business units or
sale of fixed assets) and certain general corporate income and expense items
(including interest income) which are not attributable to the operations of the
reportable operating segments.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies except that (i) defined benefit
pension expense for each segment is recognized and measured on the basis of
estimated current service cost of each segment, with the remainder of the
Company's net defined benefit pension expense or credit not allocated to each
segment but still is reported as part of operating profit or loss, (ii) segment
OPEB expense is recognized and measured based on the basis of the estimated
expense of each segment with the remainder of the Company's actual OPEB expense
not allocated to each segment but still is reported as part of operating profit
or loss, (iii) elimination of intercompany profit or loss on ending inventory
balances is not allocated to each segment but still is reported as part of
operating profit or loss, (iv) LIFO inventory reserve adjustments are not
allocated to each segment but still is reported as part of operating profit or
loss, and (v) amortization of goodwill and negative goodwill are included in
general corporate expenses and are not allocated to any segment and are not
included in total reporting operating profit or loss. General corporate expenses
also includes OPEB and environmental expenses relative to facilities no longer
owned by the Company. Intercompany sales between reportable segments are
generally recorded at prices that approximate market prices to third-party
customers.

Segment assets are comprised of all assets attributable to each reportable
operating segment. Corporate assets consist principally of pension related
assets, restricted investments, deferred tax assets and corporate property,
plant and equipment.






GAAP
Adjustments,
Corporate
Items
Garden All Segment and
KSW EWP Zone Other Total Eliminations Total
--- --- ------ ----- ------- ------------ -----
(In thousands)
Three months ended June 30, 2002:

Third party net sales $ 75,559 $ 9,310 $ 3,352 $10,784 $ 99,005 $ - $ 99,005
Intercompany sales 9,169 - 442 2,617 12,228 (12,228) -
-------- ------- ------- ------- -------- -------- --------

$ 84,728 $ 9,310 $ 3,794 $13,401 $111,233 $(12,228) $ 99,005
======== ======= ======= ======= ======== ======== ========

Operating income (loss) $ 3,334 $ 1,111 $ 248 $ (507) $ 4,186 $ 316 $ 4,502
======== ======= ======= ======= ======== ======== ========

Three months ended June 30, 2003:
Third party net sales $ 74,699 $ 9,844 $ 6,140 $ 6,066 $ 96,749 $ - $ 96,749
Intercompany sales 9,460 - 84 3,226 12,770 (12,770) -
-------- ------- ------- ------- -------- -------- --------

$ 84,159 $ 9,844 $ 6,224 $ 9,292 $109,519 $(12,770) $ 96,749
======== ======= ======= ======= ======== ======== ========

Operating income (loss) $ (3,295) $ 951 $ 670 $(1,303) $ (2,977) $ (821) $ (3,798)
======== ======= ======= ======= ======== ======== ========

Six months ended June 30, 2002:
Third party net sales $145,956 $15,222 $ 7,255 $21,013 $189,446 $ - $189,446
Intercompany sales 16,730 - 879 5,289 22,898 (22,898) -
-------- ------- ------- ------- -------- -------- --------

$162,686 $15,222 $ 8,134 $26,302 $212,344 $(22,898) $189,446
======== ======= ======= ======= ======== ======== ========

Operating income (loss) $ 4,693 $ 1,490 $ 604 $ (953) $ 5,834 $ 1,113 $ 6,947
======== ======= ======= ======= ======== ======== ========

Six months ended June 30, 2003:
Third party net sales $140,668 $15,294 $10,851 $11,025 $177,838 $ - $177,838
Intercompany sales 17,435 - 860 8,540 26,835 (26,835) -
-------- ------- ------- ------- -------- -------- --------

$158,103 $15,294 $11,711 $19,565 $204,673 $(26,835) $177,838
======== ======= ======= ======= ======== ======== ========

Operating income (loss) $ (8,699) $ 1,157 $ 758 $(1,860) $ (8,644) $ (1,862) $(10,506)
======== ======= ======= ======= ======== ======== ========

Year ended December 31, 2002:
Third party net sales $243,039 $31,247 $ 9,523 $ 34,171 $317,980 $ - $317,980
Intercompany sales 31,839 - 1,221 9,398 42,458 (42,458) -
-------- ------- ------- -------- -------- -------- --------
$274,878 $31,247 $10,744 $ 43,569 $360,438 $(42,458) $317,980
======== ======= ======= ======== ======== ======== ========
Depreciation and
amortization $ 14,693 $ 1,006 $ - $ 1,646 $ 17,345 $ 51 $ 17,396
Operating profit (loss) (3,921) 2,743 85 (2,971) (4,064) (561) (4,625)
Identifable segment assets 157,321 18,130 4,186 18,537 198,174 17,321 215,495
Capital expenditures 7,597 164 - 208 7,969 4 7,973

Year ended December 31, 2001:
Third party net sales $227,018 $32,409 $ 8,011 $ 41,232 $308,670 $ - $308,670
Intercompany sales 32,124 - 472 8,363 40,959 (40,959) -
-------- ------- ------- -------- -------- -------- --------
$259,142 $32,409 $ 8,483 $ 49,595 $349,629 $(40,959) $308,670
======== ======= ======= ======== ======== ======== ========
Depreciation and
amortization $ 15,312 $ 1,043 $ - $ 1,815 $ 18,170 $ (1,178) $ 16,992
Operating profit (loss) (12,779) 4,156 210 (2,603) (11,016) 6,610 (4,406)
Identifable segment assets 162,796 18,252 2,812 22,923 206,783 159,817 366,900
Capital expenditures 3,534 269 - 85 3,888 1 3,889

Year ended December 31, 2000:
Third party net sales $241,665 $31,909 $ 6,346 $ 58,401 $338,321 $ - $338,321
Intercompany sales 32,232 - 414 8,280 40,926 (40,926) -
-------- ------- ------- -------- -------- -------- --------
$273,897 $31,909 $ 6,760 $ 66,681 $379,247 $(40,926) $338,321
======== ======= ======= ======== ======== ======== ========
Depreciation and
amortization $ 15,289 $ 1,067 $ - $ 2,090 $ 18,446 $ (1,222) $ 17,224
Equity in loss of
unconsolidated
affiliate (281) - - - (281) - (281)
Operating profit (loss) (23,989) 3,134 345 (1,964) (22,474) 6,885 (15,589)
Identifable segment assets 172,563 19,187 3,990 29,453 225,193 160,510 385,703
Capital expenditures 12,191 352 - 502 13,045 7 13,052


In the above tables, GAAP adjustments relate to operating profit (loss),
Corporate items relate to depreciation and amortization, segment assets and
capital expenditures and eliminations relate to net sales. GAAP adjustments are
principally (i) the difference between the defined benefit pension expense or
credit and OPEB expense allocated to the segments and the actual expense or
credit included in the determination of operating profit or loss, (ii) the
elimination of intercompany profit or loss on ending inventory balances and
(iii) LIFO inventory reserve adjustments.



Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)


Operating loss ............................. $(15,589) $ (4,406) $ (4,625)
Equity in loss of unconsolidated affiliate . (281) -- --
General corporate items:
Interest income .......................... 599 253 66
Other income ............................. 183 565 34
General income (expenses), net ........... (2,002) (2,232) (4,600)
Gain on early extinguishment of debt ..... -- -- 54,739
Interest expense ......................... (15,346) (14,575) (5,569)
-------- -------- --------

Income (loss) before income taxes ........ $(32,436) $(20,395) $ 40,045
======== ======== ========


Note 3 - Inventories:

Inventories are stated at the lower of cost or market. At December 31, 2002
and June 30, 2003, the last-in, first-out ("LIFO") method was used to determine
the cost of approximately 77% and 74% respectively, of total inventories and the
first-in, first-out or average cost methods were used to determine the cost of
other inventories.



December 31, June 30,
2002 2003
----------- --------
(In thousands)

Steel and wire products:

Raw materials .................................... $ 8,825 $ 7,138
Work in process .................................. 14,920 10,334
Finished goods ................................... 21,178 17,400
Supplies ......................................... 14,710 14,077
------- -------
59,633 48,949
Less LIFO reserve ................................ 13,352 13,352
------- -------
46,281 35,597

Lawn and garden products - finished goods .......... 3,808 4,348
------- -------

$50,089 $39,945
======= =======







Note 4 - Notes payable and long-term debt:



December 31, June 30,
2002 2003
----------- --------
(In thousands)

Revolving credit facilities:

Keystone ................................. $ 28,328 $ 37,798
EWP ...................................... 1,362 4,111
Garden Zone .............................. 1,650 3,145
8% Notes ................................... 28,908 28,512
6% Notes ................................... 16,031 16,031
9 5/8% Notes ............................... 6,150 6,150
Keystone Term Loan ......................... 4,167 3,542
County Term Loan ........................... 10,000 10,000
Other ...................................... 645 665
-------- --------
97,241 109,954
Less current maturities .................. 33,935 77,696
-------- --------

$ 63,306 $ 32,258
======== ========


At June 30, 2003, Keystone was not in compliance with certain financial
covenants included in its primary revolving credit facility (the "Keystone
Revolver"). Under the terms of the Keystone Revolver, failure to comply with
these covenants is considered an event of default and gives the lender the right
to accelerate the maturity of both the Keystone Revolver and the Keystone Term
Loan. As such, the Keystone Term Loan was classified as a current liability at
June 30, 2003. The Company is currently negotiating with the Keystone Revolver
and Keystone Term Loan lender to obtain waivers of such financial covenants or
otherwise amend the respective loan agreements to cure the defaults. There can
be no assurance Keystone will be successful in obtaining such waivers or
amendments and if Keystone is unsuccessful there is no assurance the Company
would have the liquidity or other financial resources sufficient to repay the
applicable indebtedness if such indebtedness is accelerated. The indenture
governing Keystone's 8% Notes provides the holders of such Notes with the right
to accelerate the maturity of the Notes in the event of a default by Keystone
resulting in an acceleration of the maturity of any of the Company's other
secured debt. As such, the 8% Notes were also classified as a current liability
at June 30, 2003.

In addition, a wholly-owned subsidiary of Contran has agreed to loan the
Company up to an aggregate of $6 million under the terms of a revolving credit
facility that, as amended, matures on August 31, 2003. This facility is
collateralized by the common stock of EWP owned by Keystone. Through August 13,
2003, the Company has not borrowed any amounts under such facility.

Note 5 - Income taxes:

At June 30, 2003, the Company expects that its long-term profitability
should ultimately be sufficient to enable it to realize full benefit of its
future tax attributes in part due to the long-term nature of its net operating
loss carryforwards. However, considering all factors believed to be relevant,
including the Company's recent operating results, its expected future near-term
productivity rates; cost of raw materials, electricity, labor and employee
benefits, environmental remediation, and retiree medical coverage; interest
rates; product mix; sales volumes and selling prices; and the fact that accrued
OPEB expenses will become deductible over an extended period of time and require
the Company to generate significant amounts of future taxable income, the
Company believes its gross deferred tax assets do not currently meet the
"more-likely-than-not" realizability test. As such, at December 31, 2002, the
Company had provided a deferred tax asset valuation allowance of approximately
$86.5 million. As a result of the deferred tax asset valuation allowance, the
Company does not anticipate recognizing a tax benefit associated with its
expected pre-tax losses during 2003 will be appropriate. Accordingly, during the
first six months of 2003, the Company increased the deferred tax asset valuation
allowance by approximately $5.6 million. Keystone will continue to review the
recoverability of its deferred tax assets, and based on such periodic reviews,
Keystone could recognize a change in the valuation allowance related to its
deferred tax assets in the future.

Summarized below are (i) the differences between the income tax provision
(benefit) and the amounts that would be expected by applying the U.S. federal
statutory income tax rate of 35% to the income (loss) before income taxes and
cumulative effect of change in accounting principle, and (ii) the components of
the income tax provision.



Six months ended
June 30,
-----------------------
2002 2003
---- ----

Expected tax provision (benefit), at

statutory rate $19,570 $(5,193)
U.S. state income taxes, net 2,471 (446)
Deferred tax asset valuation allowance (428) 5,629
Other, net 9 10
------- -------

Income tax provision (benefit) $21,622 $ -
======= =======

Comprehensive provision (benefit) for
income taxes:
Currently refundable:
U.S. federal $ (18) $ (13)
U.S. state 18 13
------- -------
Net currently refundable - -

Deferred income taxes, net 21,622 -
------- -------
$21,622 $ -
======= =======

Comprehensive provision for income taxes
allocable to:
Income before cumulative effect of change
in accounting principle $21,622 $ -
Cumulative effect of change in accounting
principle - -
------- -------

$21,622 $ -
======= =======





Note 6 - Other accrued liabilities:



December 31, June 30,
2002 2003
----------- -------
(In thousands)

Current:

Employee benefits $11,455 $11,375
Self insurance 10,336 10,520
Environmental 8,103 8,045
Deferred vendor payments 3,338 3,338
Legal and professional 1,176 947
Disposition of former facilities 659 655
Interest 318 345
Other 4,831 5,867
------- -------
$40,216 $41,092
======= =======

Noncurrent:
Deferred vendor payments $10,252 $ 8,777
Environmental 7,087 6,895
Workers compensation payments 2,309 2,062
Interest 298 500
Other 391 95
------- -------
$20,337 $18,329
======= =======


Note 7 - Environmental matters:

Keystone has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") or similar state laws in approximately
24 governmental and private actions associated with environmental matters,
including waste disposal sites and facilities currently or previously owned,
operated or used by Keystone, certain of which are on the United States
Environmental Protection Agency's (the "U.S. EPA") Superfund National Priorities
List or similar state lists. These proceedings seek cleanup costs, damages for
personal injury or property damage and/or damages for injury to natural
resources. Certain of these proceedings involve claims for substantial amounts.
Although Keystone may be jointly and severally liable for such costs, in most
cases, it is only one of a number of PRPs who may also be jointly and severally
liable.

On a quarterly basis, Keystone evaluates the potential range of its
liability at sites where it has been named as a PRP or defendant by analyzing
and estimating the range of reasonably possible costs to Keystone. Such costs
include, among other things, expenditures for remedial investigations,
monitoring, managing, studies, certain legal fees, clean-up, removal and
remediation. Keystone believes it has provided adequate accruals ($14.9 million
at June 30, 2003) for these matters at 13 sites for which Keystone believes its
liability is probable and reasonably estimable, but Keystone's ultimate
liability may be affected by a number of factors, including the imposition of
more stringent standards or requirements under environmental laws or
regulations, new developments or changes in remedial alternatives and costs, the
allocation of such costs among PRPs, the solvency of other PRPs or a
determination that Keystone is potentially responsible for the release of
hazardous substances at other sites, any of which could result in expenditures
in excess of amounts currently estimated by Keystone to be required for such
matters. In addition, the actual timeframe for payments by Keystone for these
matters may be substantially in the future.

Keystone believes it is not possible to estimate the range of costs for
certain sites (8 sites). The upper end of the range of reasonably possible costs
to Keystone for sites for which it is possible to estimate costs (16 sites) is
approximately $20.6 million. Keystone's estimates of such liabilities have not
been discounted to present value, and other than certain previously-reported
settlements with respect to certain of Keystone's former insurance carriers,
Keystone has not recognized any material insurance recoveries. No assurance can
be given that actual costs will not exceed accrued amounts or the upper end of
the range for sites for which estimates have been made, and no assurance can be
given that costs will not be incurred with respect to the 8 sites as to which no
estimate of liability can presently be made because the respective
investigations are in early stages. The extent of CERCLA liability cannot be
determined until the Remedial Investigation/Feasibility Study ("RI/FS") is
complete, the U.S. EPA issues a Record of Decision ("ROD") and costs are
allocated among PRPs. The extent of liability under analogous state cleanup
statutes and for common law equivalents is subject to similar uncertainties.

More detailed descriptions of certain legal proceedings relating to
environmental matters are set forth below. A summary of activity in the
Company's environmental accruals for the six month period ended June 30, 2003 is
as follows:




Six months ended
June 30, 2003


Balance at beginning of period ............................ $ 15,190
Payments .................................................. (250)
--------

Balance at end of period .................................. $ 14,940
========



The Company is currently involved in the closure of inactive waste disposal
units at its Peoria facility pursuant to a closure plan approved by the Illinois
Environmental Protection Agency ("IEPA") in September 1992. The original closure
plan provides for the in-place treatment of seven hazardous waste surface
impoundments and two waste piles to be disposed of as special wastes. The
Company recorded an estimated liability for remediation of the impoundments and
waste piles based on a six-phase remediation plan. The Company adjusts the
recorded liability for each Phase as actual remediation costs become known.
During 1995, the Company began remediation of Phases II and III and completed
these Phases, as well as Phase IV during 1996. During 1998 and 1999 the Company
did not have any significant remediation efforts relative to Phases V and VI.
During 2000, Keystone began preliminary efforts relative to Phase V. Pursuant to
agreements with the IEPA and Illinois Attorney General's office, the Company is
depositing $75,000 per quarter into a trust fund. The Company must continue
these quarterly deposits and cannot withdraw funds from the trust fund until the
fund balance exceeds the sum of the estimated remaining remediation costs plus
$2 million. At December 31, 2002 and June 30, 2003 the trust fund had balances
of $5.1 million and $5.2 million, respectively, which amounts are included in
other noncurrent assets because the Company does not expect to have access to
any of these funds until after June 30, 2004.

In February 2000, Keystone received a notice from the U.S. EPA giving
formal notice of the U.S. EPA's intent to issue a unilateral administrative
order to Keystone pursuant to section 3008(h) of the Resource Conservation and
Recovery Act ("RCRA"). The draft order enclosed with this notice would require
Keystone to: (1) investigate the nature and extent of hazardous constituents
present at and released from five alleged solid waste management units at the
Peoria facility; (2) investigate hazardous constituent releases from "any other
past or present locations at the Peoria facility where past waste treatment,
storage or disposal may pose an unacceptable risk to human health and the
environment"; (3) complete by June 30, 2001 an "environmental indicators report"
demonstrating the containment of hazardous substances that could pose a risk to
"human receptors" and further demonstrating that Keystone "has stabilized the
migration of contaminated groundwater at or from the facility;" (4) submit by
January 30, 2002 proposed "final corrective measures necessary to protect human
health and the environment from all current and future unacceptable risks of
releases of hazardous waste or hazardous constituents at or from the Peoria
facility; and (5) complete by June 30, 2001 the closure of the sites discussed
in the preceding paragraph now undergoing RCRA closure under the supervision of
the IEPA. Keystone has complied with deadlines in the draft order. During the
fourth quarter of 2000, Keystone entered into a modified Administrative Order on
Consent, which may require the Company to conduct cleanup activities at certain
solid waste management units at its Peoria facility depending on the results of
soil and groundwater sampling and risk assessment to be conducted by Keystone
during future periods pursuant to the order.

In March 2000, the Illinois Attorney General (the "IAG") filed and served a
seven-count complaint against Keystone for alleged violations of the Illinois
Environmental Protection Act, 415 ILCS 5/31, and regulations implementing RCRA
at Keystone's Peoria facility. The complaint alleges Keystone violated RCRA in
failing to prevent spills of an alleged hazardous waste on four separate
occasions during the period from June 1995 through January 1999. The complaint
also alleges the Company illegally "stored", "disposed of" and manifested the
same allegedly hazardous waste on some or all of those occasions. In addition,
the complaint alleges these hazardous waste spills resulted in groundwater
pollution in violation of the Illinois Environmental Protection Act. The
complaint further alleges Keystone improperly disposed of hazardous waste on two
occasions at a landfill not permitted to receive such wastes. The complaint
seeks the maximum statutory penalties allowed which ranges up to $50,000 for
each violation and additional amounts up to $25,000 for each day of violation.
Keystone has answered the complaint and proceedings in the case have been stayed
pending the outcome of settlement negotiations between Keystone and the IAG's
office.

In June 2000, the IAG filed a Complaint For Injunction And Civil Penalties
against Keystone. The complaint alleges the Company's Peoria facility violated
its National Pollutant Discharge Elimination System ("NPDES") permit limits for
ammonia and zinc discharges from the facility's wastewater treatment facility
into the Illinois River. The complaint alleges specific violations of the 30-day
average ammonia limit in the NPDES permit for three months in 1996, 11 months in
1997, 12 months in 1998, 11 months in 1999 and the first two months of 2000. The
complaint further alleges two violations of the daily maximum limit for zinc in
October and December of 1999. Keystone has answered the complaint and
proceedings in the case have been stayed pending the outcome of settlement
negotiations between the Company and the IAG's office.

"Superfund" sites

The Company is subject to federal and state "Superfund" legislation that
imposes cleanup and remediation responsibility upon present and former owners
and operators of, and persons that generated hazardous substances deposited
upon, sites determined by state or federal regulators to contain hazardous
substances. Keystone has been notified by U.S. EPA that the Company is a PRP
under the federal "Superfund" legislation for the alleged release or threat of
release of hazardous substances into the environment at eight sites. These
situations involve cleanup of landfills and disposal facilities which allegedly
received hazardous substances generated by discontinued operations of the
Company. Although Keystone believes its comprehensive general liability
insurance policies provide indemnification for certain costs the Company incurs
at the "Superfund" sites discussed below, it has only recorded receivables for
the estimated insurance recoveries at three of those sites. During prior years,
the Company has received payments from certain of its insurers in exchange for
releasing such insurers from coverage for certain years of environmental related
liabilities. Such amounts are included in Keystone's self insurance accruals.

In July 1991, the United States filed an action against a former division
of the Company and four other PRPs in the United States District Court for the
Northern District of Illinois (Civil Action No. 91C4482) seeking to recover
investigation and remediation costs incurred by U.S. EPA at the Byron Salvage
Yard, located in Byron, Illinois. In April 1992, Keystone filed a third-party
complaint in this civil action against 15 additional parties seeking
contribution in the event the Company is held liable for any response costs at
the Byron site. Neither the Company nor the other designated PRPs are performing
any investigation of the nature and extent of the contamination. In December
1996, Keystone, U.S. EPA and the Department of Justice entered into the Fifth
Partial Consent Decree to settle Keystone's liability for EPA response costs
incurred at the site through April 1994 for a payment of $690,000. Under the
agreement Keystone is precluded from recovering any portion of the $690,000
settlement payment from other parties to the lawsuit. In January 1997, Keystone
paid the $690,000 settlement. Keystone will remain potentially liable for EPA
response costs incurred after April 30, 1994, and natural resource damage
claims, if any, that may be asserted in the future. Keystone recovered a portion
of the $690,000 payment from its insurer. In March 1997, U.S. EPA issued a
Proposed Remedial Action Plan ("PRAP") recommending that a limited excavation of
contaminated soils be performed at an estimated cost of $63,000, that a soil
cover be placed over the site, an on-site groundwater pump and treat system be
installed and operated for an estimated period of 15 years, and that both
on-site and off-site groundwater monitoring be conducted for an indefinite
period. U.S. EPA's cost estimate for the recommended plan is $5.1 million. U.S.
EPA's estimate of the highest cost alternatives evaluated but not recommended in
the PRAP is approximately $6 million. The Company filed public comments on May
1, 1997, objecting to the PRAP. In March 1999, Keystone and other PRP's received
a CERCLA special notice letter notifying them for the first time of a September
1998 ROD and requesting a commitment on or before May 19, 1999 to perform soils
work required by that ROD that was estimated to cost approximately $300,000. In
addition, the special notice letter also requested the PRPs to reimburse U.S.
EPA for costs incurred at the site since May 1994 in the amount of $1.1 million,
as well as for all future costs the U.S. EPA will incur at the site in
overseeing the implementation of the selected soils remedy and any future
groundwater remedy. Keystone refused to agree to the U.S. EPA's past and future
cost demand. In August 1999, U.S. EPA issued a groundwater PRAP with an
estimated present value cost of $3 million. Keystone filed public comments
opposing the PRAP in September 1999. In October 2002, Keystone and the other
remaining PRPs entered into a second Consent Decree with the U.S. EPA, in order
to resolve their liability for performance of the U.S. EPA's September 1998 ROD
for a soils remedy at the site, for the performance of the U.S. EPA's December
1999 ROD for remedial action regarding the groundwater component of Operable
Unit No. 4 at the site, for payment of U.S. EPA's site costs incurred since May
1994 as well as future U.S. EPA oversight costs, and for the transfer of certain
funds that may be made available to the PRPs as a result of a consent decree
reached between U.S. EPA and another site PRP. Under the terms of the second
Consent Decree, and the PRP Agreement was executed to implement the PRPs'
performance under that decree, Keystone is required to pay approximately
$700,000 (of which approximately $600,000 has already been paid into a PRP Group
trust fund), and would remain liable for 18.57% of future U.S. EPA oversight
costs as well as a similar share of any unanticipated cost increases in the
soils remedial action work. (Under the agreements, the City of Byron, Illinois,
would assume responsibility for any cost overruns associated with the municipal
water supply components of the groundwater contamination remedy.) The U.S. EPA
served the PRP Group in February 2003 with its first oversight cost claim under
the second Consent Decree, in the amount of $186,000 for the period from March
1, 2000 to November 25, 2002. Keystone's share of that claim is approximately
$35,000. The U.S. EPA has also requested changes to the groundwater monitoring
program at the site that may require future increases in the PRP Group's
groundwater monitoring reserves. In September 2002, the IAG served a demand
letter on Keystone and 3 other PRP's seeking recovery of approximately $1.3
million in state cleanup costs incurred at the Byron Salvage Yard site. The
PRP's are currently negotiating with the IAG in an attempt to settle this claim.
The four PRP's named in the demand letter are also attempting to include other
site PRP's in the negotiations. It remains possible that these negotiations
could fail and that Keystone's ultimate liability for the Byron Salvage Yard
site could increase in a subsequent settlement agreement or as a result of
litigation.

In September 1991, the Company along with 53 other PRPs, executed a consent
decree to undertake the immediate removal of hazardous wastes and initiate a
RI/FS of the Interstate Pollution Control site located in Rockford, Illinois.
The Company's percentage allocation within the group of PRPs agreeing to fund
this project is currently 2.14%. However, the Company's ultimate allocation, and
the ultimate costs of the RI/FS and any remedial action, are subject to change
depending, for example, upon: the number and financial condition of the other
participating PRPs, field conditions and sampling results, results of the risk
assessment and feasibility study, additional regulatory requirements, and the
success of a contribution action seeking to compel additional parties to
contribute to the costs of the RI/FS and any remedial action. The RI/FS began in
1993, was completed in 1997 and approved by IEPA in 1998. In the summer of 1999,
IEPA selected a capping and soil vapor extraction remedy estimated by the PRP
group to have a present value cost of approximately $2.5 million. IEPA may also
demand reimbursement of future oversight costs. The three largest PRPs at the
site are negotiating a consent order with IEPA for the performance of the site
remedy. Keystone expects to participate with the larger PRPs in the performance
of that remedy based on its RI/FS allocation percentage.

In August 1987, Keystone was notified by U.S. EPA that it is a PRP
responsible for the alleged hazardous substance contamination of a site
previously owned by the Company in Cortland, New York. Four other PRPs
participated in the RI/FS and a contribution action is pending against eleven
additional viable companies which contributed wastes to the site. Following
completion of the RI/FS, U.S. EPA published in November 1997, a PRAP for the
site that recommends the excavation and disposal of contaminated soil,
installation of an impervious cap over a portion of the site, placement of a
surface cover over the remainder of the site and semi-annual groundwater
monitoring until drinking water standards are met by natural attenuation. U.S.
EPA estimates the costs of this recommended plan to be $3.1 million. The highest
cost remedy evaluated by U.S. EPA but not recommended in the PRAP is estimated
by U.S. EPA to have a cost of $19.8 million. In September 1998, Keystone and
four other PRPs who had funded the prior remedial actions and RI/FS signed a
proposed Consent Decree with U.S. EPA calling for them to be "nonperforming
parties" for the implementation of a March 1998 Record of Decision. Under this
Consent Decree, Keystone could be responsible for an unspecified share of U.S.
EPA's future costs in the event that changes to the existing ROD are required.

Prior to its acquisition by Keystone, DeSoto, Inc. ("DeSoto") was notified
by U.S. EPA that it is one of approximately 50 PRPs at the Chemical Recyclers,
Inc. site in Wylie, Texas. In January 1999, DeSoto changed its name to Sherman
Wire Company ("Sherman"). Under a consent order with the U.S. EPA, the PRP group
has performed a removal action and an investigation of soil and groundwater
contamination. Such investigation revealed certain environmental contamination.
It is anticipated U.S. EPA will order further remedial action, the exact extent
of which is not currently known. Sherman is paying on a non-binding interim
basis, approximately 10% of the costs for this site. Remediation costs, at
Sherman's present allocation level, are estimated at a range of from $1.5
million to $4 million.

In 1984, U.S. EPA filed suit against DeSoto by amending a complaint against
Midwest Solvent Recovery, Inc. et al ("Midco"). DeSoto was a defendant based
upon alleged shipments to an industrial waste recycling storage and disposal
operation site located in Gary, Indiana. The amended complaint sought relief
under CERCLA to force the defendants to clean up the site, pay non-compliance
penalties and reimburse the government for past clean up costs. In June 1992,
DeSoto settled its portion of the case by entering into a partial consent
decree, and all but one of the eight remaining primary defendants and 93 third
party defendants entered into a main consent decree. Under the terms of the
partial consent decree, DeSoto agreed to pay its pro rata share (13.47%) of all
costs under the main consent decree. In addition to certain amounts included in
the trust fund discussed below, Sherman also has certain funds available in
other trust funds due it under the partial consent decree. These credits can be
used by Sherman (with certain limitations) to fund its future liabilities under
the partial consent decree.

In 1995, DeSoto was notified by the Texas Natural Resource Conservation
Commission ("TNRCC") that there were certain deficiencies in prior reports to
TNRCC relative to one of its non-operating facilities located in Gainesville,
Texas. During 1999, Sherman entered into TNRCC's Voluntary Cleanup Program.
Remediation costs are presently estimated to be between $1.2 million and $2
million. Investigation activities are on-going including additional soil and
groundwater sampling.

In December 1991, DeSoto and approximately 600 other PRPs were named in a
complaint alleging DeSoto and the PRPs generated wastes that were disposed of at
a Pennsauken, New Jersey municipal landfill. The plaintiffs in the complaint
were ordered by the court to show in what manner the defendants were connected
to the site. The plaintiffs provided an alleged nexus indicating garbage and
construction materials from DeSoto's former Pennsauken facility were disposed of
at the site and such waste allegedly contained hazardous material to which
DeSoto objected. The claim was dismissed without prejudice in August 1993. In
1996, DeSoto received an amended complaint containing the same allegations. This
matter is in discovery stage at June 30, 2003. Sherman has denied any liability
with regard to this matter and expects to vigorously defend the action.

Sherman has received notification from the TNRCC stating that DeSoto is a
PRP at the Material Recovery Enterprises Site near Ovalo, Texas, with
approximately 3% of the total liability. The matter has been tendered to the
Valspar Corporation ("Valspar") pursuant to a 1990 agreement whereby Valspar
purchased certain assets of DeSoto. Valspar has been handling the matter under
reservation of rights. At the request of Valspar, Sherman has signed a
participation agreement which would require Sherman to pay no less than 3% of
the remediation costs. Valspar continues to pay for legal fees in this matter
and has reimbursed Sherman for all assessments.

In addition to the sites discussed above, Sherman is allegedly involved at
various other sites and in related toxic tort lawsuits in which it does not
currently expect to incur significant liability.

Under the terms of a 1990 asset sale agreement, DeSoto established two
trust funds totaling $6 million to fund potential clean-up liabilities relating
to the assets sold. Sherman has access to the trust funds for any expenses or
liabilities it incurs relative to environmental claims relating to the sites
identified in the trust agreements. The trust funds are primarily invested in
United States Treasury securities and are classified as restricted investments
on the balance sheet. In October 2000, one of the trust's term expired and the
$3.6 million trust balance was returned to Sherman. As of December 31, 2002 and
June 30, 2003, the balance in the trust fund was approximately $385,000 and
$268,000 respectively.

Note 8 - Other commitments and contingencies:

Current litigation

In July 2001, Sherman received a letter from a law firm advising them that
Sears Roebuck & Co. ("Sears") had been named as a defendant in a lead paint
personal injury case. Sears claimed contractual indemnity against Sherman and
demanded that Sherman defend and indemnify Sears with regard to any losses or
damages Sears may sustain in the case. Sears was named as an additional insured
on insurance policies in which DeSoto, the manufacturer of the paint, was the
named insured. Additional demands were made by Sears in 2002 with regard to
additional lead paint cases. DeSoto's insurance carriers were notified of the
action and asked to indemnify Sherman with respect to the complaint. Sherman has
not indemnified Sears and is unaware if the insurors have agreed to indemnify
Sears.

In May 2002, the Company was notified by an insurance company of a
declaratory complaint filed in Cook County Illinois by Sears against the
insurance company and a second insurance company (collectively the "Insurance
Companies") relative to a certain lead paint personal injury litigation against
Sears. It is the Company's understanding that the declaratory complaint has
since been amended to include all lead paint cases where Sears has been named as
a defendant as a result of paint sold by Sears that was manufactured by DeSoto
(now Sherman). Sears was allegedly named as an additional insured on insurance
policies issued by the Insurance Companies, in which DeSoto, the manufacturer of
the paint, was the named insured. Sears has demanded indemnification from the
Insurance Companies. One of the Insurance Companies has demanded indemnification
and defense from Sherman. Sherman believes the request for indemnification is
invalid. However, such Insurance Company has refused to accept Sherman's
response and has demanded that Sherman participate in mediation in accordance
with the terms of a prior settlement agreement. Sherman and the Insurance
Company are in the process of commencing a mediation. If the mediation process
is not successful, Sherman may be sued by the Insurance Companies and, as a
result, could be held responsible for all costs incurred by the Insurance
Companies in defending Sears and paying for any claims against Sears as well as
for the cost of any litigation against Sherman. The total amount of these lead
paint litigation related costs and claims could be significant. However, the
Company does not have a liability recorded with respect to these matters because
the liability that may result, if any, cannot be reasonably estimated at this
time.


Note 9 - Earnings per share:

Net income (loss) per share is based upon the weighted average number of
common shares and dilutive securities. A reconciliation of the numerators and
denominators used in the calculations of basic and diluted earnings per share
computations of income (loss) before cumulative effect of change in accounting
principle is presented below. The effect of the assumed conversion of the Series
A Convertible Preferred Stock was antidilutive in the three months ended June
30, 2002 period and the three and six month periods ended June 30, 2003. The
dilutive effect of the assumed conversion of the Series A Preferred Stock in the
six month ended June 30, 2002 period is calculated from its issuance in March
2002. Keystone stock options were omitted from the calculation because they were
antidilutive in all periods presented.








Three months ended Six months ended
June 30, June 30,
2002 2003 2002 2003
---- ---- ---- ----
(In thousands)

Numerator:
Net income (loss) before cumulative
effect of change in accounting

principle $ 2,004 $(6,162) $34,017 $(15,168)

Less Series A Preferred Stock
dividends (1,713) (1,485) (1,713) (2,970)
------- ------- ------- ---------
Basic net income (loss) before
cumulative effect of change in
accounting principle 291 (7,647) 32,304 (18,138)
Series A Preferred Stock dividends - - 1,713 -
------- ------- ------- --------

Diluted net income (loss) before
cumulative effect of change in
accounting principle $ 291 $(7,647) $34,017 $(18,138)
======= ======= ======= ========

Denominator:
Average common shares outstanding 10,068 10,068 10,066 10,068
Dilutive effect of Series A
Preferred Stock - - 7,425 -
------- ------- ------- -------

Diluted shares 10,068 10,068 17,491 10,068
======= ======= ======= =======


Note 10 - Subsequent events:

In July 2003, Garden Zone purchased Keystone's 51% ownership in Garden Zone
for approximately $1.1 million in cash. In addition, Garden Zone repaid a
$493,000 advance that had been made in a prior year, and Keystone was released
from its guarantee of 51% of Garden Zone's revolving credit facility. Keystone
expects to report a pre-tax gain of approximately $800,000 in the third quarter
as a result of this transaction.

In addition, during July 2003, Keystone discontinued substantially all
manufacturing operations at its Sherman of Caldwell Inc. ("Caldwell") facility
in Caldwell, Texas. Substantially all of Caldwell's equipment will be relocated
to other Keystone facilities and customers previously served from the Caldwell
facility will in the future be served by Keystone's facilities in Peoria,
Illinois and Sherman, Texas.






MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

OVERALL RESULTS OF OPERATIONS:

Keystone believes it is a leading manufacturer of steel fabricated wire
products, industrial wire and wire rod for the agricultural, industrial,
construction, original equipment manufacturer and retail consumer markets.
Historically, the Company has experienced greater sales and profits during the
first half of the year due to the seasonality of sales in principal wire
products markets, including the agricultural and construction markets. Keystone
is also engaged in the distribution of wire, plastic and wood lawn and garden
products to retailers through Garden Zone and in scrap recycling through ARC.

As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
including, but not limited to, statements found in this "Management's Discussion
And Analysis Of Financial Condition And Results Of Operations," are
forward-looking statements that represent management's beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as "believes", "intends", "may", "should",
"could", "anticipates," "expected" or comparable terminology, or by discussions
of strategies or trends. Although Keystone believes the expectations reflected
in such forward-looking statements are reasonable, it cannot give any assurances
that these expectations will prove to be correct. Such statements by their
nature involve substantial risks and uncertainties that could significantly
impact expected results, and actual future results could differ materially from
those described in such forward-looking statements. While it is not possible to
identify all factors, Keystone continues to face many risks and uncertainties.
Among the factors that could cause actual future results to differ materially
are the risks and uncertainties discussed in this Quarterly Report and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission including, but not limited to;

o Future supply and demand for the Company's products (including cyclicality
thereof),
o Customer inventory levels,
o Changes in raw material and other operating costs (such as ferrous scrap
and energy)
o General economic conditions,
o Competitive products and substitute products,
o Changes in customer and competitor strategies,
o The impact of pricing and production decisions,
o The possibility of labor disruptions,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government regulations and possible changes therein,
o Significant increases in the cost of providing medical coverage to
employees and retirees,
o The ultimate resolution of pending litigation,
o International trade policies of the United States and certain foreign
countries,
o Any possible future litigation, and
o Other risks and uncertainties as discussed in this Quarterly Report and the
Annual Report, including, without limitation, the section referenced above.

Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected.
Keystone disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.

The following table sets forth Keystone's steel and wire production,
ferrous scrap costs, sales volume and pricing data for the periods indicated.




Three months ended Six months ended
June 30, June 30,
2002 2003 2002 2003
---- ---- ---- ----
(Tons in thousands)

Production volume (tons):

Billets 209 167 384 338
Wire rod 192 166 374 332

Average per-ton ferrous scrap
purchase cost $ 93 $117 $ 88 $112

Sales volume(tons):
Fabricated wire products 85 72 159 139
Industrial wire 28 27 52 52
Wire rod 80 86 162 150
Billets - 8 - 11
---- ---- ---- ----

193 193 373 352
==== ==== ==== ====

Per-ton selling prices:
Fabricated wire products $689 $689 $691 $687
Industrial wire $447 $437 $446 $441
Wire rod $305 $315 $297 $309
Billets $ - $223 $ - $207
All steel and wire products $494 $467 $486 $474


The following table sets forth the components of the Company's net sales
for the periods indicated.



Three months ended Six months ended
June 30, June 30,
2002 2003 2002 2003
---- ---- ---- ----
(In millions)

Steel and wire products:

Fabricated wire products $58.4 $49.3 $110.1 $ 95.1
Industrial wire 12.3 12.0 23.4 22.8
Wire rod 24.6 27.2 48.0 46.2
Billets - 1.8 - 2.2
Other .4 .3 .6 .6
----- ----- ------ ------
95.7 90.6 182.1 166.9

Lawn and garden products 3.3 6.1 7.3 10.9
----- ----- ------ ------

$99.0 $96.7 $189.4 $177.8
===== ===== ====== ======







The following table sets forth selected operating data of the Company as a
percentage of net sales for the periods indicated.



Three months ended Six months ended
June 30, June 30,
-------------------- -----------------------
2002 2003 2002 2003
---- ---- ---- ----


Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 89.1 96.0 89.7 97.0
----- ----- ----- -----
Gross profit 10.9 % 4.0 % 10.3 % 3.0 %
===== ==== ===== ====

Selling expense 1.8 % 2.4 % 1.9 % 2.5 %
General and administrative expense 5.4 % 3.7 % 5.6 % 4.4 %
Defined benefit pension expense
(credit) (.8)% 1.8 % (.8)% 1.9 %
Corporate expense 1.5 % 1.1 % 1.2 % 1.3 %
Gain on early extinguishment of
debt - % - % (28.9)% - %

Income (loss) before income taxes
and cumulative effect of change in
accounting principle 2.1 % (6.1)% 29.5 % (8.3)%
Income tax provision - - 11.4 -
Minority interest in after-tax
earnings .1 .3 .1 .2
--- --- --- ---

Net income (loss) before cumulative
effect of change in accounting
principle 2.0 % (6.4)% 18.0 % (8.5)%
==== ===== ===== =====



Net sales of $96.7 million in the 2003 second quarter were down 2% from
$99.0 million during the same period in 2002. The decline in sales was due to a
$27 per-ton decline in steel and wire product selling prices partially offset by
a $2.8 million increase in Garden Zone's sales as Garden Zone increased its
market penetration. Shipments of wire rod increased 8% while per-ton selling
prices of wire rod increased 3%. Industrial wire shipments during the 2003
second quarter declined 4% from the 2002 quarter while per-ton selling prices
declined 2%. Fabricated wire product shipments declined 15% during the 2003
second quarter as compared to the 2002 second quarter while per-ton selling
prices declined 1%. In addition, during the second quarter of 2003, Keystone
sold 8,000 tons of billets as compared to none sold during the 2002 second
quarter. The lower per-ton selling price of the Company's steel and wire
products during the 2003 second quarter adversely impacted total net sales by
$5.2 million. Management believes the decline in shipment volume of wire
products during the 2003 second quarter was due to softening demand due in part
to prolonged winter weather throughout most of the United States and
uncertainties regarding military action in the Middle East. Although high levels
of imported steel and wire products continue, these import levels have been
somewhat mitigated by former competitors of the Company exiting the marketplace.
However, despite this decline in domestic production capacity, rod imports have
filled the resulting production shortfall and as such, per-ton selling prices
continue to be adversely impacted by the availability of high levels of imported
wire rod.

Net sales of $177.8 million in the first six months of 2003 were down 6%
from $189.4 million in the first six months of 2002. This decline in sales was
primarily due to a 6% decline in shipments of Keystone's steel and wire products
and a $12 per-ton decline in selling prices of the Company's steel and wire
products partially offset by a $3.6 million increase in Garden Zone's sales
during the first six months of 2003. Garden Zone's sales during the first six
months of 2003 amounted to $10.9 million as compared to $7.3 million during the
same period in 2002. Wire rod shipments during the first six months of 2003
declined 7% over the first six months of 2002 while per-ton selling prices
increased 4%. Industrial wire shipments during the first six months of 2003
approximated those of the first six months of 2002 while per-ton selling prices
declined 1%. Fabricated wire products shipments during the first six months of
2003 declined 13% as compared to the first six months of 2002 while per-ton
selling prices declined 1%. Despite increases in per-ton selling prices of wire
rod, overall average per-ton selling prices declined between the first six
months of 2002 and 2003 due to change in mix resulting from volume declines in
fabricated wire products. Management believes the decline in shipment volume
during the first six months of 2003 was due to large volumes of import product
and softening demand due in part to prolonged winter weather throughout most of
the United States and uncertainties regarding military action in the Middle East
during the first six months of 2003.

Billet production during the second quarter of 2003 decreased 42,000 tons
or 20% to 167,000 tons from 209,000 tons during the second quarter of 2002. The
primary reason for the lower production levels during the 2003 second quarter
was intentional production curtailments as a result of weakening demand and
excess inventory levels. Wire rod production during the second quarter of 2003
declined to 166,000 tons as compared to production of 192,000 tons in the 2002
second quarter, primarily as a result of the lower billet production during the
2003 second quarter.

The lower billet production during the first and second quarters of 2003 as
compared to the first two quarters of 2002 resulted in billet production during
the first six months of 2003 declining 46,000 tons to 338,000 tons from 384,000
tons during the first six months of 2002. Lower wire rod production during the
first and second quarters of 2003 as compared to the 2002 first and second
quarters resulted in a decline of 42,000 tons of wire rod produced during the
first six months of 2003 to 332,000 tons from 374,000 tons during the first six
months of 2002. The low wire rod production during the first six months of 2003
was due primarily to the lower billet production and unplanned production
outages during the 2003 first quarter to effect repairs to the Company's rod
mill.

Gross profit during the 2003 second quarter declined to $3.8 million from
$10.8 million in the 2002 second quarter as the Company's gross margin declined
from 10.9% in the 2002 period to 4.0% in the 2003 second quarter. This decline
in gross margin was due primarily to the lower overall average per-ton steel and
wire product selling prices and higher costs for ferrous scrap, Keystone's
primary raw material. The higher ferrous scrap costs during the 2003 second
quarter adversely impacted gross profit by $4.3 million. In addition, during the
2002 second quarter, Keystone received $400,000 of insurance proceeds from
business interruption policies related to incidents in prior years as compared
to none received during the 2003 second quarter.

Gross profit during the first six months of 2003 declined to $5.3 million
from $19.5 million in the first six months of 2002 as the Company's gross margin
declined from 10.3% to 3.0%. This decline in gross margin was due primarily to
lower overall average per-ton selling prices of the Company's steel and wire
products combined with substantially higher costs for ferrous scrap as well as
higher costs for natural gas all partially offset by increased production
efficiencies in the Company's steel and wire mills. The higher costs for ferrous
scrap and natural gas adversely impacted gross profit by $8.8 million and $2.3
million, respectively. In addition, during the first six months of 2002,
Keystone received $800,000 of insurance proceeds from business interruption
policies related to incidents in prior years as compared to none received during
the first six months of 2003.

Selling expense was $2.3 million during the second quarter of 2003 as
compared to $1.7 million during the 2002 second quarter. Selling expense of $4.5
million during the first six months of 2003 was approximately $960,000 higher
than the same period in 2002. The primary reasons for the increased selling
expenses during the 2003 periods were increased advertising costs and employee
related expenses.

General and administrative expenses during the 2003 second quarter declined
from $5.3 million in the 2002 second quarter to $3.6 million due primarily to
lower employee related and travel costs. Due to the decline in general and
administrative expenses during each of the first and second quarters of 2003 as
compared to the 2002 first and second quarters, general and administrative
expenses for the first six months of 2003 declined $2.7 million from $10.5
million in 2002 to $7.8 million in 2003.

During the second quarter of 2003, Keystone recorded defined benefit
pension expense of $1.7 million as opposed to a $750,000 credit recorded in the
first quarter of 2002. During the first six months of 2003, Keystone recorded
defined benefit pension expense of $3.4 million as opposed to a $1.5 million
credit recorded during the first six months of 2002. Keystone currently
anticipates the total 2003 pension expense will approximate $6.8 million. The
anticipated higher pension expense in 2003 is due primarily to a $50 million
decline in plan assets during 2002 and the resulting lower expected return on
plan assets component of defined benefit pension plan expense. However, the
Company does not anticipate cash contributions for defined benefit pension plans
will be required in 2003.

General corporate expenses during the second quarter of 2003 declined from
$1.5 million during the 2002 second quarter to $1.0 million. The primary reason
for this decline was due primarily to the higher legal and professional fees
during the 2002 second quarter. These legal and professional fees were related
primarily to the Company's debt restructuring completed in the 2002 first
quarter. General corporate expenses during the first six months of 2003 in the
amount of $2.3 million were relatively unchanged from the first six months of
2002.

Interest expense in the second quarter of 2003 was higher than the second
quarter of 2002 due principally to higher debt levels partially offset by lower
interest rates. Average borrowings by Keystone approximated $109.2 million in
the second quarter of 2003 as compared to $97.1 million in the second quarter of
2002. During the second quarter of 2003, Keystone's weighted-average interest
rate was 2.8% per annum as compared to 3.0% per annum in the second quarter of
2002.

Interest expense in the first half of 2003 was lower than the first half of
2002 due principally to lower debt levels and interest rates. Average borrowings
by Keystone approximated $106.3 million in the first half of 2003 as compared to
$116.5 million in the first half of 2002. During the first half of 2003,
Keystone's weighted-average interest rate was 2.8% per annum as compared to 5.8%
per annum in the first half of 2002.

As a result of the Company's debt restructuring completed in March 2002,
Keystone recognized a $54.7 million pre-tax gain ($33.1 million net of tax) in
the first half of 2002.

The principal reasons for the difference between the U.S. federal statutory
income tax rate and the Company's effective income tax rates are explained in
Note 5 to the Consolidated Financial Statements. At June 30, 2003, the Company
had recorded a deferred tax asset valuation allowance of $92.1 million resulting
in no net deferred tax assets. Keystone periodically reviews the recoverability
of its deferred tax assets to determine whether such assets meet the
"more-likely-than-not" recognition criteria. The Company will continue to review
the recoverability of its deferred tax assets, and based on such periodic
reviews, Keystone could recognize a change in the recorded valuation allowance
related to its deferred tax assets in the future. As a result of the deferred
tax asset valuation allowance, the Company does not anticipate recognizing a tax
benefit associated with its expected pre-tax losses during 2003 will be
appropriate.

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. As
a result of adopting SFAS No. 142, negative goodwill of approximately $20.0
million recorded at December 31, 2001 was eliminated as a cumulative effect of
change in accounting principle.

As a result of the items discussed above, Keystone recorded a net loss
during the second quarter of 2003 of $6.2 million as compared to net income of
$2.0 million in the second quarter of 2002, and a net loss during the first half
of 2003 of $15.2 million as compared to net income in the first half of 2002 of
$54.0 million.

SEGMENT RESULTS OF OPERATIONS:

Keystone's operating segments are defined as components of consolidated
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is Mr. David L. Cheek, President and Chief Executive Officer of
Keystone. Each operating segment is separately managed, and each operating
segment represents a strategic business unit offering different products. During
2003, the Company expanded the composition of its reportable segments. The
corresponding segment information for prior periods has been restated to conform
to the current year presentation. See Note 2 to the Consolidated Financial
Statements.

The Company's operating segments are organized along its manufacturing
facilities and include three reportable segments: (i) Keystone Steel and Wire
("KSW") which manufacturers and sells wire rod, wire and wire products for
agricultural, industrial, construction, commercial, original equipment
manufacturers and retail consumer markets, (ii) Engineered Wire Products ("EWP")
which manufactures and sells welded wire reinforcement in both roll and sheet
form that is utilized in concrete construction products including pipe, pre-cast
boxes and applications for use in roadways, buildings and bridges, and (iii)
Garden Zone which distributes wire, plastic and wood lawn and garden products to
retailers. Keystone owns 51% of Garden Zone. In July 2003, Keystone sold its 51%
ownership in Garden Zone. See Note 10 to the Consolidated Financial Statements.
Keystone also operates three businesses that do not constitute reportable
business segments. These businesses sell wire and wire products for
agricultural, industrial, construction, commercial, original manufacturers and
retail consumer markets. The results of operations of these businesses are
aggregated and included under the "All Other" heading in the following tables.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies except that (i) defined benefit
pension expense for each segment is recognized and measured on the basis of
estimated current service cost of each segment, with the remainder of the
Company's net defined benefit pension expense or credit not allocated to each
segment but still is reported as part of operating profit or loss, (ii) segment
OPEB expense is recognized and measured based on the basis of the estimated
expense of each segment, with the remainder of the Company's actual OPEB expense
not allocated to each segment but still is reported as part of operating profit
or loss, (iii) elimination of intercompany profit or loss on ending inventory
balances is not allocated to each segment but still is reported as part of
operating profit or loss, (iv) LIFO inventory reserve adjustments are not
allocated to each segment but still are reported as a part of operating profit
or loss, and (v) amortization of goodwill and negative goodwill are included in
general corporate expenses and are not allocated to any segment and are not
included in total reported operating profit or loss. General corporate expense
also includes OPEB and environmental expense relative to facilities no longer
owned by the Company. Intercompany sales between reportable segments are
generally recorded at prices that approximate market prices to third-party
customers.



Principal
Business Segment entities Location Products


Keystone Steel & Wire Keystone Steel & Wire Peoria, IL Billets, wire rod, industrial
wire and fabricated wire products

Engineered Wire Products Engineered Wire Products Upper Sandusky, Fabricated wire products
OH

Garden Zone Garden Zone Charleston, SC Wire, wood and plastic lawn and
garden products

All Other Sherman Wire Sherman, TX Industrial wire and fabricated
wire products
Sherman Wire of Caldwell Caldwell, TX Industrial wire and fabricated
wire products
Keystone Fasteners Springdale, AR Fabricated wire products





Three months ended Six months ended
June 30, June 30,
-------------------------- ----------------------------
2002 2003 2002 2003
---- ---- ---- ----
(In thousands)

Revenues:

Keystone Steel and Wire $ 84,728 $ 84,159 $162,686 $158,103
Engineered Wire Products 9,310 9,844 15,222 15,294
Garden Zone 3,794 6,224 8,134 11,711
All other 13,401 9,292 26,302 19,565

Elimination of intersegment
revenues (12,228) (12,770) (22,898) (26,835)
-------- -------- -------- --------

$ 99,005 $ 96,749 $189,446 $177,838
======== ======== ======== ========

Operating profit (loss):
Keystone Steel and Wire $ 3,334 $ (3,295) $ 4,693 $ (8,699)
Engineered Wire Products 1,111 951 1,490 1,157
Garden Zone 248 670 604 758
All Other (507) (1,303) (953) (1,860)
GAAP adjustments and eliminations 316 (821) 1,113 (1,862)
-------- -------- -------- --------

$ 4,502 $ (3,798) $ 6,947 $(10,506)
======== ======== ======== ========



Keystone Steel & Wire

KSW's 2003 second quarter net sales of $84.2 million declined approximately
$600,000, or 1%, from the same period during 2002 due primarily to lower
shipment volumes. During the 2003 second quarter, KSW sold 1,000 less tons of
product than the 2002 second quarter. KSW's per-ton product selling prices
during the 2003 second quarter approximated the per-ton selling prices of the
2002 second quarter. During the first six months of 2003, KSW's net sales of
$158.1 declined $4.6 million or 3%, from the first six months of 2002 due
primarily to lower shipment volumes partially offset by higher product per-ton
selling prices. During the first six months of 2003, KSW sold 16,000 less tons
of product than the first six months of 2002 at per-ton selling prices that were
2% higher than the same period in 2002. During both the three and six month
periods ended June 30, 2003, approximately 11% of KSW's net sales were made to
other Keystone entities. The majority of these sales were sales of wire rod.

During the second quarter of 2003, KSW recorded a $3.3 million operating
loss as compared to $3.3 million of operating income recorded during the 2002
second quarter due primarily to the lower selling prices and higher ferrous
scrap and natural gas costs during the 2003 second quarter. In addition, during
the 2002 second quarter, KSW received $400,000 of insurance proceeds from
business interruption policies related to incidents in prior years as compared
to none received during the 2003 second quarter. KSW recorded an $8.7 million
operating loss during the first six months of 2003 as compared to $4.7 million
of operating income recorded during the first six months of 2002 due primarily
to the lower selling prices and higher ferrous scrap and natural gas costs
during the 2003 second quarter all partially offset by increased production
efficiencies in KSW's steel and wire mills. In addition, during the first six
months of 2002, KSW received $800,000 of insurance proceeds from business
interruption policies related to incidents in prior years as compared to none
received in the same period during 2003.

Engineered Wire Products

EWP's sales of $9.8 million during the second quarter of 2003 were
approximately 6% higher than sales during the second quarter of 2002 of $9.3
million due primarily to higher shipment volume as well as higher per-ton
product selling prices. EWP's shipment volume during the 2003 second quarter
increased 3% over the same quarter in 2002 and per-ton product selling prices
also increased 3%. EWP's sales of $15.3 million during the first six months of
2003 approximated EWP's sales during the first six months of 2003 of $15.2
million as a 2% decline in shipment volume was offset by a 2% increase in
per-ton product selling prices.

Despite increased sales by EWP during the 2003 periods as compared to the
same periods in 2002, operating income during the second quarter of 2003
declined by $160,000 to $951,000 and operating income during the first six
months of 2003 declined by $333,000 to $1.1 million. The primary reasons for the
decline in EWP's operating income levels during the 2003 periods as compared to
the 2002 periods is an increase in the cost of wire rod, EWP's primary raw
material. EWP purchases substantially all of its wire rod requirements from KSW.

Garden Zone

Garden Zone's net sales during the three months ended June 30, 2003
increased to $6.2 million as compared to $3.8 million during the second quarter
of 2002 and during the first six months of 2003 increased to $11.7 million as
compared to $8.1 million during the first six months of 2002. The primary reason
for these increased sales in both periods were increased market penetration by
Garden Zone. These increased sales levels resulted in an increase in operating
income during the 2003 periods as compared to the 2002 periods. Garden Zone
recorded operating income of $670,000 during the second quarter of 2003 as
compared to $248,000 during the 2002 second quarter and Garden Zone recorded
operating income of $758,000 during the first six months of 2003 as compared to
$604,000 during the first six months of 2002.






All Other

During the second quarter of 2003, these three locations recorded net sales
of approximately $9.3 million as compared to $13.4 million during the second
quarter of 2002. During the first six months of 2003, these three locations
recorded net sales of $19.6 million as compared to $26.3 million during the
first six months of 2002. The primary reason for the decline in sales during the
2003 periods was lower shipment volumes and lower per-ton product selling
prices. During the second quarter of 2003 and the first six months of 2003,
shipment volume declined 31% and 21%, respectively from the same periods in 2002
due primarily to lower volume at the Sherman Wire of Caldwell facility. In
addition, shipment volume at Keystone Fasteners during the 2003 periods were
also down significantly from the same periods during 2002 due primarily to
increased competition from import producers. In prior periods, the Sherman Wire
of Caldwell facility provided substantially all of Keystone Fastener's
industrial wire requirements. During 2003, the Company began transitioning the
manufacturing of Keystone Fastener's industrial wire to other Keystone
facilities. See Note 10 to the Consolidated Financial Statements. The per-ton
product selling prices for these locations during the 2003 second quarter and
the first six months of 2003 declined by 9% and 6%, respectively from the same
periods during 2002. Keystone Fasteners purchases substantially all of its
industrial wire requirements, their primary raw material, from either Sherman
Wire or Sherman Wire of Caldwell, Inc.

During the second quarter of 2003, these three locations recorded an
operating loss of $1.3 million as compared to a $507,000 operating loss during
the 2002 second quarter and during the first six months of 2003, these three
locations recorded an operating loss of $1.9 million as compared to a $953,000
loss during the first six months of 2002. The primary reason for the increased
operating losses during the 2003 periods was the lower volume and overall
per-ton product selling prices and higher cost for wire rod. These locations
purchase substantially all of their wire rod requirements from KSW.

GAAP adjustments and eliminations in the above table consisted primarily of
adjustments to reflect the difference between the defined benefit pension
expense or credit and OPEB expense allocated to the segments and the actual
expense or credit included in the determination of operating profit or loss.
GAAP adjustments and eliminations included a defined benefit pension credit of
$1.6 million during the three months ended June 30, 2002 and defined benefit
pension expense of $926,000 during the three months ended June 30, 2003. GAAP
adjustments and eliminations included a defined benefit pension credit of $3.1
million during the six months ended June 30, 2002 and defined benefit pension
expense of $1.9 million during the six months ended June 30, 2003. During the
three month and six month periods ended June 30, 2002, GAAP adjustments and
eliminations included OPEB expense of $1.1 million and $2.2 million,
respectively. GAAP adjustments and eliminations did not include any OPEB expense
during the 2003 periods.

Outlook for 2003

Due to continued high levels of steel and wire product imports, management
currently believes capacity utilization and shipment volumes in 2003 will be
less than 2002 levels and overall average per-ton selling prices for the year
2003 will be less than those of 2002. In addition, management currently believes
these volumes and overall average per-ton selling prices combined with
anticipated continued higher energy costs, higher scrap costs and an $8.4
million increase in defined benefit pension expense will result in Keystone
recording a loss before income taxes and cumulative effect of change in
accounting principle for calendar 2003 in excess of the comparable amount in
2002 (exclusive of the $54.7 million gain in 2002 on early extinguishment of
debt). The Company does not currently anticipate that recognizing a tax benefit
associated with its pre-tax losses during 2003 will be appropriate.





LIQUIDITY AND CAPITAL RESOURCES:

The Company's cash flows from operating activities are affected by the
seasonality of its business as sales of certain products used in the
agricultural and construction industries are typically highest during the second
quarter and lowest during the fourth quarter of each year. These seasonal
fluctuations impact the timing of production, sales and purchases and have
typically resulted in a use of cash from operations and increases in the
outstanding balance under the Company's revolving credit facilities during the
first quarter of each year.

At June 30, 2003 Keystone had negative working capital of $79.4 million,
including $2.6 million of notes payable and current maturities of long-term
debt, $30.0 million of long-term debt classified as current as a result of the
Company's failure to comply with certain financial covenants in the Keystone
Revolver as well as outstanding borrowings under the Company's revolving credit
facilities of $45.1 million. The outstanding borrowings under Keystone's
revolving credit facilities at June 30, 2003 include $3.1 million outstanding
under Garden Zone's revolving credit facility. In July 2003, Keystone sold its
51% interest in Garden Zone. See Note 10 to the Consolidated Financial
Statements. The amount of available borrowings under these revolving credit
facilities is based on formula-determined amounts of trade receivables and
inventories, less the amount of outstanding letters of credit. At June 30, 2003,
unused credit available for borrowing under Keystone's $45 million revolving
credit facility (the "Keystone Revolver"), which expires in March 2005 and EWP's
$7 million revolving credit facility, which expires in June 2004, (the "EWP
Revolver") were $4.5 million and $2.9 million, respectively. The Keystone
Revolver requires daily cash receipts be used to reduce outstanding borrowings,
which results in the Company maintaining zero cash balances when there are
balances outstanding under this credit facility. A wholly-owned subsidiary of
Contran has agreed to loan Keystone up to an aggregate of $6 million under the
terms of a revolving credit facility that matures on August 31, 2003. Through
August 13, 2003, the Company had not borrowed any amounts under such facility.

During the first six months of 2003, notes and accounts receivable
increased by $21.0 million and inventories declined by $10.1 million. These
changes in accounts receivable and inventory balances from December 31, 2002 to
June 20, 2003 are consistent with trends in prior years. The Company's business
is highly seasonal due to Keystone's principal wire products markets, including
the agricultural and construction markets. As a result of this seasonality, the
Company must typically build inventory levels during the first and fourth
quarters of each year in order to serve its customers thoughout the peak selling
season that generally lasts through May of each year. During the second quarter
of each year, these high inventory levels are reduced as the inventory is
converted to sales and there is a corresponding seasonal increase in accounts
receivable balances.

Keystone's total debt balances during the first six months of 2003
increased by $12.7 million. The Company's operations used $11.4 million of cash,
including the net use of $10.9 million related to accounts receivables and
inventories discussed above, capital expenditures amounted to $1.5 million and
Keystone made principal payments of $1.1 million on long-term debt. These uses
of cash resulted in an increase of $13.7 million in borrowings under the
Company's revolving credit facilities.

During the first half of 2003, Keystone made capital expenditures of $1.5
million as compared to $3.3 million in the first half of 2002. Capital
expenditures for calendar year 2003 are currently estimated to be approximately
$3.0 million and are related primarily to upgrades of production equipment.
Keystone currently anticipates these capital expenditures will be funded using
cash flows from operations together with borrowing availability under the
Company's credit facilities.

See Notes 7 and 8 to the Consolidated Financial Statements for discussions
of the Company's environmental liabilities and current litigation.

The Company periodically reviews the recoverability of its deferred tax
assets to determine whether such assets meet the "more-likely-than-not"
recognition criteria. At June 30, 2003, the Company expects that its long-term
profitability should ultimately be sufficient to enable it to realize full
benefit of its future tax deductions. Although, considering all factors believed
to be relevant, including the Company's recent operating results, its expected
future near-term productivity rates; cost of raw materials, electricity, labor
and employee benefits, environmental remediation, and retiree medical coverage;
interest rates; product mix; sales volumes and selling prices and the fact that
accrued OPEB expenses will become deductible over an extended period of time and
require the Company to generate significant amounts of future taxable income,
the Company believes the gross deferred tax assets may not currently meet the
"more-likely-than-not" realizability test. As such, at June 30, 2003 the Company
has a deferred tax asset valuation allowance of approximately $92.1 million. The
Company will continue to review the recoverability of its deferred tax assets,
and based on such periodic reviews, the Company could change the valuation
allowance related to its deferred tax assets in the future. The Company does not
currently expect it will be appropriate to recognize a tax benefit associated
with its expected pre-tax losses during 2003.

Keystone incurs significant ongoing costs for plant and equipment and
substantial employee medical benefits for both current and retired employees. As
such, Keystone is vulnerable to business downturns and increases in costs, and
accordingly, routinely compares its liquidity requirements and capital needs
against its estimated future operating cash flows. In addition to planned
reductions in fixed costs and announced increases in certain product selling
prices, Keystone is taking additional action towards improving its liquidity.
These actions include, but are not limited to, reducing inventory levels through
more efficient production schedules and modifying coverages and participant
contribution levels of medical plans for both employees and retirees. Keystone
has also considered, and may in the future consider, the sale of certain
divisions or subsidiaries that are not necessary to achieve the Company's
long-term business objectives. However, there can be no assurance Keystone will
be successful in any of these or other efforts, or that if successful, they will
provide sufficient liquidity for the Company's operations during the next year.

At June 30, 2003, Keystone was not in compliance with certain financial
covenants included in the Keystone Revolver. Under the terms of the Keystone
Revolver, failure to comply with these covenants is considered an event of
default and gives the lender the right to accelerate the maturity of both the
Keystone Revolver and the Keystone Term Loan. The Company is currently
negotiating with the Keystone Revolver and Keystone Term Loan lender to obtain
waivers of such financial covenants or otherwise amend the respective loan
agreements to cure the defaults. There can be no assurance Keystone will be
successful in obtaining such waivers or amendments, and if Keystone is
unsuccessful, there is no assurance the Company would have the liquidity or
other financial resources sufficient to repay the Keystone Revolver and the
Keystone Term Loan if such indebtedness is accelerated. The indenture governing
Keystone's 8% Notes provides the holders of such Notes with the right to
accelerate the maturity of the Notes in the event of a default by Keystone
resulting in acceleration of the maturity of any of the Company's other secured
debt.






Management currently believes funds available under the Company's credit
facilities will be sufficient to fund the anticipated needs of the Company's
operations and capital improvements for the year ending December 31, 2003. This
belief is based upon management's assessment of various financial and
operational factors, including, but not limited to, assumptions relating to
product shipments, product mix and selling prices, production schedules,
productivity rates, raw materials, electricity, labor, employee benefits and
other fixed and variable costs, interest rates, repayments of long-term debt,
capital expenditures, and available borrowings under the Company's credit
facilities. However, there are many factors that could cause actual future
results to differ materially from management's current assessment, as discussed
above, and actual results could differ materially from those forecasted or
expected which could materially adversely effect the future liquidity, financial
condition and results of operations of the Company. Additionally, significant
declines in the Company's end-user markets or market share, the inability to
maintain satisfactory billet and wire rod production levels, or other
unanticipated costs, if significant, could result in a need for funds greater
than the Company currently has available. There can be no assurance the Company
would be able to obtain an adequate amount of additional financing. See Notes 13
and 15 to the Consolidated Financial Statements in the Annual Report.






ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission ("SEC"), means controls and other procedures
that are designed to ensure that information required to be disclosed in the
reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of David L. Cheek, the Company's
President and Chief Executive Officer, and Bert E. Downing, Jr., the Company's
Vice President, Chief Financial Officer, Corporate Controller and Treasurer,
have evaluated the Company's disclosure controls and procedures as of June 30,
2003. Based upon their evaluation, these executive officers have concluded that
the Company's disclosure controls and procedures are effective as of the date of
such evaluation.

The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America ("GAAP)", and
includes those policies and procedures that:


o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.

There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended June 30, 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.







PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Reference is made to disclosure provided under the caption "Current
litigation" in Notes 7 and 8 to the Consolidated Financial Statements.


ITEM 6. Exhibits and Reports on Form 8-K

(a) The Company has retained a signed original of any exhibit listed below that
contains signatures, and the Company will provide any such exhibit to the
Commission or its staff upon request. The following exhibit is included
herein:

4.1 Third Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of June 30, 2003, by and between Registrant and EWP Financial
LLC.

4.2 Fourth Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of July 31, 2003, by and between Registrant and EWP Financial
LLC.

31.1 Chief Executive Officer's Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

31.2 Chief Financial Officer's Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

32.1 Chief Executive and Chief Financial Officers' Certification Pursuant
to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K filed during the quarter ended June 30, 2003:

None.






S I G N A T U R E S



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.


Keystone Consolidated Industries, Inc.
(Registrant)



Date: August 19, 2003 By /s/Bert E. Downing, Jr.
-------------------------------------
Bert E. Downing, Jr.
Vice President, Chief Financial
Officer, Corporate Controller
and Treasurer
(Principal Financial and Accounting
Officer)