<PAGE>
                                                                               .
                                                                               .
                                                                               .

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

<Table>
<C>        <S>
   [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934

           FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

   [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</Table>

                        COMMISSION FILE NUMBER 33-29035

                             K & F INDUSTRIES, INC.
             (Exact name of registrant as specified in its charter)

<Table>
<S>                                            <C>
                   DELAWARE                                      34-1614845
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                     Identification Number)

              600 THIRD AVENUE,                                    10016
                 NEW YORK, NY                                    (Zip Code)
   (Address of principal executive offices)
</Table>

              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 (212) 297-0900

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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

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

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b.2).  Yes [ ]     No [X]

     There is no trading market for the registrant's common stock and none of
the registrant's common stock is held by non-affiliates of the registrant. As of
March 1, 2004, there were 740,398 shares of common stock outstanding.

                   DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>

                             K & F INDUSTRIES, INC.

                                   FORM 10-K
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

                               TABLE OF CONTENTS

<Table>
<Caption>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
                                   PART I
Item 1.   Business....................................................    1
Item 2.   Properties..................................................    7
Item 3.   Legal Proceedings...........................................    8
Item 4.   Submission of Matters to a Vote of Security Holders.........    8

                                  PART II
Item 5.   Market for Registrant's Common Equity and Related
          Stockholder Matters and Issuer Purchases of Equity
          Securities..................................................    8
Item 6.   Selected Financial Data.....................................    9
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................   10
Item 7A.  Quantitative and Qualitative Disclosures About Market
          Risk........................................................   17
Item 8.   Financial Statements and Supplementary Data.................   17
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................   17
Item 9A.  Controls and Procedures.....................................   17

                                  PART III
Item 10.  Directors and Executive Officers of the Registrant..........   18
Item 11.  Executive Compensation......................................   22
Item 12.  Security Ownership and Certain Beneficial Owners and
          Management and Related Stockholder Matters..................   25
Item 13.  Certain Relationships and Related Transactions..............   27
Item 14.  Principal Accountant Fees and Services......................   28

                                  PART IV
Item 15.  Exhibits, Financial Statement Schedules and Reports on Form
          8-K.........................................................   29
Index to Exhibits.....................................................   29
Signatures............................................................   32
</Table>

                                        i
<PAGE>

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including, without limitation, the statements
under , "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business." The words "believes," "anticipates," "plans,"
"expects," "intends," "estimates" and similar expressions are intended to
identify forward-looking statements. These forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance and achievements, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements.

     All forward-looking statements included in this Annual Report on Form 10-K
are based on information available to us on the date of this Annual Report. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained throughout this Annual Report.

                                        ii
<PAGE>

                                     PART I

ITEM I.  BUSINESS

     We sell our products to a wide range of major airframe manufacturers,
commercial airlines and replacement part distributors and to the United States
and certain foreign governments. We are, through our wholly-owned subsidiary,
Aircraft Braking Systems Corporation, or Aircraft Braking Systems, one of the
world's leading manufacturers of aircraft wheels, brakes and brake control
systems for commercial transport, military and general aviation aircraft. During
the year ended December 31, 2003, approximately 84% of our total revenues were
derived from sales made by Aircraft Braking Systems. In addition, we believe we
are, through our wholly-owned subsidiary, Engineered Fabrics Corporation, or
Engineered Fabrics, the leading worldwide manufacturer of aircraft fuel tanks,
supplying approximately 80% of the worldwide general aviation and commercial
transport markets and over 50% of the domestic military market for those
products. Engineered Fabrics also manufactures and sells iceguards and specialty
coated fabrics with storage, shipping, environmental and rescue applications for
military and commercial uses. During the year ended December 31, 2003,
approximately 16% of our total revenues were derived from sales made by
Engineered Fabrics.

     Aircraft Braking Systems has been a leader in the design and development of
aircraft wheels, brakes and brake control systems, investing significant
resources to refine existing braking systems, develop new technologies and
design braking systems for new airframes. We have carefully directed our efforts
toward expanding Aircraft Braking Systems' presence in each of the commercial
transport, military and general aviation segments of the aircraft industry.

     We were incorporated in Delaware on March 13, 1989.

THE AIRCRAFT WHEEL AND BRAKE INDUSTRY

     Aircraft manufacturers are required to obtain regulatory airworthiness
certification of their commercial aircraft by the FAA, by the United States
Department of Defense in the case of military aircraft, or by similar agencies
in most foreign countries. This process, which is both costly and time
consuming, involves testing the entire airframe, including the wheels, brakes
and brake control system, to demonstrate that the airframe in operation complies
with relevant governmental requirements for safety and performance. Generally,
replacement parts for a wheel and brake system which has been certified for use
on an airframe may only be provided by the original manufacturer of such wheel
and brake system. Since most modern aircraft have a useful life of 25 years or
more and require replacement of certain components of the braking system at
regular intervals (which for medium- and short-range commercial aircraft
generally averages once or twice a year), sales of replacement parts are
expected to provide a long and steady source of revenues for the manufacturer of
the braking system.

     Due to the cost and time commitment associated with the aircraft
certification process, competition among aircraft wheel and brake suppliers most
often occurs at the time the airframe manufacturer makes its initial
installation decision. Generally, competing suppliers submit proposals in
response to requests for bids from manufacturers, although in recent years,
Aircraft Braking Systems has occasionally teamed with landing gear manufacturers
to respond to requests for proposals for a complete or "dressed" landing gear
system. Selections are made by the manufacturer on the basis of technological
superiority, conformity to design criteria established by the manufacturer and
pricing considerations. Typically, general aviation aircraft and military
manufacturers will select one supplier of wheels and brakes for a particular
aircraft. In the commercial transport market, however, there will often be "dual
sourcing" of wheels and brakes. In that case, an airframe manufacturer may
approve and receive FAA certification to configure a particular airframe with
equipment provided by two or more wheel and brake manufacturers. Generally,
where more than one supplier has been certified, the aircraft customer, such as
a major airline, will designate the original equipment to be installed on its
aircraft. Competition among certified suppliers for that airline's initial
installation decision generally focuses on such factors as the system's
"cost-per-landing," given certain assumptions concerning the frequency of
replacements required and the impact that the weight of the system has on the
airline's ability to

                                        1
<PAGE>

load the aircraft with passengers, freight or fuel, and the technical operating
performance characteristics of the wheel and brake systems. Once selected,
airlines infrequently replace entire wheel and brake systems.

     In accordance with industry practice in the commercial aviation industry,
aircraft wheel and brake suppliers customarily sell original wheel and brake
assemblies below cost in order to win selection of their products by airframe
manufacturers and airlines. These investments are typically recouped through the
sale of replacement parts. Recovery of original equipment investments and design
costs for each airframe's wheels and brakes is contingent on a number of factors
but occurs prior to the end of the useful life of the particular aircraft. Price
concessions on original wheel and brake equipment are not customary in the
military market. Although manufacturers of military aircraft generally select
only one supplier of wheels and brakes for each model, the government has
approved at times the purchase of specific component replacement parts from
suppliers other than the original supplier of the wheel and brake system.

     The following table illustrates the lifecycle of a typical commercial
aircraft program.

<Table>
<Caption>
                              PROGRAM LIFECYCLE STAGES
-------------------------------------------------------------------------------------
 STAGE OF
 LIFECYCLE      DURATION
 ---------      --------                          CHARACTERISTICS
<S>            <C>            <C>
DEVELOPMENT    2-4 years      - Time period up through certification
                              - Design and development
                              - No revenues generated
                              - Planes certified
GROWTH         8-15 years     - Planes delivered
                              - Investing in original equipment (cash outflows)
                              - Cash inflows from replacement parts
MATURE         10-20 years    - Most lucrative stage
                              - Full program fleet in flight, but program no longer
                              in production
                              - No program investments
                              - Cash inflows from replacement parts
DECLINE        10-15 years    - Planes in fleet gradually taken out of service
</Table>

BUSINESS STRATEGY

     Commercial Transport.  Aircraft Braking Systems has directed its efforts
toward expanding its presence on high-cycle, medium- and short-range commercial
aircraft. These aircraft typically make more frequent landings than long-range
commercial aircraft and require more frequent replacement of wheels and brakes.
As a result, we believe that Aircraft Braking Systems has become the largest
supplier of wheel and brake parts for these planes, adding approximately 2,100
medium- and short-range commercial aircraft to the portfolio of aircraft using
its products. We believe that this strategy has been successful, because more
and more passengers are demanding non-stop service to the destination of their
choice, with more frequent departure times. This increase in point-to-point
service has resulted in fewer connecting flights but more frequent service from
smaller, local airports. Following the events of September 11, 2001, major
airlines became increasingly dependent on lower-cost regional aircraft, further
accelerating point-to-point geographical coverage, even as the major airlines
reduced capacity overall by grounding some planes and eliminating some flights.

     Military.  We will continue to try to increase our leadership in the
military sector. The 2004 U.S. defense budget for aircraft procurement is
approximately $23.0 billion. This emphasis on defense spending is expected to
benefit the fleet of more than 11,000 military aircraft already in Aircraft
Braking Systems' portfolio through replenishment, upgrades and modernization
activities and may lead to additional military program opportunities. In
addition, Engineered Fabrics is expected to benefit from this renewed emphasis
as more than 70% of its revenues for the year ended December 31, 2003 were
attributable to U.S. military sales.

                                        2
<PAGE>

     General Aviation.  We will continue to focus our efforts on high-end
business and executive jet platforms within the general aviation sector. We
expect further utilization of aircraft within this sector through the increased
use of "fractional" ownership programs, which allow multiple parties to share in
the ownership of an aircraft through such forms as memberships and limited
partnerships. Business jet utilization should also benefit from the perception
of greater safety, as well as the convenience of easier security checks. We
believe that Aircraft Braking Systems already provides braking equipment for
more than 50% of the business jets in the worldwide general aviation fleet.

PRODUCTS

     Aircraft Braking Systems.  Aircraft Braking Systems is one of the world's
leading manufacturers of wheels, brakes and brake control systems for commercial
transport, military and general aviation aircraft. The braking systems produced
by Aircraft Braking Systems are either carbon-based or steel-based. While steel-
based systems typically are sold for less than carbon-based systems, these
systems generally require more frequent replacement because their steel brake
pads tend to wear more quickly. More than 75% of Aircraft Braking Systems'
revenues are derived from the sale of replacement parts.

     As of December 31, 2003, Aircraft Braking Systems' products were installed
on over 27,000 commercial transport, military and general aviation aircraft.
Current fleets of commercial transport aircraft include the DC-9, DC-10, Fokker
FO-100/70, Fokker F-27/28, Fokker F-50/60, Fairchild Dornier DO-228, Bombardier
CRJ-100/200 and CRJ-700, Saab 340 and Saab 2000, for all of which Aircraft
Braking Systems is the sole certified supplier. In addition, Aircraft Braking
Systems is a supplier of spare parts for the dual-sourced MD-80 program.

     Aircraft Braking Systems' wheels and brakes have been selected for use on a
number of high-cycle airframe designs including the Airbus A-320, A-321 and the
MD-80 Series. Aircraft Braking Systems is also the sole certified supplier for
the Boeing MD-90 and Bombardier's CRJ-100/200, CRJ-440, CRJ-700 and CRJ-900
regional jets. Since its introduction in late 1992, Bombardier has received firm
orders for approximately 1,300 Canadair Regional Jets with approximately 1,000
aircraft currently in service. In addition, Aircraft Braking Systems is the sole
certified supplier of wheels and carbon brakes for the Embraer 170, 175, 190 and
195 aircraft, a family of regional jets entering service in 2004.

     Some of the military platforms using wheels and brakes supplied by Aircraft
Braking Systems are the F-14 and F-16 fighters, the B-1B bomber and the C-130
transport. We supply the wheels, brakes and brake control systems on the Korean
Aerospace T-50 Trainer. In general aviation, we have been selected to supply the
wheels and brakes for the new Dassault Falcon 7X business jet, and we supply
wheels and brakes for such general aviation aircraft in production as the
Raytheon Hawker 400XP, the Dassault Falcon 900EX EASy, the Gulfstream G100, G200
and G450 and the Learjet 60.

     Aircraft Braking Systems' brake control systems, which are integrated into
the total braking system, are designed to minimize the distance required to stop
an aircraft by controlling applied brake pressure to maximize the braking force
while also preventing the wheels from locking and skidding. Because of the
sensitivity of brake control systems to variations in brake performance, our
management believes that our total braking system integration capability gives
Aircraft Braking Systems a competitive advantage over our two largest
competitors, Honeywell's Aircraft Landing Systems Division and Goodrich
Corporation. Other products manufactured by Aircraft Braking Systems include
helicopter rotor brakes and brake temperature monitoring equipment for various
types of aircraft.

     A large part of Aircraft Braking Systems' existing programs are in the
mature stage. This is favorable to us because our investments to establish these
programs are completed, resulting in cash inflows from the sale of replacement
parts. Additionally, programs in the growth stage should provide stability and
substantial cash flow in the future, offsetting the loss of revenues from
programs in the declining stage.

     Engineered Fabrics.  We believe Engineered Fabrics is the leading worldwide
manufacturer of flexible bladder type fuel tanks for aircraft, serving
approximately 80% of the worldwide commercial transport and general aviation
markets and over 50% of the domestic military market for those products.
Engineered

                                        3
<PAGE>

Fabrics' programs include fixed-wing aircraft fuel tank programs for the U.S.
Navy's F-18 C/D and E/F aircraft and F-14, F-15, F-16, C-130, KC-10 and KC-135
aircraft. Military helicopter fuel tank programs include the UH-60, SH-60,
CH/MH-53 and RAH-66 platforms with Sikorsky, the CH-47 with Boeing and the V-22
with Bell/Boeing. Commercial helicopter applications include the MD-500 and
MD-600 and the Bell 214-ST. Many of these platforms also utilize Engineered
Fabrics' iceguards for deicing and anti-icing of the rotor blades and inlets.

     Bladder fuel tanks, manufactured by combining multiple layers of coated
fabrics and adhesives, are sold for use in commercial transport, military and
general aviation aircraft. During the year ended December 31, 2003, sales of
fuel tanks accounted for approximately 72% of Engineered Fabrics' total
revenues. For military helicopter applications, Engineered Fabrics' fuel tanks
feature encapsulated layers of rubber which expand in contact with fuel, thereby
sealing off holes or gashes caused by bullets or other projectiles penetrating
the walls of the fuel tank. Engineered Fabrics manufactures crash-resistant fuel
tanks for helicopters and military aircraft that significantly reduce the
potential for fires, leaks and spilled fuel following a crash. Engineered
Fabrics is the only known domestic supplier of polyurethane fuel tanks for
aircraft, which are substantially lighter and more flexible than their metal or
nitrile counterparts, and are therefore cost-advantageous.

     Iceguards manufactured by Engineered Fabrics are heating systems made from
layered composite materials that are applied on engine inlets, propellers, rotor
blades and tail assemblies. Encapsulated in the material are heating elements
which are connected to the electrical system of the aircraft and, when activated
by the pilot, the system provides anti-icing protection when in flight.

     Engineered Fabrics also produces a variety of products utilizing coated
fabrics such as oil containment booms, towable storage bladders, heavy lift bags
and pillow tanks. Oil containment booms are air-inflated cylinders that are used
to confine oil spilled on the high seas and along coastal waterways. Towable
storage bladders are used for storage and transportation of the recovered oil
after removal from the water. Heavy lift bags, often used in emergency
situations, are inserted into tight spaces and inflated to lift heavy loads for
short distances. Pillow tanks are collapsible rubberized containers used as an
alternative to steel drums and stationary storage tanks for the storage of
liquids.

     The following table shows the distribution of sales of aircraft wheels and
brakes, brake control systems and fuel tanks as a percentage of our total sales:

<Table>
<Caption>
                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                              2003   2002   2001
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Wheels and brakes...........................................   77%    80%    79%
Brake control systems.......................................    7%     7%     7%
Fuel tanks..................................................   12%    11%    11%
Other.......................................................    4%     2%     3%
                                                              ---    ---    ---
Total.......................................................  100%   100%   100%
                                                              ===    ===    ===
</Table>

SALES AND CUSTOMERS

     We sell our products to more than 175 airlines, airframe manufacturers,
governments and distributors across the commercial transport, military and
general aviation sectors. Sales to the U.S. government represented approximately
26%, 26% and 21% of total sales for the years ended December 31, 2003, 2002 and
2001, respectively. No other customer accounted for more than 10% of total
sales.

                                        4
<PAGE>

     The following table shows the distribution of our total revenues by
respective market, as a percentage of total sales:

<Table>
<Caption>
                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                              2003   2002   2001
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Commercial transport........................................   53%    53%    56%
Military (U.S. and foreign).................................   31%    30%    26%
General aviation............................................   16%    17%    18%
                                                              ---    ---    ---
Total.......................................................  100%   100%   100%
                                                              ===    ===    ===
</Table>

     Commercial Transport.  Customers for our products in the commercial
transport market include a wide variety of airframe manufacturers, commercial
airlines and replacement part distributors. Our products are used on a broad
range of large commercial transports (100 seats or more), regional jets and
other commuter aircraft (between 20 and 120 seats). Customers include Delta Air
Lines, Alitalia, Japan Air Systems, Lufthansa, Swiss Airlines, Northwest
Airlines, Continental Airlines, American Airlines, Saudi Arabian Airlines,
Aeromexico, TAM Airlines, Asiana Airlines, China Eastern Airlines, Honeywell and
Goodrich Corporation. We provide spare replacement parts to aircraft
manufactured by the four largest commercial aircraft manufacturers: Boeing,
Airbus, Bombardier and Embraer.

     Military.  We believe we supply wheels, brakes and fuel tanks for more
types of U.S. military aircraft than any competitor. We also supply the
militaries of many foreign governments. Our products are used on a variety of
fighters, training aircraft, transports, cargo planes, bombers and helicopters.
Some of the U.S. military aircraft using these products are the F-4, F-14, F-15,
F-16, F-18, F-117A, A-10, B-1B, C-130, C-130J, E-2E, EA6B, E3, E8, T-1A, and
T-2B. Some of the foreign military aircraft using these products include the F-2
(formerly the FS-X) in Japan, AIDC Indigenous Defensive Fighter, or IDF, in
Taiwan, Westland Super Lynx in Great Britian, Saab JAS-39 in Sweden, Alenia C-27
and Augusta A129 in Italy, Casa C-212 in Spain, and the T-50 in South Korea.
Substantially all of our military products are sold to the U.S. Department of
Defense, foreign governments or to airframe manufacturers including Lockheed
Martin, Boeing, Sikorsky, Bell, Saab and AIDC in Taiwan. Some of the brake
control systems we manufacture for the military are used on the F-16, F-117A,
B-2, Panavia Toronado, British Aerospace Hawk, JAS-39, IDF and T-50 aircraft.

     General Aviation.  We believe we are the industry's largest supplier of
wheels, brakes and fuel tanks for general aviation aircraft (19 seats or less).
This market includes personal, business and executive aircraft. Customers
include airframe manufacturers, such as Gulfstream, Raytheon Aircraft,
Bombardier, Cessna, Dassault and Israeli Aircraft Industries, and distributors,
such as Aviall. We supply brake control systems to Gulfstream, Dassault and
other aircraft manufacturers. General aviation aircraft using our wheels and
brakes exclusively include the Raytheon Hawker 400XP and Hawker Horizon, the
Lear series 20, 30, 50 and 60, the Gulfstream G-I, G-II, G-IIB, G-III and G-IV,
the IAI 1123, 1124, 1125 Astra, Astra SPX and Galaxy, the Challenger CL600,
CL601 and CL604, and the Dassault Falcon 10, 100, 20, 200, 50 and 50EX.

FOREIGN CUSTOMERS

     We supply products to a number of foreign aircraft manufacturers, airlines
and foreign governments. Substantially all sales to foreign customers are in
U.S. dollars and, therefore, the impact of currency translations is immaterial
to us. The following table shows our sales to both foreign and domestic
customers:

<Table>
<Caption>
                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                              2003   2002   2001
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Domestic sales..............................................   61%    59%    58%
Foreign sales...............................................   39%    41%    42%
                                                              ---    ---    ---
Total.......................................................  100%   100%   100%
                                                              ===    ===    ===
</Table>

                                        5
<PAGE>

INDEPENDENT RESEARCH AND DEVELOPMENT

     We employ scientific, engineering and other personnel to improve our
existing product lines and to develop new products and technologies in the same
or related fields. At December 31, 2003, we employed approximately 130 engineers
(of whom 19 held advanced degrees). Approximately 22 of those engineers
(including 9 holding advanced degrees) devoted all or part of their efforts
toward a variety of projects including refining carbon processing techniques to
create more durable braking systems, upgrading existing braking systems to
provide enhanced performance, and developing new technologies to improve our
products.

     The costs incurred relating to independent research and development for the
years ended December 31, 2003, 2002 and 2001 were $14.9 million, $14.6 million
and $16.2 million, respectively.

PATENTS AND LICENSES

     We have a large number of patents related to the products of our
subsidiaries. While in the aggregate our patents are of material importance to
our business, we believe no single patent or group of patents is of material
importance to our business as a whole.

COMPETITION

     We face substantial competition from a few suppliers in each of our product
areas. Our principal competitors that supply wheels and brakes are Honeywell's
Aircraft Landing Systems Division, Goodrich Corporation and Messier-Bugatti in
France. All three competitors are larger and have greater financial resources
than us. The principal competitors for brake control systems are the Hydro-Aire
Division of Crane Co. and Messier-Bugatti. The principal competitors for fuel
tanks are American Fuel Cell & Coated Fabrics Company and Aerazur of France,
both owned by Zodiac S.A., a French company.

BACKLOG

     Backlog at December 31, 2003 and 2002 amounted to approximately $130.6
million and $142.5 million, respectively. Backlog consists of firm orders for
our products which have not been shipped. Approximately 86% of our total backlog
at December 31, 2003 is expected to be shipped during the next twelve months,
with the balance expected to be shipped over the subsequent two-year period. No
significant seasonality exists for sales of our products.

     Of our total backlog at December 31, 2003, approximately 40% was directly
or indirectly for end use by the U.S. government, substantially all of which was
for use by the Department of Defense. For certain risks associated with U.S.
government contracts, see "Government Contracts" discussed below.

GOVERNMENT CONTRACTS

     For the years ended December 31, 2003, 2002 and 2001, approximately 26%,
26% and 21%, respectively, of our total sales were made to agencies of the U.S.
government or to prime contractors or subcontractors of the U.S. government.

     The majority of our defense-related sales are from basic ordering
agreements. The remainder of our defense business is derived from contracts that
are firm, fixed-price contracts under which we agree to perform for a
predetermined price. Although our fixed-price contracts generally permit us to
keep unexpected profits if costs are less than projected, we do bear the risk
that increased or unexpected costs may reduce profit or cause us to sustain
losses on the contract. All domestic defense contracts and subcontracts to which
we are a party are subject to standard provisions for termination at the
convenience of the government. Upon termination, other than for a contractor's
default, the contractor will normally be entitled to reimbursement for allowable
costs and to an allowance for profit. Foreign defense contracts generally
contain comparable provisions relating to termination at the convenience of the
government.

     Companies supplying defense-related equipment to the U.S. government are
subject to certain additional business risks peculiar to that industry. Among
these risks are the ability of the U.S. government to

                                        6
<PAGE>

unilaterally suspend us from new contracts pending resolution of alleged
violations of procurement laws or regulations. Other risks include a dependence
on appropriations by the U.S. government, changes in the U.S. government's
procurement policies (such as greater emphasis on competitive procurements) and
the need to bid on programs in advance of design completion. A reduction in
expenditures by the government for aircraft using products of the type
manufactured by us, lower margins resulting from increasingly competitive
procurement policies, a reduction in the volume of contracts or subcontracts
awarded to us or substantial cost overruns would have an adverse effect on our
cash flow and results of operations.

SUPPLIES AND MATERIALS

     The principal raw materials used by Aircraft Braking Systems in its wheel
and brake manufacturing operations are steel, aluminum forgings and carbon
compounds. We produce most of our carbon at our carbon manufacturing facility in
Akron, Ohio. Steel and aluminum forgings are purchased from multiple sources.
The principal raw materials used by Engineered Fabrics to manufacture fuel tanks
and related coated fabric products are nylon cloth, forged metal fittings and
various adhesives and coatings, whose formulae are internally developed and
proprietary. We have not experienced any shortage of raw materials to date.

PERSONNEL

     At December 31, 2003, we had 1,281 full-time employees, of which 722 were
employed by Aircraft Braking Systems (325 hourly and 397 salaried employees) and
559 were employed by Engineered Fabrics (426 hourly and 133 salaried employees).
All of Aircraft Braking Systems' hourly employees are represented by the United
Auto Workers' Union and all of Engineered Fabrics' hourly employees are
represented by the United Food and Commercial Workers' Union.

     Aircraft Braking Systems' current four-year labor agreement will expire on
June 30, 2006. The three-year term of the collective bargaining agreement at
Engineered Fabrics expired on February 5, 2004, and the contract is the subject
of on-going collective bargaining.

ITEM 2.  PROPERTIES

     United States Facilities.  Aircraft Braking Systems and Engineered Fabrics
operate two manufacturing facilities in the United States which are individually
owned except as set forth below under "Akron Facility Arrangements." Aircraft
Braking Systems' facility is located in Akron, Ohio and consists of
approximately 770,000 square feet of manufacturing, engineering and office
space. Engineered Fabrics' facility is located in Rockmart, Georgia and consists
of approximately 564,000 square feet of manufacturing, engineering and office
space. We believe that our properties and equipment are generally
well-maintained, in good operating condition and adequate for our present needs.

     Foreign Facilities.  We occupy approximately 21,000 square feet of leased
office and warehouse space in Slough, England, under a lease expiring in 2020.
We also maintain a sales and service office in Toulouse, France.

     Akron Facility Arrangements.  The manufacturing facilities owned by
Aircraft Braking Systems are part of a larger complex owned by Lockheed Martin.
Aircraft Braking Systems and Lockheed Martin have various occupancy and service
agreements to provide for shared easements and services (including utility,
sewer and steam). In addition to the 770,000 square feet owned by Aircraft
Braking Systems, we lease approximately 433,000 square feet of space within the
Lockheed Martin complex and are subject to annual occupancy payments to Lockheed
Martin. During the years ended December 31, 2003, 2002 and 2001, Aircraft
Braking Systems made occupancy payments to Lockheed Martin of $1.0 million, $0.9
million and $0.9 million, respectively. Certain access easements and agreements
regarding water, sanitary sewer, storm sewer, gas, electricity and
telecommunication are perpetual. In addition, Lockheed Martin and Aircraft
Braking Systems equally control Valley Association Corporation, an Ohio
corporation, which was formed to establish a single entity to deal with the City
of Akron and utility companies concerning governmental and utility services
which are furnished to Lockheed Martin's and Aircraft Braking Systems'
facilities.

                                        7
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

LITIGATION

     There are various lawsuits and claims pending against us which are
incidental to our business. Although the final results in those suits and
proceedings cannot be predicted with certainty, in the opinion of our
management, the ultimate liability, if any, will not have a material adverse
effect on us.

ENVIRONMENTAL

     Our manufacturing operations are subject to various environmental laws and
regulations, including those related to pollution, air emissions and the
protection of human health and the environment, administered by federal, state
and local agencies. We continually assess our obligations and compliance with
respect to these requirements. Based upon these assessments and other available
information, we believe that our manufacturing facilities are in substantial
compliance with all applicable existing federal, state and local environmental
laws and regulations and we do not expect environmental costs to have a material
adverse effect on us. The operation of manufacturing plants entails risk in
these areas, and there can be no assurance that we will not incur material costs
or liabilities in the future that could adversely affect us. For example, such
costs or liabilities could arise due to changes in the existing law or its
interpretation, or newly discovered contamination.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     See Item 12, "Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters" in Part III of this Annual Report on
Form 10-K.

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
         AND ISSUER PURCHASES OF EQUITY SECURITIES

     There is no trading market for our common stock. All of our common stock is
owned or controlled by Bernard L. Schwartz, our Chairman and Chief Executive
Officer, and by four limited partnerships of Lehman Brothers Holdings Inc. See
Item 12, "Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters" in Part III of this Annual Report on Form 10-K. In
2002, we paid a dividend to stockholders in connection with a recapitalization.
Our ability to pay dividends in the future is restricted by, among other things,
our current credit agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Financial
Condition."

                                        8
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The following selected financial data should be read in conjunction with
the related audited consolidated financial statements contained in this Annual
Report on Form 10-K.

<Table>
<Caption>
                                                       YEAR ENDED DECEMBER 31,
                                       -------------------------------------------------------
                                         2003        2002        2001       2000       1999
                                       ---------   ---------   --------   --------   ---------
                                                       (DOLLARS IN THOUSANDS)
<S>                                    <C>         <C>         <C>        <C>        <C>
Income Statement Data:
  Net sales..........................  $ 342,818   $ 348,649   $355,334   $375,890   $ 355,951
  Cost of sales......................    197,812     204,819    204,036    199,459     197,757
                                       ---------   ---------   --------   --------   ---------
  Gross margin.......................    145,006     143,830    151,298    176,431     158,194
  Independent research and
     development.....................     14,936      14,600     16,188     15,763      13,996
  Selling, general and administrative
     expenses(b).....................     30,499      40,238     30,273     37,666      33,245
  Amortization(c)....................      4,264       3,935      8,837      8,118       8,773
                                       ---------   ---------   --------   --------   ---------
  Operating income...................     95,307      85,057     96,000    114,884     102,180
  Interest expense, net(a)...........     44,186      26,194     32,569     35,993      40,396
                                       ---------   ---------   --------   --------   ---------
  Income before income taxes.........     51,121      58,863     63,431     78,891      61,784
  Income tax (provision) benefit.....    (10,488)    (16,730)   (27,447)   (14,906)     12,136
                                       ---------   ---------   --------   --------   ---------
  Net income(c)......................  $  40,633   $  42,133   $ 35,984   $ 63,985   $  73,920
                                       =========   =========   ========   ========   =========
Balance Sheet Data (at end of
  period):
  Working capital....................  $  50,077   $  35,547   $ 39,223   $ 45,695   $  76,622
  Total assets.......................    419,585     422,045    404,008    430,085     441,868
  Long-term debt (includes current
     maturities(a)(b)................    395,000     435,000    285,625    347,125     433,625
  Stockholders' deficiency(b)........   (186,971)   (227,656)   (58,253)   (78,006)   (141,734)
Other Data (for the period):
  Capital expenditures...............      5,468       4,084      5,057      9,845      10,413
  Depreciation and amortization(c)...     12,200      12,012     16,889     16,128      17,268
</Table>

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

(a)  On October 15, 2003, we redeemed $40.0 million of our 9 1/4% notes. In
     2003, we took a $1.6 million charge to interest expense for the redemption
     premiums and the write-off of a portion of unamortized financing costs
     associated with the redemption.

(b)  On December 20, 2002, we completed a recapitalization that included the
     issuance of $250 million of 9 5/8% Senior Subordinated Notes Due 2010. The
     net proceeds of the notes were used to pay a $200 million dividend to our
     stockholders, pay off our former credit facility, pay transaction fees of
     $8.5 million and pay $9.4 million to holders of our common stock options.
     As a result of this transaction, our stockholders' deficiency increased by
     $200 million for the dividend, we recorded a $9.4 million charge to
     selling, general and administrative expenses for the payment to the holders
     of common stock options and we capitalized $8.5 million for the transaction
     fees. See Note 7 to the consolidated financial statements contained in this
     Annual Report on Form 10-K.

(c)  On January 1, 2002, we adopted SFAS No. 142. Assuming the adoption of SFAS
     No. 142 at the beginning of the periods presented, amortization would have
     decreased by $6.1 million for each of the three years in the period ended
     December 31, 2001. Net income would have increased to $39.4 million, $68.9
     million and $77.6 million for the years ended December 31, 2001, 2000 and
     1999, respectively.

                                        9
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     The following section may include forward-looking statements that involve
inherent risks and uncertainties. A number of important factors could cause
actual results to differ materially from those in the forward-looking
statements. These factors include reduction in airline traffic, business risks
inherent in the airline industry, including terrorism, government regulation,
lower than expected revenues, general economic conditions and competition in the
areas in which we operate.

GENERAL

     Aircraft Braking Systems generates more than 75% of its revenues through
the sale of replacement parts for wheels and braking systems that are installed
on over 27,000 commercial transport, military and general aviation aircraft. As
is customary in the industry, we incur substantial expenditures to research,
develop, design and supply original wheel and brake equipment to aircraft
manufacturers at or below the cost of production. Research, development and
design expenditures are charged to operations when incurred. Original wheel and
brake equipment supplied to aircraft manufacturers at or below the cost of
production, or program investments, are charged to operations when delivered to
the aircraft manufacturers. Development participation costs, paid in connection
with the award of wheels, brakes and brake control equipment on various
commercial programs, are capitalized and amortized on a straight-line method
over a period of 20 years. Since most modern aircraft have a useful life of 25
years or longer and require periodic replacement of certain components of the
braking system, we typically recoup our initial investment in original equipment
and generate profits from the sales of replacement parts over the life of the
aircraft. We have invested and will continue to invest significant resources to
have our products selected for use on new commercial airframes, focusing on
high-cycle, medium- and short-range aircraft, and business jets.

     During the years ended December 31, 2003, 2002 and 2001, we spent an
aggregate of approximately $53.3 million, $51.3 million and $54.1 million,
respectively, for research, development, design, program investments, capital
expenditures and development participation costs. These types of costs are
somewhat discretionary in any given year and our levels of spending may increase
or decrease as the business base dictates. In 2003, we achieved many design and
development milestones as we moved closer to aircraft certification and initial
rates of production on a number of our recent sole source wins: Embraer 170/175,
190/195, Dassault Falcon 7X, Falcon 900EX EASy, Raytheon Hawker Horizon, Sino
Swearingen SJ-30 and the T-50 Military Trainer. In recent years, we were
selected as the sole supplier of wheels and steel brakes for the Bombardier
CRJ-100, CRJ-200 and CRJ-440 aircraft, the Fairchild Dornier DO-328 turboprop
and the Alenia C27J; total braking system including wheels, steel brakes and
brake control systems for the Bombardier CRJ-700 and 900 and the SJ-30 aircraft;
total braking systems, including wheels, carbon brakes and brake control systems
for the Dassault F-7X, Dassault 900EX EASy, Raytheon's Hawker Horizon and Hawker
450, and the T-50 Military Trainer; wheels and carbon brakes for the Embraer
170, 175, 190 and 195 aircraft; and one of three suppliers of wheels and carbon
brakes on the Airbus A-320 and A-321 aircraft. Aircraft produced under most of
these programs are in development or the early stages of their life cycles and
represent significant future revenue opportunities for us. With these program
wins, we expect a number of favorable things to occur in our business including:

     - sales of replacement parts increase in the aftermarket;

     - the number of airplanes using Aircraft Braking Systems' wheels and brakes
       increases, net of retired aircraft; and

     - the average age of the total fleet using Aircraft Braking Systems'
       products will be reduced.

     Our strategy has been to focus on the high cycle regional jet sector, where
planes typically make over 2,000 landings per year. During the last 2 1/2 years,
passenger traffic on regional jets has averaged over 20% growth, month over
month, and has not shown signs of abating, while during the comparable period
traffic has declined approximately 4% per year for the major United States
airlines operating larger, longer range aircraft.

     Since 2001, the commercial and general aviation segments of the industry we
serve, and our financial results, have been adversely affected by the sluggish
economy and the events of September 11, 2001. We believe, however, that
conditions have improved throughout the industry and that prospects for us are
good in each of our commercial, general aviation and military market sectors.
The growing number of regional jets in

                                        10
<PAGE>

service should lead to increased business for us, as will new opportunities for
original equipment and spare part sales in what has been a stagnant general
aviation marketplace. We expect military spending for new aircraft and spare
parts to continue at high levels.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     This section is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires our management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to bad debts, inventories, intangible assets,
income taxes, warranty obligations, workers compensation liabilities, pension
and other postretirement benefits, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates. We believe the following critical accounting policies affect
our more significant judgments and estimates used in the preparation of the
consolidated financial statements.

     Inventory.  Inventory is stated at average cost, not in excess of net
realizable value. In accordance with industry practice, inventoried costs may
contain amounts related to contracts with long production cycles, a portion of
which will not be realized within one year. Reserves for slow moving and
obsolete inventories are provided based on current assessments about future
product demand and production requirements for the next twelve months. These
factors are impacted by market conditions, technology changes, and changes in
strategic direction, and require estimates and management judgment that may
include elements that are uncertain. We evaluate the adequacy of these reserves
quarterly.

     Our inventory reserve balances of $9.1 million, $9.6 million and $11.8
million as of December 31, 2003, 2002 and 2001, respectively, represent 15.4%,
15.6% and 16.3% of our gross inventory balances for each period. Although we
strive to achieve a balance between market demands and risk of inventory excess
or obsolescence, it is possible that, should conditions change, additional
reserves may be needed. Any changes in reserves will impact operating income
during a given period. This policy is consistently applied to all of our
operating segments and we do not anticipate any changes to our policy in the
near term.

     Evaluation of Long-Lived Assets.  Long-lived assets are assessed for
recoverability on an ongoing basis in accordance with SFAS No. 144. In
evaluating the value and future benefits of long-lived assets, their carrying
value is compared to management's estimate of the anticipated undiscounted
future net cash flows of the related long-lived asset. Any necessary impairment
charges are recorded when we do not believe the carrying value of the long-lived
asset will be recoverable. There were no adjustments to the carrying amount of
long-lived assets during the years ended December 31, 2003, 2002 and 2001
resulting from our evaluations.

     Warranty.  Estimated costs of warranty are accrued when individual claims
arise with respect to a product or performance. When we become aware of those
types of defects, the estimated costs of all potential warranty claims arising
from those types of defects are fully accrued. As of December 31, 2003, 2002 and
2001, our warranty liability was $13.9 million, $15.2 million and $13.7 million,
respectively.

     Pension and Other Postretirement Benefits.  We have significant pension and
postretirement benefit costs and liabilities. The determination of our
obligation and expense for pension and other postretirement benefits is
dependent on our selection of certain assumptions used by actuaries in
calculating those amounts. Assumptions are made about interest rates, expected
investment return on plan assets, rate of increase in health care costs, total
and involuntary turnover rates, and rates of future compensation increases. In
addition, our actuarial consultants use subjective factors such as withdrawal
rates and mortality rates to develop our valuations. We generally review and
update these assumptions at the beginning of each fiscal year. We are required
to consider current market conditions, including changes in interest rates, in
making these assumptions. The actuarial assumptions that we may use may differ
materially from actual results due to changing market and economic conditions,
higher or lower withdrawal rates or longer or shorter life spans of
                                        11
<PAGE>

participants. These differences may result in a significant impact to the amount
of pension and postretirement benefits expense we have recorded or may record.
See Note 11 to the consolidated financial statements contained in this Annual
Report on Form 10-K for a disclosure of our assumptions.

     The discount rate enables us to state expected future cash flows at a
present value on the measurement date. The rate represents the market rate of
high-quality fixed income investments. A lower discount rate increases the
present value of benefit obligations and increases pension expense. A 50 basis
point decrease in the discount rate would increase our current year pension
expense by approximately $0.6 million. We used a 6 3/4% discount rate to
determine the 2003 expense and will use a 6 1/4% discount rate for 2004 to
reflect market interest rate conditions.

     To determine the expected long-term rate of return on pension plan assets,
we consider the current and expected asset allocations, as well as historical
and expected returns on various categories of plan assets. A 50 basis point
decrease in the expected annual return on assets would increase our current year
pension expense by approximately $0.5 million. We assumed that the long-term
returns on our pension plan assets was 9.0% in 2003 and will remain at 9.0% for
2004 to reflect projected returns in the fixed income and equity markets.

     The annual postretirement expense was calculated using a number of
actuarial assumptions, including a health care cost trend rate and a discount
rate. Our discount rate assumption for postretirement benefits is consistent
with that used in the calculation of pension benefits. The healthcare cost trend
rate range used to calculate the 2003 postretirement expense was 11% in 2003
trending down to 4.5% for 2010. A 1% increase in the assumed health care cost
trend rate would increase 2003 postretirement benefit costs and the benefit
obligation by approximately $1.3 million and $13.4 million, respectively.

RESULTS OF OPERATIONS

  COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
  DECEMBER 31, 2002

     Our sales for the year ended December 31, 2003 totaled $342.8 million,
reflecting a decrease of $5.8 million, or 1.7%, compared with $348.6 million for
the same period in the prior year. This decrease was due to lower sales at
Aircraft Braking Systems of $13.9 million, partially offset by higher sales at
Engineered Fabrics of $8.1 million

     Commercial sales at Aircraft Braking Systems decreased $6.0 million,
primarily due to lower sales of wheels and brakes on the Boeing DC-9 and DC-10
and the Airbus A-321 programs, partially offset by higher sales on the Canadair
CRJ-100/200, CRJ-700 and CRJ-900 programs. General aviation sales decreased $5.3
million, primarily on Israeli Aircraft Industries and Raytheon aircraft.
Military sales decreased $2.6 million primarily on the Boeing B-1B, the Northrop
Grumman F-14 and the Fairchild Republic A-10 programs, partially offset by
higher sales on the Lockheed Martin C-130 program.

     Sales at Engineered Fabrics increased primarily due to higher sales of oil
containment booms, fuel tanks for the Northrop Grumman F-18, the Sikorsky
Blackhawk, SH3A and SH3D programs, and iceguards on the Sikorsky UH-60 program.

     Our gross margin for the year ended December 31, 2003 was 42.3%, compared
with 41.3% for the same period in the prior year. Aircraft Braking Systems'
gross income was $132.8 million, or 46.2% of sales for the year ended December
31, 2003, compared with $135.2 million, or 44.9% of sales for the same period in
the prior year. Engineered Fabrics' gross income was $12.2 million, or 22.1% of
sales for the year ended December 31, 2003, compared with $8.6 million, or 18.3%
for the same period in the prior year.

     Aircraft Braking Systems' gross margin increased primarily due to a
favorable mix of products sold and lower warranty costs, partially offset by
higher program investments and the unfavorable overhead absorption effect
relating to lower sales. Engineered Fabrics' gross margin increased primarily
due to a favorable overhead absorption effect relating to the higher sales.

     Independent research and development costs were $14.9 million for the year
ended December 31, 2003, compared with $14.6 million for the same period in the
prior year. This increase was primarily due to higher
                                        12
<PAGE>

costs associated with the Dassault Falcon 7X program, partially offset by lower
costs on the Gulfstream G450 program.

     Selling, general and administrative expenses were $30.5 million for the
year ended December 31, 2003, compared with $40.2 million for the same period in
the prior year. This decrease was primarily due to a $9.4 million charge
incurred in 2002, relating to payments made to holders of our common stock
options in connection with the recapitalization described below under "Liquidity
and Financial Conditions."

     Our net interest expense was $44.2 million for the year ended December 31,
2003, compared with $26.2 million for the same period in the prior year. This
increase was primarily due to higher interest relating to our issuance of $250.0
million of 9 5/8% Senior Subordinated Notes in December 2002, in connection with
the recapitalization described below under "Liquidity and Financial Condition"
and a $1.6 million charge taken in 2003, for redemption premiums and the
write-off of a portion of unamortized financing costs, associated with the early
redemption of $40.0 million of our 9 1/4% notes on October 15, 2003.

     Our effective tax rate of 20.5% for the year ended December 31, 2003
differs from the statutory rate of 35% due to reversal of prior years tax
reserve no longer needed, utilization of state net operating losses, tax
benefits derived from foreign sales, available tax credits and a favorable
foreign tax rate. The effective tax rate of 28.4% for the year ended December
31, 2002 differs from the statutory rate of 35% due to utilization of state net
operating losses, tax benefits derived from foreign sales and available tax
credits.

  COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND
  DECEMBER 31, 2001

     Our sales for the year ended December 31, 2002 totaled $348.6 million, a
decrease of $6.7 million, or 1.9%, compared with $355.3 million for the same
period in the prior year. This decrease was principally due to lower sales of
wheels and brakes for commercial transport aircraft of $14.1 million, primarily
on the Fokker F100, DC-9, Fokker F27/28, CRJ-700 and DC-10 programs. General
aviation sales decreased $5.2 million due to lower sales of wheels, brakes and
fuel tanks on Gulfstream and Raytheon aircraft. Military sales increased $12.6
million primarily due to higher sales of wheels and brakes of $15.0 million on
the B-1B, F-4, A-10 and F-14 programs, partially offset by lower sales of
helicopter cabin interiors on various Sikorsky aircraft.

     Our gross margin for the year ended December 31, 2002 was 41.3%, compared
with 42.6% for the same period in the prior year. This decrease was primarily
due to the unfavorable overhead absorption effect relating to the lower sales
and higher program investments.

     Independent research and development costs were $14.6 million for the year
ended December 31, 2002, compared with $16.2 million for the same period in the
prior year. This decrease was primarily due to lower costs associated with the
Dassault Falcon 900 and JAS-39 programs.

     Selling, general and administrative expenses were $40.2 million for the
year ended December 31, 2002, compared with $30.3 million for the same period in
the prior year. This increase was primarily due to a $9.4 million charge
relating to payments made to holders of our common stock options in connection
with the recapitalization described below under "Liquidity and Financial
Condition."

     Amortization expense was $3.9 million for the year ended December 31, 2002,
compared with $8.8 million for the same period in the prior year. This decrease
was primarily due to the elimination of $6.1 million of goodwill amortization
during the year ended December 31, 2002 in accordance with SFAS No. 142,
partially offset by higher amortization of intangible assets and deferred
charges.

     Our net interest expense was $26.2 million for the year ended December 31,
2002 compared with $32.6 million for the same period in the prior year. This
decrease was primarily due to lower non-cash interest expense of $4.3 million
(non-cash interest income of $0.4 million during the year ended December 31,
2002 compared with non-cash interest expense of $3.9 million for the same period
in the prior year) relating to the change in market value of our interest rate
swap in accordance with SFAS No. 133. Net interest expense also decreased due to
a lower average debt balance.

                                        13
<PAGE>

     Our effective tax rate of 28.4% for the year ended December 31, 2002
differs from the statutory rate of 35% due to utilization of state net operating
losses, tax benefits derived from foreign sales and available tax credits. The
effective tax rate of 43.3% for year ended December 31, 2001 differs from the
statutory rate of 35% due to foreign, state and local taxes partially offset by
tax benefits derived from foreign sales.

LIQUIDITY AND FINANCIAL CONDITION

     Our cash and cash equivalents totaled $24.5 million at December 31, 2003,
compared with $22.7 million at December 31, 2002. Our total debt, consisting of
our 9 5/8% notes and our 9 1/4% notes, was $395.0 million at December 31, 2003,
compared with $435.0 million at December 31, 2002. The reason for the decrease
in the debt balance is due to the prepayment of $40.0 million of our 9 1/4%
notes on October 15, 2003.

     On December 20, 2002, we completed a recapitalization as follows:

     - We issued $250 million of senior subordinated notes due December 15, 2010
       for which we received $241.5 million after paying fees and expenses.

     - We paid $32.0 million of outstanding borrowings under our former credit
       facility.

     - We established a new $30.0 million revolving credit facility.

     - We paid a dividend of $200.0 million to the holders of our common stock.

     - We paid $9.4 million to the holders of our common stock options.

     We expect that our principal use of funds for the next several years will
be to pay interest and principal on indebtedness, fund capital expenditures and
make program investments. Our primary source of funds for conducting our
business activities and servicing our indebtedness has been cash generated from
operations and borrowings under our credit facility. In the past, the cash
generated from operations has been sufficient to pay our indebtedness. We do not
have to pay principal on our notes until October 2007, when our 9 1/4% notes
mature.

     Our credit facility provides for revolving loans not to exceed $30.0
million, with up to $10.0 million available for letters of credit. At December
31, 2003, we had outstanding letters of credit of $2.0 million and $28.0 million
available to borrow under the credit facility. The credit facility commitment
terminates on June 30, 2007. The credit facility is secured by substantially all
of our assets, including the stock of our subsidiaries.

     The credit facility contains certain covenants and events of default,
including limitations on additional indebtedness, liens, asset sales, making
certain restricted payments, capital expenditures, creating guarantee
obligations and material lease obligations. The credit facility also contains
certain financial ratio requirements, including a cash interest coverage ratio
and a leverage ratio. We were in compliance with all debt covenants at December
31, 2003.

     The following represents our contractual commitments consisting of our
scheduled debt maturities, scheduled interest payments, letters of credit,
purchase commitments, non-cancelable operating lease commitments and payments
required under the advisory agreement with Bernard L. Schwartz, subsequent to
December 31, 2003:

<Table>
<Caption>
                       SCHEDULED    SCHEDULED                                OPERATING
YEAR ENDING               DEBT      INTEREST    LETTERS OF     PURCHASE        LEASE      ADVISORY
DECEMBER 31,           MATURITIES   PAYMENTS      CREDIT     COMMITMENTS*   COMMITMENTS   AGREEMENT   TOTAL
------------           ----------   ---------   ----------   ------------   -----------   ---------   -----
                                                      (DOLLARS IN MILLIONS)
<S>                    <C>          <C>         <C>          <C>            <C>           <C>         <C>
2004.................    $   --       $37.6        $ --         $18.7          $4.7        $  2.4     $63.4
2005.................        --        37.6          --           0.3           4.3           2.4      44.6
2006.................        --        37.6          --            --           2.9           2.4      42.9
2007.................     145.0        37.6         2.0            --           2.6           2.4     189.6
2008.................        --        24.1          --            --           1.5           2.4      28.0
Thereafter...........     250.0        48.1          --            --           4.2           2.4**   304.7
</Table>

                                        14
<PAGE>

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

 * Represents the value of purchase orders placed with vendors for materials and
   equipment.

** Represents one annual payment under the advisory agreement which has an
   indefinite term.

     Our funding policy is to contribute cash to our pension plans so the
minimum required under the Employee Retirement Income Security Act of 1974 is
met. Based on this requirement, we made no contributions to the pension plans in
2003 and expect to make none in 2004. Our minimum pension liability was $26.9
million and $19.8 million at December 31, 2003 and 2002, respectively. We made
approximately $3.6 million in contributions to our postretirement health care
and life insurance benefit plans in 2003 and expect to contribute approximately
$4.0 million in 2004.

     In 2003, we paid $6.6 million in federal and state income taxes. In 2004,
we anticipate the amount to increase by approximately $6.0 million as our
alternate minimum tax credits have been fully utilized.

     Based upon the current level of operations, our management believes that
our cash flow from operations, together with available borrowings under the
credit facility, are adequate to meet our anticipated requirements for working
capital, capital expenditures, research and development expenditures, program
and other discretionary investments and interest payments. There can be no
assurance, however, that our business will continue to generate cash flow at or
above current levels. If we are unable to generate sufficient cash flow from
operations in the future to service our debt, we may be required to sell assets,
reduce capital expenditures, refinance all or a portion of our existing debt
(including notes) or obtain additional financing. Our ability to make scheduled
principal payments, to pay interest and to refinance our indebtedness (including
our 9 5/8% notes and our 9 1/4% notes) depends on our future performance and
financial results, which, to a certain extent, are subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond our
control. There can be no assurance that sufficient funds will be available to
enable us to service our indebtedness, including senior subordinated notes, or
make necessary capital expenditures and program and other discretionary
investments.

CASH FLOW

     During the year ended December 31, 2003, net cash provided by operating
activities amounted to $52.7 million, compared with $90.4 million for the same
period in the prior year, a decrease of $37.7 million. Our cash flow from
operating activities decreased from the prior year due to higher interest
payments of $22.3 million, relating to the issuance of $250.0 million of our
9 5/8% notes in December 2002, payments made in 2003 to the holders of our
common stock options in connection with the 2002 recapitalization, decreased
reductions in inventory and an increase in accounts receivable due to the timing
of sales in the later part of the fourth quarter of 2003. This was partially
offset by a decrease in the amount required to fund the pension plan in 2003
versus 2002. During the year ended December 31, 2002, net cash provided by
operating activities amounted to $90.4 million, compared with $77.5 million for
the same period in the prior year, an increase of $12.9 million. Our cash flow
from operating activities in 2002 increased from 2001 due to higher operating
profitability, greater reductions in accounts receivable and inventory due to
improved asset management, partially offset by an increase in funding for our
pension plans.

     During the year ended December 31, 2003, net cash used in investing
activities amounted to $11.0 million due to $5.5 million of capital expenditures
and $5.5 million of program participation costs. During the year ended December
31, 2002, net cash used in investing activities amounted to $13.7 million due to
$4.1 million of capital expenditures and $9.6 million of program participation
costs. During the year ended December 31, 2001, net cash used in investing
activities amounted to $17.3 million due to $5.1 million of capital
expenditures, $11.7 million of program participation payments and $0.5 million
for costs relating to intangible assets. Capital spending for the year ending
December 31, 2004 is expected to be approximately $6.0 million.

     During the year ended December 31, 2003, net cash used in financing
activities amounted to $40.0 million due to the prepayment of $40.0 million of
our 9 1/4% notes. During the year ended December 31, 2002, net cash used in
financing activities amounted to $59.1 million due to the payment of a $200.0
million dividend to the holders of our common stock, the repayment of
indebtedness of $100.6 million and transaction fees of $8.5 million in
connection with our issuance of our 9 5/8% notes, partially offset by proceeds
of

                                        15
<PAGE>

$250.0 million from our sale of the 9 5/8% notes. During the year ended December
31, 2001, net cash used in financing activities amounted to $61.5 million, due
to the repayment of indebtedness.

ACCOUNTING CHANGES AND PRONOUNCEMENTS

     On December 8, 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, or the Act. The Act introduces a
federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. In January
2004, the Financial Accounting Standards Board, or the FASB, issued Staff
Position No. 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003," which
permits a sponsor of a postretirement health care plan that provides a
prescription drug benefit to make a one-time election to defer accounting for
the effects of the Act. In accordance with FASB Staff Position No. 106-1, we are
electing to defer recognition of any potential savings on the calculation of our
accumulated postretirement benefit obligation or net periodic benefit cost as a
result of the Act until specific authoritative guidance on the accounting of the
Federal subsidy is issued. Therefore, these financial statements and
accompanying notes do not reflect the effects of the Act on the plan.

     During the three years ended December 31, 2003, we implemented, as
required, a number of new accounting pronouncements, none of which had a
material impact on our consolidated financial statements, except as follows:

     In December 2003, the FASB issued Statement of Financial Accounting
Standards, or SFAS, No. 132 (Revised), or SFAS No. 132-R, "Employer's Disclosure
about Pensions and Other Postretirement Benefits." SFAS 132-R retains disclosure
requirements of the original SFAS No. 132 and requires additional disclosures
relating to assets, obligations, cash flows, and net periodic benefit cost. SFAS
No. 132-R is effective for fiscal years ending after December 15, 2003, except
that certain disclosures are effective for fiscal years ending after June 15,
2004. Interim period disclosures are effective for interim periods beginning
after December 15, 2003. The adoption of the disclosure provisions of this
standard did not have a material effect on our consolidated financial position,
results of operations or cash flows. (See Note 11 to the Consolidated Financial
Statements).

     Effective January 1, 2003, we adopted SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002." SFAS No. 145 rescinds Statement of Financial
Accounting Standards No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," and an amendment of SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." SFAS No. 145 amends SFAS No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. The adoption of this
standard decreased income before taxes by $1.6 million during 2003. This
represents the premium paid and the write-off of a portion of unamortized
financing costs related to the early redemption of $40.0 million of our 9 1/4%
notes. This premium and write-off would have been recorded as an extraordinary
charge prior to adoption of this standard.

     In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and broadens the criteria
for recording intangible assets separate from goodwill.

     Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that goodwill no longer be amortized,
but instead be tested for impairment at least annually. SFAS No. 142 also
requires that any recognized intangible asset determined to have an indefinite
useful life not be amortized, but instead be tested for impairment in accordance
with this standard until its life is determined to no longer be indefinite. We
adopted SFAS No. 142 on January 1, 2002, at which time amortization of goodwill
ceased. Our impairment analysis did not result in an impairment charge.

     Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended and
interpreted, establishes accounting and reporting

                                        16
<PAGE>

standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. All derivatives,
whether designated in hedging relationships or not, are required to be recorded
on the balance sheet at fair value. SFAS No. 133 defines new requirements for
designation and documentation of hedging relationships as well as ongoing
effectiveness assessments in order to use hedge accounting. For a derivative
that does not qualify as a hedge, changes in fair value will be recognized in
earnings.

     As a requirement of a previous credit facility, we entered into an interest
rate swap agreement in 1997 to reduce the impact of potential increases in
interest rates on the credit facility. This interest rate swap agreement was our
only financial instrument that was required to be accounted for at fair value in
accordance with SFAS No. 133. On December 17, 2003, the interest rate swap
agreement expired.

     The adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative
pre-tax reduction in other comprehensive income of $0.9 million ($0.6 million
after tax) during the year ended December 31, 2001, related to the derivative
designated in a cash flow-type hedge prior to adopting SFAS No. 133. This amount
was amortized into interest expense over three years, which was the remaining
life of the interest rate swap agreement at January 1, 2001. During the years
ended December 31, 2003, 2002 and 2001, the change in fair market value of this
derivative instrument resulted in non-cash interest income of $3.5 million and
$0.4 million, and non-cash interest expense of $3.9 million, respectively. These
amounts were recorded in interest expense as this derivative was not designated
as a hedging instrument. We do not utilize derivatives for speculative purposes.

INFLATION

     A majority of our sales are conducted through annually established price
lists and long-term contracts. The effect of inflation on our sales and earnings
is minimal because the selling prices of those price lists and contracts,
established for deliveries in the future, generally reflect estimated costs to
be incurred in these future periods. In addition, some contracts provide for
price adjustments through escalation clauses.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We have $395.0 million of total fixed rate debt outstanding at December 31,
2003. Borrowings under the credit facility bear interest that varies with LIBOR.

     As a requirement of a previous credit facility, we entered into an interest
rate swap agreement to reduce the impact of potential increases in interest
rates. The interest rate swap agreement expired on December 17, 2003. The
payments made under the swap agreement were $4.0 million and $3.8 million in
2003 and 2002, respectively. Given that all of our outstanding debt is at a
fixed rate, a 10% change in interest rates would not have a significant impact
on fair values, cash flows or earnings. We have no other derivative financial
instruments.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See the financial statements, together with the auditors' reports thereon,
beginning on page F-1.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     None.

ITEM 9A.  CONTROLS AND PROCEDURES

     We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports under the Securities
and Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures. Any controls and procedures, no matter how well designed and
operated, can provide only
                                        17
<PAGE>

reasonable assurance of achieving the designed control objectives. Our
management, with the participation of our Chief Executive Officer and our Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of December 31, 2003. Based upon
that evaluation and subject to the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that the design and operation of our
disclosure controls and procedures provided reasonable assurance that the
disclosure controls and procedures are effective to accomplish their objectives.

     In addition, there was no change to our internal control over financial
reporting that occurred during the quarter ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     We have adopted a Code of Ethics within the meaning of Item 406(b) of
Regulation S-K. This Code of Ethics applies to our principal executive officer,
principal financial officer and other of our officers involved in finance,
accounting, treasury and tax matters. This Code of Ethics is filed as an exhibit
to this Annual Report on Form 10-K.

     All of our shareholders are represented on our Board of Directors. The
matters that would be addressed by an audit committee are subject to the review
and action of our full Board of Directors. Because we do not have an audit
committee, we have not determined whether or not any member of the Board of
Directors would be considered an "audit committee financial expert"as defined
under Item 401(b) of Regulation S-K.

     Set forth below are the names, ages and positions of our directors and
executive officers. All directors hold office until the next annual meeting of
stockholders and until their successors are duly elected and qualified, and all
executive officers hold office at the pleasure of the Board of Directors. Our
following executive officers or directors are related by blood or marriage:
Kenneth M. Schwartz is the nephew of Bernard L. Schwartz, Ronald H. Kisner's
wife is the niece of Bernard L. Schwartz and John R. Paddock's wife is the
daughter of Bernard L. Schwartz. No other executive officer or director of ours
is related by blood, marriage or adoption.

<Table>
<Caption>
NAME                             AGE                 POSITION(S)                 DIRECTOR SINCE
----                             ---                 -----------                 --------------
<S>                              <C>   <C>                                       <C>
Bernard L. Schwartz*             78    Chairman of the Board and Chief                1989
                                       Executive Officer
David J. Brand**                 42    Director                                       1997
Herbert R. Brinberg*             78    Director                                       1989
Robert B. Hodes*                 78    Director                                       1997
Ronald H. Kisner*                55    Director and Secretary                         1989
John R. Paddock*                 50    Director                                       1989
A. Robert Towbin***              68    Director                                       1989
Alan H. Washkowitz**             63    Director                                       1989
Donald E. Fogelsanger            78    Vice Chairman
Kenneth M. Schwartz              52    President and Chief Operating Officer
Dirkson R. Charles               40    Chief Financial Officer
</Table>

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

  * Designated as director by Bernard L. Schwartz pursuant to the Stockholders
    Agreement.

 ** Designated as director by certain Lehman Brothers merchant banking
    partnerships pursuant to the Stockholders Agreement.

*** Designated as independent director by Bernard L. Schwartz and certain Lehman
    Brothers merchant banking partnerships pursuant to the Stockholders
    Agreement.

                                        18
<PAGE>

     Mr. Bernard L. Schwartz has been our Chairman and Chief Executive Officer
since 1989. Mr. B. Schwartz has been Chairman and Chief Executive Officer of
Loral Space & Communications Ltd. since April 1996. From 1972 to April 1996, Mr.
B. Schwartz was Chairman and Chief Executive Officer of Loral Corporation. Mr.
B. Schwartz is a Director of Loral Cyberstar, Inc., a Director of Satelites
Mexicanos, S.A. de C.V., a Director of First Data Corporation, a Trustee of
Mount Sinai-NYU Medical Center and Health System and a Trustee of Thirteen/WNET
Educational Broadcasting Corporation.

     Mr. Brand is a Managing Director of Lehman Brothers and a senior principal
in the Global Mergers & Acquisitions Group. Since 1995, Mr. Brand has led Lehman
Brothers' Technology Mergers and Acquisitions business. Mr. Brand joined Lehman
Brothers in 1987 and has been responsible for merger and corporate finance
advisory services for many of Lehman Brothers' technology and defense industry
clients.

     Dr. Brinberg has been President and Chief Executive Officer of Parnassus
Associates International, a firm of consultants in the field of Information
Management, since September 1989. Previously, he was President and Chief
Executive Officer of Wolters Kluwer U.S. Corporation, a wholly owned subsidiary
of Wolters Kluwer N.V. of the Netherlands, and its predecessor companies since
1978. He is also currently an Adjunct Professor of Management at Baruch College
City University of New York and a Director of Brill Academic Publishers, Inc.

     Mr. Hodes is Counsel to the law firm of Willkie Farr & Gallagher with which
he has been associated since 1949. He is a Director of Loral Space &
Communications Ltd. and Mueller Industries, Inc.

     Mr. Kisner has been our Secretary since 1997 and employed by us since
January 1999. He was a member of the law firm of Chekow & Kisner, P.C. from 1984
until 1999. From 1982 to 1984, Mr. Kisner was a sole practitioner. From 1973 to
1982, he was Associate General Counsel of APL Corporation, where he held the
offices of Secretary, Vice President and Director.

     Dr. Paddock is a licensed psychologist who has maintained an independent
practice of psychotherapy, assessment and consultation in Atlanta, Georgia since
1982. He has also been President of the Georgia Psychological Association
(1993-1994). He holds appointments in the Departments of Psychology and
Psychiatry at Emory University.

     Mr. Towbin is a Managing Director of Stephens, Inc. and a Founder of
Stephens Financial Group. From January 2000 to November 2001 he was Co-Chairman
of C.E. Unterberg Towbin. From September of 1995 to January 2000 he was Senior
Managing Director. From January 1994 to September 1995, he was President and
Chief Executive Officer of the Russian-American Enterprise Fund and later Vice
Chairman of its successor fund, The U.S. Russia Investment Fund. Mr. Towbin was
a Managing Director at Lehman Brothers and Co-head, High Technology Investment
Banking from January 1987 until January of 1994. Mr. Towbin was Vice Chairman
and a Director of L.F. Rothschild, Unterberg, Towbin Holdings, Inc. and its
predecessor companies from 1959 to 1987. Mr. Towbin is also a Director of Gerber
Scientific, Inc., Globalstar Telecommunications Ltd. and Globecomm Systems, Inc.

     Mr. Washkowitz is a Managing Director of Lehman Brothers and is responsible
for the oversight of Merchant Banking Fund II and its affiliated investment
vehicles, as well as their predecessor, Merchant Banking Fund I. He has served
on the Investment Committee for 15 years, and he is also a member of Lehman
Brothers' Commitment Committee and Fairness Opinion Committee. Mr. Washkowitz
joined Kuhn Loeb & Co. in 1968. He became a general partner of Lehman Brothers
in 1977 when Kuhn Loeb was acquired and a Managing Director of Lehman Brothers
in 1978. Prior to joining the Merchant Banking Group in 1988, Mr. Washkowitz
headed the Financial Restructuring Group, which advised distressed companies and
their creditors on a wide range of business and financial issues. Mr. Washkowitz
is a Director of L-3 Communications Corporation, Peabody Energy Corporation and
C.P. Kelco.

     Mr. Fogelsanger has been our Vice Chairman since March 2000. Mr.
Fogelsanger was our President from January 1996 to March 2000. From April 1989
to January 1996, Mr. Fogelsanger was the President of Aircraft Braking Systems.
From 1987 to 1989 he was President of Loral Corporation's Aircraft Braking
Systems Division. From January 1986 to March 1987 he was Vice President and
General Manager of Goodyear Aerospace Corporation's ABSC division. From 1980 to
1986 he was General Manager of Goodyear's Aircraft
                                        19
<PAGE>

Tire Operations. In 1968, Mr. Fogelsanger directed Goodyear's development of a
crash-resistant fuel system for helicopters that was credited with saving
hundreds of lives during the Vietnam War. He joined Goodyear in 1951.

     Mr. Kenneth M. Schwartz has been our President and Chief Operating Officer
since March 2000. Mr. K. Schwartz was our Executive Vice President from January
1996 to March 2000. From June 1989 to January 1996, Mr. K. Schwartz held the
positions of Chief Financial Officer, Treasurer and Secretary. Previously he was
the Corporate Director of Internal Audit for Loral Corporation and prior to that
held various positions with the accounting firm of Deloitte & Touche LLP.

     Mr. Charles has been our Chief Financial Officer since May 1996. From May
1993 to May 1996, Mr. Charles was our Controller. Previously, he was the Manager
of Accounting and Financial Planning. Prior to employment with us in 1989, Mr.
Charles held various other positions with a major accounting firm, which he
joined in 1984.

EXECUTIVE OFFICERS OF AIRCRAFT BRAKING SYSTEMS CORPORATION AND ENGINEERED
FABRICS CORPORATION

     Set forth below are the names, ages and positions of the executive officers
of Aircraft Braking Systems and Engineered Fabrics. All executive officers hold
office at the pleasure of their respective Board of Directors.

AIRCRAFT BRAKING SYSTEMS CORPORATION

<Table>
<Caption>
NAME                                           AGE                POSITION
----                                           ---                --------
<S>                                            <C>   <C>
Frank P. Crampton............................  60    Senior Vice President -- Marketing
Richard W. Johnson...........................  60    Senior Vice President -- Finance
                                                     and Administration
James J. Williams............................  48    Senior Vice President -- Operations
</Table>

ENGINEERED FABRICS CORPORATION

<Table>
<Caption>
NAME                                           AGE                POSITION
----                                           ---                --------
<S>                                            <C>   <C>
John A. Skubina..............................  47    President
Richard P. Arsenault.........................  46    Vice President -- Finance
Terry L. Lindsey.............................  59    Vice President -- Marketing
Anthony G. McCann............................  44    Vice President -- Operations
Dan C. Sydow.................................  67    Vice President -- Engineering
</Table>

     Mr. Crampton has been Senior Vice President of Marketing at Aircraft
Braking Systems since October 1999. He was previously Vice President of
Marketing at Aircraft Braking Systems since March 1987. He had been Director of
Business Development for Goodyear Aerospace Corporation's Wheel and Brake
Division since 1985. Prior to that assignment, he was the divisional manager of
Program Operations since 1983. Mr. Crampton joined Goodyear in 1967. He became
Section Manager in Commercial Sales in 1977, a product marketing manager in 1978
and Divisional Sales Manager in 1979. In August of 1982, he joined manufacturing
as the manager of the manufacturing process organization. He also worked for
NASA at the Johnson Space Center, Houston, Texas from 1963 to 1966.

     Mr. Johnson has been Senior Vice President of Finance and Administration at
Aircraft Braking Systems since October 1999. He was previously Vice President of
Finance and Controller at Aircraft Braking Systems since April 1989. From 1987
to 1989, he was Vice President of Finance and Controller of Loral Corporation's
Aircraft Braking Systems Division. Prior to this assignment, he had spent 22
years with Goodyear Aerospace Corporation, including one year as the Controller
of the Wheel and Brake Division. Mr. Johnson joined Goodyear Aerospace
Corporation in 1966. He became Manager of Accounting in 1979 for the Centrifuge
Equipment Division of Goodyear Aerospace Corporation after holding various
positions in the Defense Systems Division.

                                        20
<PAGE>

     Mr. Williams has been Senior Vice President of Operations at Aircraft
Braking Systems since October 1999. He was previously Vice President of
Manufacturing at Aircraft Braking Systems since May 1992. He had been Director
of Manufacturing since joining Aircraft Braking Systems in September 1989.
Previously, from April 1985 to August 1989, he was Branch Manager of
Refurbishment Operations at United Technologies responsible for the
refurbishment process of the Solid Rocket Boosters on the Shuttle Program. Mr.
Williams started his aviation career in 1975 in the Air Force as a Hydraulic
Systems Specialist. He was Superintendent, Manufacturing at Fairchild Republic
Company from 1979 to 1983, followed by Manager, B-1B Manufacturing Operations at
Rockwell International Corporation from 1983 to 1985.

     Mr. Skubina has been President of Engineered Fabrics Corporation since
April 2000. Mr. Skubina was Senior Vice President of Engineered Fabrics
Corporation from September 1999 to April 2000. He had been Vice President of
Finance and Administration since February 1991. Prior to that, he was made Vice
President of Finance on April 1, 1990. He joined Engineered Fabrics Corporation
in 1988 as Accounting Manager. From 1985 until 1988, Mr. Skubina was the
Assistant Controller and Controller of MPD, a division of M/A-Com.

     Mr. Arsenault joined Engineered Fabrics Corporation in 1997 as Vice
President of Finance. Prior to this he held various finance positions with the
Remington Arms Company from 1994 to 1996 and he held Accounting and Auditing
positions with the Fibers business, Composites business, and Corporate offices
of E.I. Dupont from 1988 to 1994. He also worked for the U.S. Army Audit Agency
in various capacities from 1983 to 1988 and is a veteran of the U.S. Army, 82nd
Airborne Division.

     Mr. Lindsey has been Vice President of Business Development at Engineered
Fabrics Corporation since 1989. He has been with Goodyear Aerospace Corporation,
Loral Corporation and Engineered Fabrics Corporation since 1977. Prior to this
he had 12 years of federal service with the U.S. Army. He joined GAC as Contract
Administrator of the Industrial Brake Operation in Berea, Kentucky, and
transferred to Engineered Fabrics in 1979 as Manager of Contracts.

     Mr. McCann has been Vice President of Operations at Engineered Fabrics
Corporation since June 1993. Prior to that, he was Manager of Production Support
from April 1990 to June 1993. He joined Engineered Fabrics Corporation in August
1988 as Manager of Production. From January 1984 to August 1988, Mr. McCann
worked for Aircraft Braking Systems as Manager of Manufacturing Engineering,
Manager of Assembly and as a Manufacturing Engineer.

     Mr. Sydow has served as the Director and Vice President of Engineering
since 1993. He joined Engineered Fabrics Corporation in September 1985 as a
Senior Engineer. He served as the Manager of Product Engineering from 1989 to
1993. Before that, he served as the Supervisor of Centrifuge Assembly at
Goodyear Atomic from 1981 to 1985.

                                        21
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

     The following table sets forth the compensation for the years ended
December 31, 2003, 2002 and 2001, for the chief executive officer and each of
the other four most highly compensated executive officers.

<Table>
<Caption>
                                                                            LONG-TERM
                                                                          COMPENSATION
                                                                        -----------------   ALL OTHER
                                             ANNUAL COMPENSATION        OPTIONS    LTIP      COMPEN-
                                           ------------------------     GRANTED   PAYOUTS   SATION(A)
NAME AND PRINCIPAL POSITION         YEAR   SALARY ($)     BONUS ($)       (#)       ($)        ($)
---------------------------         ----   ----------     ---------     -------   -------   ---------
<S>                                 <C>    <C>            <C>           <C>       <C>       <C>
Bernard L. Schwartz
  Chairman of the Board and
     Chief........................  2003   2,175,372(b)   2,732,800         --        --         --
  Executive Officer of............  2002   1,920,000(b)   4,839,700         --        --         --
  K & F Industries, Inc...........  2001   2,060,259(b)   5,483,700         --        --         --
Kenneth M. Schwartz...............  2003     553,746(b)     964,136      1,400    54,000     14,257
  President and Chief Operating...  2002     535,000(b)   1,950,000(c)   5,000    74,000     13,918
  Officer of K & F Industries,
     Inc..........................  2001     485,000(b)     120,000         --    60,000     12,518
Dirkson R. Charles................  2003     236,946        387,000        650    40,667      9,996
  Chief Financial Officer of......  2002     230,000        895,000(c)   1,000    55,666      9,396
  K & F Industries, Inc...........  2001     200,000         63,000         --    46,333      8,916
Ronald H. Kisner..................  2003     213,152        310,000        450    37,000     13,656
  Director and Secretary of.......  2002     207,000        689,000(c)      --    50,333     13,656
  K & F Industries, Inc...........  2001     180,000         54,000         --    41,667     12,576
Frank P. Crampton.................  2003     207,838        210,000        350    28,000     19,219
  Senior Vice
     President -- Marketing.......  2002     200,192        483,500(c)      --    39,000     18,483
  of Aircraft Braking Systems.....  2001     180,000         48,750         --    33,667     17,721
</Table>

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

(a)  Includes the following: (i) Our contributions to individual 401(k) plan
     accounts for the years ended December 31, 2003, 2002 and 2001,
     respectively: Mr. K. Schwartz -- $7,200, $7,200 and $6,120; Mr.
     Charles -- $7,200, $6,600 and $6,120; Mr. Kisner -- $7,200, $7,200 and
     $6,120; and Mr. Crampton -- $7,200, $6,882 and $6,120; (ii) the
     compensation element of supplemental life insurance programs for the years
     ended December 31, 2003, 2002 and 2001, respectively: Mr. K.
     Schwartz -- $7,057, $6,718 and $6,398; Mr. Charles -- $2,796, $2,796 and
     $2,796; Mr. Kisner  -- $6,456, $6,456 and $6,456; and Mr.
     Crampton -- $12,019, $11,601 and $11,601.

(b)  Paid pursuant to an Advisory Agreement with Mr. Bernard L. Schwartz, which
     provides for the payment of an aggregate of $200,000 per month of
     compensation to Mr. B. Schwartz and persons or expenses designated by him.
     Mr. B. Schwartz designated that $150,000 of the aggregate annual advisory
     fee be paid to Kenneth M. Schwartz, which is included in his salary for
     each of the three years in the period ended December 31, 2003.

(c)  Includes payments made as a holder of common stock options in connection
     with the recapitalization, of: $1,725,000 for Mr. K. Schwartz; $780,000 for
     Mr. Charles; $585,000 for Mr. Kisner; and $420,000 for Mr. Crampton.

                                        22
<PAGE>

                       OPTION GRANTS IN LAST FISCAL YEAR

     We granted non-qualified stock options during the year ended December 31,
2003 to the executive officers named below. The options granted in 2003 become
exercisable in three equal installments on the first, second and third
anniversaries of the date of grant, and remain exercisable until 10 years from
the date of the grant. None of our stock is publicly traded.

<Table>
<Caption>
                                                                                     POTENTIAL REALIZABLE
                                             INDIVIDUAL GRANTS                         VALUE AT ASSUMED
                          --------------------------------------------------------      ANNUAL RATES OF
                           NUMBER OF                                                      STOCK PRICE
                          SECURITIES      % OF TOTAL                                   APPRECIATION FOR
                          UNDERLYING    OPTIONS GRANTED   EXERCISE OR                     OPTION TERM
                            OPTIONS     TO EMPLOYEES IN   BASE PRICE    EXPIRATION   ---------------------
NAME                      GRANTED (#)   FISCAL YEAR (%)     ($/SH)         DATE       5% ($)     10% ($)
----                      -----------   ---------------   -----------   ----------   --------   ----------
<S>                       <C>           <C>               <C>           <C>          <C>        <C>
Kenneth M. Schwartz.....     1,400           12.8           475.00       03/25/13    418,215    1,059,839
Dirkson R. Charles......       650            5.9           475.00       03/25/13    194,171      492,068
Ronald H. Kisner........       450            4.1           475.00       03/25/13    134,426      340,662
Frank P. Crampton.......       350            3.2           475.00       03/25/13    104,554      264,960
</Table>

                   AGGREGATED OPTION EXERCISES IN LAST FISCAL
                        YEAR AND YEAR-END OPTION VALUES

     The following sets forth information concerning the exercise of stock
options during the year ended December 31, 2003 and the value of unexercised
stock options at year-end. Our stock is not publicly traded.

<Table>
<Caption>
                                                                     NUMBER OF          VALUE OF
                                                                    UNEXERCISED        UNEXERCISED
                                                                     SECURITIES       IN-THE-MONEY
                                                                 UNDERLYING OPTIONS    OPTIONS AT
                                                                   AT FY-END (#)       FY-END ($)
                                                                 ------------------   -------------
                             SHARES ACQUIRED ON      VALUE          EXERCISABLE/      EXERCISABLE/
NAME                            EXERCISE (#)      REALIZED ($)     UNEXERCISABLE      UNEXERCISABLE
----                         ------------------   ------------   ------------------   -------------
<S>                          <C>                  <C>            <C>                  <C>
Bernard L. Schwartz........          0                 0                    0/0            0/0
Kenneth M. Schwartz........          0                 0            8,167/4,733            0/0
Dirkson R. Charles.........          0                 0            4,533/1,317            0/0
Ronald H. Kisner...........          0                 0              3,900/450            0/0
Frank P. Crampton..........          0                 0              2,725/425            0/0
</Table>

LONG-TERM INCENTIVE PLAN AWARDS

     Under our long-term incentive plan (designed to provide an incentive to
encourage attainment of our objectives and retain and attract key executives), a
limited number of persons participate in a Deferred Bonus Plan. Under the terms
of the plan, generally no awards are allocated to any participant unless we
achieve at least a 5% growth in earnings before interest, taxes and amortization
over the prior fiscal year. Awards vest and are paid in three equal annual
installments starting on January 15th following each fiscal year-end. All
amounts not vested are forfeited upon termination of employment for any reason
other than death or disability prior to the vesting date. No awards were earned
during the year ended December 31, 2003.

THE RETIREMENT PLAN

     We established, effective May 1, 1989, as amended, the K & F Industries
Retirement Plan for Salaried Employees, or our Retirement Plan or the Plan, a
defined benefit pension plan. We have received favorable determination letters
from the Internal Revenue Service that our Retirement Plan, as amended, is a
qualified plan under the Internal Revenue Code. Our Retirement Plan provides a
non-contributory benefit and a contributory benefit. The cost of the former is
borne by us; the cost of the latter is borne partly by us and partly by the
participants. Salaried employees who have completed at least six months of
service and satisfied a minimum earnings level are eligible to participate in
the contributory portion of our Retirement Plan; salaried

                                        23
<PAGE>

employees become participants in the non-contributory portion on their date of
hire. The Plan provides a benefit of $20.00 per month for each year of credited
service. For participants who contribute to the Plan, in addition to the benefit
of $20.00 per month for each year of credited service, the Plan provides an
annual benefit equal to the greater of: 60% of the participant's aggregate
contributions or average compensation earned (while contributing) during the
last 10 years of employment in excess of 90% of the Social Security Wage Base
amount multiplied by: (1) 2.4% times years of continuous service up to 10, plus
(2) 1.8% times additional years of such service up to 20, plus (3) 1.2% times
additional years of such service up to 30, plus (4) 0.6% times all additional
such service above 30 years.

     Effective January 1, 1990, the Plan was amended for our eligible employees
and those of Aircraft Braking Systems to provide an annual benefit equal to (1)
the accrued benefit described above as of December 31, 1989, plus (2) a
non-contributory benefit for each year of credited service after January 1, 1990
of 0.7% of annual earnings up to the Social Security Wage Base or $288,
whichever is greater, plus (3) for each year of contributory service on and
after January 1, 1990, a contributory benefit of (i) for 14 years of
contributory service or less, 1.05% of annual earnings between $19,800 and the
Social Security Wage Base plus 2.25% of annual earnings above the Social
Security Wage Base, and (ii) for more than 14 years of contributory service,
1.35% of annual earnings between $19,800 and the Social Security Wage Base plus
2.65% of annual earnings above the Social Security Wage Base. In no event will
the amount calculated in (3) above be less than 60% of the participant's
aggregate contributions made on and after January 1, 1990. Benefits are payable
upon normal retirement age at age 65 in the form of single life or joint and
survivor annuity or, at the participant's option with appropriate spouse
consent, in the form of an annuity with a term certain. A participant who has
(a) completed at least 30 years of continuous service, (b) attained age 55 and
completed at least 10 years of continuous service, or (c) attained age 55 and
the combination of such participant's age and service equals at least 70 years,
is eligible for early retirement benefits. If a participant elects early
retirement before reaching age 62, such benefits will be reduced except that the
non-contributory benefits of a participant with at least 30 years of credited
service will not be reduced. In addition, employees who retire after age 55 but
before age 62 with at least 30 years of service are entitled to a supplemental
non-contributory benefit until age 62. Annual benefits under our Retirement Plan
are subject to a statutory ceiling of $165,000 per participant. Participants are
fully vested in their accrued benefits under our Retirement Plan after five
years of credited service with us.

     The individuals named in the Summary Compensation Table also participate in
a supplemental plan which generally makes up for certain reductions in such
benefits caused by Internal Revenue Code limitations. Estimated annual benefits
upon retirement for these individuals who are participants in our Retirement
Plan and the supplemental plan are: $569,000 for Mr. B. Schwartz; $374,000 for
Mr. K. Schwartz; $266,000 for Mr. Charles; $123,000 for Mr. Kisner; and $157,000
for Mr. Crampton. The retirement benefits have been computed on the assumption
that (1) employment will be continued until normal retirement at age 65 or
current age if greater; (2) current levels of creditable compensation and the
Social Security Wage Base will continue without increases or adjustments
throughout the remainder of the computation period; and (3) participation in the
contributory portion of the plan will continue at current levels. We have a
similar plan at Engineered Fabrics.

     For purposes of eligibility, vesting and benefit accrual, participants
receive credit for years of service with Loral Corporation and Goodyear. At
retirement, retirement benefits calculated according to the benefit formula
described above are reduced by any retirement benefits payable from The Goodyear
Tire & Rubber Company Retirement Plan for Salaried Employees.

COMPENSATION OF DIRECTORS

     The Board of Directors held six meetings during the year ended December 31,
2003. Members of the Board of Directors are entitled to receive a director's fee
of $12,000 per year. Messrs. B. Schwartz, Brand, Kisner and Washkowitz did not
receive director's fees during the year ended December 31, 2003. All directors
are reimbursed for reasonable out-of-pocket expenses incurred in that capacity.

                                        24
<PAGE>

ADVISORY AGREEMENT

     We have an Advisory Agreement with Bernard L. Schwartz which provides for
the payment of an aggregate of $200,000 per month of compensation to Mr. B.
Schwartz and persons or expenses designated by him. Such agreement will continue
until Mr. B. Schwartz dies or is disabled or ceases to own a specified number of
shares of our common stock.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     We have not used a compensation committee to determine executive officer
compensation. The payments to Bernard L. Schwartz, our Chairman and Chief
Executive Officer, are paid in accordance with the Advisory and Stockholders
Agreements. All other executive compensation decisions are made by Mr. B.
Schwartz in accordance with policies established in consultation with the Board
of Directors.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

EQUITY COMPENSATION PLAN INFORMATION

     The following sets forth information about compensation plans under which
equity securities are authorized for issuance as of December 31, 2003.

<Table>
<Caption>
                                                                                        (C)
                                                                               NUMBER OF SECURITIES
                                    (A)                       (B)             REMAINING AVAILABLE FOR
                         NUMBER OF SECURITIES TO BE     WEIGHTED-AVERAGE       FUTURE ISSUANCE UNDER
                          ISSUED UPON EXERCISE OF      EXERCISE PRICE OF     EQUITY COMPENSATION PLANS
                            OUTSTANDING OPTIONS,      OUTSTANDING OPTIONS      (EXCLUDING SECURITIES
PLAN CATEGORY               WARRANTS AND RIGHTS       WARRANTS AND RIGHTS    REFLECTED IN COLUMN (A))
-------------            --------------------------   --------------------   -------------------------
<S>                      <C>                          <C>                    <C>
Equity compensation
  plans approved by
  security holders:....            71,300                   $237.98                    9,750
Equity compensation
  plans not approved by
  security holders:....                --                        --                       --
                                   ------                   -------                    -----
Total..................            71,300                   $237.98                    9,750
                                   ======                   =======                    =====
</Table>

     The following table sets forth the ownership of our capital stock as of
December 31, 2003.

<Table>
<Caption>
                                                                               PERCENTAGE
                                                       NUMBER OF SHARES       OWNERSHIP OF
                                                       OF COMMON STOCK**     CAPITAL STOCK
                                                       -----------------   ------------------
<S>                                                    <C>                 <C>
Bernard L. Schwartz..................................       365,199***            49.30%***
Robert B. Hodes......................................         5,000***              .70***
*Lehman Brothers Merchant Banking Portfolio
  Partnership L.P.(a)................................       180,228               24.34
*Lehman Brothers Offshore Investment Partnership
  L.P.(b)............................................        48,880                6.60
*Lehman Brothers Offshore Investment
  Partnership -- Japan L.P.(b).......................        18,591                2.51
*Lehman Brothers Capital Partners II, L.P.(c)........       122,500               16.55
                                                            -------              ------
                                                            740,398              100.00%
                                                            =======              ======
</Table>

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

  * Collectively referred to as the "Lehman Investors."

 ** The executive officers named in Item 11 hold options covering 19,325 shares,
    and executive officers and directors as a group hold options covering 31,275
    shares, which may be acquired within 60 days pursuant to the exercise of the
    options.

                                        25
<PAGE>

*** In 2002, Bernard L. Schwartz transferred 10,000 shares to each of his
    daughters (one of whom is the wife of John Paddock, one of our directors)
    and 5,000 shares to Mr. Hodes, one of our directors. All of these shares
    remain subject to the Stockholders Agreement and Bernard L. Schwartz has the
    right to vote all of these shares. Dr. Paddock disclaims beneficial
    ownership of the shares owned by his wife.

(a) LBI Group Inc. is the general partner of the limited partnership and is an
    indirect wholly owned subsidiary of Lehman Brothers Holdings Inc. ("LBH").

(b) Lehman Brothers Offshore Partners Ltd. is the general partner of the limited
    partnership and is an indirect wholly owned subsidiary of LBH.

(c) LBH is the general partner of the limited partnership. The limited
    partnership is a fund for current and former employees of LBH.

STOCKHOLDERS AGREEMENT

     Bernard L. Schwartz and the Lehman Investors have a Stockholders Agreement
dated as of October 15, 1997. The Stockholders Agreement contains certain
restrictions with respect to the transferability of our capital stock, subject
to certain exceptions. The Stockholders Agreement also includes provisions
regarding designation of members of the Board of Directors and other voting
arrangements. The Stockholders Agreement will terminate at the time when more
than 75% of the shares of common stock and shares of common stock issuable upon
the exercise of options or rights to acquire common stock or upon conversion of
convertible securities then outstanding have been sold pursuant to one or more
public offerings, except that the registration rights contained therein (as
described below) continue as to any common stock held by the Stockholders as
long as they own their shares and the voting provisions contained therein
terminate on October 15, 2007.

     The Stockholders Agreement provides that our Board of Directors be
comprised initially of nine directors. Under the Stockholders Agreement, Mr. B.
Schwartz is entitled to appoint five directors, the Lehman Investors are
entitled to appoint three directors and Mr. B. Schwartz and the Lehman Investors
are jointly entitled to designate one independent director. Upon the death,
retirement or resignation as Chairman or Chief Executive Officer or permanent
disability of Mr. B. Schwartz, the Lehman Investors and the BLS Group (as
defined in the Stockholders Agreement) will each be entitled to designate 50% of
the members of the Board of Directors. Our By-laws provide that for so long as
there is a director designated by the Lehman Investors, certain corporate
actions will require the vote of at least one director designated by the Lehman
Investors, including (with certain exceptions) (i) mergers, consolidations or
recapitalizations, (ii) issuances of capital stock, (iii) repurchases of and
dividends on capital stock, (iv) issuance of employee options to purchase more
than 50,000 shares of capital stock, (v) our dissolution or liquidation, (vi)
acquisition, sale or exchange of assets in excess of $5 million, (vii) the
incurrence of debt or liens in excess of $10 million in the aggregate, (viii)
the making of loans, investments or capital expenditures in excess of $10.0
million in each case in any single year, (ix) transactions with affiliates, (x)
prepayments of or amendments to any amount of financing in excess of $10.0
million, (xi) amendment of our Certificate of Incorporation and By-laws, (xii)
engaging in new businesses or ventures and (xiii) certain employee compensation
and other matters.

     The Stockholders Agreement provides that either the BLS Group or the Lehman
Investors may request an appraisal of the value of our capital stock, or the
Appraised Value, and may notify the other party of its desire to sell all of its
and its transferees' capital stock for a pro rata share of the Appraised Value.
The other party may elect to purchase the capital stock, arrange for the
purchase of the capital stock by a third party or notify the other party that it
does not intend to purchase or arrange for the purchase by a third party of the
capital stock. If the other party is unable or chooses not to arrange for and
consummate the purchase of the capital stock, the BLS Group and the Lehman
Investors shall cause us to be sold as an entirety if the sale can be arranged
for a price at least equal to the Appraised Value (subject to reduction by no
more than 10% under specified circumstances). Any sale of us as a whole shall
include all Stockholders and the proceeds thereof shall be allocated among the
Stockholders in accordance with their stock ownership.

     Notwithstanding other restrictions, the Lehman Investors have the right to
transfer capital stock to a third party, subject to specified conditions. The
put-sale rights of the Lehman Investors described above and

                                        26
<PAGE>

the rights of the Lehman Investors to designate 50% of the members of the Board
of Directors upon the death, retirement, resignation or disability of Mr. B.
Schwartz will terminate upon any transfer by the Lehman Investors of their
capital stock.

     The Stockholders Agreement provides certain first offer and tag-along
rights with respect to certain transfers of common stock or shares of common
stock issuable upon the exercise of options or rights to acquire common stock or
upon conversion of convertible securities then outstanding.

     The Stockholders Agreement grants the Stockholders demand and incidental
registration rights with respect to shares of capital stock held by them, which
rights will be exercisable at any time after an initial public offering of our
common stock approved by the Board of Directors. The Stockholders Agreement
contains customary terms and provisions with respect to those registration
rights.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Bernard L. Schwartz owns or controls 50% of our capital stock and pursuant
to the Stockholders Agreement has the right to designate a majority of our Board
of Directors. In addition, he serves as our Chairman of the Board of Directors
and Chief Executive Officer and devotes such time to our business and affairs as
he deems appropriate. Mr. B. Schwartz is also Chairman of the Board and Chief
Executive Officer of Loral Space & Communications Ltd., or Loral Space. Because
Mr. B. Schwartz is Chairman of the Board of Directors and has the right to
designate a majority of the Directors to our Board, he has operating control of
us.

     We have an advisory agreement with Mr. B. Schwartz which provides for the
payment of an aggregate of $200,000 per month of compensation to him and persons
or expenses designated by him in exchange for acting as directors or providing
advisory services to us and our subsidiaries. The advisory agreement will
continue until Mr. B. Schwartz dies or is disabled or ceases to own a specified
number of shares of our common stock.

     We have a bonus plan pursuant to which our Board of Directors awards
bonuses to Mr. B. Schwartz ranging from 5% to 10% of earnings in excess of $50.0
million before interest, taxes and amortization. Bonuses earned under this plan
were $2.7 million, $4.8 million and $5.5 million for the years ended December
31, 2003, 2002 and 2001, respectively.

     We reimburse Loral Space for rent and certain other services. The related
charges agreed upon were established to reimburse Loral Space for actual costs
incurred without profit or fee. We believe this arrangement is as favorable to
us as could have been obtained from unaffiliated parties. Payments to Loral
Space were $0.4 million, $0.3 million and $0.5 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

     Pursuant to a financial advisory agreement, Lehman Brothers has agreed to
act as our exclusive financial adviser and we have agreed to pay Lehman Brothers
customary fees for services when rendered. During the year ended December 31,
2002, we paid Lehman Brothers $6.3 million for underwriting discounts and
commission in connection with the issuance of our 9 5/8% notes. During the years
ended December 31, 2003 and 2001, no amounts were paid under this agreement. The
agreement may be terminated by us or Lehman Brothers upon certain conditions.
Certain merchant banking partnerships affiliated with Lehman Brothers own 50% of
our outstanding capital stock and are entitled to elect three directors (in
addition to one independent director jointly designated by Mr. B. Schwartz and
the certain merchant banking partnerships affiliated with Lehman Brothers) to
our Board of Directors. The certain merchant banking partnerships affiliated
with Lehman Brothers have the benefit of certain additional rights under the
Stockholders Agreement and our By-laws.

                                        27
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The following table sets forth the aggregate fees to Deloitte & Touche LLP
for audit services rendered in connection with the consolidated financial
statements and reports and for other services rendered during the years ended
December 31, 2003 and 2002 on behalf of the Company and its subsidiaries, as
well as all out-of-pocket costs incurred in connection with these services:

<Table>
<Caption>
                                                                2003       2002
                                                              --------   --------
<S>                                                           <C>        <C>
Audit Fees..................................................  $419,152   $470,938
Audit Related Fees..........................................    60,600     30,500
Tax Fees....................................................    96,000    102,400
                                                              --------   --------
Total.......................................................  $575,752   $603,838
                                                              ========   ========
</Table>

     Audit Fees: Consists of fees billed for professional services rendered for
the audit of the Company's consolidated financial statements, for the review of
the interim condensed consolidated financial statements included in quarterly
reports, services that are normally provided by Deloitte & Touche LLP in
connection with statutory and regulatory filings or engagements and attest
services, except those not required by statute or regulation.

     Audit Related Fees: Consists of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of the Company's consolidated financial statements and are not reported under
"Audit Fees". These services include employee benefit plan audits, attest
services that are not required by statute or regulation, and consultations
concerning financial accounting and reporting standards.

     Tax Fees: Consists of tax compliance/preparation and other tax services.
Tax compliance preparation consists of fees billed for professional services
related to federal, state and international tax compliance and assistance with
tax audits and appeals. Other tax services consist of fees billed for other
miscellaneous tax consulting and planning.

PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS

     The Board of Directors pre-approves all audit and permissible non-audit
services provided by Deloitte & Touche LLP. These services may include audit
services, audit-related services, tax services and other services. Management
negotiates the annual audit fee directly with the Company's independent
auditors, which is then reviewed for approval by the Board of Directors. The
Board of Directors has also established pre-approved services for which the
Company's management can engage the Company's independent auditors. Any work in
addition to these pre-approved services requires the advance approval of the
Board of Directors. All fees were approved by the Board of Directors for fiscal
2003.

                                        28
<PAGE>

                                    PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a) Index to Financial Statements:

<Table>
<Caption>
                                                               PAGE
                                                               ----
 <S>                                                           <C>
 K & F Industries, Inc. -- Consolidated Financial Statements:
   Independent Auditors' Report..............................
                                                               F-1
   Consolidated Balance Sheets as of December 31, 2003 and
      2002...................................................
                                                               F-2
   Consolidated Statements of Operations for the Years Ended
      December 31, 2003, 2002 and 2001.......................
                                                               F-3
   Consolidated Statements of Stockholders' Deficiency for
      the Years Ended December 31, 2003, 2002 and 2001.......
                                                               F-4
   Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2003, 2002 and 2001.......................
                                                               F-5
   Notes to Consolidated Financial Statements................
                                                               F-6
</Table>

     All other schedules and separate financial statements are omitted because
they are not applicable or the required information is shown in the financial
statements or notes thereto. Exhibits 10.6 through 10.11 and 10.13, 10.14,
10.21, 10.27 and 10.28 are management contracts or compensation plans.

     (b) Reports on Form 8-K:

          (i) A report on Form 8-K was filed on November 14, 2003 to report our
     third quarter 2003 earnings.

        Exhibits: See exhibit index below.

(c) Exhibits

                               INDEX TO EXHIBITS

<Table>
<Caption>
EXHIBIT
NUMBER                                  DESCRIPTION
-------                                 -----------
<C>       <C>   <S>
 2.1        --  Agreement for Sale and Purchase of Assets dated March 26,
                1989 between the Registrant and Loral Corporation(2).
 3.1        --  Amended and Restated Certificate of Incorporation of the
                Registrant(1).
 3.2        --  Amended and Restated By-Laws of the Registrant(1).
 4.1        --  Indenture dated as of October 15, 1997 for the 9 1/4% Senior
                Subordinated Notes between the Registrant and U.S. Bank
                National Association (successor to State Street Bank and
                Trust Company), as Trustee(4).
 4.2        --  Indenture dated as of December 20, 2002 for the 9 5/8%
                Senior Subordinated Notes between the Registrant and U.S.
                Bank National Association (successor to State Street Bank
                and Trust Company), as Trustee(7).
 4.3        --  Amended and Restated Credit Agreement dated as of December
                20, 2002 by and among Aircraft Braking Systems Corporation
                ("ABS") and Engineered Fabrics Corporation ("EFC"), as
                Borrowers, and the Lenders (as defined therein), Lehman
                Brothers Inc., as Arranger, Lehman Commercial Paper Inc., as
                Administrative Agent, and National City Bank and Bank One,
                NA, as Co-Agents(7).
 4.4        --  Amended and Restated Guarantee and Collateral Agreement
                dated as of December 20, 2002 made by the Registrant, ABS ,
                EFC and the other signatories thereto in favor of Lehman
                Commercial Paper Inc., as Administrative Agent(7).
 4.5        --  K & F Agreement dated as of December 20, 2002 by the
                Registrant in favor of Lehman Commercial Paper Inc., as
                Administrative Agent(7).
</Table>

                                        29
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                                  DESCRIPTION
-------                                 -----------
<C>       <C>   <S>
10.1        --  Stock Purchase Agreement dated September 15, 1997 among
                Bernard L. Schwartz ("BLS"), the Lehman Investors (as
                defined therein) and the other signatories thereto(4).
10.2        --  First Amendment to Stock Purchase Agreement dated October
                15, 1997 among BLS, the Lehman Investors and the other
                signatories thereto(1).
10.3        --  Securities Purchase Agreement dated as of April 27, 1989
                among the Registrant, BLS and Lehman Brothers Holdings Inc.
                ("LBH")(2).
10.4        --  Assignment and Assumption Agreement dated as of April 27,
                1989(2).
10.5        --  Shared Services Agreement dated as of April 27, 1996 between
                Lockheed Martin Tactical Defense Systems -- Akron and
                ABS(1).
10.6        --  Amended and Restated Director Advisory Agreement dated as of
                October 15, 1997 between the Registrant and BLS(1).
10.7        --  Non-Competition Agreement dated as of April 27, 1989 between
                the Registrant and BLS(2).
10.8        --  K & F Industries, Inc. Retirement Plan for Salaried
                Employees(3).
10.9        --  K & F Industries, Inc. Savings Plan for Salaried
                Employees(3).
10.10       --  Goodyear Aerospace Corporation Supplemental Unemployment
                Benefits Plan for Salaried Employees Plan A -- Layoff or
                Retrenchment(2).
10.11       --  The Loral Systems Group Release and Separation Allowance
                Plan(2).
10.12       --  Letter Agreement dated April 27, 1989 between the Registrant
                and LBH(2).
10.13       --  K & F Industries, Inc. 1989 Stock Option Plan(7).
10.14       --  K & F Industries, Inc. Executive Deferred Bonus Plan(7).
10.15       --  Securities Purchase Agreement dated as of July 22, 1991
                among the Registrant, BLS and certain merchant banking
                partnerships affiliated with LBH(7).
10.16       --  Securities Purchase Agreement dated September 2, 1994 among
                the Registrant, BLS and the Purchasers (as defined
                therein)(7).
10.17       --  Amended and Restated Stockholders Agreement dated as of
                September 2, 1994 among the Registrant, BLS, the Lehman
                Investors, CBC Capital Partners, Inc. and Loral
                Corporation(7).
10.18       --  Agreement dated as of September 2, 1994 between the
                Registrant and Loral Corporation(7).
10.19       --  Amendment of Stockholders Agreement dated November 8,
                1994(7).
10.20       --  Securities Conversion Agreement dated November 8, 1994 among
                the Registrant and the Converting Stockholders (as defined
                therein)(7).
10.21       --  K & F Industries, Inc. Supplemental Executive Retirement
                Plan(7).
10.22       --  Settlement Agreement dated as of October 15, 1997 between
                the Registrant and the Pension Benefit Guaranty
                Corporation(1).
10.23       --  Registration Rights Agreement dated as of October 15, 1997
                among the Registrant, Lehman Brothers Inc. and Unterberg
                Harris(1).
10.24       --  Registration Rights Agreement dated as of December 20, 2002
                between the Registrant and Lehman Brothers Inc(7).
10.25       --  Dealer Manager Agreement dated as of September 15, 1997
                between the Registrant and Lehman Brothers Inc.(1).
10.26       --  Stockholders' Agreement dated as of October 15, 1997 among
                the Registrant, BLS and the Lehman Investors(1).
10.27       --  K & F Industries, Inc. 1998 Stock Option Plan(4).
10.28       --  K & F Industries, Inc. Supplemental Executive Retirement
                Plan, as amended(5).
10.29       --  Management Services Agreement dated as of January 1, 2000
                between the Registrant and Loral SpaceCom Corporation(6).
10.30       --  Purchase Agreement dated October 9, 1997 among the
                Registrant, Lehman Brothers Inc. and Unterberg Harris(1).
</Table>

                                        30
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                                  DESCRIPTION
-------                                 -----------
<C>       <C>   <S>
10.31       --  Purchase Agreement dated December 13, 2002 between the
                Registrant and Lehman Brothers Inc.(7).
12.1        --  Statement regarding computation of ratio of earnings to
                fixed charges.
14.1        --  K & F Industries, Inc. Code of Ethics for Financial
                Professionals
21.1        --  Subsidiaries of the Registrant(2).
31.1        --  Certification of Chief Executive Officer pursuant to Rule
                13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
                as amended.
31.2        --  Certification of Chief Financial Officer pursuant to Rule
                13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
                as amended.
32.1        --  Certification pursuant to 18 U.S.C. Section 1350, as adopted
                pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2        --  Certification pursuant to 18 U.S.C. Section 1350, as adopted
                pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
</Table>

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

(1) Previously filed as an exhibit to the Company's Registration Statement on
    Form S-4, No. 333-40977 and incorporated herein by reference.

(2) Previously filed as an exhibit to the Company's Registration Statement on
    Form S-1, No. 33-29035 and incorporated herein by reference.

(3) Previously filed as an exhibit to the Company's Registration Statement on
    Form S-1, No. 33-47028 and incorporated herein by reference.

(4) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the year ended December 31, 1998 and incorporated herein by reference.

(5) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the year ended December 31, 1999 and incorporated herein by reference.

(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the year ended December 31, 2000 and incorporated herein by reference.

(7) Previously filed as an exhibit to the Company's Registration Statement on
    Form S-4, No. 333-102658 and incorporated herein by reference.

    Supplemental Information to Be Furnished With Reports Filed Pursuant to
    Section 15(d) of the Act by Registrants Which Have Not Registered Securities
    Pursuant to Section 12 of the Act: No annual report or proxy material has
    been sent to security holders.

                                        31
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          K & F INDUSTRIES, INC.

                                          By:    /s/ KENNETH M. SCHWARTZ
                                            ------------------------------------
                                                    Kenneth M. Schwartz
                                               President and Chief Operating
                                                           Officer

Date: March 29, 2000

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

<Table>
<Caption>
              SIGNATURE                                TITLE                       DATE
              ---------                                -----                       ----
<S>     <C>                              <C>                                  <C>

       /s/ BERNARD L. SCHWARTZ              Chairman of the Board, Chief      March 29, 2004
--------------------------------------     Executive Officer and Director
         Bernard L. Schwartz               (principal executive officer)


       /s/ KENNETH M. SCHWARTZ             President and Chief Operating      March 29, 2004
--------------------------------------                Officer
         Kenneth M. Schwartz


        /s/ DIRKSON R. CHARLES           Chief Financial Officer (principal   March 29, 2004
--------------------------------------   financial and accounting officer)
          Dirkson R. Charles


          /s/ DAVID J. BRAND                          Director                March 26, 2004
--------------------------------------
            David J. Brand


       /s/ HERBERT R. BRINBERG                        Director                March 26, 2004
--------------------------------------
         Herbert R. Brinberg


         /s/ ROBERT B. HODES                          Director                March 26, 2004
--------------------------------------
           Robert B. Hodes


         /s/ RONALD H. KISNER                         Director                March 29, 2004
--------------------------------------
           Ronald H. Kisner


         /s/ JOHN R. PADDOCK                          Director                March 26, 2004
--------------------------------------
           John R. Paddock


         /s/ A. ROBERT TOWBIN                         Director                March 26, 2004
--------------------------------------
           A. Robert Towbin


        /s/ ALAN H. WASHKOWITZ                        Director                March 26, 2004
--------------------------------------
          Alan H. Washkowitz
</Table>

                                        32
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
K & F Industries, Inc.:

     We have audited the accompanying consolidated balance sheets of K & F
Industries, Inc. and subsidiaries (the "Company") as of December 31, 2003 and
2002, and the related consolidated statements of operations, stockholders'
deficiency, and cash flows for each of the three years in the period ended
December 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of K & F Industries, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.

     As discussed in Note 2 to the consolidated financial statements in 2002,
the Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142.

                                          DELOITTE & TOUCHE LLP

New York, New York
March 12, 2004

                                       F-1
<PAGE>

                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                              DECEMBER 31,    DECEMBER 31,
                                                                  2003            2002
                                                              -------------   -------------
<S>                                                           <C>             <C>
                                          ASSETS
Current Assets:
Cash and cash equivalents...................................  $  24,464,000   $  22,735,000
Accounts receivable -- net..................................     41,595,000      38,228,000
Inventory...................................................     50,087,000      52,006,000
Other current assets........................................      1,527,000       1,353,000
Income taxes receivables....................................        851,000       2,609,000
                                                              -------------   -------------
     Total current assets...................................    118,524,000     116,931,000
                                                              -------------   -------------
Property, Plant and Equipment -- Net........................     63,580,000      66,048,000
Deferred Charges -- Net of amortization of $20,970,000 and
  $16,882,000...............................................     54,232,000      54,195,000
Intangible Assets -- Net of amortization of $9,342,000 and
  $8,112,000................................................     16,238,000      17,860,000
Goodwill....................................................    167,011,000     167,011,000
                                                              -------------   -------------
     Total Assets...........................................  $ 419,585,000   $ 422,045,000
                                                              =============   =============

                         LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
  Accounts payable..........................................  $  15,029,000   $  15,081,000
  Interest payable..........................................      3,797,000       4,367,000
  Other current liabilities.................................     49,621,000      61,936,000
                                                              -------------   -------------
     Total current liabilities..............................     68,447,000      81,384,000
                                                              -------------   -------------
Pension Liabilities.........................................     26,885,000      19,819,000
Deferred Income Taxes.......................................     19,373,000      16,767,000
Postretirement Benefit Obligation Other Than Pensions.......     84,468,000      81,307,000
Other Long-Term Liabilities.................................     12,383,000      15,424,000
Long-Term Debt..............................................    395,000,000     435,000,000
Commitments and Contingencies (Notes 12 and 13)
Stockholders' Deficiency:
  Common stock, $.01 par value -- authorized, 1,000,000
     shares; issued and outstanding, 740,398 shares.........          7,000           7,000
  Additional paid-in capital................................   (263,259,000)   (263,259,000)
  Retained earnings.........................................    104,039,000      63,406,000
  Accumulated other comprehensive loss......................    (27,758,000)    (27,810,000)
                                                              -------------   -------------
     Total stockholders' deficiency.........................   (186,971,000)   (227,656,000)
                                                              -------------   -------------
Total Liabilities and Stockholders' Deficiency..............  $ 419,585,000   $ 422,045,000
                                                              =============   =============
</Table>

                See notes to consolidated financial statements.

                                       F-2
<PAGE>

                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                     ------------------------------------------
                                                         2003           2002           2001
                                                     ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>
Net sales..........................................  $342,818,000   $348,649,000   $355,334,000
Cost of sales......................................   197,812,000    204,819,000    204,036,000
                                                     ------------   ------------   ------------
Gross margin.......................................   145,006,000    143,830,000    151,298,000
Independent research and development...............    14,936,000     14,600,000     16,188,000
Selling, general and administrative expenses.......    30,499,000     40,238,000     30,273,000
Amortization.......................................     4,264,000      3,935,000      8,837,000
                                                     ------------   ------------   ------------
Operating income...................................    95,307,000     85,057,000     96,000,000
Interest expense, net of interest income of
  $427,000, $87,000 and $243,000...................    44,186,000     26,194,000     32,569,000
                                                     ------------   ------------   ------------
Income before income taxes.........................    51,121,000     58,863,000     63,431,000
Income tax provision...............................   (10,488,000)   (16,730,000)   (27,447,000)
                                                     ------------   ------------   ------------
Net income.........................................  $ 40,633,000   $ 42,133,000   $ 35,984,000
                                                     ============   ============   ============
</Table>

                See notes to consolidated financial statements.

                                       F-3
<PAGE>

                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

<Table>
<Caption>
                              COMMON STOCK                                       ACCUMULATED
                            ----------------                       RETAINED         OTHER
                            SHARES               ADDITIONAL        EARNINGS     COMPREHENSIVE   COMPREHENSIVE
                            ISSUED    AMOUNT   PAID-IN CAPITAL    (DEFICIT)     INCOME (LOSS)   INCOME (LOSS)
                            -------   ------   ---------------   ------------   -------------   -------------
<S>                         <C>       <C>      <C>               <C>            <C>             <C>
Balance, January 1,
  2001....................  740,398   $7,000    $ (63,259,000)   $(14,711,000)  $    (43,000)
  Net income..............                                         35,984,000                   $ 35,984,000
  Cumulative translation
    adjustments...........                                                           (87,000)        (87,000)
  Cumulative effect of
    adoption of SFAS No.
    133 (net of tax
    benefit of
    $373,000).............                                                          (550,000)       (550,000)
  Amortization of
    transition adjustment
    included in interest
    expense (net of tax of
    $122,000).............                                                           184,000         184,000
  Additional minimum
    pension liability (net
    of tax benefit of
    $12,034,000)..........                                                       (15,778,000)    (15,778,000)
                            -------   ------    -------------    ------------   ------------    ------------
Balance, December 31,
  2001....................  740,398   7,000       (63,259,000)     21,273,000    (16,274,000)   $ 19,753,000
                                                                                                ============
  Net income..............                                         42,133,000                   $ 42,133,000
  Cumulative translation
    adjustments...........                                                           224,000         224,000
  Amortization of
    transition adjustment
    included in interest
    expense (net of tax of
    $125,000).............                                                           184,000         184,000
  Additional minimum
    pension liability (net
    of tax benefit of
    $6,595,000)...........                                                       (11,944,000)    (11,944,000)
  Dividends...............                       (200,000,000)
                            -------   ------    -------------    ------------   ------------    ------------
Balance, December 31,
  2002....................  740,398   7,000      (263,259,000)     63,406,000    (27,810,000)   $ 30,597,000
                                                                                                ============
  Net income..............                                         40,633,000                   $ 40,633,000
  Cumulative translation
    adjustments...........                                                           199,000         199,000
  Amortization of
    transition adjustment
    included in interest
    expense (net of tax of
    $126,000).............                                                           182,000         182,000
  Additional minimum
    pension liability (net
    of tax of
    $1,157,000)...........                                                          (329,000)       (329,000)
                            -------   ------    -------------    ------------   ------------    ------------
Balance, December 31,
  2003....................  740,398   $7,000    $(263,259,000)   $104,039,000   $(27,758,000)   $ 40,685,000
                            =======   ======    =============    ============   ============    ============
</Table>

                See notes to consolidated financial statements.

                                       F-4
<PAGE>

                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                    -------------------------------------------
                                                        2003           2002            2001
                                                    ------------   -------------   ------------
<S>                                                 <C>            <C>             <C>
Cash Flows From Operating Activities:
  Net income......................................  $ 40,633,000   $  42,133,000   $ 35,984,000
  Adjustments to reconcile net income to net cash
     provided by operating activities:
  Depreciation....................................     7,936,000       8,077,000      8,052,000
  Amortization....................................     4,264,000       3,935,000      8,837,000
  Non-cash interest expense-amortization of
     deferred financing charges...................     2,477,000       2,048,000      1,680,000
  Non-cash interest (income) expense -- change in
     fair market value of interest rate swap......    (3,533,000)       (402,000)     3,935,000
  Provision for losses on accounts receivable.....       170,000         419,000        512,000
  Deferred income taxes...........................     1,449,000      12,818,000     24,507,000
  Changes in assets and liabilities:
     Accounts receivable..........................    (3,412,000)      5,037,000      2,625,000
     Inventory....................................     1,993,000       8,639,000      3,419,000
     Other current assets.........................     1,584,000        (687,000)       (32,000)
     Prepaid pension costs........................     8,286,000      (7,554,000)       940,000
     Accounts payable.............................       (52,000)        900,000     (4,192,000)
     Notes payable................................            --              --     (3,900,000)
     Interest payable.............................      (570,000)        655,000       (436,000)
     Other current liabilities....................    (8,600,000)     10,081,000     (4,363,000)
     Postretirement benefit obligation other than
       pensions...................................     3,161,000       1,651,000        (31,000)
     Other long-term liabilities..................    (3,041,000)      2,676,000        (47,000)
                                                    ------------   -------------   ------------
       Net cash provided by operating
          activities..............................    52,745,000      90,426,000     77,490,000
                                                    ------------   -------------   ------------
Cash Flows From Investing Activities:
  Capital expenditures............................    (5,468,000)     (4,084,000)    (5,057,000)
  Deferred charges................................    (5,548,000)     (9,610,000)   (11,737,000)
  Payment for intangible assets...................            --              --       (537,000)
                                                    ------------   -------------   ------------
       Net cash used in investing activities......   (11,016,000)    (13,694,000)   (17,331,000)
                                                    ------------   -------------   ------------
Cash Flows From Financing Activities:
  Payments on long-term debt......................   (40,000,000)   (100,625,000)   (41,500,000)
  Payments of senior revolving loan...............            --     (40,000,000)   (66,000,000)
  Borrowings under senior revolving loan..........            --      40,000,000     46,000,000
  Proceeds from issuance of long-term debt........            --     250,000,000             --
  Dividend on common stock........................            --    (200,000,000)            --
  Deferred charges -- financing costs.............            --      (8,508,000)            --
                                                    ------------   -------------   ------------
Net cash used in financing activities.............   (40,000,000)    (59,133,000)   (61,500,000)
                                                    ------------   -------------   ------------
Net increase (decrease) in cash and cash
  equivalents.....................................     1,729,000      17,599,000     (1,341,000)
Cash and cash equivalents, beginning of year......    22,735,000       5,136,000      6,477,000
                                                    ------------   -------------   ------------
Cash and cash equivalents, end of year............  $ 24,464,000   $  22,735,000   $  5,136,000
                                                    ============   =============   ============
Supplemental Information:
  Interest paid during the year...................  $ 46,239,000   $  23,980,000   $ 27,633,000
                                                    ============   =============   ============
  Income taxes paid during the year...............  $  6,552,000   $   3,461,000   $  2,467,000
                                                    ============   =============   ============
</Table>

                See notes to consolidated financial statements.

                                       F-5
<PAGE>

                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  DESCRIPTION OF BUSINESS

     K & F Industries, Inc. ("K & F") and subsidiaries (collectively, the
"Company") is primarily engaged in the design, development, manufacture and
distribution of wheels, brakes and brake control systems for commercial,
military and general aviation aircraft, and the manufacture of materials for
fuel tanks, iceguards, inflatable oil booms and various other products made from
coated fabrics for military and commercial uses. The Company serves the
aerospace industry and sells its products to airframe manufacturers and
commercial airlines throughout the world and to the United States and certain
foreign governments. The Company's activities are conducted through its two
wholly owned subsidiaries, Aircraft Braking Systems Corporation ("Aircraft
Braking Systems"), which generated approximately 84% of the Company's total
revenues during the year ended December 31, 2003, and Engineered Fabrics
Corporation ("Engineered Fabrics") (collectively, the "Subsidiaries"), which
generated approximately 16% of the Company's total revenues during the year
ended December 31, 2003.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation -- The consolidated financial statements
include the accounts of K & F Industries, Inc. and the Subsidiaries. All
material intercompany accounts and transactions between these entities have been
eliminated.

     Cash and Cash Equivalents -- Cash and cash equivalents consist of cash,
commercial paper and other investments that are readily convertible into cash
and have original maturities of three months or less.

     Revenue and Expense Recognition -- Sales are recorded as units are shipped.
The Company customarily sells original wheel and brake equipment below cost as
an investment in a new airframe which is expected to be recovered through the
subsequent sale of replacement parts. These commercial investments (losses) are
recognized when original equipment is shipped. Losses on U.S. government
contracts are immediately recognized in full when determinable.

     Inventory -- Inventory is stated at average cost, not in excess of net
realizable value. In accordance with industry practice, inventoried costs may
contain amounts relating to contracts with long production cycles, a portion of
which will not be realized within one year. Reserves for slow moving and
obsolete inventories are provided based on current assessments about future
product demand and production requirements for the next twelve months. The
Company evaluates the adequacy of these reserves quarterly.

     Property, Plant and Equipment -- Property, plant and equipment are stated
at cost. Maintenance and repairs are expensed when incurred; renewals and
betterments are capitalized. When assets are retired or otherwise disposed of,
the cost and accumulated depreciation are eliminated from the accounts, and any
gain or loss is included in the results of operations. Depreciation is provided
on the straight-line method over the estimated useful lives of the related
assets as follows: buildings and improvements -- 8 to 40 years; machinery,
equipment, furniture and fixtures -- 3 to 25 years; and leasehold
improvements -- over the life of the applicable lease or 10 years, whichever is
shorter.

     Goodwill, Deferred Charges and Other Intangible Assets -- Effective January
1, 2002, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets." The adoption of SFAS
No. 142 required an initial impairment assessment involving a comparison of the
fair value of goodwill, deferred charges and other intangible assets to current
carrying value. Upon adoption, the impairment analysis did not result in any
impairment of our intangible assets. Deferred charges and other intangible
assets determined to have finite lives are amortized over their useful lives. We
review such deferred charges and other intangible assets with finite lives for
impairment to ensure they are appropriately valued if conditions exist that may
indicate the carrying value may not be recoverable. Such conditions may include
an economic downturn in a geographic market or a change in the assessment of
future operations. Goodwill is not amortized. We perform tests for impairment of
goodwill annually or more frequently if events

                                       F-6
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

or circumstances indicate it might be impaired. Such tests include comparing the
fair value of a reporting unit with its carrying value, including goodwill.
Impairment assessments are performed using cash flow analysis. Where applicable,
an appropriate discount rate is used, based on the Company's cost of capital
rate. See Note 14.

     Before January 1, 2002, the Company amortized goodwill on the straight-line
method over a period of 40 years.

     Deferred charges consist primarily of financing costs ($8.2 million and
$10.6 million, which are net of amortization (non-cash interest expense) of $5.5
million and $4.4 million at December 31, 2003 and 2002, respectively), and
development participation costs ($46.1 million and $43.6 million, which are net
of amortization of $15.5 million and $12.4 million at December 31, 2003 and
2002, respectively) paid in connection with the award of wheels, brakes and
brake control equipment on various commercial programs. Development
participation costs are being amortized on a straight-line method over a period
of 20 years. Deferred financing charges are primarily being amortized on an
effective interest method over 4.5 to 10 years, which reflect the terms of the
Company's debt.

     Intangible assets consist of patents, licenses and computer software which
are stated at cost and are being amortized on a straight-line method over
periods of 3 to 30 years.

     Evaluation of Long-Lived Assets -- Long-lived assets are assessed for
recoverability on an ongoing basis in accordance with SFAS No. 144. In
evaluating the value and future benefits of long-lived assets, their carrying
value is compared to management's estimate of the anticipated undiscounted
future net cash flows of the related long-lived asset. There were no adjustments
to the carrying amount of long-lived assets during the years ended December 31,
2003, 2002 and 2001 resulting from the Company's evaluations.

     Warranty -- Estimated costs of warranty are accrued when individual claims
arise with respect to a product or performance. When the Company becomes aware
of such defects, the estimated costs of all potential warranty claims arising
from such defects are fully accrued. See Note 12.

     Business and Credit Concentrations -- The Company's customers are
concentrated in the airline industry but are not concentrated in any specific
region. The U.S. government accounted for approximately 26%, 26% and 21% of
total sales for the years ended December 31, 2003, 2002 and 2001, respectively.
No other single customer accounted for 10% or more of consolidated revenues for
the years then ended, and there were no significant accounts receivable from a
single customer, except the U.S. government, at December 31, 2003 and 2002.

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

     Stock-Based Compensation Plans -- As permitted by SFAS No. 123, the Company
accounts for its stock-based compensation using the intrinsic value method in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS No. 123 requires the disclosure of pro forma net income had the Company
adopted the fair value method. However, disclosure has been omitted because the
pro forma effect on net income required to be disclosed under SFAS No. 123 is
not material to the Company's results of operations. Effective January 1, 2002,
the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," have been adopted by the Company.

     Accounting Changes and Pronouncements -- In January 2004, the Financial
Accounting Standards Board (the "FASB") issued Staff Position No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug Improvement and Modernization Acts of 2003," which permits a sponsor of a

                                       F-7
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

postretirement health care plan that provides a prescription drug benefit to
make a one-time election to defer accounting for the effects of the Act. In
accordance with FASB Staff Position No. 106-1, the Company is electing to defer
recognition of any potential savings on the measure of the accumulated
postretirement benefit obligation or net periodic benefit cost as a result of
the Act until specific authoritative guidance on the accounting of the Federal
subsidy is issued. Therefore, these financial statements and accompanying notes
do not reflect the effects of the Act on the plan. (See Note 11).

     In December 2003, the FASB issued SFAS No. 132 (Revised) ("SFAS No.
132-R"), "Employer's Disclosure about Pensions and Other Postretirement
Benefits." SFAS 132-R retains disclosure requirements of the original SFAS No.
132 and requires additional disclosures relating to assets, obligations, cash
flows, and net periodic benefit cost. SFAS No. 132-R is effective for fiscal
years ending after December 15, 2003, except that certain disclosures are
effective for fiscal years ending after June 15, 2004. Interim period
disclosures are effective for interim periods beginning after December 15, 2003.
The adoption of the disclosure provisions of this standard did not have a
material effect on the Company's consolidated financial position, results of
operations or cash flows. (See Note 11).

     In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial position.
Previously, many of those financial instruments were classified as equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this standard did not have
a material effect on the Company's consolidated financial statements.

     In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of this standard did
not have a material effect on the Company's consolidated financial statements.

     In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities," expanding the guidance in Accounting Research Bulletin No.
51, "Consolidated Financial Statements," relating to transactions involving
variable interest entities. In December 2003, the FASB issued FIN No. 46
(Revised) to address certain FIN No. 46 implementation issues. The Company
adopted FIN No. 46 (Revised) as of December 31, 2003. As the Company does not
have any variable interest entities, the adoption of this standard did not have
an impact on the Company's consolidated financial statements.

     Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards
for the recognition and measurement of an asset retirement obligation and its
associated asset retirement cost. The retirement obligations included within the
scope of this project are those that an entity cannot avoid as a result of
either acquisition, construction or normal operation of a long-lived asset. The
adoption of this standard did not have a material impact on the Company's
consolidated financial statements.

     Effective January 1, 2003, the Company adopted SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections as of April 2002." SFAS No. 145 rescinds Statement of
Financial Accounting Standards No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of SFAS No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 amends SFAS No.
13, "Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback

                                       F-8
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transactions. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. The adoption of this
standard decreased income before taxes by $1.6 million during 2003. This
represents the premium paid and the write-off of a portion of unamortized
financing costs relating to the early redemption of $40.0 million of the
Company's 9 1/4% Notes. This premium and write-off would have been recorded as
an extraordinary charge prior to adoption of this standard.

     Effective January 1, 2003, the Company adopted SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." This Statement requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The adoption of this standard did not have a material
impact on the Company's consolidated financial statements.

     In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. FIN No.
45 requires the Company to recognize an initial liability for the fair value of
an obligation assumed by issuing a guarantee. The provision for initial
recognition and measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company has
adopted the disclosure provisions of FIN No. 45 as of December 31, 2002 (see
Note 12). In 2003, the Company adopted the initial recognition and initial
measurement provisions of FIN No. 45. The Company does not provide guarantees
for performance of third parties, and therefore, there was no impact on the
Company's consolidated financial statements.

     Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. SFAS No. 133 defines new requirements for designation and
documentation of hedging relationships as well as ongoing effectiveness
assessments in order to use hedge accounting. For a derivative that does not
qualify as a hedge, changes in fair value will be recognized in earnings.

     As a requirement of a previous credit facility, the Company entered into an
interest rate swap agreement to reduce the impact of potential increases in
interest rates on the credit facility.

     The adoption of SFAS No. 133 on January 1, 2001 resulted in a cumulative
pre-tax reduction in other comprehensive income of $0.9 million ($0.6 million
after tax) related to derivatives designated in cash flow-type hedges prior to
adopting SFAS No. 133. This amount was amortized into interest expense over
three years which was the remaining life of the interest rate swap agreement.
During the years ended December 31, 2003, 2002 and 2001, the change in fair
market value of this derivative instrument resulted in non-cash interest income
of $3.5 million and $0.4 million, and non-cash interest expense of $3.9 million,
respectively. These amounts were recorded in interest expense as this derivative
was not designated as a hedging instrument for accounting purposes. On December
17, 2003 the interest rate swap agreement expired.

     Reclassifications -- Certain amounts in the financial statements for the
prior years have been reclassified to conform to the presentation in the current
year.

                                       F-9
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3.  ACCOUNTS RECEIVABLE

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                2003          2002
                                                             -----------   -----------
<S>                                                          <C>           <C>
Accounts receivable, principally from commercial
  customers................................................  $35,306,000   $36,027,000
Accounts receivable on U.S. government and other long-term
  contracts................................................    7,505,000     3,257,000
Allowances.................................................   (1,216,000)   (1,056,000)
                                                             -----------   -----------
  Total....................................................  $41,595,000   $38,228,000
                                                             ===========   ===========
</Table>

     An analysis of changes in the allowance for doubtful accounts is as
follows:

<Table>
<Caption>
                                                       2003         2002        2001
                                                    ----------   ----------   --------
<S>                                                 <C>          <C>          <C>
Balance at January 1..............................  $1,056,000   $  647,000   $144,000
Current year provisions...........................     170,000      419,000    512,000
Write-offs........................................     (10,000)     (10,000)    (9,000)
                                                    ----------   ----------   --------
Balance at December 31............................  $1,216,000   $1,056,000   $647,000
                                                    ==========   ==========   ========
</Table>

4.  INVENTORY

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                2003          2002
                                                             -----------   -----------
<S>                                                          <C>           <C>
Raw materials and work-in-process..........................  $22,324,000   $24,830,000
Finished goods.............................................   15,839,000    17,017,000
Inventoried costs related to U.S government and other
  long-term contracts......................................   11,924,000    10,159,000
                                                             -----------   -----------
  Total....................................................  $50,087,000   $52,006,000
                                                             ===========   ===========
</Table>

5.  PROPERTY, PLANT AND EQUIPMENT

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                           ---------------------------
                                                               2003           2002
                                                           ------------   ------------
<S>                                                        <C>            <C>
Land.....................................................  $    661,000   $    661,000
Buildings and improvements...............................    38,234,000     37,695,000
Machinery, equipment, furniture and fixtures.............   134,433,000    133,018,000
                                                           ------------   ------------
  Total..................................................   173,328,000    171,374,000
Less accumulated depreciation and amortization...........   109,748,000    105,326,000
                                                           ------------   ------------
  Total..................................................  $ 63,580,000   $ 66,048,000
                                                           ============   ============
</Table>

                                       F-10
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6.  OTHER CURRENT LIABILITIES

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                2003          2002
                                                             -----------   -----------
<S>                                                          <C>           <C>
Accrued payroll costs......................................  $14,451,000   $22,888,000
Accrued property and other taxes...........................    2,711,000     3,665,000
Accrued costs on long-term contracts.......................    5,061,000     4,605,000
Accrued warranty costs.....................................   13,261,000    12,810,000
Customer credits...........................................    5,918,000     5,128,000
Postretirement benefit obligation other than pensions......    3,000,000     3,000,000
Fair market value of interest rate swap....................           --     3,715,000
Other......................................................    5,219,000     6,125,000
                                                             -----------   -----------
  Total....................................................  $49,621,000   $61,936,000
                                                             ===========   ===========
</Table>

7.  LONG-TERM DEBT

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                           ---------------------------
                                                               2003           2002
                                                           ------------   ------------
<S>                                                        <C>            <C>
9 1/4% Senior Subordinated Notes due 2007................  $145,000,000   $185,000,000
9 5/8% Senior Subordinated Notes due 2010................   250,000,000    250,000,000
                                                           ------------   ------------
Total....................................................  $395,000,000   $435,000,000
                                                           ============   ============
</Table>

     On December 20, 2002, the Company consummated a recapitalization as
follows:

     - We issued $250 million of senior subordinated notes due December 15, 2010
       for which we received $241.5 million after paying fees and expenses.

     - We paid $32.0 million of outstanding borrowings under our former credit
       facility.

     - We established a new $30.0 million revolving credit facility.

     - We paid a dividend of $200.0 million to the holders of our common stock.

     - We paid $9.4 million to the holders of our common stock options.

     The Company has $145 million of debt maturing on October 15, 2007 and $250
million of debt maturing on December 15, 2010.

     The Company has a $30.0 million bank Revolving Credit Facility (the
"Revolving Loan") with up to $10 million available for letters of credit. The
Revolving Loan commitment terminates on June 30, 2007. At December 31, 2003, the
Company had $28.0 million available to borrow and outstanding letters of credit
of $2.0 million.

     The Revolving Loan contains certain covenants and events of default,
including limitations on additional indebtedness, liens, asset sales, making
certain restricted payments, capital expenditures, creating guarantee
obligations and material lease obligations. The Revolving Loan also contains
certain financial ratio requirements including a cash interest coverage ratio, a
leverage ratio and maintenance of a minimum adjusted net worth. The Company was
in compliance with all covenants at December 31, 2003 and 2002.

     On December 20, 2002, the Company issued $250 million of 9 5/8% Senior
Subordinated Notes which mature on December 15, 2010 (the "9 5/8% Notes"). The
9 5/8% Notes are not subject to a sinking fund. The 9 5/8% Notes may not be
redeemed prior to December 15, 2006. On or after December 15, 2006, the Company

                                       F-11
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

may redeem the 9 5/8% Notes at descending premiums ranging from 104.813% in
December 2006 to no premium after December 2009.

     On October 15, 1997, the Company issued $185 million of 9 1/4% Senior
Subordinated Notes which mature on October 15, 2007 (the "9 1/4% Notes"). The
9 1/4% Notes are not subject to a sinking fund. On or after October 15, 2002,
the Company may redeem the 9 1/4% Notes at descending premiums ranging from
104.625% in October 2002 to no premium after October 2005.

     On October 15, 2003, the Company redeemed $40 million aggregate principal
amount of the 9 1/4% Notes at a redemption price of 103.083% of the principal
amount thereof. In connection therewith, the Company took a charge to interest
expense of $1.6 million, for redemption premiums and the write-off of a portion
of related unamortized financing costs.

8.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts of all financial instruments reported on the balance
sheet at December 31, 2003 and 2002 approximate their fair value, except as
discussed below.

     The fair value of the Company's total debt based on quoted market prices or
on current rates for similar debt with the same maturities was approximately
$431.0 million and $445.0 million at December 31, 2003 and 2002, respectively.

     As a requirement of a previous credit facility, we entered into an interest
rate swap agreement to reduce the impact of potential increases in interest
rates. This agreement expired on December 17, 2003. The payments made under the
swap agreement were $4.0 million and $3.8 million in 2003 and 2002,
respectively, which is included in interest expense.

9.  CAPITAL STOCK

     The Company has two stock option plans which provide for the grant of
non-qualified or incentive stock options to acquire an aggregate of 100,000
authorized but unissued shares of common stock. Only non-qualified stock options
have been granted to date. The options granted prior to 2000 become exercisable
in four equal installments on the second, third, fourth and fifth anniversaries
of the date of grant. The options granted in 2000 and thereafter become
exercisable in three equal installments on the first, second and third
anniversaries of the date of grant. All options remain exercisable until the
expiration of the option, which is 10 years from the date of the grant. Option
exercise prices were issued above the fair market value of the Company's common
stock at the date of grant, as determined by an independent appraisal of the
Company.

                                       F-12
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Stock option activity is summarized as follows:

<Table>
<Caption>
                                                                        WEIGHTED
                                                              NUMBER    AVERAGE
                                                                OF      EXERCISE
                                                              OPTIONS    PRICE
                                                              -------   --------
<S>                                                           <C>       <C>
Outstanding at January 1, 2001..............................  54,400    $192.57
  Granted...................................................   1,600     250.00
  Exercised.................................................      --         --
  Canceled..................................................    (125)    175.00
                                                              ------
Outstanding at December 31, 2001............................  55,875     194.27
  Granted...................................................   6,950     200.00
  Exercised.................................................      --         --
  Canceled..................................................    (125)    175.00
                                                              ------
Outstanding at December 31, 2002............................  62,700     194.94
  Granted...................................................  10,950     475.00
  Exercised.................................................      --         --
  Canceled..................................................  (2,350)    194.15
                                                              ------
Outstanding at December 31, 2003............................  71,300     237.98
                                                              ======
</Table>

     The following summarizes information about stock options outstanding at
December 31, 2003:

<Table>
<Caption>
                                         OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
                          -------------------------------------------------   ------------------------------
                            NUMBER      WEIGHTED AVERAGE   WEIGHTED AVERAGE     NUMBER      WEIGHTED AVERAGE
EXERCISE PRICE            OUTSTANDING     LIFE (YEARS)      EXERCISE PRICE    EXERCISABLE    EXERCISE PRICE
--------------            -----------   ----------------   ----------------   -----------   ----------------
<S>                       <C>           <C>                <C>                <C>           <C>
$175.00.................    39,650            4.1              $175.00          39,650          $175.00
 200.00.................     6,950            8.1               200.00           2,317           200.00
 250.00.................    13,750            6.6               250.00          13,025           250.00
 475.00.................    10,950            9.3               475.00              --           475.00
                            ------                                              ------
                            71,300            5.8               237.98          54,992           193.82
                            ======                                              ======
</Table>

     At December 31, 2003, there were 9,750 shares available for future grants
under the terms of our stock option plans. At December 31, 2002, there were
38,638 options and 8,883 options exercisable at $175 per share and $250 per
share, respectively. At December 31, 2001, there were 28,350 options and 4,175
options exercisable at $175 per share and $250 per share, respectively.

                                       F-13
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

     Components of accumulated other comprehensive income (loss), net of taxes,
consist of the following:

<Table>
<Caption>
                                                   AMORTIZATION
                                      CUMULATIVE   OF TRANSITION
                                      EFFECT OF     ADJUSTMENT      ADDITIONAL     ACCUMULATED
                        CUMULATIVE    CHANGE IN     INCLUDED IN      MINIMUM          OTHER
                        TRANSLATION   ACCOUNTING     INTEREST        PENSION      COMPREHENSIVE
                        ADJUSTMENTS   PRINCIPLE       EXPENSE       LIABILITY     INCOME (LOSS)
                        -----------   ----------   -------------   ------------   -------------
<S>                     <C>           <C>          <C>             <C>            <C>
January 1, 2001.......   $ (43,000)   $      --      $     --      $         --   $    (43,000)
2001 Change...........     (87,000)    (550,000)      184,000       (15,778,000)   (16,231,000)
                         ---------    ---------      --------      ------------   ------------
December 31, 2001.....    (130,000)    (550,000)      184,000       (15,778,000)   (16,274,000)
2002 Change...........     224,000           --       184,000       (11,944,000)   (11,536,000)
                         ---------    ---------      --------      ------------   ------------
December 31, 2002.....      94,000     (550,000)      368,000       (27,722,000)   (27,810,000)
2003 Change...........     199,000           --       182,000          (329,000)        52,000
                         ---------    ---------      --------      ------------   ------------
December 31, 2003.....   $ 293,000    $(550,000)     $550,000      $(28,051,000)  $(27,758,000)
                         =========    =========      ========      ============   ============
</Table>

11.  EMPLOYEE BENEFIT PLANS

     The Company provides pension benefits to substantially all employees
through hourly and salaried pension plans. The plans provide benefits based
primarily on the participant's years of service. The salaried plan also includes
voluntary employee contributions. The Company's funding policy is to contribute
the minimum required under the Employee Retirement Income Security Act of 1974
("ERISA").

     The Company provides postretirement health care and life insurance benefits
for all eligible employees and their dependents active at April 27, 1989 and
thereafter, and postretirement life insurance benefits for retirees prior to
April 27, 1989. Participants are eligible for these benefits when they retire
from active service and meet the eligibility requirements of the Company's
pension plans. The health care plans are generally contributory and the life
insurance plans are generally non-contributory.

                                       F-14
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following represents a reconciliation of the benefit obligation, fair
value of plan assets and funded status of the Company's defined benefit and
other postretirement benefit plans:

<Table>
<Caption>
                                          PENSION BENEFITS            POSTRETIREMENT BENEFITS
                                            DECEMBER 31,                   DECEMBER 31,
                                     ---------------------------   -----------------------------
                                         2003           2002           2003            2002
                                     ------------   ------------   -------------   -------------
<S>                                  <C>            <C>            <C>             <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
  year.............................  $121,797,000   $103,845,000   $ 101,020,000   $  77,886,000
Service cost.......................     4,412,000      3,797,000       2,215,000       1,883,000
Interest cost......................     8,029,000      7,663,000       6,953,000       6,452,000
Plan participants' contributions...       436,000        356,000         919,000         778,000
Amendments.........................            --      3,367,000     (12,638,000)        420,000
Actuarial loss.....................     7,623,000      8,502,000      15,842,000      17,739,000
Benefits paid......................    (6,222,000)    (5,733,000)     (4,474,000)     (4,138,000)
                                     ------------   ------------   -------------   -------------
Benefit obligation at end of
  year.............................   136,075,000    121,797,000     109,837,000     101,020,000
                                     ------------   ------------   -------------   -------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
  beginning of year................    97,161,000     93,806,000              --              --
Actual return on plan assets.......    11,268,000     (3,437,000)             --              --
Employer contributions.............        32,000     12,169,000       3,555,000       3,360,000
Plan participants' contributions...       436,000        356,000         919,000         778,000
Benefits paid......................    (6,222,000)    (5,733,000)     (4,474,000)     (4,138,000)
                                     ------------   ------------   -------------   -------------
Fair value of plan assets at end of
  year.............................   102,675,000     97,161,000              --              --
                                     ------------   ------------   -------------   -------------
Funded status......................   (33,400,000)   (24,636,000)   (109,837,000)   (101,020,000)
Unrecognized actuarial loss........    52,038,000     51,168,000      36,401,000      22,039,000
Unrecognized prior service cost....     3,373,000      3,765,000     (14,032,000)     (5,326,000)
                                     ------------   ------------   -------------   -------------
Net amount recognized..............  $ 22,011,000   $ 30,297,000   $ (87,468,000)  $ (84,307,000)
                                     ============   ============   =============   =============
AMOUNTS RECOGNIZED IN THE BALANCE
  SHEET CONSIST OF:
Prepaid benefit cost...............  $         --   $         --   $          --   $          --
Accrued benefit liability..........   (26,885,000)   (19,819,000)    (87,468,000)    (84,307,000)
Intangible asset...................     3,373,000      3,765,000              --              --
Accumulated other comprehensive
  income...........................    45,523,000     46,351,000              --              --
                                     ------------   ------------   -------------   -------------
Net amount recognized..............  $ 22,011,000   $ 30,297,000   $ (87,468,000)  $ (84,307,000)
                                     ============   ============   =============   =============
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate......................          6.25%          6.75%           6.25%           6.75%
Expected return on plan assets.....          9.00           9.00              --              --
Rate of compensation increase......          4.00           4.00            4.00            4.00
</Table>

                                       F-15
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following represents the net periodic benefit cost (income) for the
defined benefit and postretirement benefit plans:

<Table>
<Caption>
                                  PENSION BENEFITS                       POSTRETIREMENT BENEFITS
                       ---------------------------------------   ---------------------------------------
                               YEAR ENDED DECEMBER 31,                   YEAR ENDED DECEMBER 31,
                       ---------------------------------------   ---------------------------------------
                          2003          2002          2001          2003          2002          2001
                       -----------   -----------   -----------   -----------   -----------   -----------
<S>                    <C>           <C>           <C>           <C>           <C>           <C>
Service cost.........  $ 4,412,000   $ 3,797,000   $ 3,971,000   $ 2,215,000   $ 1,883,000   $ 1,611,000
Interest cost........    8,029,000     7,663,000     7,148,000     6,953,000     6,452,000     5,453,000
Expected return on
  plan assets........   (8,272,000)   (9,064,000)   (9,729,000)           --            --            --
Amortization of prior
  service cost.......      393,000       217,000       303,000    (3,932,000)   (3,932,000)   (3,966,000)
Recognized actuarial
  loss (gain)........    3,757,000     2,002,000       279,000     1,480,000       608,000        (9,000)
                       -----------   -----------   -----------   -----------   -----------   -----------
Net periodic benefit
  cost...............  $ 8,319,000   $ 4,615,000   $ 1,972,000   $ 6,716,000   $ 5,011,000   $ 3,089,000
                       ===========   ===========   ===========   ===========   ===========   ===========
</Table>

     The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $136.1 million, $129.6 million and $102.7 million,
respectively, as of December 31, 2003 and $121.8 million, $117.0 million and
$97.1 million, respectively, as of December 31, 2002.

     In the fourth quarter of 2003 the Company announced to all active salaried
and the majority of its retired salaried employees that effective January 1,
2012 it would freeze its share of the retiree health care costs at the 2011
employer cost level. This announcement was also made to all Aircraft Braking
Systems' retired bargaining employees or their continuing beneficiary.

     On December 8, 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act"). The Act introduces a
federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. In January
2004, the FASB issued Staff Position No. 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug Improvement and
Modernization Acts of 2003," which permits a sponsor of a postretirement health
care plan that provides a prescription drug benefit to make a one-time election
to defer accounting for the effects of the Act. In accordance with FASB Staff
Position No. 106-1, the Company is electing to defer recognition of any
potential savings on the measure of the accumulated postretirement benefit
obligation or net periodic benefit cost as a result of the Act until specific
authoritative guidance on the accounting of the Federal subsidy is issued.
Therefore, these financial statements and accompanying notes do not reflect the
effects of the Act on the plan.

     For measurement purposes, a 11.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2004. The rate was assumed
to decrease to 4.5% for 2010 and remain at that level thereafter.

     Assumed health care cost trend rates have a significant effect on the
amounts reported for the retiree medical plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:

<Table>
<Caption>
                                                                 ONE-             ONE-
                                                             PERCENTAGE-      PERCENTAGE-
                                                            POINT INCREASE   POINT DECREASE
                                                            --------------   --------------
<S>                                                         <C>              <C>
Effect on total of service cost and interest cost
  components..............................................   $ 1,327,000      $ (1,077,000)
Effect on postretirement benefit obligation...............    13,374,000       (10,022,000)
</Table>

                                       F-16
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company hired an investment manager to oversee the selection of
investment managers and their performance. Our current asset allocation is 50%
of assets invested primarily in U.S. equities with the balance primarily in
investment grade fixed income securities.

     Eligible employees also participate in the Company's Savings Plan. The
Company matches 60% of a participating employee's contributions, up to 6% of
compensation. The employer contributions generally have vested to participating
employees after five years of service (three years of service effective January
1, 2002). The matching contributions were $1,690,000, $1,689,000 and $1,796,000
for the years ended December 31, 2003, 2002 and 2001, respectively.

12.  COMMITMENTS AND PRODUCT WARRANTIES

  COMMITMENTS

     The Company is party to various non-cancelable operating leases which are
longer than a one-year term for certain data processing, and other equipment and
facilities with minimum rental commitments payable as follows:

<Table>
<Caption>
YEAR ENDING DECEMBER 31,                                        AMOUNT
------------------------                                      ----------
<S>                                                           <C>
  2004......................................................  $4,742,000
  2005......................................................   4,296,000
  2006......................................................   2,930,000
  2007......................................................   2,622,000
  2008......................................................   1,505,000
Thereafter..................................................   4,245,000
</Table>

     Rental expense was $4,155,000, $4,076,000 and $4,608,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.

  PRODUCT WARRANTIES

     Estimated costs of product warranty are accrued when individual claims
arise with respect to a product. When the Company becomes aware of those types
of defects, the estimated costs of all potential warranty claims arising from
those types of defects are fully accrued. An analysis of changes in the
liability for product warranty is as follows:

<Table>
<Caption>
                                                   2003          2002          2001
                                                -----------   -----------   -----------
<S>                                             <C>           <C>           <C>
Balance at January 1..........................  $15,166,000   $13,736,000   $11,872,000
Current year provisions.......................    6,925,000     9,935,000    10,247,000
Expenditures..................................   (8,167,000)   (8,505,000)   (8,383,000)
                                                -----------   -----------   -----------
Balance at December 31........................  $13,924,000   $15,166,000   $13,736,000
                                                ===========   ===========   ===========
</Table>

13.  CONTINGENCIES

     There are various lawsuits and claims pending against the Company
incidental to its business. Although the final results in such suits and
proceedings cannot be predicted with certainty, in the opinion of management,
the ultimate liability, if any, will not have a material adverse effect on the
Company's consolidated financial statements.

                                       F-17
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14.  GOODWILL AND INTANGIBLE ASSETS

     Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 requires that goodwill no longer be
amortized, but instead be tested for impairment at least annually. SFAS No. 142
also requires that any recognized intangible asset determined to have an
indefinite useful life not be amortized, but instead be tested for impairment in
accordance with this Standard until its life is determined to no longer be
indefinite. The Company adopted SFAS No. 142 on January 1, 2002, at which time
amortization of goodwill ceased. The impairment analysis did not result in an
impairment charge upon adoption or during the years ended December 31, 2003 and
2002.

     The following table adjusts net income assuming the adoption of SFAS No.
142 at the beginning of the periods presented:

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31
                                                ---------------------------------------
                                                   2003          2002          2001
                                                -----------   -----------   -----------
<S>                                             <C>           <C>           <C>
Reported net income...........................  $40,633,000   $42,133,000   $35,984,000
  Add back goodwill amortization, net of
     tax......................................           --            --     3,465,000
                                                -----------   -----------   -----------
Adjusted net income...........................  $40,633,000   $42,133,000   $39,449,000
                                                ===========   ===========   ===========
</Table>

     Intangible assets consist of the following:

<Table>
<Caption>
                                                           DECEMBER 31, 2003
                                              -------------------------------------------
                                              GROSS CARRYING   ACCUMULATED
                                                  AMOUNT       AMORTIZATION       NET
                                              --------------   ------------   -----------
<S>                                           <C>              <C>            <C>
Amortized intangible assets:
  Program participation payments............   $61,537,000     $(15,473,000)  $46,064,000
  Financing costs...........................    13,665,000       (5,497,000)    8,168,000
                                               -----------     ------------   -----------
     Total deferred charges.................   $75,202,000     $(20,970,000)  $54,232,000
                                               ===========     ============   ===========
  Tradenames................................   $16,000,000     $ (7,823,000)  $ 8,177,000
  Intellectual Property.....................     5,670,000       (1,134,000)    4,536,000
  Other (includes pension intangible
     asset).................................     3,910,000         (385,000)    3,525,000
                                               -----------     ------------   -----------
     Total intangible assets................   $25,580,000     $ (9,342,000)  $16,238,000
                                               ===========     ============   ===========
</Table>

<Table>
<Caption>
                                                           DECEMBER 31, 2002
                                              -------------------------------------------
                                              GROSS CARRYING   ACCUMULATED
                                                  AMOUNT       AMORTIZATION       NET
                                              --------------   ------------   -----------
<S>                                           <C>              <C>            <C>
Amortized intangible assets:
  Program participation payments............   $55,989,000     $(12,439,000)  $43,550,000
  Financing costs...........................    15,088,000       (4,443,000)   10,645,000
                                               -----------     ------------   -----------
     Total deferred charges.................   $71,077,000     $(16,882,000)  $54,195,000
                                               ===========     ============   ===========
  Tradenames................................   $16,000,000     $ (7,290,000)  $ 8,710,000
  Intellectual Property.....................     5,670,000         (567,000)    5,103,000
  Other (includes pension intangible
     asset).................................     4,302,000         (255,000)    4,047,000
                                               -----------     ------------   -----------
     Total intangible assets................   $25,972,000     $ (8,112,000)  $17,860,000
                                               ===========     ============   ===========
</Table>

     There was no change in the carrying amount of goodwill during the years
ended December 31, 2003 and 2002. Total goodwill was $167.0 million at December
31, 2003 and 2002. Goodwill at December 31, 2003 and

                                       F-18
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2002 allocated to the Company's segments, Aircraft Braking Systems and
Engineered Fabrics, was $135.7 million and $31.3 million, respectively.

     The aggregate amortization expense for the years ended December 31, 2003,
2002 and 2001 was $4.3 million, $3.9 million and $8.8 million, respectively.

     The estimated annual amortization expense for intangible assets subject to
amortization in each of the five succeeding years from December 31, 2003 is
approximately $4.0 million.

15.  INCOME TAXES

     The Company's provision for income taxes consists of:

<Table>
<Caption>
                                                      YEAR ENDED DECEMBER 31,
                                             ------------------------------------------
                                                 2003           2002           2001
                                             ------------   ------------   ------------
<S>                                          <C>            <C>            <C>
Current domestic provision.................  $ (8,288,000)  $ (1,815,000)  $ (2,653,000)
Foreign provision..........................      (739,000)      (451,000)      (287,000)
Deferred tax provision.....................    (1,461,000)   (14,464,000)   (24,507,000)
                                             ------------   ------------   ------------
Income tax provision.......................  $(10,488,000)  $(16,730,000)  $(27,447,000)
                                             ============   ============   ============
</Table>

     The effective income tax rate differs from the statutory federal income tax
rate for the following reasons:

<Table>
<Caption>
                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                              2003   2002   2001
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Statutory federal income tax rate...........................  35.0%  35.0%  35.0%
State tax...................................................   2.0    1.7    5.8
Tax reserve no longer needed................................  (5.3)   0.0    0.0
Extraterritorial income exclusion benefit...................  (5.3)   0.0    0.0
Tax credits.................................................  (3.9)   0.0    0.0
Foreign taxes and other.....................................  (2.0)  (8.3)   2.5
                                                              ----   ----   ----
Effective income tax rate...................................  20.5%  28.4%  43.3%
                                                              ====   ====   ====
</Table>

     The components of the net deferred tax liability are as follows:

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                           ---------------------------
                                                               2003           2002
                                                           ------------   ------------
<S>                                                        <C>            <C>
Tax net operating loss carryforwards.....................  $  1,076,000   $  1,612,000
Temporary differences:
  Postretirement and other employee benefits.............    50,473,000     50,540,000
  Intangibles............................................   (49,342,000)   (47,340,000)
  Program participation costs............................   (16,729,000)   (17,503,000)
  Other..................................................    (4,851,000)    (4,076,000)
                                                           ------------   ------------
  Net deferred tax liability.............................  $(19,373,000)  $(16,767,000)
                                                           ============   ============
</Table>

16.  RELATED PARTY TRANSACTIONS

     Bernard L. Schwartz ("BLS") owns or controls 50% of the capital stock of
the Company and pursuant to the Stockholders Agreement has the right to
designate a majority of the Board of Directors of the Company.

                                       F-19
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition, BLS serves as Chairman of the Board of Directors and Chief
Executive Officer of the Company and devotes such time to the business and
affairs of the Company as he deems appropriate. BLS is also Chairman of the
Board and Chief Executive Officer of Loral Space & Communications Ltd. ("Loral
Space"). Because BLS is Chairman of the Board of Directors and has the right to
designate a majority of the Directors to the Board of the Company, he has
operating control of the Company.

     The Company has an Advisory Agreement with BLS which provides for the
payment of an aggregate of $200,000 per month of compensation to BLS and persons
or expenses designated by him. Such agreement will continue until BLS dies or is
disabled or ceases to own a specified number of shares of common stock of the
Company.

     The Company has a bonus plan pursuant to which the Company's Board of
Directors awards bonuses to BLS ranging from 5% to 10% of earnings in excess of
$50 million before interest, taxes and amortization. Bonuses earned under this
plan were $2.7 million, $4.8 million and $5.5 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

     The Company reimburses Loral Space for rent and certain other services. The
related charges agreed upon were established to reimburse Loral Space for actual
costs incurred without profit or fee. The Company believes this arrangement is
as favorable to the Company as could have been obtained from unaffiliated
parties. Payments to Loral Space were $0.4 million, $0.3 million and $0.5
million for the years ended December 31, 2003, 2002 and 2001, respectively.

     Pursuant to a financial advisory agreement between Lehman Brothers Inc.
("Lehman Brothers") and the Company, Lehman Brothers has agreed to act as
exclusive financial adviser to the Company and the Company has agreed to pay
Lehman Brothers customary fees for services when rendered. During the year ended
December 31, 2002, the Company paid Lehman Brothers $6.3 million for
underwriting discounts and commissions in connection with the issuance of the
9 5/8% Notes. During the years ended December 31, 2003 and 2001, no amounts were
paid under this agreement. The agreement may be terminated by the Company or
Lehman Brothers upon certain conditions. The Lehman Investors own 50% of the
outstanding capital stock of the Company and are entitled to elect three
directors (in addition to one independent director jointly designated by BLS and
the Lehman Investors) to the Company's Board of Directors. The Lehman Investors
have the benefit of certain additional rights under the Stockholders' Agreement
and the Company's By-laws.

17.  SEGMENTS

     The Company's activities are conducted through its two wholly owned
subsidiaries, Aircraft Braking Systems and Engineered Fabrics, each considered
an operating segment. Aircraft Braking Systems manufactures aircraft wheels,
brakes and brake control systems. Engineered Fabrics manufactures aircraft fuel
tanks and iceguards and various other products from coated fabrics. The
accounting policies of the subsidiaries are the same as those described in the
summary of significant accounting policies. Both subsidiaries are managed
separately due to different products, technology and marketing strategies. The
Company evaluates performance of the subsidiaries based on profits from
operations before interest, income taxes and extraordinary charges.

                                       F-20
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following represents financial information about the Company's
segments:

<Table>
<Caption>
                                                      YEAR ENDED DECEMBER 31,
                                             ------------------------------------------
                                                 2003           2002           2001
                                             ------------   ------------   ------------
<S>                                          <C>            <C>            <C>
Sales:
  Aircraft Braking Systems.................  $287,522,000   $301,408,000   $304,919,000
  Engineered Fabrics.......................    55,296,000     47,241,000     50,415,000
                                             ------------   ------------   ------------
                                             $342,818,000   $348,649,000   $355,334,000
                                             ============   ============   ============
Operating Profits:
  Aircraft Braking Systems.................  $ 87,824,000   $ 80,871,000   $ 91,719,000
  Engineered Fabrics.......................     7,483,000      4,186,000      4,281,000
                                             ------------   ------------   ------------
     Operating Income......................    95,307,000     85,057,000     96,000,000
     Interest expense, net.................    44,186,000     26,194,000     32,569,000
                                             ------------   ------------   ------------
       Income before income taxes..........  $ 51,121,000   $ 58,863,000   $ 63,431,000
                                             ============   ============   ============
Depreciation and Amortization:
  Aircraft Braking Systems.................  $ 11,189,000   $ 11,077,000   $ 14,785,000
  Engineered Fabrics.......................     1,011,000        935,000      2,104,000
                                             ------------   ------------   ------------
                                             $ 12,200,000   $ 12,012,000   $ 16,889,000
                                             ============   ============   ============
Capital Expenditures:
  Aircraft Braking Systems.................  $  4,734,000   $  3,487,000   $  4,245,000
  Engineered Fabrics.......................       729,000        591,000        804,000
                                             ------------   ------------   ------------
     Total segments........................     5,463,000      4,078,000      5,049,000
  Corporate................................         5,000          6,000          8,000
                                             ------------   ------------   ------------
                                             $  5,468,000   $  4,084,000   $  5,057,000
                                             ============   ============   ============
</Table>

<Table>
<Caption>
                                                            DECEMBER 31,
                                             ------------------------------------------
                                                 2003           2002           2001
                                             ------------   ------------   ------------
<S>                                          <C>            <C>            <C>
Total Assets:
  Aircraft Braking Systems.................  $348,609,000   $346,956,000   $338,636,000
  Engineered Fabrics.......................    60,593,000     60,034,000     60,451,000
                                             ------------   ------------   ------------
                                             $409,202,000   $406,990,000   $399,087,000
                                             ============   ============   ============
</Table>

                                       F-21
<PAGE>
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following reconciles the total assets for the reportable segments to
the Company's consolidated assets:

<Table>
<Caption>
                                                            DECEMBER 31,
                                             ------------------------------------------
                                                 2003           2002           2001
                                             ------------   ------------   ------------
<S>                                          <C>            <C>            <C>
Total Assets:
  Total assets for reportable segments.....  $409,202,000   $406,990,000   $399,087,000
  Deferred financing costs not allocated to
     segments..............................     8,168,000     10,645,000      4,463,000
  Corporate assets.........................     1,364,000      1,801,000        458,000
  Income taxes receivable not allocated to
     segments..............................       851,000      2,609,000             --
                                             ------------   ------------   ------------
     Consolidated Total....................  $419,585,000   $422,045,000   $404,008,000
                                             ============   ============   ============
</Table>

     The following represents the Company's total sales by products:

<Table>
<Caption>
                                                      YEAR ENDED DECEMBER 31,
                                             ------------------------------------------
                                                 2003           2002           2001
                                             ------------   ------------   ------------
<S>                                          <C>            <C>            <C>
Braking systems............................  $287,522,000   $301,408,000   $304,919,000
Fuel tanks.................................    39,881,000     37,845,000     38,778,000
Other......................................    15,415,000      9,396,000     11,637,000
                                             ------------   ------------   ------------
                                             $342,818,000   $348,649,000   $355,334,000
                                             ============   ============   ============
</Table>

     The following represents sales by geographic location:

<Table>
<Caption>
                                                    YEAR ENDED DECEMBER 31,
                                      ----------------------------------------------------
                                          2003                2002                2001
                                      ------------   ----------------------   ------------
<S>                                   <C>            <C>                      <C>
Sales:
  United States.....................  $208,408,000        $207,107,000        $207,420,000
  Europe............................    67,859,000          69,210,000          69,721,000
  Asia..............................    37,519,000          40,018,000          39,075,000
  North America.....................    21,081,000          20,287,000          23,908,000
  South America.....................     5,815,000           9,658,000          12,203,000
  Australia.........................     2,136,000           2,369,000           3,007,000
                                      ------------        ------------        ------------
                                      $342,818,000        $348,649,000        $355,334,000
                                      ============        ============        ============
</Table>

     Sales are attributed to geographic location based on the location of the
customer. Long-lived assets held outside of the United States were $323,000 and
$269,000 as of December 31, 2003 and 2002, respectively.

     The U.S. government accounted for approximately 26%, 26% and 21% of the
Company's total sales for the years ended December 31, 2003, 2002 and 2001,
respectively.

                                       F-22