<PAGE>

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                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, 2001
    [ ]      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, NEW YORK, NY                             10016
   (Address of principal executive offices)                      (Zip Code)
</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]

     There is no trading market for the Company's common stock. As of March 1,
2002, there were 740,398 shares of common stock outstanding.

     Documents Incorporated by Reference: None
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

GENERAL

     K & F Industries, Inc. ("K & F" or the "Company") was incorporated in
Delaware on March 13, 1989. K & F, through its wholly owned subsidiary, Aircraft
Braking Systems Corporation ("Aircraft Braking Systems"), is one of the world's
leading manufacturers of aircraft wheels, brakes and brake control systems for
commercial transport, general aviation and military aircraft. K & F sells its
products to virtually all major airframe manufacturers and most commercial
airlines and to the United States and certain foreign governments. During the
year ended December 31, 2001, approximately 86% of the Company's total revenues
were derived from sales made by Aircraft Braking Systems. In addition, K & F,
through its wholly owned subsidiary, Engineered Fabrics Corporation ("Engineered
Fabrics"), is the leading worldwide manufacturer of aircraft fuel tanks,
supplying approximately 80% of the worldwide general aviation and commercial
transport market and over one-half of the domestic military market for such
products. Engineered Fabrics also manufactures and sells iceguards and specialty
coated fabrics with storage, shipping, environmental and rescue applications for
commercial and military uses. During the year ended December 31, 2001,
approximately 14% of the Company's 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. The Company has carefully directed its
efforts toward expanding Aircraft Braking Systems' presence in the commercial
and general aviation segments of the aircraft industry, focusing particularly on
medium- and short-range commercial aircraft. These aircraft typically make more
frequent landings than long-range commercial aircraft and correspondingly
require more frequent replacement of brake parts.

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 and
braking 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, 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 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 such 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 two
suppliers have been certified, the aircraft customer, such as a major airline,
will designate the original equipment to be installed on the customer's
aircraft. Competition among two 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

                                        2
<PAGE>

frequency of replacements required and the impact that the weight of the system
has on the airline's ability to 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 because of the expense.

     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
sales of replacement parts. Recovery of pricing concessions and design costs for
each airframe's wheels and brakes is contingent on a number of factors but
generally 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.

PRODUCTS

     Aircraft Braking Systems.  Aircraft Braking Systems is one of the world's
leading manufacturers of wheels, steel and carbon brakes and brake control
systems for commercial transport, general aviation and military aircraft. Since
1989, Aircraft Braking Systems has carefully directed its efforts toward
expanding its presence in the commercial and general aviation segments of the
aircraft industry, focusing particularly on high-cycle, medium- and short-range
commercial aircraft and carbon equipped executive jets. As a result of this
strategic focus, during this period, Aircraft Braking Systems has added
approximately 1,900 medium- and short-range commercial aircraft to the portfolio
of aircraft using its products. These aircraft typically make frequent landings
and correspondingly require more frequent replacement of brake parts. The
braking systems produced by Aircraft Braking Systems are either carbon or
steel-based. While steel-based systems typically are sold for less than
carbon-based systems, such systems generally require more frequent replacement
because their steel brake pads tend to wear more quickly.

     Approximately 75% of Aircraft Braking Systems' revenues are derived from
the sales of replacement parts. As of December 31, 2001, Aircraft Braking
Systems' products had been installed on approximately 30,000 commercial
transport, general aviation and military aircraft. Current fleets of commercial
transport aircraft include the DC-9, DC-10, Fokker FO-100/70, Fokker F-28,
Fokker F-50/60, Fairchild Dornier DO-228, Bombardier CRJ-100/200, CRJ-700, Saab
340 and Saab 2000, on all of which Aircraft Braking Systems is the sole source
supplier. In addition, Aircraft Braking Systems is a supplier of spare parts for
the dual-sourced, MD-80 program. In 2001, commercial airline activity was
interrupted by terrorist acts and as a result some older aircraft, such as the
DC-9, were removed from service as carriers adjusted routes and schedules after
September 11. See "Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations -- Effect of September 11, 2001 Events."

     Aircraft Braking Systems' wheels and brakes have been selected for use on a
number of new high-cycle airframe designs including the Airbus A-320, A-321 and
the MD-90. Aircraft Braking Systems is also the sole source supplier for the
Bombardier CRJ-100/200, CRJ-700 and CRJ-900 regional jets. Since its
introduction in late 1992, Bombardier has received firm orders for over 1,177
Canadair Regional Jets with approximately 596 aircraft currently in service. In
addition, Aircraft Braking Systems is the sole supplier of wheels and carbon
brakes for the Embraer ERJ170, ERJ175, ERJ190-100 and ERJ190-200, a family of
regional jets introduced in 2001. Since 2000, the Company has been the sole
source supplier for the Fairchild Dornier DO-328 Turboprop.

     Aircraft Braking Systems is a supplier of wheels and carbon brakes on the
Airbus A-321, the 186-seat "stretch" version of the popular A-320 standard body
twin-jet. Airbus has booked orders for over 415 A-321 aircraft. Of the 221
aircraft delivered to date, Aircraft Braking Systems has provided wheels and
brakes for 107 of these aircraft.

     In addition to its commercial business, Aircraft Braking Systems supplies
its products to customers in the general aviation market and to the military. In
2001, the Company was selected to supply the wheels and
                                        3
<PAGE>

brakes for the new Dassault Falcon 7X business jet and the Raytheon Hawker 450.
Other general aviation aircraft supplied by the Company include the Dassault
Falcon 900EX, the Gulfstream G100, G200 and GIV-X aircraft and the Learjet 31A
and Learjet 60. Some of the U. S. military platforms using wheels and brakes
supplied by Aircraft Braking Systems are the F-14, F-15 and F-16 fighters, the
B-1B bomber and the C-130 transport.

     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. Of the three
principal competitors in the wheel and brake industry, Aircraft Braking Systems,
Honeywell's Aircraft Landing Systems Division and Goodrich Corporation, Aircraft
Braking Systems is the only significant manufacturer of brake control systems.
Because of the sensitivity of brake control systems to variations in brake
performance, the Company's management believes that its braking system
integration capability gives Aircraft Braking Systems a competitive advantage
over its two largest competitors. Other products manufactured by Aircraft
Braking Systems include helicopter rotor brakes and brake temperature monitoring
equipment for various types of aircraft.

     Engineered Fabrics.  The Company believes Engineered Fabrics is the largest
manufacturer of flexible bladder type fuel tanks for aircraft in the world,
serving approximately 80% of the worldwide general aviation and commercial
transport market and over half of the domestic military market for such
products. Engineered Fabrics' programs include new production or replacement
parts programs for the U.S. Navy's F-18 C/D and E/F aircraft and F-14, F-15,
F-16 and C-130 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. Many of these platforms also utilize Engineered
Fabrics' iceguards for deicing and anti-icing of the rotor blades and inlets.
Commercial helicopter applications include the MD-500 and MD-600 and the Bell
214ST and Bell 609. During the year ended December 31, 2001 approximately 14% of
the Company's total revenues were derived from sales made by Engineered Fabrics.

     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, 2001, sales of
fuel tanks accounted for approximately 77% 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 supplier of polyurethane fuel tanks for aircraft,
which are substantially lighter and more flexible than their metal or nitrile
counterparts and 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 the protection.

     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.

                                        4
<PAGE>

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

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                              2001      2000      1999
                                                              -----     -----     -----
<S>                                                           <C>       <C>       <C>
Wheels and brakes...........................................   79%       81%       81%
Brake control systems.......................................    7%        6%        7%
Fuel tanks..................................................   11%       10%       10%
                                                               --        --        --
          Total.............................................   97%       97%       98%
                                                               ==        ==        ==
</Table>

SALES AND CUSTOMERS

     K & F sells its products to more than 175 airlines, airframe manufacturers,
governments and distributors within each of the commercial transport, general
aviation and military aircraft markets. Sales to the U.S. government represented
approximately 21%, 17% and 15% of total sales for the years ended December 31,
2001, 2000 and 1999, respectively. No other customer accounted for more than 10%
of total sales.

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

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                              2001      2000      1999
                                                              -----     -----     -----
<S>                                                           <C>       <C>       <C>
Commercial transport........................................    56%       61%       63%
Military (U.S. and foreign).................................    26%       20%       18%
General aviation............................................    18%       19%       19%
                                                               ---       ---       ---
          Total.............................................   100%      100%      100%
                                                               ===       ===       ===
</Table>

     Commercial Transport.  Customers for the Company's products in the
commercial transport market include most airframe manufacturers and major
airlines. The Company's products are used on a broad range of large commercial
transports (100 seats or more), regional jets and other commuter aircraft. Some
of the Company's airline customers include American Airlines, Delta Air Lines,
Alitalia, Japan Air Systems, Lufthansa, Crossair, Northwest Airlines, United
Airlines, US Airways and Continental Airlines. The Company provides parts to the
three largest commercial aircraft manufacturers: Boeing, Airbus and Bombardier.

     Military.  The Company is the largest supplier of wheels, brakes and fuel
tanks to the U.S. military and also supplies the militaries of many foreign
governments. The Company's 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, B2, C-130, C-130J and C-141. Some of the foreign military
aircraft using these products include the F-2 (formerly the FS-X) in Japan, AIDC
Indigenous Defensive Fighter ("IDF") in Taiwan, Saab JAS-39 in Sweden, Alenia
C-27 in Italy and the Casa C-212 in Spain. Substantially all of the Company's
military products are sold to the Department of Defense, foreign governments or
to airframe manufacturers including the Lockheed Martin Corporation ("Lockheed
Martin"), Boeing, Sikorsky, Bell, Saab and AIDC in Taiwan. Some of the brake
control systems manufactured for the military are used on the F-16, F-117A, B-2,
Panavia Toronado, British Aerospace Hawk, JAS-39 and IDF aircraft.

     General Aviation.  The Company believes it is 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,
Learjet, Canadair, Cessna, Dassault and Israeli Aircraft Industries ("IAI"), and
distributors, such as Aviall. Brake control systems are supplied by the Company
to Gulfstream, Dassault and other aircraft manufacturers. General aviation
aircraft using the Company's wheels and brakes exclusively include the Beech
Starship and Beech 400 A/T series of aircraft, the Lear series 20, 30, 31A, 55
and 60, the Gulfstream G-I, G-II, G-III and

                                        5
<PAGE>

G-IV, the IAI 1123, 1124, 1125 Astra, Astra SPX and Galaxy, the Challenger
CL600, CL601 and CL604, the Raytheon Hawker Horizon and the Falcon 10, 100, 20,
200, 50 and 50EX.

FOREIGN CUSTOMERS

     The Company supplies 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 the Company. The following table shows sales of
the Company to both foreign and domestic customers:

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                              2001      2000      1999
                                                              -----     -----     -----
<S>                                                           <C>       <C>       <C>
Domestic sales..............................................    58%       60%       58%
Foreign sales...............................................    42%       40%       42%
                                                               ---       ---       ---
          Total.............................................   100%      100%      100%
                                                               ===       ===       ===
</Table>

INDEPENDENT RESEARCH AND DEVELOPMENT

     The Company employs scientific, engineering and other personnel to improve
its existing product lines and to develop new products and technologies in the
same or related fields. At December 31, 2001, the Company employed approximately
144 engineers (of whom 23 held advanced degrees); approximately 27 of such
engineers (including 11 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 the Company's products.

     The costs incurred relating to independent research and development for the
years ended December 31, 2001, 2000 and 1999 were $16.2 million, $15.8 million
and $14.0 million, respectively.

PATENTS AND LICENSES

     The Company has a large number of patents related to the products of its
subsidiaries. While in the aggregate its patents are of material importance to
its business, the Company believes no single patent or group of patents is of
material importance to its business as a whole.

COMPETITION

     The Company faces substantial competition from a few suppliers in each of
its product areas. Its principal competitors that supply wheels and brakes are
Honeywell's Aircraft Landing Systems Division and Goodrich Corporation. Both
significant competitors are larger and have greater financial resources than the
Company. The principal competitors for brake control systems are the Hydro-Aire
Division of Crane Co. and Messier Bugatti in France. 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, 2001 and 2000 amounted to approximately $150.2
million and $148.2 million, respectively. Backlog consists of firm orders for
the Company's products which have not been shipped. Approximately 88% of total
Company backlog at December 31, 2001 is expected to be shipped during the year
ending December 31, 2002, with the balance expected to be shipped over the
subsequent two-year period. No significant seasonality exists for sales of the
products manufactured by the Company.

     Of the total Company backlog at December 31, 2001, approximately 37% was
directly or indirectly for end use by the U. S. Government (the "Government"),
substantially all of which was for use by the Department of Defense. For certain
risks associated with Government contracts, see "Government Contracts" discussed
below.
                                        6
<PAGE>

GOVERNMENT CONTRACTS

     For the years ended December 31, 2001, 2000 and 1999, approximately 21%,
17% and 15%, respectively, of the Company's total sales were made to agencies of
the Government or to prime contractors or subcontractors of the Government.

     The majority of the Company's defense related sales are from an annual
catalog. The remainder of the Company's defense business is derived from
contracts that are firm, fixed-price contracts under which the Company agrees to
perform for a predetermined price. Although the Company's fixed-price contracts
generally permit the Company to keep unexpected profits if costs are less than
projected, the Company does bear the risk that increased or unexpected costs may
reduce profit or cause the Company to sustain losses on the contract. All
domestic defense contracts and subcontracts to which the Company is a party are
subject to audit, various profit and cost controls and 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 Government are subject
to certain additional business risks peculiar to that industry. Among these
risks are the ability of the Government to unilaterally suspend the Company from
new contracts pending resolution of alleged violations of procurement laws or
regulations. Other risks include a dependence on appropriations by the
Government, changes in the 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 the Company, lower margins resulting
from increasingly competitive procurement policies, a reduction in the volume of
contracts or subcontracts awarded to the Company or substantial cost overruns
would have an adverse effect on the Company's cash flow and results of
operations.

SUPPLIES AND MATERIALS

     The principal raw materials used in the Company's wheel and brake
manufacturing operations are steel, aluminum forgings and carbon compounds. The
Company produces most of its carbon at its carbon manufacturing facility in
Akron, Ohio. Steel and aluminum forgings are purchased from several 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. The Company has not experienced any shortage of raw materials to
date.

PERSONNEL

     At December 31, 2001, the Company had 1,404 full-time employees, of which
836 were employed by Aircraft Braking Systems (390 hourly and 446 salaried
employees) and 568 were employed by Engineered Fabrics (428 hourly and 140
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' four-year contract with its union expires on May
31, 2002. Engineered Fabrics' three-year contract with its union expires on
February 5, 2004.

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

                                        7
<PAGE>

space. The Company believes that its properties and equipment are generally
well-maintained, in good operating condition and adequate for its present needs.

     Foreign Facilities.  The Company occupies approximately 19,000 square feet
of leased office and warehouse space in Slough, England, under a lease expiring
in 2020. The Company also maintains 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, the Company leases approximately 433,000 square feet of space
within the Lockheed Martin complex and is subject to annual occupancy payments
to Lockheed Martin. During the years ended December 31, 2001, 2000 and 1999,
Aircraft Braking Systems made occupancy payments to Lockheed Martin of $0.9
million, $2.1 million and $1.9 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.

ITEM 3.  LEGAL PROCEEDINGS

     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 the Company's
management, the ultimate liability, if any, will not have a material adverse
effect on the Company.

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

     None.

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     There is no trading market for the Company's common stock. The Company has
not paid dividends on its common stock and is restricted from doing so under its
current credit agreement. All of the common stock of the Company is owned by
Bernard L. Schwartz ("BLS"), Chairman of the Company, and by four limited
partnerships of Lehman Brothers Holdings Inc. (the "Lehman Investors"). See
"Security Ownership of Certain Beneficial Owners and Management."

                                        8
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The following selected financial data has been derived from, and 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,
                                  ----------------------------------------------------
                                    2001       2000       1999       1998       1997
                                  --------   --------   --------   --------   --------
                                                     (IN THOUSANDS)
<S>                               <C>        <C>        <C>        <C>        <C>
Income Statement Data:
  Net sales.....................  $355,334   $375,890   $355,951   $345,447   $304,331
  Cost of sales.................   204,036    199,459    197,757    196,190    188,001
                                  --------   --------   --------   --------   --------
  Gross Margin..................   151,298    176,431    158,194    149,257    116,330
  Independent research and
     development................    16,188     15,763     13,996     13,705     10,873
  Selling, general and
     administrative expenses....    30,273     37,666     33,245     35,332     40,182(a)
  Amortization..................     8,837      8,118      8,773     10,286     10,316
                                  --------   --------   --------   --------   --------
  Operating income..............    96,000    114,884    102,180     89,934     54,959
  Interest expense, net.........    32,569     35,993     40,396     44,830     34,091
                                  --------   --------   --------   --------   --------
  Income before income taxes and
     extraordinary charge.......    63,431     78,891     61,784     45,104     20,868
  Income tax (provision)
     benefit....................   (27,447)   (14,906)    12,136     (5,744)    (5,184)
  Extraordinary charge..........        --         --         --         --    (29,513)(a)(b)
                                  --------   --------   --------   --------   --------
  Net income (loss).............  $ 35,984   $ 63,985   $ 73,920   $ 39,360   $(13,829)
                                  ========   ========   ========   ========   ========
Balance Sheet Data (at end of
  period):
  Working capital...............  $ 39,223   $ 45,695   $ 76,622   $ 38,839   $ 31,953
  Total assets..................   404,008    430,085    441,868    420,099    425,236
  Long-term debt................   284,125    345,625    432,125    477,125    519,125(a)
  Stockholders' deficiency......   (58,253)   (78,006)  (141,734)  (215,610)  (256,459)(a)
Other Data (for the period):
  Capital expenditures..........     5,057      9,845     10,413     14,873     10,016
  Depreciation and
     amortization...............    16,889     16,128     17,268     19,961     19,680
</Table>

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

(a) On October 15, 1997, the Company completed a recapitalization (the
    "Recapitalization") that consisted of the refinancing of existing
    indebtedness and the repurchase of a portion of its outstanding stock. In
    connection therewith, the Company directly increased its stockholders'
    deficiency by $218.6 million and recorded an extraordinary charge of $27.8
    million (net of tax) for the write-off of unamortized financing costs and
    redemption premiums. In addition, the Company recorded a charge of $12.4
    million to selling, general and administrative expenses, relating to the
    exercise of stock options and other fees incurred in connection with the
    Recapitalization. Financing for the Recapitalization was provided with $185
    million of 9 1/4% Senior Subordinated Notes due 2007 and $345 million in
    borrowings under a new credit facility.

(b) On June 1, 1997, the Company redeemed $30 million aggregate principal amount
    of its 11 7/8% Senior Secured Notes at a redemption price of 105.28% of the
    principal thereof. In connection therewith, the Company recorded an
    extraordinary charge of $1.7 million (net of tax) for the write-off of
    unamortized financing costs and redemption premiums.

                                        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 the Company operates.

GENERAL

     Aircraft Braking Systems generates approximately 75% of its revenues
through the sale of replacement parts for wheels and braking systems which are
installed on approximately 30,000 commercial, general aviation and military
aircraft. As is customary in the industry, Aircraft Braking Systems incurs
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 ("Program
Investments") are charged to operations when delivered to the aircraft
manufacturers. Since most modern aircraft have a useful life of 25 years or
longer and require periodic replacement of certain components of the braking
system, the Company typically recoups its initial investment in original
equipment and generates significant profits from the sales of replacement parts
over the life of the aircraft. The Company has invested and will continue to
invest significant resources to have its products selected for use on new
commercial airframes, focusing particularly on high-cycle, medium- and
short-range aircraft.

     During the years ended December 31, 2001, 2000 and 1999, the Company spent
an aggregate of approximately $54.1 million, $53.3 million and $50.8 million,
respectively, for research, development, design, Program Investments, capital
expenditures and development participation costs. In 2001, the Company was
selected to be the sole source supplier on three new aircraft programs. Aircraft
Braking Systems will provide wheels and carbon brakes on the new 78 passenger
Embraer EMB-175 regional jet, and it will supply the complete braking system,
consisting of wheels, brakes and digital brake control systems on the Dassault
Falcon 7X and the Raytheon Hawker 450 business jets. In prior years, the Company
was selected as the sole supplier of wheels and brakes for each of the Saab
2000, the Bombardier CRJ-100/200, CRJ-700 and CRJ-900, the Lear 60, Embraer's 70
and 90 passenger jets, the Fairchild Dornier DO-328 Turboprop, the Dassault
Falcon 900EX and the Gulfstream GIV-X, a supplier of wheels and carbon brakes on
the Airbus A-321 and the sole supplier of wheels, carbon brakes and brake
control systems on the MD-90. Aircraft produced under these programs are in
development or the early stages of their life cycles and represent significant
future revenue opportunities for the Company.

EFFECT OF SEPTEMBER 11, 2001 EVENTS

     The air transportation business was slowed by a sluggish economy throughout
2001 and was impacted by the September 11 events. In the immediate aftermath,
domestic air travel was temporarily grounded and travel in September 2001 was
reduced. As a result, the Company's revenues, earnings and margins are lower
than the prior year. Management has reacted by implementing cost reductions in
the fourth quarter of 2001, aggregating $8 million annually.

     The Company has seen an improvement in sales and orders in the fourth
quarter of 2001, reversing the downward trend through September 2001. One
consequence of the September 11 events was an increase in the Company's military
business, where bookings were 44% higher in 2001 than 2000. We expect this
increase in demand to continue in the foreseeable future. The Company also
expects demand in its commercial and general aviation business to continue to
improve in 2002.

                                        10
<PAGE>

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
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, the Company evaluates its
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. The Company
bases its 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. The Company believes the following critical
accounting policies affect its 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. The
Company evaluates the adequacy of these reserves quarterly.

     Evaluation of Long-Lived Assets.  Long-lived assets are assessed for
recoverability on an ongoing basis. 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 the Company does 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, 2001, 2000 and 1999 resulting from the Company's evaluations.

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

     Pension and Other Postretirement Benefits.  The determination of the
Company's obligation and expense for pension and other postretirement benefits
is dependent on the Company's selection of certain assumptions used by actuaries
in calculating such amounts. Those assumptions are described in Note 11 to the
consolidated financial statements and include, among others, the discount rate,
expected long-term rate of return on plan assets and rates of increases in
compensation and health care costs. Actual results that differ from the
Company's assumptions would affect the pension and postretirement obligations
and future expense.

RESULTS OF OPERATIONS

  YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000

     Sales.  Sales for the year ended December 31, 2001 totaled $355.3 million,
a decrease of $20.6 million or 5.5%, compared with $375.9 million for the same
period in the prior year. This decrease was due to lower sales of wheels and
brakes for commercial transport aircraft of $23.5 million, primarily on the
DC-9, MD-90, DC-10 and SAAB 340 programs, partially offset by higher sales on
the CRJ-700 program. General aviation sales also decreased $5.7 million,
primarily due to lower sales of wheels and brakes on Gulfstream and Lear
aircraft. This overall weakness in commercial and general aviation sales was
primarily due to the sluggish economy and the tragic events of September 11.
Other commercial sales decreased $5.2 million primarily due to lower sales of
coated fabrics used on railroad train cars. Military sales increased $13.8
million, primarily due

                                        11
<PAGE>

to higher sales of wheels and brakes on the B-IB program, fuel tanks on the
AH-64 and Blackhawk programs and helicopter cabin interiors on various Sikorsky
aircraft.

     Gross Margin.  The gross margin for the year ended December 31, 2001 was
42.6% compared with 46.9% for the same period in the prior year. This decrease
was primarily due to an unfavorable product sales mix and the unfavorable effect
that the lower sales volume had on margin.

     Independent Research and Development.  Independent research and development
costs were $16.2 million for the year ended December 31, 2001 compared with
$15.8 million for the same period in the prior year. This increase was primarily
due to higher costs associated with the Gulfstream GIV and Dassault Falcon 900
programs, partially offset by lower costs on the JAS-39 program.

     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses were $30.3 million for the year ended December 31, 2001
compared with $37.7 million for the same period in the prior year. This decrease
was primarily due to lower performance-related incentive compensation.

     Interest Expense, Net.  Interest expense, net was $32.6 million for the
year ended December 31, 2001 compared with $36.0 million for the same period in
the prior year. This decrease was due to a lower average debt balance and lower
interest rates on the Company's variable rate indebtedness, partially offset by
a non-cash charge of $3.9 million relating to the change in fair market value on
the Company's interest rate swap in accordance with SFAS No. 133. See Note 7 to
the consolidated financial statements.

     Effective Tax Rate.  The Company's effective tax rate of 43.3% for the year
ended December 31, 2001 differs from the statutory rate of 35% due to foreign,
state and local taxes. The effective tax rate of 18.9% for year ended December
31, 2000 differs from the statutory rate of 35% due to utilization of net
operating losses for which a tax benefit had not been recognized and foreign
sales corporation tax benefits, partially offset by state and local taxes. The
increase in the effective rate in 2001 over 2000 is primarily due to a net
decrease in the valuation allowance during 2000.

  YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999

     Sales.  Sales for the year ended December 31, 2000 totaled $375.9 million,
reflecting an increase of $19.9 million or 5.6%, compared with $356.0 million
for the same period in the prior year. This increase was due to higher
commercial sales of wheels and brakes for commercial transport aircraft of $3.8
million, primarily on the MD-90, Canadair Regional Jet and Airbus A-321
programs, partially offset by lower sales on the Fokker FO-100, DC-9 and DC-10
programs. General aviation sales increased $4.1 million, primarily due to higher
sales of wheels and brakes on Gulfstream aircraft. Military sales increased
$12.0 million, primarily due to higher sales of wheels and brakes on the F-14
program and for fuel tanks on the F-18 program.

     Gross Margin.  The gross margin for the year ended December 31, 2000 was
46.9% compared with 44.4% for the same period in the prior year. This increase
was primarily due to a favorable sales mix, the overhead absorption effect
relating to the higher sales and operating efficiencies. Partially offsetting
this increase was higher Program Investments.

     Independent Research and Development.  Independent research and development
costs were $15.8 million for the year ended December 31, 2000 compared with
$14.0 million for the same period in the prior year. This increase was primarily
due to higher costs associated with the Embraer ERJ-170, Dassault Falcon 900 and
JAS-39 programs.

     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses were $37.7 million for the year ended December 31, 2000
compared with $33.2 million for the same period in the prior year. This increase
was primarily due to higher performance-related incentive compensation.

     Interest Expense, Net. Interest expense, net was $36.0 million for the year
ended December 31, 2000 compared with $40.4 million for the same period in the
prior year. This decrease was due to a lower average debt balance, partially
offset by higher interest rates on the Company's variable rate indebtedness.

     Effective Tax Rate.  The Company's effective tax rate of 18.9% for the year
ended December 31, 2000 differs from the statutory rate of 35% due to
utilization of tax net operating losses for which a tax benefit had

                                        12
<PAGE>

not been recognized and foreign sales corporation tax benefits, partially offset
by state and local taxes. The effective tax rate of (19.6)% for year ended
December 31, 1999 differs from the statutory rate of 35% due to a net decrease
in the valuation allowance and utilization of tax net operating loss, for which
a tax benefit had not been recognized, partially offset by state and local
income taxes. The increase in the effective rate in 2000 over 1999 is primarily
due to a net decrease in the valuation allowance during 1999.

LIQUIDITY AND FINANCIAL CONDITION

     The Company expects that its 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. The Company's primary source of funds
for conducting its business activities and servicing its indebtedness has been
cash generated from operations and borrowings under its revolving credit
facilities. The Company's total indebtedness decreased $61.5 million to $285.6
million at December 31, 2001 from $347.1 million at December 31, 2000. This
reduction was a result of payments made with cash generated from operations.

     At December 31, 2001, the Credit Facility consisted of a term loan facility
in an aggregate principal amount of $100.6 million (the "Term Loans") and a
revolving credit facility in an aggregate principal amount of up to $50 million
(the "Revolving Loan"). The Term Loans consist of a Tranche A term loan ("Term
Loan A") in the principal amount of $47.9 million and a Tranche B term loan
("Term Loan B") in the principal amount of $52.7 million. The Credit Facility
bears interest at floating rates selected at the option of the Company. At
December 31, 2001 and 2000, the average interest rate on outstanding borrowings
under the Credit Facility was 3.8% and 8.6%, respectively. As a requirement of
the Credit Facility, the Company entered into an interest rate swap agreement
that effectively fixes the Company's borrowing rate at 7.8% on $97 million of
borrowings at December 31, 2001. Obligations under the Credit Facility are
secured by a lien on substantially all of the assets of the Subsidiaries and are
guaranteed by K & F.

     Term Loan A is a six-year quarterly amortizing facility maturing October
15, 2003, with installments of $0.5 million due in year 2002 and $47.4 million
due in 2003. Term Loan B is an eight-year quarterly amortizing facility maturing
December 31, 2004, with installments of $1.0 million per year due in years 2002
and 2003 and $50.7 million due in 2004. The Company is required to make
mandatory reductions in the Credit Facility in the event of certain asset sales,
the incurrence of certain additional indebtedness, and annually from 50% of
excess cash flow (as defined). As a result of the excess cash flow calculation,
$30 million was determined to be due in 2002; however, this prepayment
obligation was satisfied by $40 million of voluntary prepayments on Term Loan B
in 2001.

     The Credit Facility provides for revolving loans not to exceed $50 million,
with up to $20 million available for letters of credit. At December 31, 2001,
the Company had outstanding letters of credit of $1.8 million. The Revolving
Loan commitment terminates on October 15, 2003. At December 31, 2001, the
Company had $48.2 million available to borrow under the Revolving Loan.

     The Company's management believes that it will have adequate resources to
meet its current cash requirements through funds generated from operations and
borrowings under its Revolving Loan.

     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, a
leverage ratio and maintenance of a minimum adjusted net worth. The Company was
in compliance with all covenants at December 31, 2001.

                                        13
<PAGE>

     The following represents the Company's scheduled debt maturities,
non-cancelable operating lease commitments and payments required under the
Advisory Agreement subsequent to December 31, 2001:

<Table>
<Caption>
                                SCHEDULED DEBT    OPERATING LEASE    ADVISORY
YEAR ENDING DECEMBER 31,          MATURITIES        COMMITMENTS     AGREEMENT       TOTAL
------------------------        ---------------   ---------------   ----------   ------------
<S>                             <C>               <C>               <C>          <C>
2002..........................   $  1,500,000       $3,548,000      $2,400,000   $  7,448,000
2003..........................     48,375,000        3,163,000       2,400,000     53,938,000
2004..........................     50,750,000        3,251,000       2,400,000     56,401,000
2005..........................             --        2,796,000       2,400,000      5,196,000
2006..........................             --        1,448,000       2,400,000      3,848,000
2007..........................    185,000,000        1,143,000       2,400,000    188,543,000
Thereafter....................             --        3,905,000       2,400,000*     6,305,000
</Table>

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

* Represents one annual payment under the Advisory Agreement which has an
  indefinite term.

CASH FLOW

     During the year ended December 31, 2001, net cash provided by operating
activities amounted to $77.5 million and reflected $112.9 million of earnings
before interest, taxes, depreciation and amortization ("EBITDA"), decreases in
accounts receivable of $2.6 million, inventory of $3.4 million, prepaid pension
costs of $0.9 million and other working capital of $0.3 million, partially
offset by decreases in accounts payable of $4.2 million, notes payable of $3.9
million, other current liabilities of $4.4 million, interest payments of $27.6
million and tax payments of $2.5 million. During the year ended December 31,
2000, net cash provided by operating activities amounted to $110.7 million and
reflected $131.0 million of EBITDA, decreases in accounts receivable of $4.9
million, inventory of $4.7 million, increases in accounts payable of $0.7
million, notes payable of $3.9 million, other current liabilities of $6.7
million and decreases in other working capital of $1.2 million, partially offset
by prepaid pension costs of $5.9 million, interest payments of $34.9 million and
tax payments of $1.6 million. During the year ended December 31, 1999, net cash
provided by operating activities amounted to $60.5 million and reflected $119.4
million of EBITDA, decreases in inventory of $1.4 million, increases in accounts
payable of $2.4 million, decreases in other working capital of $1.0 million and
increases in long-term liabilities of $1.3 million, partially offset by
increases in accounts receivable of $16.1 million, prepaid pension costs of $4.0
million, decreases in other current liabilities of $3.7 million, interest
payments of $39.5 million and income tax payments of $1.7 million.

     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 Investments and $0.5 million for costs
relating to intangible assets. During the year ended December 31, 2000, net cash
used in investing activities amounted to $21.3 million due to $9.8 million of
capital expenditures, $5.8 million of Program Investments and $5.7 million for
the purchase of intellectual property for the Dornier 328 program. During the
year ended December 31, 1999, net cash used in investing activities amounted to
$18.3 million due to $10.4 million of capital expenditures and $7.9 million of
Program Investments. Capital spending for the year ending December 31, 2002 is
expected to be approximately $5.0 million.

     During the years ended December 31, 2001 and 2000, net cash used in
financing activities amounted to $61.5 million and $86.5 million, respectively,
due to the repayment of indebtedness. During the year ended December 31, 1999,
net cash used in financing activities amounted to $45.5 million due to the
repayment of indebtedness of $51.5 million, partially offset by $6.0 million of
proceeds received from a sale and leaseback transaction.

ACCOUNTING CHANGES

     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,

                                        14
<PAGE>

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 the Credit Facility, during 1997 the Company entered
into an interest rate swap agreement to reduce the impact of potential increases
in interest rates on the Credit Facility. This interest rate swap agreement
effectively fixes the Company's borrowing rate at 7.8% on $97 million of
borrowings at December 31, 2001. At December 31, 2001, the fair value of the
interest rate swap agreement was approximately $4.6 million in favor of the
counterparty, representing the amount the Company would pay if the agreement was
terminated. Any differences paid or received on the interest rate swap agreement
are recognized as adjustments to current interest expense.

     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 is being amortized into interest expense over
three years which is the remaining life of the interest rate swap agreement.
During the year ended December 31, 2001, the change in fair market value of our
derivative instrument resulted in a non-cash charge of $3.9 million, which is
recorded in interest expense as this derivative was not designated as a hedging
instrument.

ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." 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.

     SFAS No. 142 requires that goodwill no longer be amortized, but instead be
tested for impairment at least annually. SFAS No. 142 will also require 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 will adopt
SFAS No. 142 on January 1, 2002, at which time amortization of goodwill will
cease. At December 31, 2001, goodwill net of accumulated amortization was $167.0
million and the related amortization expense during each of the three years in
the period ended December 31, 2001 was $6.1 million. Based on the Company's
evaluations at December 31, 2001, there is no impairment to the Company's
long-lived assets and, therefore, there will be no impairment charges when the
Company adopts SFAS No. 142 on January 1, 2002.

     In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 supercedes SFAS No. 121, "Accounting for Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 establishes a single accounting model based on the framework established
in SFAS No. 121 for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. SFAS No. 144 is effective for the
Company on January 1, 2002. The Company is currently evaluating the impact, if
any, of SFAS No. 144 on its financial position, results of operation and cash
flows.

INFLATION

     A majority of the Company's sales are conducted through annually
established price lists and long-term contracts. The effect of inflation on the
Company's sales and earnings is minimal because the selling prices of such 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.

                                        15
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company had $285.6 million of total debt outstanding at December 31,
2001. Of this amount, $185 million is borrowed at a fixed rate of 9 1/4% and the
balance is borrowed under the Credit Facility. The interest rate for borrowings
under the Credit Facility varies with LIBOR or the prime rate, at the Company's
option.

     As a requirement of the 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 interest rate swap agreement
effectively fixes the Company's borrowing rate at 7.8% on $97 million at
December 31, 2001 and expires on December 17, 2003. Therefore, the Company has
effectively fixed the interest on $282 million of its indebtedness at December
31, 2001. Given that approximately 99% of the Company's borrowings at December
31, 2001 are at fixed interest rates, a change in rates by 10% would not have a
significant impact on fair values, cash flows or earnings. The Company has no
other derivative financial instruments.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See the financial statements, together with the auditors' reports thereon,
appearing on pages F-1 to F-19 hereof.

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

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Set forth below are the names, ages and positions of the directors and
executive officers of the Company. All directors hold office until the next
annual meeting of stockholders of the Company and until their successors are
duly elected and qualified, and all executive officers hold office at the
pleasure of the Board of Directors. The following executive officers or
directors of the Company 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 the Company is related by
blood, marriage or adoption.

<Table>
<Caption>
NAME                              AGE             POSITION(S)              DIRECTOR SINCE
----                              ---             -----------              --------------
<S>                               <C>   <C>                                <C>
Bernard L. Schwartz*............  76    Chairman of the Board and Chief         1989
                                        Executive Officer
David J. Brand**................  41    Director                                1997
Herbert R. Brinberg*............  76    Director                                1989
Robert B. Hodes*................  76    Director                                1997
Ronald H. Kisner*...............  53    Director and Secretary                  1989
John R. Paddock*................  48    Director                                1989
A. Robert Towbin***.............  66    Director                                1989
Alan H. Washkowitz**............  61    Director                                1989
Donald E. Fogelsanger...........  76    Vice Chairman
Kenneth M. Schwartz.............  50    President and Chief Operating
                                        Officer
Dirkson R. Charles..............  38    Chief Financial Officer
</Table>

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

  * Designated as director by BLS pursuant to the Stockholders Agreement.

 ** Designated as director by the Lehman Investors pursuant to the Stockholders
    Agreement.

                                        16
<PAGE>

*** Designated as independent director by BLS and the Lehman Investors pursuant
    to the Stockholders Agreement.

     Mr. Bernard L. Schwartz has been Chairman and Chief Executive Officer of
the Company since 1989. Mr. Schwartz has been Chairman and Chief Executive
Officer of Loral Space & Communications Ltd. since April 1996. From 1972 to
April 1996 Mr. Schwartz was Chairman and Chief Executive Officer of Loral
Corporation. Mr. 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 principal in the
Global Mergers & Acquisitions Group, leading 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 W.R. Berkley Corporation,
LCH Investments N.V., Loral Space & Communications Ltd., Mueller Industries,
Inc., Restructured Capital Holdings Ltd. and R.V.I. Guaranty Co., Ltd.

     Mr. Kisner has been Secretary of the Company since 1997 and employed by the
Company 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 such offices as 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. 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 Head of the
Merchant Banking Group, 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 14 years,
and he also is 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.

                                        17
<PAGE>

     Mr. Fogelsanger has been Vice Chairman of the Company since March 2000. Mr.
Fogelsanger was President of the Company from January 1996 to March 2000. From
April 1989 to January 1996, Mr. Fogelsanger was the President of Aircraft
Braking Systems Corporation. 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
ABS division. From 1980 to 1986 he was General Manager of Goodyear's Aircraft
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 President and Chief Operating Officer of
the Company since March 2000. Mr. Schwartz was Executive Vice President of the
Company from January 1996 to March 2000. From June 1989 to January 1996, Mr.
Schwartz held the positions of Chief Financial Officer, Treasurer and Secretary.
Previously he was the Corporate Director of Internal Audit for Loral Corporation
since late 1987. From 1984 to 1987, Mr. Schwartz held the position of Director
of Cost and Schedule Administration for Loral Electronic Systems. Prior to 1984,
Mr. Schwartz held various other positions with Loral Electronic Systems and the
accounting firm of Deloitte & Touche LLP.

     Mr. Charles has been Chief Financial Officer of the Company since May 1996.
From May 1993 to May 1996, Mr. Charles was the Controller of the Company.
Previously he was the Manager of Accounting and Financial Planning. Prior to
employment with the Company in 1989, Mr. Charles held various other positions
with the accounting firm of Arthur Andersen & Co. LLP, 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.....................  58    Senior Vice President -- Marketing
Richard W. Johnson....................  58    Senior Vice President -- Finance and
                                              Administration
James J. Williams.....................  46    Senior Vice President -- Operations
Gary M. Rimlinger.....................  54    Vice President -- Engineering
</Table>

  ENGINEERED FABRICS CORPORATION

<Table>
<Caption>
NAME                                    AGE                  POSITION
----                                    ---                  --------
<S>                                     <C>   <C>
John A. Skubina.......................  47    President
Richard P. Arsenault..................  44    Vice President -- Finance
Terry L. Lindsey......................  57    Vice President -- Marketing
Anthony G. McCann.....................  42    Vice President -- Operations
Dan C. Sydow..........................  65    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.

                                        18
<PAGE>

     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.

     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. Rimlinger was named Vice President of Engineering at Aircraft Braking
Systems in June 1998. He had been Director of Research and Technology for
Aircraft Braking Systems since February 1990. Prior to this assignment, he had
spent 11 years in various Engineering and Engineering Management positions in
the Research and Technology Department of Aircraft Braking Systems, Loral
Corporation's Aircraft Braking Systems Division and Goodyear Aerospace.

     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 US 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.

                                        19
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

     The following table sets forth the compensation for the years ended
December 31, 2001, 2000 and 1999, paid to the chief executive officer and each
of the other four most highly compensated executive officers of the Company and
the Company's subsidiaries.

<Table>
<Caption>
                                                                      LONG-TERM
                                                                    COMPENSATION
                                        ANNUAL COMPENSATION       -----------------
                                      -----------------------     OPTIONS    LTIP        ALL OTHER
NAME AND PRINCIPAL POSITION    YEAR    SALARY         BONUS       GRANTED   PAYOUTS   COMPENSATION(A)
---------------------------    ----   ---------     ---------     -------   -------   ---------------
                                         ($)           ($)          (#)       ($)           ($)
<S>                            <C>    <C>           <C>           <C>       <C>       <C>
Bernard L. Schwartz.........   2001   2,060,259(b)  5,483,700         --        --            --
Chairman of the Board and      2000   2,082,572(b)  7,300,200         --        --            --
Chief Executive Officer        1999   2,084,224(b)  6,095,300         --        --            --
Kenneth M. Schwartz.........   2001     485,000(b)    120,000         --    60,000        12,518
President and Chief
  Operating                    2000     476,155(b)    850,000(c)   2,500    53,333        11,140
Officer of K & F Industries,
  Inc.                         1999     435,000(b)    175,000         --    48,333         5,856
Donald E. Fogelsanger.......   2001     235,000        96,000         --    58,334        31,646
Vice Chairman of               2000     235,000       410,000(c)      --    55,000        30,382
K & F Industries, Inc.         1999     235,000       150,000         --    53,333        32,976
Dirkson R. Charles..........   2001     200,000        63,000         --    46,333         8,916
Chief Financial Officer of     2000     185,000       525,000(c)     750    39,333         7,888
K & F Industries, Inc.         1999     170,000        90,000         --    34,333         7,596
Ronald H. Kisner............   2001     180,000        54,000         --    41,667        12,576
Director and Secretary of      2000     170,000       430,000(c)   1,250    35,000        11,552
K & F Industries, Inc.         1999     160,000        75,000         --    21,667        23,254
</Table>

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

(a) Includes the following: (i) Company contributions to individual 401(k) plan
    accounts for the years ended December 31, 2001, 2000 and 1999, respectively:
    Mr. K. Schwartz -- $6,120, $5,057 and $4,800; Mr. Fogelsanger -- $6,120,
    $5,086 and $4,800; Mr. Charles -- $6,120, $5,092 and $4,800; Mr. Kisner --
    $6,120, $5,096 and $4,798; and (ii) the compensation element of supplemental
    life insurance programs for the years ended December 31, 2001, 2000 and
    1999, respectively: Mr. K. Schwartz -- $6,398, $6,083 and $1,056; Mr.
    Fogelsanger -- $25,526, $25,296 and $28,176; Mr. Charles -- $2,796, $2,796
    and $2,796; Mr. Kisner  -- $6,456, $6,456 and $6,456. Mr. Kisner also
    received a Board of Directors fee of $12,000 in 1999.

(b) 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 designated by him. BLS 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, 2001.

(c) In 2000, the Board of Directors awarded special bonuses to various
    directors, officers and employees, including: $650,000 for Mr. K. Schwartz;
    $250,000 for Mr. Fogelsanger; $420,000 for Mr. Charles; and $340,000 for Mr.
    Kisner.

                       OPTION GRANTS IN LAST FISCAL YEAR

     There were no grants of stock options by the Company during the year ended
December 31 2001 to the individuals named in the Summary Compensation Table.

                                        20
<PAGE>

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

     The following sets forth information as to the exercise of stock options
during the year ended December 31, 2001 and the value of unexercised stock
options at year-end. The Company's stock is not publicly traded.

<Table>
<Caption>
                                                                                             VALUE OF
                                                                             NUMBER OF      UNEXERCISED
                                                                            UNEXERCISED    IN-THE-MONEY
                                                                            OPTIONS AT      OPTIONS 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         3,458/3,042         0/0
Donald E. Fogelsanger........................       0             0           1,875/625         0/0
Dirkson R. Charles...........................       0             0         2,538/1,662         0/0
Ronald H. Kisner.............................       0             0         2,180/1,720         0/0
</Table>

LONG-TERM INCENTIVE PLAN AWARDS

     Under the Company's long-term incentive plan designed to provide an
incentive to encourage attainment of Company objectives and retain and attract
key executives of the Company, 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 the Company has achieved at least a 10%
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, 2001. The following awards were earned for the individuals
named in the Summary Compensation Table during the years ended December 31, 2000
and 1999, respectively: Mr. K. Schwartz $92,000 and $70,000; Mr. Fogelsanger
$79,000 and $65,000; Mr. Charles $67,000 and $55,000; and Mr. Kisner $61,000 and
$50,000.

THE RETIREMENT PLAN

     The Company established, effective May 1, 1989, as amended, the K & F
Industries Retirement Plan for Salaried Employees (the "Company Retirement Plan"
or the "Plan"), a defined benefit pension plan. The Company has received a
favorable initial determination letter from the Internal Revenue Service that
the Company Retirement Plan is a qualified plan under the Internal Revenue Code.
The Company Retirement Plan was amended in 2001 to comply with changes mandated
by law and it has been submitted to the Internal Revenue Service for
determination of continuing qualification. The terms of the Company Retirement
Plan are as follows: a non-contributory benefit and a contributory benefit. The
cost of the former is borne by the Company; the cost of the latter is borne
partly by the Company 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 the Company
Retirement Plan; salaried 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: (a) 2.4% times years of
continuous service up to 10, plus, (b) 1.8% times additional years of such
service up to 20, plus, (c) 1.2% times additional years of such service up to
30, plus, (d) 0.6% times all additional such service above 30 years.

                                        21
<PAGE>

     Effective January 1, 1990, the Plan was amended for eligible employees of K
& F and Aircraft Braking Systems to provide an annual benefit equal to (a) the
accrued benefit described above as of December 31, 1989, plus (b) 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 (c) 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 (c) 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 the Company
Retirement Plan are subject to a statutory ceiling of $140,000 per participant.
Participants are fully vested in their accrued benefits under the Company
Retirement Plan after five years of credited service with the Company.

     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 the Company
Retirement Plan and the supplemental plan are: $224,000 for Mr. B. Schwartz;
$362,000 for Mr. K. Schwartz; $177,000 for Mr. Fogelsanger; $255,000 for Mr.
Charles; and $108,000 for Mr. Kisner. The retirement benefits have been computed
on the assumption that (a) employment will be continued until normal retirement
at age 65 or current age if greater; (b) 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 (c)
participation in the contributory portion of the plan will continue at current
levels. The Company has 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 four meetings during the year ended December
31, 2001. Members of the Board of Directors are entitled to receive a director's
fee of $12,000 per year. Messrs. Brand, Kisner and Washkowitz did not receive
director's fees during the year ended December 31, 2001. All directors are
reimbursed for reasonable out-of-pocket expenses incurred in that capacity.

ADVISORY AGREEMENT

     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
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.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The Company has not in the past used a compensation committee to determine
executive officer compensation. The payments to BLS, the Company's Chairman and
Chief Executive Officer, are paid in

                                        22
<PAGE>

accordance with the Advisory and Stockholders Agreements. All other executive
compensation decisions are made by BLS in accordance with policies established
in consultation with the Board of Directors.

                                    PART IV

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth the ownership of the capital stock of the
Company as of December 31, 2001.

<Table>
<Caption>
                                                           NUMBER OF SHARES    PERCENTAGE
                                                              OF COMMON       OWNERSHIP OF
                                                               STOCK**        CAPITAL STOCK
                                                           ----------------   -------------
<S>                                                        <C>                <C>
Bernard L. Schwartz......................................      370,199            50.00%
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 10,051
     shares, and executive officers and directors as a group hold options
     covering 18,526 shares, which may be acquired within 60 days pursuant to
     the exercise of the options.

(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

     In connection with the Recapitalization, BLS and the Lehman Investors
(collectively, the "Stockholders") entered into a Stockholders Agreement dated
as of October 15, 1997 (the "Stockholders Agreement"). The Stockholders
Agreement contains certain restrictions with respect to the transferability of
the Company's 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 such time as 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 (collectively, "Common
Equivalents") 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 the Company's Board of Directors
be comprised initially of nine directors. Under the Stockholders Agreement, BLS
is entitled to appoint five directors, the Lehman Investors are entitled to
appoint three directors and BLS 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 BLS, 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.

                                        23
<PAGE>

The Company's 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 recapitalization, (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) dissolution or liquidation of the Company, (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 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 million, (xi) amendment of the
Certificate of Incorporation and By-laws of the Company, (xii) engaging in new
businesses or ventures and (xiii) certain employee compensation and other
matters.

     The Stockholders Agreement provides that any time after the earlier of (i)
the fifth anniversary of the Recapitalization, (ii) six months following the
death of BLS or (iii) upon the resignation or retirement of BLS as Chairman or
Chief Executive Officer, either the BLS Group or the Lehman Investors (the "Put
Party") may request an appraisal of the value of the capital stock of the
Company (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 such
Appraised Value. The other party may elect to purchase such capital stock,
arrange for the purchase of such capital stock by a third party or notify the
Put Party that it does not intend to purchase, or arrange for the purchase by a
third party of such capital stock. If the other party is unable or chooses not
to arrange for and consummate the purchase of such capital stock, the BLS Group
and the Lehman Investors shall cause the Company to be sold as an entirety if
such 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 the Company as an entirety shall include all Stockholders and the
proceeds thereof shall be allocated among the Stockholders in accordance with
their stock ownership.

     Notwithstanding other restrictions on transfer set forth in the
Stockholders Agreement, from and after March 3, 2001, 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 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 BLS will
terminate upon any such transfer.

     The Stockholders Agreement provides certain first offer and tag-along
rights with respect to certain transfers and common stock or Common Equivalents.

     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 the
Company's common stock approved by the Board of Directors. The Stockholders
Agreement contains customary terms and provisions with respect to such
registration rights.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

GENERAL

     BLS owns 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. 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
designated by him in exchange for acting as directors and providing advisory
services to the Company and its subsidiaries. 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.

                                        24
<PAGE>

     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 $5,483,700, $7,300,200 and $6,095,300 for the years ended December 31,
2001, 2000 and 1999, 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 $0.5 million, $0.6 million and $0.6
million for the years ended December 31, 2001, 2000 and 1999, 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 three
years ended December 31, 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.

ITEM 14.  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, 2001 and
  2000......................................................   F-2
Consolidated Statements of Operations for the Years Ended
  December 31, 2001, 2000 and 1999..........................   F-3
Consolidated Statements of Stockholders' Deficiency for the
  Years Ended December 31, 2001, 2000 and 1999..............   F-4
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2001, 2000 and 1999..........................   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 10.04 through 10.09 and 10.11, 10.12,
10.19, 10.40 and 10.41 are management contracts or compensation plans.

  (b) Reports on Form 8-K:  No reports on Form 8-K were filed for the three
months ended December 31, 2001.

     Exhibits: See exhibit index below.

  (c) Exhibits

<Table>
<S>    <C>   <C>
1.01    --   Purchase Agreement dated as of October 9, 1997 between the
             Company and Lehman Brothers Inc. and Unterberg Harris(10)
2.01    --   Agreement for Sale and Purchase of Assets dated March 26,
             1989 between Loral Corporation and the Registrant(1)
2.02    --   Stock Purchase Agreement dated September 15, 1997 among the
             Company and the Stockholders of the Company(10)
</Table>

                                        25
<PAGE>
<Table>
<S>    <C>   <C>
2.03    --   First Amendment to Stock Purchase Agreement dated as of
             October 15, 1997 among the Company and the Stockholders
             named therein(10)
3.01    --   Amended and Restated Certificate of Incorporation of the
             Company(10)
3.02    --   Amended and Restated By-Laws of the Company(10)
4.01    --   Indenture dated October 15, 1997 for the 9 1/4% Notes
             between the Company and State Street Bank and Trust Company,
             as trustee(10)
4.02    --   Indenture dated as of August 15, 1996 for the 10 3/8% Notes
             between the Company and Fleet National Bank, as trustee(9)
4.03    --   Indenture dated as of June 1, 1992 for the 11 7/8% Notes
             between the Company and the Bank of New York, as trustee(5)
4.04    --   Pledge Agreement dated as of June 10, 1992 between the
             Company and the Bank of New York, as collateral trustee(5)
10.01   --   Securities Purchase Agreement dated as of April 27, 1989
             among the Company, BLS and Lehman Brothers Holdings Inc.
             ("LBH")(1)
10.02   --   Assumption Agreement dated as of April 27, 1989(1)
10.03   --   Shared Services Agreement dated as of April 27, 1996 between
             Lockheed Martin Tactical Defense Systems -- Akron and
             Aircraft Braking Systems(10)
10.04   --   Amended and Restated Director Advisory Agreement dated as of
             October 15, 1997 between the Company and BLS(10)
10.05   --   Non-Competition Agreement dated as of April 27, 1989 between
             the Company and BLS(1)
10.06   --   K & F Industries, Inc. Retirement Plan for Salaried
             Employees(5)
10.07   --   K & F Industries, Inc. Savings Plan for Salaried
             Employees(5)
10.08   --   Goodyear Aerospace Corporation Supplemental Unemployment
             Benefits Plan for Salaried Employees -- Plan A(1)
10.09   --   The Loral Systems Group Release and Separation Allowance
             Plan(1)
10.10   --   Letter Agreement dated April 27, 1989 between the Company
             and LBH(1)
10.11   --   K & F Industries, Inc. 1989 Stock Option Plan(2)
10.12   --   K & F Industries, Inc. Executive Deferred Bonus Plan(2)
10.13   --   Securities Purchase Agreement dated as of July 22, 1991
             among the Company, BLS and the Lehman Investors(4)
10.14   --   Securities Purchase Agreement among the Company, BLS and the
             Lehman Investors dated September 2, 1994(6)
10.15   --   Amended and Restated Stockholders Agreement dated as of
             September 2, 1994 by and among the Company, BLS, the Lehman
             Investors, Chase Capital Partners and Loral Space(6)
10.16   --   Agreement dated as of September 2, 1994 between the Company
             and Loral Space(6)
10.17   --   Amendment of Stockholders Agreement dated November 8,
             1994(6)
10.18   --   Securities Conversion Agreement among the Company and the
             Converting Stockholders, dated November 8, 1994(6)
10.19   --   K & F Industries, Inc. Supplemental Executive Retirement
             Plan(8)
10.20   --   Amended and Restated Credit Agreement dated as of August 14,
             1996 among Aircraft Braking Systems ("ABS"), Engineered
             Fabrics Corporation ("EFC"), the Lenders (as defined
             therein), Lehman Commercial Paper, Inc., as Documentation
             Agent, and Chase Securities Inc., individually and as agent
             for the Lenders ("Chase")(9)
10.21   --   Amended and Restated Security Agreement dated as of August
             14, 1996 between ABS and Chase(9)
10.22   --   Amended and Restated Security Agreement dated as of August
             14, 1996 between EFC and Chase(9)
</Table>

                                        26
<PAGE>
<Table>
<S>    <C>   <C>
10.23   --   Revolving Credit Note dated as of August 14, 1996 executed
             by each of ABS and EFC in favor of NBD Bank(9)
10.24   --   Facility A Notes dated as of August 14, 1996 executed by
             each of ABS and EFC in favor of NBD Bank(9)
10.25   --   Amended and Restated K & F Agreement dated as of August 14,
             1996 between the Company and Chase(9)
10.26   --   Amended and Restated Subordination Agreement dated as of
             August 14, 1996 between ABS and Chase(9)
10.27   --   Amended and Restated Subordination Agreement dated as of
             August 14, 1996 between EFC and Chase(9)
10.28   --   Purchase Agreement dated August 12, 1996 among the Company,
             Lehman Brothers Inc. and Chase Securities Inc.(9)
10.29   --   Registration Rights Agreement dated as of August 15, 1996
             among the Company, Lehman Brothers Inc. and Chase Securities
             Inc.(9)
10.30   --   Credit Agreement dated as of October 15, 1997 among ABS,
             EFC, the Lenders (as defined therein), Lehman Commercial
             Paper, Inc., as Documentation Agent, and The First National
             Bank of Chicago ("FNBC"), as Administrative Agent(10)
10.31   --   Guarantee and Collateral Agreement dated as of October 15,
             1997 among the Company, ABS, EFC, certain subsidiaries named
             therein and FNBC, as Collateral Agent(10)
10.32   --   Subordination Agreement dated as of October 15, 1997 between
             ABS and FNBC(10)
10.33   --   Subordination Agreement dated as of October 15, 1997 between
             EFC and FNBC(10)
10.34   --   Intercreditor Agreement dated as of October 15, 1997 among
             the Pension Benefit Guaranty Corporation ("PBGC"), FNBC,
             ABS, EFC and the Company(10)
10.35   --   K & F Agreement dated as of October 15, 1997 executed by the
             Company in favor of FNBC(10)
10.36   --   Settlement Agreement dated as of October 15, 1997 between
             the Company and PBGC(10)
10.37   --   Registration Rights Agreement dated as of October 15, 1997
             between the Company and Lehman Brothers Inc. and Unterberg
             Harris(10)
10.38   --   Dealer Manager Agreement dated as of September 15, 1997
             between Lehman Brothers Inc. and the Company(10)
10.39   --   Stockholders' Agreement dated as of October 15, 1997 between
             the Company and the Stockholders identified therein(10)
10.40   --   K & F Industries, Inc. 1998 Stock Option Plan(11)
10.41   --   K & F Industries, Inc. Supplemental Executive Retirement
             Plan, as amended(12)
10.42   --   Agreement dated as of January 1, 2000 between the Company
             and Loral Space(13)
12.01   --   Statement of computations of ratio of earnings to fixed
             charges(10)
21.01   --   Subsidiaries of the Registrant(1)
24.01   --   Powers of Attorney (included on signature page)
</Table>

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

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

 (2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
     for the fiscal year ended March 31, 1990 and incorporated herein by
     reference.

 (3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
     for the fiscal year ended March 31, 1991 and incorporated herein by
     reference.

 (4) Previously filed as an exhibit to the Company's Quarterly Report on Form
     10-Q for the quarter ended June 30, 1991 and incorporated herein by
     reference.

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

                                        27
<PAGE>

 (6) Previously filed as an exhibit to the Company's Quarterly Report on Form
     10-Q for the quarter ended September 30, 1994 and incorporated herein by
     reference.

 (7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
     for the fiscal year ended March 31, 1995 and incorporated herein by
     reference.

 (8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
     for the fiscal year ended March 31, 1996 and incorporated herein by
     reference.

 (9) Previously filed as an exhibit to the Company's Registration Statement on
     Form S-4, No. 333-11047 and incorporated herein by reference.

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

(11) 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.

(12) 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.

(13) 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.

     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.

                                        28
<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, 2002

     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
---------                                                        -----                       ----
<C>                                                <C>                                  <S>



                       *                              Chairman of the Board, Chief      March 29, 2002
------------------------------------------------     Executive Officer and Director
              Bernard L. Schwartz                    (principal executive officer)




            /s/ KENNETH M. SCHWARTZ                  President and Chief Operating      March 29, 2002
------------------------------------------------                Officer
              Kenneth M. Schwartz




             /s/ DIRKSON R. CHARLES                Chief Financial Officer (principal   March 29, 2002
------------------------------------------------   financial and accounting officer)
               Dirkson R. Charles




                       *                                        Director                March 29, 2002
------------------------------------------------
                 David J. Brand




                       *                                        Director                March 29, 2002
------------------------------------------------
              Herbert R. Brinberg




                       *                                        Director                March 29, 2002
------------------------------------------------
                Robert B. Hodes




                       *                                        Director                March 29, 2002
------------------------------------------------
                Ronald H. Kisner




                       *                                        Director                March 29, 2002
------------------------------------------------
                John R. Paddock




                       *                                        Director                March 29, 2002
------------------------------------------------
                A. Robert Towbin




                       *                                        Director                March 29, 2002
------------------------------------------------
               Alan H. Washkowitz




          *By: /s/ KENNETH M. SCHWARTZ                      Attorney-in-Fact            March 29, 2002
     ------------------------------------------
              Kenneth M. Schwartz
</Table>

                                        29
<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, 2001 and
2000, and the related consolidated statements of operations, stockholders'
deficiency, and cash flows for each of the three years in the period ended
December 31, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.

DELOITTE & TOUCHE LLP

New York, New York
January 25, 2002

                                       F-1
<PAGE>

                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  2001           2000
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                         ASSETS
Current Assets:
  Cash and cash equivalents.................................  $  5,136,000   $  6,477,000
  Accounts receivable -- net................................    43,595,000     46,765,000
  Inventory.................................................    60,510,000     63,983,000
  Other current assets......................................       666,000      1,634,000
  Deferred tax asset........................................            --      4,260,000
                                                              ------------   ------------
          Total current assets..............................   109,907,000    123,119,000
                                                              ------------   ------------
Property, Plant and Equipment -- Net........................    70,041,000     73,036,000
Prepaid Pension Cost........................................            --     23,683,000
Deferred Charges -- Net of amortization of $17,353,000 and
  $13,622,000...............................................    41,126,000     32,120,000
Goodwill -- Net of amortization of $77,365,000 and
  $71,257,000...............................................   167,011,000    162,679,000
Intangible Assets -- Net of amortization of $35,738,000 and
  $35,060,000...............................................    15,923,000     15,448,000
                                                              ------------   ------------
Total Assets................................................  $404,008,000   $430,085,000
                                                              ============   ============

                        LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
  Accounts payable..........................................  $ 14,181,000   $ 18,373,000
  Notes payable.............................................            --      3,900,000
  Current portion of long-term debt.........................     1,500,000      1,500,000
  Interest payable..........................................     3,712,000      4,148,000
  Other current liabilities.................................    51,291,000     49,503,000
                                                              ------------   ------------
          Total current liabilities.........................    70,684,000     77,424,000
                                                              ------------   ------------
Pension Liabilities.........................................     5,685,000             --
Deferred Income Taxes.......................................     8,213,000             --
Postretirement Benefit Obligation Other Than Pensions.......    79,656,000     79,687,000
Other Long-Term Liabilities.................................    13,898,000      5,355,000
Long-Term Debt..............................................   284,125,000    345,625,000
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................................   (63,259,000)   (63,259,000)
  Retained earnings (deficit)...............................    21,273,000    (14,711,000)
  Accumulated other comprehensive loss......................   (16,274,000)       (43,000)
                                                              ------------   ------------
          Total stockholders' deficiency....................   (58,253,000)   (78,006,000)
                                                              ------------   ------------
Total Liabilities and Stockholders' Deficiency..............  $404,008,000   $430,085,000
                                                              ============   ============
</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,
                                                     ------------------------------------------
                                                         2001           2000           1999
                                                     ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>
Net sales..........................................  $355,334,000   $375,890,000   $355,951,000
Cost of sales......................................   204,036,000    199,459,000    197,757,000
                                                     ------------   ------------   ------------
Gross margin.......................................   151,298,000    176,431,000    158,194,000
Independent research and development...............    16,188,000     15,763,000     13,996,000
Selling, general and administrative expenses.......    30,273,000     37,666,000     33,245,000
Amortization.......................................     8,837,000      8,118,000      8,773,000
                                                     ------------   ------------   ------------
Operating income...................................    96,000,000    114,884,000    102,180,000
Interest expense, net of interest income of
  $243,000, $318,000 and $281,000..................    32,569,000     35,993,000     40,396,000
                                                     ------------   ------------   ------------
Income before income taxes.........................    63,431,000     78,891,000     61,784,000
Income tax (provision) benefit.....................   (27,447,000)   (14,906,000)    12,136,000
                                                     ------------   ------------   ------------
          Net income...............................  $ 35,984,000   $ 63,985,000   $ 73,920,000
                                                     ============   ============   ============
</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, 2001, 2000 AND 1999

<Table>
<Caption>
                                                                                ACCUMULATED
                               COMMON STOCK                                        OTHER
                             ----------------    ADDITIONAL      RETAINED      COMPREHENSIVE   COMPREHENSIVE
                             SHARES               PAID-IN        EARNINGS         INCOME          INCOME
                             ISSUED    AMOUNT     CAPITAL        (DEFICIT)        (LOSS)          (LOSS)
                             -------   ------   ------------   -------------   -------------   -------------
<S>                          <C>       <C>      <C>            <C>             <C>             <C>
Balance, January 1, 1999...  740,398   $7,000   $(63,259,000)  $(152,616,000)  $    258,000
  Net Income...............                                       73,920,000                   $ 73,920,000
  Cumulative translation
    adjustments............                                                         (44,000)        (44,000)
                             -------   ------   ------------   -------------   ------------    ------------
Balance, December 31,
  1999.....................  740,398   7,000     (63,259,000)    (78,696,000)       214,000    $ 73,876,000
                                                                                               ============
  Net Income...............                                       63,985,000                   $ 63,985,000
  Cumulative translation
    adjustments............                                                        (257,000)       (257,000)
                             -------   ------   ------------   -------------   ------------    ------------
Balance, December 31,
  2000.....................  740,398   7,000     (63,259,000)    (14,711,000)       (43,000)   $ 63,728,000
                                                                                               ============
  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
                             =======   ======   ============   =============   ============    ============
</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,
                                                              ------------------------------------------
                                                                  2001           2000           1999
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
Cash Flows From Operating Activities:
  Net income................................................  $ 35,984,000   $ 63,985,000   $ 73,920,000
  Adjustments to reconcile net income to net cash provided
    by operating activities:
    Depreciation............................................     8,052,000      8,010,000      8,495,000
    Amortization............................................     8,837,000      8,118,000      8,773,000
    Non-cash interest expense -- amortization of deferred
      financing charges.....................................     1,680,000      1,755,000      1,836,000
    Non-cash interest expense -- change in fair market value
      of interest rate swap.................................     3,935,000             --             --
    Provision for losses on accounts receivable.............       512,000        109,000        161,000
    Deferred income taxes...................................    24,507,000     13,803,000    (13,258,000)
    Changes in assets and liabilities:
      Accounts receivable...................................     2,625,000      4,897,000    (16,058,000)
      Inventory.............................................     3,419,000      4,707,000      1,421,000
      Other current assets..................................       (32,000)       167,000       (128,000)
      Prepaid pension costs.................................       940,000     (5,869,000)    (4,007,000)
      Accounts payable......................................    (4,192,000)       686,000      2,359,000
      Notes payable.........................................    (3,900,000)     3,900,000             --
      Interest payable......................................      (436,000)      (358,000)      (627,000)
      Other current liabilities.............................    (4,363,000)     6,652,000     (3,652,000)
      Postretirement benefit obligation other than
        pensions............................................       (31,000)     1,020,000      2,711,000
      Other long-term liabilities...........................       (47,000)      (911,000)    (1,398,000)
                                                              ------------   ------------   ------------
        Net cash provided by operating activities...........    77,490,000    110,671,000     60,548,000
                                                              ------------   ------------   ------------
Cash Flows From Investing Activities:
  Capital expenditures......................................    (5,057,000)    (9,845,000)   (10,413,000)
  Deferred charges..........................................   (11,737,000)    (5,763,000)    (7,892,000)
  Payment for intangible assets.............................      (537,000)            --             --
  Purchase of intellectual property.........................             -     (5,670,000)            --
                                                              ------------   ------------   ------------
        Net cash used in investing activities...............   (17,331,000)   (21,278,000)   (18,305,000)
                                                              ------------   ------------   ------------
Cash Flows From Financing Activities:
  Payments of senior revolving loan.........................   (66,000,000)   (95,000,000)   (59,000,000)
  Borrowings under senior revolving loan....................    46,000,000    108,000,000     66,000,000
  Payments on long-term debt................................   (41,500,000)   (99,500,000)   (58,500,000)
  Proceeds from sale and leaseback transaction..............            --             --      5,997,000
                                                              ------------   ------------   ------------
        Net cash used in financing activities...............   (61,500,000)   (86,500,000)   (45,503,000)
                                                              ------------   ------------   ------------
Net (decrease) increase in cash and cash equivalents........    (1,341,000)     2,893,000     (3,260,000)
Cash and cash equivalents, beginning of year................     6,477,000      3,584,000      6,844,000
                                                              ------------   ------------   ------------
Cash and cash equivalents, end of year......................  $  5,136,000   $  6,477,000   $  3,584,000
                                                              ============   ============   ============
Supplemental Information:
  Interest paid during the year.............................  $ 27,633,000   $ 34,914,000   $ 39,468,000
                                                              ============   ============   ============
  Income taxes paid during the year.........................  $  2,467,000   $  1,550,000   $  1,658,000
                                                              ============   ============   ============
</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 86% of the Company's total
revenues during the year ended December 31, 2001, and Engineered Fabrics
Corporation ("Engineered Fabrics") (collectively, the "Subsidiaries"), which
generated approximately 14% of the Company's total revenues during the year
ended December 31, 2001.

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.

     Deferred Charges -- Deferred charges consist primarily of financing costs
($4.5 million and $6.1 million, which is net of amortization (non-cash interest
expense) of $7.6 million and $6.0 million at December 31, 2001 and 2000,
respectively), and program participation costs ($36.7 million and $26.0 million,
which is net of amortization of $9.7 million and $7.7 million at December 31,
2001 and 2000, respectively) paid in connection with the award of wheels, brakes
and brake control equipment on various commercial programs. Program
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 6 to 10 years, which reflect the terms of the
Company's debt.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Goodwill -- Goodwill is being amortized on the straight-line method over a
period of 40 years. The Company reviews the goodwill for recoverability on an
ongoing basis using undiscounted cash flows. Impairments would be recognized in
operating results.

     Intangible Assets -- 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. During the year ended
December 31, 2000, the Company purchased intellectual property (primarily
consisting of patents, licenses, trade names and drawings) in connection with
the Dornier 328 program in the amount of $5.7 million.

     Evaluation of Long-Lived Assets -- Long-lived assets are assessed for
recoverability on an ongoing basis in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121. 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, 2001, 2000 and 1999 resulting from
the Company's evaluations.

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

     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 21%, 17% and 15% of
total sales for the years ended December 31, 2001, 2000 and 1999, 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, 2001 and 2000.

     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 allowed by SFAS 123, "Accounting for
Stock-Based Compensation," the Company records compensation expense for its
stock-based compensation plans in accordance with the intrinsic-value method
prescribed by Accounting Principles Board ("APB") No. 25, "Accounting for Stock
Issued to Employees." Intrinsic value is the amount by which the market price of
the underlying stock exceeds the exercise price of the stock option or award on
the measurement date, generally the date of grant.

     Accounting Changes -- 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 its 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 is being amortized into interest expense over
three

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

years which is the remaining life of the interest rate swap agreement. During
the year ended December 31, 2001, the change in fair market value of this
derivative instrument resulted in a non-cash charge of $3.9 million, which is
recorded in interest expense as this derivative was not designated as a hedging
instrument.

     Accounting Pronouncements -- In June 2001, the Financial Accounting
Standards board issued SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." 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.

     SFAS No. 142 requires that goodwill no longer be amortized, but instead be
tested for impairment at least annually. SFAS No. 142 will also require 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 will adopt
SFAS No. 142 on January 1, 2002, at which time amortization of goodwill will
cease. At December 31, 2001, goodwill net of accumulated amortization was $167.0
million and the related amortization expense during each of the three years in
the period ended December 31, 2001 was $6.1 million. Based on the Company's
evaluations at December 31, 2001, there is no impairment to the Company's
long-lived assets and, therefore, there will be no impairment charges when the
Company adopts SFAS No. 142 on January 1, 2002.

     In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 supercedes SFAS No. 121, "Accounting for Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 establishes a single accounting model based on the framework established
in SFAS No. 121 for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. SFAS No. 144 is effective for the
Company on January 1, 2002. The Company is currently evaluating the impact, if
any, of SFAS No. 144 on its financial position, results of operation and cash
flows.

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

3.  ACCOUNTS RECEIVABLE

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                2001          2000
                                                             -----------   -----------
<S>                                                          <C>           <C>
Accounts receivable, principally from commercial
  customers................................................  $37,266,000   $40,816,000
Accounts receivable on U.S. government and other long-term
  contracts................................................    6,976,000     6,093,000
Allowances.................................................     (647,000)     (144,000)
                                                             -----------   -----------
          Total............................................  $43,595,000   $46,765,000
                                                             ===========   ===========
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4.  INVENTORY

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                2001          2000
                                                             -----------   -----------
<S>                                                          <C>           <C>
Raw materials and work-in-process..........................  $29,458,000   $36,058,000
Finished goods.............................................   18,712,000    18,642,000
Inventoried costs related to U.S government and other
  long-term contracts......................................   12,340,000     9,283,000
                                                             -----------   -----------
          Total............................................  $60,510,000   $63,983,000
                                                             ===========   ===========
</Table>

5.  PROPERTY, PLANT AND EQUIPMENT

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                           ---------------------------
                                                               2001           2000
                                                           ------------   ------------
<S>                                                        <C>            <C>
Land.....................................................  $    661,000   $    661,000
Buildings and improvements...............................    37,351,000     36,894,000
Machinery, equipment, furniture and fixtures.............   132,160,000    127,820,000
                                                           ------------   ------------
  Total..................................................   170,172,000    165,375,000
Less accumulated depreciation and amortization...........   100,131,000     92,339,000
                                                           ------------   ------------
          Total..........................................  $ 70,041,000   $ 73,036,000
                                                           ============   ============
</Table>

6.  OTHER CURRENT LIABILITIES

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                2001          2000
                                                             -----------   -----------
<S>                                                          <C>           <C>
Accrued payroll costs......................................  $18,086,000   $25,256,000
Accrued taxes..............................................    3,264,000     2,984,000
Accrued costs on long-term contracts.......................    3,420,000     3,172,000
Accrued warranty costs.....................................   12,619,000    10,789,000
Customer credits...........................................    2,766,000     2,693,000
Postretirement benefit obligation other than pensions......    3,000,000     3,000,000
Fair market value of interest rate swap....................    3,151,000            --
Other......................................................    4,985,000     1,609,000
                                                             -----------   -----------
          Total............................................  $51,291,000   $49,503,000
                                                             ===========   ===========
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7.  LONG-TERM DEBT

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                           ---------------------------
                                                               2001           2000
                                                           ------------   ------------
<S>                                                        <C>            <C>
Senior Revolving Loan....................................  $         --   $ 20,000,000
Senior Term Loan A.......................................    47,875,000     48,375,000
Senior Term Loan B.......................................    52,750,000     93,750,000
9 1/4% Senior Subordinated Notes due 2007................   185,000,000    185,000,000
                                                           ------------   ------------
Total....................................................   285,625,000    347,125,000
Less current maturities..................................     1,500,000      1,500,000
                                                           ------------   ------------
          Total..........................................  $284,125,000   $345,625,000
                                                           ============   ============
</Table>

     At December 31, 2001, the Credit Facility consisted of a term loan facility
in an aggregate principal amount of $100.6 million (the "Term Loans") and a
revolving credit facility in an aggregate principal amount of up to $50 million
(the "Revolving Loan"). The Term Loans consist of a Tranche A term loan ("Term
Loan A") in the principal amount of $47.9 million and a Tranche B term loan
("Term Loan B") in the principal amount of $52.7 million. The interest rates
under the Credit Facility are, at the Company's option, either the LIBOR or
prime rate, in each case, plus a margin. At December 31, 2001 and 2000, the
average interest rate on outstanding borrowings under the Credit Facility was
3.8% and 8.6%, respectively. As a requirement of the Credit Facility, during
1997 the Company entered into an interest rate swap agreement to reduce the
impact of potential increases in interest rates under the Credit Facility. The
interest rate swap agreement fixes the Company's LIBOR borrowing rate at 5.95%
and expires on December 17, 2003. At December 31, 2001, the notional value on
the interest rate swap agreement was $97 million and the fair value was
approximately $4.6 million in favor of the counterparty, representing the amount
the Company would pay if the agreement was terminated. Any differences paid or
received on the interest rate swap agreement are recognized as adjustments to
current interest expense. This interest rate agreement effectively fixes the
Company's borrowing rate at 7.8% on $97 million of borrowings at December 31,
2001. Obligations under the Credit Facility are secured by a lien on
substantially all of the assets of the Subsidiaries and are guaranteed by K & F.

     Term Loan A is a six-year quarterly amortizing facility maturing October
15, 2003, with installments of $0.5 million due in 2002 and $47.4 million due in
2003. Term Loan B is an eight-year quarterly amortizing facility maturing
December 31, 2004, with installments of $1.0 million per year due in years 2002
and 2003 and $50.7 million due in 2004. The Company is required to make
mandatory reductions in the Credit Facility in the event of certain asset sales,
the incurrence of certain additional indebtedness, and annually from a portion
of excess cash flow (as defined). As a result of the excess cash flow
calculation, $30 million was determined to be due in 2002; however, this
prepayment obligation was satisfied by $40 million of voluntary prepayments in
2001.

     Scheduled debt maturities for the five years subsequent to December 31,
2001 are as follows:

<Table>
<Caption>
YEAR ENDING DECEMBER 31,                                         AMOUNT
------------------------                                       -----------
<S>                                                            <C>
2002........................................................   $ 1,500,000
2003........................................................    48,375,000
2004........................................................    50,750,000
2005........................................................            --
2006........................................................            --
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Credit Facility provides for Revolving Loans not to exceed $50 million,
with up to $20 million available for letters of credit. The Revolving Loan
commitment terminates on October 15, 2003. At December 31, 2001 and 2000, the
Company had $48.2 million and $23.6 million available to borrow, respectively.
At December 31, 2001 and 2000, the Company had outstanding letters of credit of
$1.8 million and $6.4 million, respectively.

     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, a
leverage ratio and maintenance of a minimum adjusted net worth. The Company was
in compliance with all covenants at December 31, 2001.

     On October 15, 1997, the Company issued $185 million of 9 1/4% Notes which
mature on October 15, 2007. The 9 1/4% Notes are not subject to a sinking fund.
The 9 1/4% Notes may not be redeemed prior to October 15, 2002. 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.

8.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts of all financial instruments reported on the balance
sheet at December 31, 2001 and 2000 approximate their fair value, except as
discussed below. See Note 7 for disclosure of the fair value of the Company's
interest rate swap agreement.

     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
$285 million and $340 million at December 31, 2001 and 2000, respectively.

9.  CAPITAL STOCK

     a. 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. The options granted prior to
2000 are exercisable in four equal installments on the second, third, fourth and
fifth anniversaries of the date of grant. The options issued in 2000 and
thereafter are 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. All
options granted in 1998 and 1997 were issued with an exercise price of $175 per
share. All options granted thereafter were issued with an exercise price of $250
per share. Option exercise prices approximate fair market value at date of
grant, as determined by the Board of Directors.

     Stock option activity is summarized as follows:

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                             ------------------------
                                                              2001     2000     1999
                                                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
Outstanding at beginning of year...........................  54,400   43,075   47,350
Granted....................................................   1,600   11,850      900
Exercised..................................................      --       --       --
Canceled...................................................    (125)    (525)  (5,175)
                                                             ------   ------   ------
Outstanding at end of year.................................  55,875   54,400   43,075
                                                             ======   ======   ======
Exercisable options outstanding............................  32,525   18,000    7,719
                                                             ======   ======   ======
Available for future grant.................................  27,175   28,650   40,500
                                                             ======   ======   ======
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     At December 31, 2001, there were outstanding options for 41,525 and 14,350
shares that were exercisable at $175 per share and $250 per share and with
weighted-average remaining contractual lives of 6.1 years and 8.6 years,
respectively. At December 31, 2001, there were 28,350 options and 4,175 options
exercisable at $175 per share and $250 per share, respectively.

     b. 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 (loss) had the Company adopted the fair value
method. However, disclosure has been omitted because the pro forma effect on net
income (loss) required to be disclosed under SFAS No. 123 is not material to the
Company's results of operations.

10.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

     Components of other comprehensive income (loss) 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, 1999.......   $ 258,000    $      --      $     --      $         --   $    258,000
1999 Change...........     (44,000)          --            --                --        (44,000)
                         ---------    ---------      --------      ------------   ------------
December 31, 1999.....     214,000           --            --                --        214,000
2000 Change...........    (257,000)          --            --                --       (257,000)
                         ---------    ---------      --------      ------------   ------------
December 31, 2000.....     (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)
                         =========    =========      ========      ============   ============
</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 lesser of (i) the amount required by the Employee Retirement Income Security
Act of 1974 ("ERISA") without considering the $10 million credit balance
accumulated by the Company per ERISA calculations on December 31, 1997 plus
interest, or (ii) the maximum deductible for tax purposes, or (iii) the excess
of the liability calculated under Section 4001(a) of ERISA over the fair market
value of the assets at year-end.

     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-12
<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,
                               ---------------------------   ---------------------------
                                   2001           2000           2001           2000
                               ------------   ------------   ------------   ------------
<S>                            <C>            <C>            <C>            <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at
  beginning of year..........  $ 94,060,000   $ 86,110,000   $ 78,644,000   $ 76,127,000
Service cost.................     3,971,000      2,405,000      1,611,000      1,720,000
Interest cost................     7,148,000      6,766,000      5,453,000      5,661,000
Plan participants'
  contributions..............       386,000        353,000        645,000        551,000
Amendments...................       274,000             --             --     (2,875,000)
Actuarial loss (gain)........     3,204,000      3,306,000     (4,702,000)       658,000
Benefits paid................    (5,198,000)    (4,880,000)    (3,765,000)    (3,198,000)
                               ------------   ------------   ------------   ------------
Benefit obligation at end of
  year.......................   103,845,000     94,060,000     77,886,000     78,644,000
                               ------------   ------------   ------------   ------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
  beginning of year..........   102,763,000    101,299,000             --             --
Actual return on plan
  assets.....................    (5,177,000)       978,000             --             --
Employer contributions.......     1,032,000      5,013,000      3,120,000      2,647,000
Plan participants'
  contributions..............       386,000        353,000        645,000        551,000
Benefits paid................    (5,198,000)    (4,880,000)    (3,765,000)    (3,198,000)
                               ------------   ------------   ------------   ------------
Fair value of plan assets at
  end of year................    93,806,000    102,763,000             --             --
                               ------------   ------------   ------------   ------------
Funded status................   (10,039,000)     8,703,000    (77,886,000)   (78,644,000)
Unrecognized actuarial
  loss.......................    32,166,000     14,336,000      4,908,000      9,601,000
Unrecognized prior service
  cost.......................       616,000        644,000     (9,678,000)   (13,644,000)
                               ------------   ------------   ------------   ------------
Net amount recognized........  $ 22,743,000   $ 23,683,000   $(82,656,000)  $(82,687,000)
                               ============   ============   ============   ============
AMOUNTS RECOGNIZED IN THE
  BALANCE SHEET CONSIST OF:
Prepaid benefit cost.........  $         --   $ 24,521,000   $         --   $         --
Accrued benefit liability....    (5,685,000)      (838,000)   (82,656,000)   (82,687,000)
Intangible asset.............       616,000             --             --             --
Accumulated other
  comprehensive income.......    27,812,000             --             --             --
                               ------------   ------------   ------------   ------------
Net amount recognized........  $ 22,743,000   $ 23,683,000   $(82,656,000)  $(82,687,000)
                               ============   ============   ============   ============
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate................          7.50%          7.75%          7.50%          7.75%
Expected return on plan
  assets.....................          9.50           9.50             --             --
Rate of compensation
  increase...................          4.50           4.50           4.50           4.50
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                      PENSION BENEFITS                    POSTRETIREMENT BENEFITS
                           --------------------------------------   ------------------------------------
                                  YEAR ENDED DECEMBER 31,                 YEAR ENDED DECEMBER 31,
                           --------------------------------------   ------------------------------------
                              2001          2000          1999         2001         2000         1999
                           ----------   ------------   ----------   ----------   ----------   ----------
<S>                        <C>          <C>            <C>          <C>          <C>          <C>
Service cost.............  $3,971,000   $  2,405,000   $2,900,000   $1,611,000   $1,720,000   $2,044,000
Interest cost............   7,148,000      6,766,000    6,216,000    5,453,000    5,661,000    5,671,000
Expected return on plan
  assets.................  (9,729,000)   (10,498,000)  (8,459,000)          --           --           --
Amortization of prior
  service cost...........     303,000        467,000      467,000   (3,966,000)  (3,966,000)  (3,730,000)
Recognized actuarial loss
  (gain).................     279,000          3,000      402,000       (9,000)     251,000    1,368,000
Special termination
  charge.................          --             --      574,000           --           --           --
                           ----------   ------------   ----------   ----------   ----------   ----------
Net periodic benefit cost
  (income)...............  $1,972,000   $  ( 857,000)  $2,100,000   $3,089,000   $3,666,000   $5,353,000
                           ==========   ============   ==========   ==========   ==========   ==========
</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 $103.8 million, $99.5 million and $93.8 million,
respectively, as of December 31, 2001.

     On October 28, 1999, the Company offered a voluntary early retirement
incentive program to certain employees. The special benefit was the addition of
three years of age and service to be immediately credited to their
non-contributory pension benefit as well as three years of age credited to their
contributory portion of such benefit. Twenty-two employees accepted the offer.
As a result of the early retirement incentive program a $574,000 charge was
recorded as part of the 1999 net periodic benefit cost.

     For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2002. The rate was assumed
to decrease to 4.5% for 2005 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-PERCENTAGE-   ONE-PERCENTAGE-
                                                          POINT INCREASE    POINT DECREASE
                                                          ---------------   ---------------
<S>                                                       <C>               <C>
Effect on total of service cost and interest cost
  components............................................    $  974,000        $  (794,000)
Effect on postretirement benefit obligation.............     9,678,000         (8,003,000)
</Table>

     Investments held by the Company's pension plans consist primarily of S&P
500 equity securities and 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. The matching contributions were
$1,796,000, $1,609,000 and $1,530,000 for the years ended December 31, 2001,
2000 and 1999, respectively.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12.  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>
2002........................................................   $3,548,000
2003........................................................    3,163,000
2004........................................................    3,251,000
2005........................................................    2,796,000
2006........................................................    1,448,000
Thereafter..................................................    5,048,000
</Table>

     Rental expense was $4,608,000, $5,612,000 and $5,991,000 for the years
ended December 31, 2001, 2000 and 1999, respectively.

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 financial position, results of operations or cash flows.

14.  INCOME TAXES

     The Company's benefit (provision) for income taxes consists of:

<Table>
<Caption>
                                                       YEAR ENDED DECEMBER 31,
                                              -----------------------------------------
                                                  2001           2000          1999
                                              ------------   ------------   -----------
<S>                                           <C>            <C>            <C>
Current domestic provision..................  $ (2,653,000)  $ (1,412,000)  $(5,920,000)
Foreign provision...........................      (287,000)       309,000        (7,000)
Deferred tax provision......................   (24,507,000)   (13,803,000)   18,063,000
                                              ------------   ------------   -----------
Income tax (provision) benefit..............  $(27,447,000)  $(14,906,000)  $12,136,000
                                              ============   ============   ===========
</Table>

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

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              2001     2000     1999
                                                              -----   ------   ------
<S>                                                           <C>     <C>      <C>
Statutory federal income tax rate...........................  35.0%    35.0%    35.0%
Change in the valuation allowance...........................   0.0    (18.8)   (60.5)
State tax...................................................   5.8      5.3      5.9
Foreign taxes and other.....................................   2.5     (2.6)      --
                                                              ----    -----    -----
Effective income tax rate...................................  43.3%    18.9%   (19.6)%
                                                              ====    =====    =====
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                           ---------------------------
                                                               2001           2000
                                                           ------------   ------------
<S>                                                        <C>            <C>
Tax net operating loss carryforwards.....................  $  4,708,000   $ 24,708,000
Temporary differences:
  Postretirement and other employee benefits.............    44,112,000     32,669,000
  Intangibles............................................   (43,475,000)   (41,213,000)
  Program participation costs............................   (15,335,000)   (11,419,000)
  Other..................................................     1,777,000       (485,000)
                                                           ------------   ------------
Net deferred tax (liability) asset.......................  $ (8,213,000)  $  4,260,000
                                                           ============   ============
</Table>

     The Company has tax net operating loss carryforwards of approximately $12
million at December 31, 2001. The tax net operating losses expire from 2011
through 2020, with $1 million of carryforwards expiring in 2011. In addition,
the Company has $3.7 million of alternate minimum tax credits which may be
carried forward indefinitely and used to offset future regular tax liability.

15.  RELATED PARTY TRANSACTIONS

     Bernard L. Schwartz ("BLS") owns 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. 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
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 $5,483,700, $7,300,200 and $6,095,300 for the years ended December 31,
2001, 2000 and 1999, 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 $0.5 million, $0.6 million and $0.6
million for the years ended December 31, 2001, 2000 and 1999, 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 three
years ended December 31, 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.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16.  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.

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

<Table>
<Caption>
                                                      YEAR ENDED DECEMBER 31,
                                             ------------------------------------------
                                                 2001           2000           1999
                                             ------------   ------------   ------------
<S>                                          <C>            <C>            <C>
Sales:
  Aircraft Braking Systems.................  $304,919,000   $328,472,000   $313,475,000
  Engineered Fabrics.......................    50,415,000     47,418,000     42,476,000
                                             ------------   ------------   ------------
                                             $355,334,000   $375,890,000   $355,951,000
                                             ============   ============   ============
Earnings Before Interest, Taxes,
  Depreciation and Amortization:
  Aircraft Braking Systems.................  $106,504,000   $121,761,000   $111,457,000
  Engineered Fabrics.......................     6,385,000      9,251,000      7,991,000
                                             ------------   ------------   ------------
                                             $112,889,000   $131,012,000   $119,448,000
                                             ============   ============   ============
Operating Profits:
  Aircraft Braking Systems.................  $ 91,719,000   $107,596,000   $ 96,172,000
  Engineered Fabrics.......................     4,281,000      7,288,000      6,008,000
                                             ------------   ------------   ------------
     Operating Income......................    96,000,000    114,884,000    102,180,000
     Interest expense, net.................    32,569,000     35,993,000     40,396,000
                                             ------------   ------------   ------------
       Income before income taxes..........  $ 63,431,000   $ 78,891,000   $ 61,784,000
                                             ============   ============   ============
Depreciation and Amortization:
  Aircraft Braking Systems.................  $ 14,785,000   $ 14,165,000   $ 15,285,000
  Engineered Fabrics.......................     2,104,000      1,963,000      1,983,000
                                             ------------   ------------   ------------
                                             $ 16,889,000   $ 16,128,000   $ 17,268,000
                                             ============   ============   ============

Capital Expenditures:
  Aircraft Braking Systems.................  $  4,245,000   $  9,092,000   $  8,757,000
  Engineered Fabrics.......................       804,000        714,000      1,600,000
                                             ------------   ------------   ------------
          Total segments...................     5,049,000      9,806,000     10,357,000
  Corporate................................         8,000         39,000         56,000
                                             ------------   ------------   ------------
                                             $  5,057,000   $  9,845,000   $ 10,413,000
                                             ============   ============   ============
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                            DECEMBER 31,
                                             ------------------------------------------
                                                 2001           2000           1999
                                             ------------   ------------   ------------
<S>                                          <C>            <C>            <C>
Total Assets:
  Aircraft Braking Systems.................  $338,636,000   $360,070,000   $360,490,000
  Engineered Fabrics.......................    60,451,000     59,235,000     55,055,000
                                             ------------   ------------   ------------
                                             $399,087,000   $419,305,000   $415,545,000
                                             ============   ============   ============
</Table>

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

<Table>
<Caption>
                                                            DECEMBER 31,
                                             ------------------------------------------
                                                 2001           2000           1999
                                             ------------   ------------   ------------
<S>                                          <C>            <C>            <C>
Total Assets:
  Total assets for reportable segments.....  $399,087,000   $419,305,000   $415,545,000
  Deferred financing costs not allocated to
     segments..............................     4,463,000      6,143,000      7,898,000
  Corporate assets.........................       458,000        377,000        362,000
  Deferred tax asset not allocated to
     segments..............................            --      4,260,000     18,063,000
                                             ------------   ------------   ------------
          Consolidated Total...............  $404,008,000   $430,085,000   $441,868,000
                                             ============   ============   ============
</Table>

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

<Table>
<Caption>
                                                      YEAR ENDED DECEMBER 31,
                                             ------------------------------------------
                                                 2001           2000           1999
                                             ------------   ------------   ------------
<S>                                          <C>            <C>            <C>
Braking systems............................  $304,919,000   $328,472,000   $313,475,000
Fuel tanks.................................    38,778,000     36,889,000     33,935,000
Other......................................    11,637,000     10,529,000      8,541,000
                                             ------------   ------------   ------------
                                             $355,334,000   $375,890,000   $355,951,000
                                             ============   ============   ============
</Table>

     The following represents sales by geographic location:

<Table>
<Caption>
                                                      YEAR ENDED DECEMBER 31,
                                             ------------------------------------------
                                                 2001           2000           1999
                                             ------------   ------------   ------------
<S>                                          <C>            <C>            <C>
Sales:
  United States............................  $207,420,000   $226,082,000   $207,810,000
  Europe...................................    69,721,000     76,470,000     75,766,000
  Asia.....................................    39,075,000     35,255,000     34,052,000
  North America............................    23,908,000     23,567,000     19,429,000
  South America............................    12,203,000     10,000,000     14,105,000
  Australia................................     3,007,000      4,516,000      4,789,000
                                             ------------   ------------   ------------
                                             $355,334,000   $375,890,000   $355,951,000
                                             ============   ============   ============
</Table>

     Sales are attributed to geographic location based on the location of the
customer. Long-lived assets held outside of the United States were $239,000,
$266,000 and $322,000 as of December 31, 2001, 2000 and 1999, respectively.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The U.S. government accounted for approximately 21%, 17% and 15% of the
Company's total sales for the years ended December 31, 2001, 2000 and 1999,
respectively.

                                       F-19