##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF
    THE SECURITIES EXCHANGE ACT OF 1934   Commission file number 33-29035
  K&F Industries,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

34-1614845(State or other jurisdiction
    of

(I.R.S. Employerincorporation or
    organization)

Identification Number)50 Main Street, White Plains,
    New York

10606(Address of principal executive
    offices)

(Zip
    Code)   Registrants telephone number, including area code:
 (914) 448-2700
  Securities registered pursuant to Section 12(b) of the
    Act:  None
   Securities registered pursuant to Section 12(g) of the
    Act:  None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ
      The Registrant meets the conditions set forth in general
    instructions I (1)(a) and (b) of
    Form 10-K
    and is therefore filing this form with the reduced disclosure
    format.
  DOCUMENTS
    INCORPORATED BY REFERENCE:  None




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##### 



K&F
    INDUSTRIES, INC.
  FORM 10-K
    For the Fiscal Year Ended December 31, 2006
  TABLE OF
    CONTENTS
  PageIntroduction


2Special Note
    Regarding Forward-Looking Statements


4PART IItem 1.

Business


5Item 1A.

Risk
    Factors


16Item 1B.

Unresolved Staff
    Comments


23Item 2.

Properties


23Item 3.

Legal
    Proceedings


23Item 4.

Omitted Pursuant to
    General Instructions I (2) (c) of
    Form 10-K


24PART IIItem 5.

Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


25Item 6.

Selected Financial
    Data


25Item 7.

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


29Item 7A.

Quantitative and
    Qualitative Disclosures about Market Risk


46Item 8.

Financial
    Statements and Supplementary Data


47Item 9.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


47Item 9A.

Controls and
    Procedures


47Item 9B.

Other
    Information


47PART IIIItem 10.

Omitted Pursuant to
    General Instructions I (2) (c) of
    Form 10-K


47Item 11.

Omitted Pursuant to
    General Instructions I (2) (c) of
    Form 10-K


47Item 12.

Omitted Pursuant to
    General Instructions I (2) (c) of
    Form 10-K


47Item 13.

Omitted Pursuant to
    General Instructions I (2) (c) of
    Form 10-K


48Item 14.

Principal
    Accountant Fees and Services


48PART IVItem 15.

Exhibits and
    Financial Statement Schedules


49Index to Exhibits


49Signatures


52EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION   1




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INTRODUCTION  References in this Annual Report on
    Form 10-K
    to we, us, our,
    K&F, K&F Industries and the
    Company refer to K&F Industries, Inc., together
    with its subsidiaries. References to K&F
    Holdings refer to K&F Industries Holdings, Inc., the
    indirect parent company of K&F. References to K&F
    Acquisition refer to K&F Acquisition, Inc. prior to
    the merger of K&F Acquisition with and into K&F
    Industries and to K&F Industries upon and following the
    consummation of such merger. References to Intermediate
    Holdco refer to K&F Intermediate Holdco, Inc., a
    wholly owned subsidiary of K&F Holdings and the direct
    parent company of K&F Industries.
  General
    Recent
    Developments
    Acquisition
    of Nasco Aircraft Brake, Inc.
      Fair value of assets acquired,
    including goodwill

$
21,618,000Cash paid, net of cash acquired


(16,016,000
)Issuance of note payable


(3,000,000
)Liabilities assumed

$
2,602,000  2




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##### Table of Contents



The
    Acquisition of K&F Industries
    3 4
    Basis of
    Presentation
         3




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Market
    Share Estimates
    SPECIAL
    NOTE REGARDING FORWARD-LOOKING STATEMENTS  Form 10-K,
   4




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##### Table of Contents



PART I  Item 1.
    Business  The
    Company
      
    regional jets,
    business jets, and
    the U.S. military.      FAA-certified
    Industry
    Background and Market Opportunity
   5




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##### Table of Contents



Market
    Sectors
    Commercial Transport. point-to-point
  General Aviation.
  Military.
 6




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##### Table of Contents



Competitive
    Strengths
    Leader in Attractive Industry Sectors Poised for
    Growth.
  Significant Aftermarket Sales from Sole Source
    Contracts.
  Well-Balanced Portfolio of Programs with Strong Recurring
    Cash Flows.
  
    increase our sales of replacement parts;
    increase the number of high-cycle aircraft in our portfolio;
    increase revenues per aircraft in our portfolio; and
    decrease the average age of the total fleet using Aircraft
    Braking Systems products.    History of Successful Product Innovation. ® ®
 7




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##### Table of Contents



Our
    Growth Strategy
    Expanding our Presence on High-Cycle Regional Jets and
    Business Jets.
  Increasing Our Leading Position on Military
    Aircraft.
  Pursuing Continued Growth at Engineered
    Fabrics. KC-135 KC-135s ®
  Expanding Presence in Targeted International
    Markets.
  Lifecycle
    Stages
   8




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##### Table of Contents



Program
    Lifecycle Stages
  Stage of Lifecycle

Duration of Stage



CharacteristicsDevelopment


3-5 years






Time period from selection up
    through certification of aircraft


Design and development of aircraft
    and Aircraft Braking Systems equipment


No revenues generated by Aircraft
    Braking Systems


Development and cash payments
    costsGrowth


8-15 years






Planes delivered


Investment by Aircraft Braking
    Systems in originalequipment (cash outflows)


Cash inflows to Aircraft Braking
    Systems from initial provisioning and replacement partsMature


10-20 years






Most profitable stage for Aircraft
    Braking Systems


Full program fleet in flight, but
    new aircraft nolonger produced


No program investments by Aircraft
    Braking Systems


Cash inflows to Aircraft Braking
    Systems from
    replacement partsDecline


10-15 years






Planes in fleet gradually taken
    out of service


Continued, but decreasing, cash
    inflows toAircraft Braking Systems   Products
    Year Ended December 31,2006


2005


2004Wheels and brakes


73
%


75
%


76
%Brake control systems


9



8



7Fuel tanks


14



13



13Other


4



4



4Total


100
%


100
%


100
%   Aircraft Braking Systems.
   9




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##### Table of Contents



Commercial Transport

General Aviation

MilitaryAdam Aircraft:

A700Aero-Commander:

690Airbus:

A-320

Aerospatiale:

SN601

Aermacchi:

M346A-321

Astra:

SPX

Aerospatiale:

SA-360/365ATR:

ATR-42



Galaxy

Augusta/Westland:

A-129AVIC 1:

ARJ21

Augusta/Westland:

A139

AIDC:

IDFBoeing:

B707-320 B/C

Bell:

206/212/230/412DC 3/4/6/7/8

Boeing Vertol:

234

Alenia:

C27JDC9-10/15

Bombardier:

CL600/601/604/605

Boeing:

A -4DC9-20/30



CL850/870/890



B-1BDC9-40/50



Lear 23/24/25



E-3/E-6/E-8DC10-10/15



Lear 32/35



F-4DC10-30/40



Lear 55/55C



F-15MD-11



Lear 31A



CH-46MD-81/82/87



Lear 60 Series



CH-47SDMD-83/88

Cessna:

Citation 500/550



T-2MD-90



310/401/402



T-2BBombardier:

CRJ-100/200/440



414/421/441



T-33CRJ-700

Dassault:

Falcon 10/100

Bombardier:

CT-114CRJ-705



Falcon 20/200



DHC-5CRJ-900



Falcon 50

CASA:

C-101DHC-4



Falcon 50EX



CASA 212DHC-6



Falcon 900EX

Cessna:

A-37DHC-8-400



Falcon 900DX



AT-37CASA:

C212



Falcon 7X

Fairchild:

A-10Convair:

Convair 340/440

GROB Aerospace:

SP

IAI:

AravaConvair 580

Gulfstream:

GS I

KAI:

T-50Embraer:

ERJ-170



GS II



A-50ERJ-175



GS IIB/III/IV

Kaman:

K-2ERJ-190



GS100

Lockheed Martin:

C-130 SeriesERJ-195



GS150



C-130JFairchild:

Do27/28



GS200



C-141Do228



GS350



F-16Do328



GS450



F-117AMetro III

IAI:

1121,1123,1124

Mitsubishi:

F-2 10




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##### Table of Contents



Commercial Transport

General Aviation

MilitaryMetro 23

Mitsubishi:

MU-2

Northrop Grumman:

A-6Fokker:

F27



MU-300/300A



B-2FH227

Piper:

PA31 P/T



E-2F28

Raytheon:

B 90/100/200



EA-6BF50



Beechjet 400/400A



F-5 E/FF60



Hawker Horizon



F-14F70



Hawker 400XP



OV-1F100

Sabreliner:

Sabreliner 40/60

Panavia:

TornadoLockheed Martin:

L100



Sabreliner 65

Pilatus:

PC-6L1011



Sabreliner 70/75/80

Raytheon:

T-1AMitsubishi:

YS11

Sikorsky:

S61

Saab:

J-35Nord:

Nord 262



S76



105Raytheon:

B99

Sino-Swearingen:

SJ30-2



JAS-39B1200





Sikorsky:

CH-53B1900







CH-60Saab:

Saab 340







SH-60Saab 2000





Westland:

LynyxSuper Lynnx   Engineered Fabrics.
       11




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##### Table of Contents



Commercial Transport

General Aviation

MilitaryBoeing:

707-120

Bell:

206B

Bell:

AH-1, OH58707-320



214-ST



V-22, CV-22, MV-22, ARH727

Boeing



Boeing:

RC-135, KC-135737

Helicopters:

MD-500 MD-600



E-3, KE-3A,
    E-8C767

Cessna:

310, 320, 340, 401



KC-10A, T43, A3DDC9



402, 411, 414, 421



F-15A/B, C/D, E, B-52DC10

ERA:

425, 650, A188

Boeing Helicopters:

AH-64, CH-46DC-10XR



U206, P206, T310



CH-47 C/D, OH-6MD-11

Fargo:

412, BK117, B0105



V-22, CV-22, MV-22MD-80

IAI:

MD900

Lockheed Martin:

C-130, F-16MD-83

Learjet:

1121, 1122, 1123,

Northrop Grumman:

F-14, F-20MD-87



1124, 45, 60



F-18 C/D, E/FC9A

Piper Aircraft:

31, 35, 45



A-10,
    T-38C9B



60, Max 124

Pratt & Whitney:

CH-124Bombardier:

CL-215



PA25, PA31P

Raytheon Missile:

TomahawkRaytheon:

1900



PA 31T,



Tactical TomahawkPA31-310



MALDPA31-325, PA34

Robertson:

Extended RangePA42, PA42-100



CEFSRaytheon:

35-33, 35, 36, 38

Sikorsky:

S-61, HH-3F48, 50, 56TC, 60



ACAP, CH-5365, 65-68, 65-80



CV-Helo, HH6065-90, 68, 70-95



CV-Helo, HH6099, 100, 200, 400A



MHJ3, SH-601900, 200, T-1A



SH3A, SH3DSabreliner:

40, 60, 65, 70, 80



UH60 Blackhawk S70Schweizer:

333C, 300



VH60Twin Commander:

500, 560, 680, 681

Schweizer:

VTUAV685, 690-A, 695B

Westland:

US101720, 840, 980   Sales and
    Customers
      Year Ended December 31,2006


2005


2004Commercial transport


50
%


52
%


54
%Military (U.S. and foreign)


29



29



28General aviation


21



19



18Total


100
%


100
%


100
%   Commercial Transport.
 12




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##### Table of Contents



General Aviation.
  Military. E-3, E-6 E-8 A-10, E-2, C-2 T-1A. JAS-39 A-129 JAS-39,
  Domestic
    and Foreign Sales
    Year Ended December 31,2006


2005


2004Domestic sales


60
%


61
%


59
%Foreign sales


40



39



41Total


100
%


100
%


100
%   Independent
    Research and Development
      Patents
    and Licenses
    Competition
   13




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Backlog
      Government
    Contracts
        Government
    Regulation
   14




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Supplies
    and Materials
    Personnel
      Securities
    Exchange Act Reports
     15




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Executive
    Officers
  Kenneth
    M. Schwartz; age 55; President and Chief Executive
    Officer
  Kenneth M. Schwartz
  Dirkson
    R. Charles; age 43; Executive Vice President and Chief
    Financial Officer
  Dirkson Charles
  Ronald
    H. Kisner; age 58; Executive Vice President, Secretary and
    General Counsel
  Ronald H. Kisner
  Frank
    P. Crampton; age 63; Senior Vice President, Marketing of
    Aircraft Braking Systems
  Frank P. Crampton
  Richard
    W. Johnson; age 63; Senior Vice President, Finance and
    Administration of Aircraft Braking Systems
  Richard W. Johnson
  James
    J. Williams; age 51; Senior Vice President, Operations of
    Aircraft Braking Systems
  James J. Williams
  John
    A. Skubina; age 52; President of Engineered Fabrics
    Corporation
  John A. Skubina
 Item 1A.  Risk
    Factors  Risks
    Relating to Our Business
  Our
    commercial transport business is sensitive to our
    customers usage of planes, which are, in turn, affected by
    general economic conditions.
     16




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Program
    Participation Costs negatively affect our cash flow during the
    earlier stages of the lifecycle of an aircraft
    platform.
    We may
    be unable to execute our growth strategy, and our failure to do
    so could have a negative impact on our business.
    
    our ability to win and retain sole source contracts and expand
    the number of our platforms;
    the health and future levels of business in the commercial
    transport, general aviation and military market sectors;
    whether high-cycle regional jets and high-end business jets,
    market sectors we have chosen to focus upon, perform as we have
    predicted;
    our ability to develop, innovate, introduce and improve our
    products and services while maintaining our margins and
    profitability;
    our ability to realize cost savings from our productivity
    initiatives;
    risks associated with outsourcing some production capabilities
    to foreign countries;
    our ability to access available capital, whether through cash
    flow or borrowings, in order to fund operating expenses,
    potential acquisitions or other corporate purposes; and
    competition in our industries and general economic conditions. 17




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##### Table of Contents



The
    U.S. government is a significant customer, the loss of
    which could adversely affect us.
          A
    decline in the U.S. defense budget or limitations on sales
    to foreign governments may adversely affect our
    sales.
    We
    could be adversely affected if one of our components causes an
    aircraft to crash.
   18




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The
    airline industry is heavily regulated and failure to comply with
    applicable laws could reduce our sales or require us to incur
    additional costs to achieve compliance, which could negatively
    impact our results of operations.
      Any
    problem or interruption in our supply from key vendors could
    delay production and adversely affect our sales.
    
    the destruction of our suppliers facilities or their
    distribution infrastructures;
    a work stoppage or strike by our suppliers employees;
    the failure of our suppliers to provide materials of the
    requisite quality;
    the failure of essential equipment at our suppliers plants;
    the failure or shortage of supply of raw materials to our
    suppliers; and
    contractual amendments and disputes with our suppliers.    We
    operate in a very competitive business
    environment.
   19




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##### Table of Contents



The
    uncertainties relating to our foreign operations could affect
    our operating results.
    
    the difficulty of enforcing agreements and collecting
    receivables through some foreign legal systems;
    foreign customers may pay more slowly than customers in the
    United States;
    unexpected changes in regulatory requirements or geopolitical
    conditions;
    the risk that foreign governments may adopt regulations or take
    other actions that would have a direct or indirect adverse
    impact on our business and market opportunities; and
    the potential difficulty in enforcing intellectual property
    rights in some foreign countries.        We are
    subject to environmental regulations and our operations may
    expose us to environmental liabilities.
     20




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##### Table of Contents



We
    have been included, and may in the future be included, in claims
    against prior owners of our facilities relating to asbestos
    exposure.
    Products Liability.
  Employee Exposure.
    Risks
    Relating to Our Indebtedness
  Our
    substantial debt may adversely affect our financial condition
    and operations.
      
    requiring us to use a substantial portion of our cash flow from
    operations to pay interest and principal on our debt, thereby
    reducing the availability of our cash flow to fund working
    capital, capital expenditures, acquisitions and other general
    corporate purposes;
    limiting our ability to obtain additional financing in the
    future for working capital, capital expenditures, acquisitions
    and other general corporate purposes;
    subjecting us to the risk of interest rate increases on our
    indebtedness with variable interest rates; 21




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##### Table of Contents




    subjecting us to the possibility of an event of default under
    the financial and operating covenants contained in the
    agreements governing our indebtedness; and
    limiting our ability to adjust to rapidly changing market
    conditions, reducing our ability to withstand competitive
    pressures and making us more vulnerable to a downturn in general
    economic conditions than our competitors with less debt.  To
    service our indebtedness, we will require a significant amount
    of cash and our inability to generate sufficient cash flow may
    require us to seek additional or replacement
    financing.
    We are
    subject to restrictive debt covenants, which may restrict our
    operational flexibility.
  3 4
  
    incur indebtedness or issue disqualified stock or preferred
    stock;
    pay dividends or make other distributions on, redeem or
    repurchase their capital stock;
    incur Program Participation Costs;
    make investments or acquisitions;
    create liens;
    sell assets;
    engage in sale and lease back transactions;
    restrict dividends or other payments to K&F;
    guarantee indebtedness;
    engage in transactions with affiliates; and
    consolidate, merge or transfer all or substantially all of their
    assets.    3 4
 22




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##### Table of Contents



Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties  United States Facilities.
      Foreign Facilities.
  Akron Facility Arrangements.
  Item 3.
    Legal
    Proceedings  Litigation
    Environmental
   23




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Products Liability.
  Employee Exposure.
    Item 4.
    Submission
    of Matters to a Vote of Security Holders  Form 10-K.
 24




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PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities    3 4
  Item 6.
    Selected
    Financial Data        November 18,



January 1,Year Ended


2004 through



2004 throughDecember 31,


December 31,



November 17,


Year Ended December 31,2006(a)


2005(a)


2004(a)



2004


2003


2002(Predecessor)


(Predecessor)


(Predecessor)(In thousands, except per share data)Statement of Operations
    Data:Net sales

$
424,134


$
384,630


$
53,448



$
299,868


$
342,818


$
348,649Cost of sales(b)


228,244



215,710



33,315




174,223



197,812



204,819Gross profit


195,890



168,920



20,133




125,645



145,006



143,830Independent research and development


16,067



15,974



1,770




12,048



14,936



14,600Selling, general and
    administrative
    expenses(c)(d)


36,340



36,934



4,519




27,650



30,499



40,238Amortization of intangible assets


5,615



10,753



1,440




4,196



4,264



3,935Acquisition expenses(e)










5,350




101,533







Operating income (loss)


137,868



105,259



7,054




(19,782
)


95,307



85,057Interest expense, net(f)


57,240



56,149



6,410




34,287



44,186



26,194Income (loss) before income taxes


80,628



49,110



644




(54,069
)


51,121



58,863Income tax (provision) benefit


(26,242
)


(15,989
)


236




25,082



(10,488
)


(16,730
)Net income (loss)

$
54,386


$
33,121


$
880



$
(28,987
)

$
40,633


$
42,133Other Data (for the
    period):Capital expenditures

$
21,181


$
12,826


$
1,810



$
2,902


$
5,468


$
4,084Depreciation and amortization


29,236



25,532



2,910




10,467



12,200



12,012Cash flows from (used for):Operating activities


67,393



76,898



(3,650
)



55,623



47,197



80,816Investing activities


(37,197
)


(27,508
)


(695,902
)



(2,902
)


(5,468
)


(4,084
)Financing activities


(48,580
)


(24,295
)


632,003








(40,000
)


(59,133
)EBITDA(g)


167,104



130,791



9,964




(9,315
)


107,507



97,069Non-recurring and certain other
    items included in EBITDA(h)


1,174



17,084



12,934




129,213



26,828



33,374   25




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##### Table of Contents



As of December 31,2006


2005


2004



2003


2002(Predecessor)


(Predecessor)(In thousands)Balance Sheet Data:Working capital

$
78,061


$
66,625


$
34,201



$
50,077


$
35,547Total assets


1,423,501



1,383,918



1,349,905




419,585



422,045Long term debt (includes current
    maturities)(d)


707,000



766,577



790,577




395,000



435,000Note payable


3,000







14,682








Capital lease obligation


10,997
















Stockholders equity
    (deficiency)(d)


392,840



341,878



310,739




(186,971
)


(227,656
)     (a)
    
    Our consolidated financial statements for all periods after
    November 17, 2004: (i) utilize a different accounting
    treatment for Program Participation Costs than that used in the
    periods prior to the Acquisition and (ii) reflect the fair
    value adjustments made to our assets and liabilities in
    recording the Acquisition. See Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Critical Accounting Policies and
    Estimates  Program Participation Costs and
    Notes 1 and 2 to our audited consolidated financial statements
    included elsewhere in this Annual Report.(b)
    
    Cost of sales includes inventory purchase accounting charges of
    $1.2 million, $12.1 million and $6.7 million
    during the years ended December 31, 2006 and 2005 and for
    the period November 18, 2004 through December 31,
    2004, respectively. Cost of sales for the period January 1,
    2004 through November 17, 2004 and the years ended
    December 31, 2003 and 2002 include Program Participation
    Costs, previously expensed in the Predecessor period, of
    $21.9 million, $17.2 million and $15.0 million,
    respectively.(c)
    
    We amended our management services agreement with Aurora
    Management Partners LLC. The amendment eliminated the
    $1.0 million annual fee payable over the 10 year term
    of the agreement in exchange for a $5.0 million fee that
    was charged to selling, general and administrative expenses
    during the year ended December 31, 2005.(d)
    
    On December 20, 2002, K&F Industries completed a
    recapitalization that included the issuance of
    $250.0 million of
    95/8% senior
    subordinated notes due 2010. The net proceeds of those notes
    were used to pay a $200.0 million dividend to the then
    stockholders of K&F Industries, pay off the former credit
    facility of K&F Industries, pay transaction fees of
    $8.5 million and pay $9.4 million to the holders of
    common stock options of K&F Industries. As a result of the
    recapitalization, K&F Industries recorded a
    $9.4 million charge to selling, general and administrative
    expenses during the year ended December 31, 2002 for the
    payment to the holders of common stock options and it
    capitalized $8.5 million for the transaction fees. 26




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##### Table of Contents



(e)
    
    Our results of operations for the period from January 1,
    2004 through November 17, 2004 and from November 18,
    2004 through December 31, 2004 include one-time charges of
    $101.5 million and $5.4 million, respectively. These
    charges were a result of the Acquisition, and are as follows:  November 18,


January 1,2004 through


2004 throughDecember 31,


November 17,2004


2004(Predecessor)(In thousands)Compensation costs recognized for
    the cancellation of stock options

$



$
46,156Premiums paid to redeem
    95/8% senior
    subordinated notes due 2010 and
    91/4% senior
    subordinated notes due 2007






45,282Write-off of debt issuance costs
    associated with the redemption of
    95/8% senior
    subordinated notes due 2010 and
    91/4%
    senior subordinated notes due 2007






6,551Professional fees and other
    expenses






3,544Write-off of interim loan facility
    commitment fee and other fees and expenses


5,350



$
5,350


$
101,533   (f)
    
    During the years ended December 31, 2006 and 2003; the
    Company charged to interest expense $1.5 million and
    $1.6 million, respectively, related to the write-off of
    unamortized debt issuance costs associated with the prepayment
    of indebtedness.(g)
    
    EBITDA represents net income before interest
    expense, income tax provision and depreciation and amortization.
    EBITDA does not represent and should not be considered as an
    alternative to net income or cash flows from operations, as
    determined in accordance with accounting principles generally
    accepted in the United States of America, or GAAP
    and our calculations thereof may not be comparable to similarly
    entitled measures reported by other companies. We present EBITDA
    because we believe it is a useful indicator of our
    profitability. Our management uses EBITDA principally as a
    measure of our operating performance and believes that EBITDA is
    useful to investors because it is frequently used by securities
    analysts, investors and other interested parties in their
    evaluation of companies in industries similar to ours. We also
    believe EBITDA is useful to our management and investors as a
    measure of comparative operating performance between time
    periods and among companies as it is reflective of changes in
    pricing decisions, cost controls and other factors that affect
    operating performance. Our management also uses EBITDA for
    planning purposes, including the preparation of our annual
    operating budget and financial projections.EBITDA does not represent and should not be considered as an
    alternative to results of operations under GAAP and has
    significant limitations as an analytical tool. Although we use
    EBITDA as a measure to assess the performance of our business,
    the use of EBITDA is limited because it excludes certain
    material costs. For example, it does not include interest
    expense, which is a necessary element of our costs and ability
    to generate revenue, because we have borrowed money in order to
    finance our operations. Because we use capital assets,
    depreciation expense is a necessary element of our costs and
    ability to generate revenue. In addition, the omission of the
    substantial amortization expense associated with our intangible
    assets further limits the usefulness of this measure. EBITDA
    also does not include the payment of taxes, which is also a
    necessary element of our operations. Because EBITDA does not
    account for these expenses, its utility as a measure of our
    operating performance has material limitations. Because of these
    limitations management does not view EBITDA in isolation or as a
    primary performance measure and also uses other measures, such
    as net income, sales, bookings and operating profit, to measure
    operating performance. 27




---



##### Table of Contents



The following is a reconciliation of EBITDA to net income (loss):  November 18,



January 1,Year Ended


2004 through



2004 throughDecember 31,


December 31,



November 17,


Year Ended December 31,2006


2005


2004



2004


2003


2002(Predecessor)


(Predecessor)


(Predecessor)(In thousands)Net income (loss)

$
54,386


$
33,121


$
880



$
(28,987
)

$
40,633


$
42,133Interest expense, net


57,240



56,149



6,410




34,287



44,186



26,194Income tax provision (benefit)


26,242



15,989



(236
)



(25,082
)


10,488



16,730Depreciation and amortization


29,236



25,532



2,910




10,467



12,200



12,012EBITDA

$
167,104


$
130,791


$
9,964



$
(9,315
)

$
107,507


$
97,069   (h)
    
    The following table shows certain non-recurring and certain
    other items, which are included in EBITDA. These include:
    non-recurring Acquisition expenses, non-recurring inventory
    purchase accounting adjustments, non-recurring management
    services termination fee, non-recurring salary and benefit
    expense, headcount reduction, non-recurring non-cash charge
    (income), payment to optionholders and capitalization of Program
    Participation Costs. This table does not represent and should
    not be considered as an alternative to net income or cash flows
    from operations, as determined in accordance with GAAP and our
    calculations thereof may not be comparable to similarly entitled
    measures reported by other companies. We believe this table,
    when reviewed in connection with our presentation of EBITDA
    provides another useful tool to investors and our management for
    measuring comparative operating performance between time periods
    and among companies as it is further reflective of changes in
    pricing decisions, cost controls and other factors that affect
    operating performance. In addition to EBITDA, our management
    assesses the adjustments presented in this table when preparing
    our annual operating budget and financial projections.
    Specifically, because this table excludes non-recurring salary
    and benefit expense, non-recurring non-cash charge (income) and
    payment to optionholders, we believe that this table allows our
    investors to assess our operating performance during the periods
    these charges were incurred on a consistent basis with the
    periods during which these unusual charges were not incurred.
    Further, because of the significant changes in our capital
    structure resulting from the Acquisition, including the
    post-Acquisition capitalization of our Program Participation
    Costs, we believe that the presentation of the adjustments
    relating to non-recurring Acquisition expenses, non-recurring
    inventory purchase accounting adjustments and capitalization of
    Program Participation Costs enables our management and investors
    to assess the impact of the Acquisition on our operating
    performance and provides a consistent measure of our operating
    performance for periods subsequent to the Acquisition as
    compared to the Predecessor periods.This table is not intended to comply with GAAP and has
    significant limitations as an analytical tool, and you should
    not consider it in isolation, or as a substitute for analysis of
    our results of operations under GAAP. Although we use this table
    as a financial measure to assess the performance of our
    business, the use of this table is limited because, in addition
    to the costs excluded in our presentation of EBITDA, it excludes
    certain material costs that we have incurred over the periods
    presented. Because this table does not account for these
    expenses, its utility as a measure of our operating performance
    has material limitations. 28




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##### Table of Contents



EBITDA, as defined above, was (increased) reduced by the
    following non-recurring and certain other items, each of which
    is further discussed below:  November 18,



January 1,Year Ended


2004 through



2004 throughDecember 31,


December 31,



November 17,


Year Ended December 31,2006


2005


2004



2004


2003


2002(Predecessor)


(Predecessor)


(Predecessor)(In thousands)Non-recurring Acquisition
    expenses(1)

$



$



$
5,350



$
101,533


$



$
Inventory purchase accounting
    charges(2)


1,174



12,084



6,748












Non-recurring management  services
    termination fee(3)






5,000
















Non-recurring salary and benefit
    expense(4)










836




8,180



6,197



7,500Headcount reduction(5)



















1,099



1,465Non-recurring non-cash charge
    (income)(6)















(2,350
)


2,350



Payment to optionholders(7)























9,405Program Participation Costs
    previously expensed(8)















21,850



17,182



15,004$
1,174


$
17,084


$
12,934



$
129,213


$
26,828


$
33,374     (1)
    
    See Note (e).(2)
    
    Represents charges resulting from inventory purchase accounting
    adjustments related to the acquisition of NASCO in 2006 and the
    Acquisition.(3)
    
    Represents a non-recurring charge for a one-time payment of
    management services fees in connection with the amendment of our
    management services agreement with Aurora Management Partners
    LLC.(4)
    
    Non-recurring salary and benefit expense of Mr. Bernard
    Schwartz (the Chairman of the Board and a principal stockholder
    of K&F Industries prior to the Acquisition), whose prior
    employment and other related agreements were terminated upon
    consummation of the Acquisition. Gives effect to compensation
    ($100,000) due to Mr. B. Schwartz under a one-year
    employment agreement that was entered into at the closing of the
    Acquisition.(5)
    
    Represents the pro forma effect on prior periods of a headcount
    reduction in September 2003.(6)
    
    Amounts represent estimated non-recurring, non-cash contract
    charges.(7)
    
    Represents a non-recurring payment to holders of our common
    stock options in connection with a recapitalization undertaken
    in 2002.(8)
    
    Represents the Program Participation Costs expensed in the
    Predecessor periods that would have been capitalized under the
    accounting treatment for Program Participation Costs used by us
    after November 17, 2004. See Note (a).  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations   29




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##### Table of Contents



Overview
      
    regional jets,
    business jets, and
    the U.S. military.          Performance
    Evaluation
     30




---



##### Table of Contents



Certain
    Market Trends, Challenges and Opportunities
      point-to-point 70-90 EMB-170/190 CRJ-700/900) 30-50
        Productivity
    Initiatives
   31




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##### Table of Contents



The
    Acquisition
    3 4
    Critical
    Accounting Policies and Estimates
    Inventory.
     32




---



##### Table of Contents



(b) work-in-process
  Evaluation of Long-Lived Assets.
  Goodwill.
        Program Participation Costs. FAA-certification
     33




---



##### Table of Contents



Warranty.
  Pension and Other Postretirement Benefits.
  Income Taxes.
  Contingencies and Litigation.
  Revenue Recognition.
  Results
    of Operations
   34




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##### Table of Contents



January 1,


November 18,Year Ended


2004 through


2004 through


Year EndedDecember 31,


November 17,


December 31,


December 31,2006


2005


2004


2004


2004(a)(Predecessor)





(Combined)(In thousands)Net sales

$
424,134


$
384,630


$
299,868


$
53,448


$
353,316Cost of sales


228,244



215,710



174,223



33,315



207,538Gross profit


195,890



168,920



125,645



20,133



145,778Independent research and development


16,067



15,974



12,048



1,770



13,818Selling, general and administrative
    expenses


36,340



36,934



27,650



4,519



32,169Amortization of intangible assets


5,615



10,753



4,196



1,440



5,636Acquisition expenses(b)










101,533



5,350



106,883Operating income (loss)


137,868



105,259



(19,782
)


7,054



(12,728
)Interest expense, net


57,240



56,149



34,287



6,410



40,697Income (loss) before income taxes


80,628



49,110



(54,069
)


644



(53,425
)Income tax (provision) benefit


(26,242
)


(15,989
)


25,082



236



25,318Net income (loss)

$
54,386


$
33,121


$
(28,987
)

$
880


$
(28,107
)     (a)
    
    The amounts for the year ended December 31, 2004 represent
    a combination of the results for the Predecessor period
    (January 1, 2004 through November 17, 2004) and
    the period subsequent to the Acquisition (November 18, 2004
    through December 31, 2004), to facilitate comparisons with
    subsequent years.(b)
    
    Our results of operations for the period from January 1,
    2004 through November 17, 2004 and from November 18,
    2004 through December 31, 2004 include one-time charges of
    $101.5 million and $5.4 million, respectively. These
    charges were a result of the Acquisition, and are as follows:  January 1,


November 18,2004 through


2004 through


Year EndedNovember 17,


December 31,


December 31,2004


2004


2004(Predecessor)





(Combined)(In thousands)Compensation costs recognized for
    the cancellation of stock options

$
46,156


$



$
46,156Premiums paid to redeem the
    95/8% senior
    subordinated notes due 2010 and the
    91/4% senior
    subordinated notes due 2007


45,282







45,282Write-off of debt issuance costs
    associated with the redemption of the
    95/8% senior
    subordinated notes due 2010 and the
    91/4%
    senior subordinated notes due 2007


6,551







6,551Professional fees and other
    expenses


3,544







3,544Write-off of interim loan facility
    commitment fee and other fees and expenses






5,350



5,350$
101,533


$
5,350


$
106,883  35




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##### Table of Contents



Business
    Segment Financial Information
  Year Ended December 31,2006


2005


2004(Combined)(In thousands)Net Sales:Aircraft Braking Systems

$
349,766


$
319,885


$
293,848Engineered Fabrics


74,368



64,745



59,468Total

$
424,134


$
384,630


$
353,316Gross Profit:Aircraft Braking Systems

$
179,099


$
156,464


$
133,537Engineered Fabrics


16,791



12,456



12,241Total

$
195,890


$
168,920


$
145,778Gross Profit Margin:Aircraft Braking Systems


51.2%



48.9%



45.4%Engineered Fabrics


22.6%



19.2%



20.6%Consolidated


46.2%



43.9%



41.3%   Comparison
    of Results of Operations for the Years Ended December 31,
    2006 and December 31, 2005
    ERJ-170/190, MD-11 F-100 DC-9 DC-10 C-130 F-16 AH-64, B-52, CH-47 KC-135, C-130
      Year Ended December 31,2006


2005(In thousands)Gross Program Participation Costs

$
41,696


$
39,860Amount capitalized during the year


(32,531
)


(27,302
)Amortization of Program
    Participation Costs


9,251



3,955Program Participation Costs
    expensed during the year

$
18,416


$
16,513  36




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##### Table of Contents



Share-Based Payment,
       37




---



##### Table of Contents



Comparison
    of Results of Operations for the Years Ended December 31,
    2005 and December 31, 2004
          Year EndedDecember 31,2005


2004(In thousands)Gross Program Participation Costs

$
39,860


$
35,043Amount capitalized during the year


(27,302
)


(2,787
)Amortization of Program
    Participation Costs


3,955



247Program Participation Costs
    expensed during the year

$
16,513


$
32,503        38




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##### Table of Contents



Liquidity
    and Capital Resources
  3 4
        Credit
    Facility
     39




---



##### Table of Contents



73/4%
    Notes
  3 4 pari passu pari passu
    3 4
 40




---



##### Table of Contents



Cash
    Flows
    January 1,


November 18,Year Ended


2004 through


2004 through


Year EndedDecember 31,


November 17,


December 31,


December 31,2006


2005


2004


2004


2004(a)(Predecessor)





(Combined)(In thousands)Cash flows provided by
    (used in):Operating activities

$
67,393


$
76,898


$
55,623


$
(3,650
)

$
51,973Investing activities


(37,197
)


(27,508
)


(2,902
)


(695,902
)


(698,804
)Financing activities


(48,580
)


(24,295
)






632,003



632,003     (a)
    
    The amounts for the year ended December 31, 2004 represent
    a combination of the results for the Predecessor period
    (January 1, 2004 through November 17, 2004) and
    the period subsequent to the Acquisition (November 18, 2004
    through December 31, 2004) to facilitate comparisons
    with subsequent years.       41




---



##### Table of Contents



Contractual
    Obligations
    Payments Due by PeriodLess Than


1 to 3


4 to 5


More ThanTotal


1 Year


Years


Years


5 Years(In millions)Long-term debt and note payable
    obligations

$
710.0


$



$
3.0


$



$
707.0Interest payments*


352.3



53.7



107.3



106.7



84.6Purchase commitments**


206.2



75.0



24.9



26.8



79.5Operating lease obligations


8.8



1.9



1.9



1.5



3.5Capital lease obligation


14.0



1.4



2.9



2.9



6.8Employment contracts


3.0



2.4



0.6







$
1,294.3


$
134.4


$
140.6


$
137.9


$
881.4     *
    
    Assumes that the variable interest rate on our borrowings under
    the credit facility remains constant at 7.35%, the weighted
    average variable rate that was in effect on December 31,
    2006.**
    
    Represents the value of purchase orders placed with vendors for
    raw materials and equipment and long-term purchase commitments.    Program
    Participation Costs
    Pension
    and Postretirement Benefits
  Pension
    Benefits
   42




---



##### Table of Contents



Long-Term
    Rate of Return on Assets
            Discount
    Rate
       43




---



##### Table of Contents



Postretirement
    Benefits
          Recent
    Accounting Pronouncements
  Accounting
    Changes
  st
   44




---



##### Table of Contents



Current
    Accounting Pronouncements
       45




---



##### Table of Contents



Inflation
    Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk      
    a three month LIBOR interest rate cap at 6% from December 2005
    to December 2007 for an increasing notional amount starting at
    $144.6 million and increasing to $161.2 million;
    a swap arrangement for a portion of our term loans from a
    variable three month LIBOR interest rate to a fixed rate of
    4.0375%, beginning January 24, 2006. The notional amount of
    the swap arrangement is initially $95.4 million and
    declines to $78.8 million on January 24, 2008 at the
    termination of the swap arrangement; and
    a swap arrangement for a portion of our term loans from a
    variable three month LIBOR interest rate to a fixed rate of
    4.506%, beginning January 24, 2006. The notional amount of
    the swaps is initially $47.7 million and declines to
    $39.4 million on January 24, 2008 at the termination
    of the swap agreement.           46




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  page F-1.
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure     Item 9A.
    Controls
    and Procedures  Rule 13a-15
  Internal Control 
    Integrated Framework
     Item 9B.
    Other
    Information    PART III   Item 10.
    Directors
    and Executive Officers of the Registrant  Form 10-K.
  Item 11.
    Executive
    Compensation  Form 10-K.
  Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholders Matters  Form 10-K.
 47




---



##### Table of Contents



Item 13.
    Certain
    Relationships and Related Transactions  Form 10-K.
  Item 14.
    Principal
    Accountant Fees and Services    2006


2005Audit Fees(1)

$
899,695


$
552,270Audit-Related Fees(2)


44,650



95,230Tax Fees(3)


90,000



90,000All Other Fees(4)


26,168



120,500Total

$
1,060,513


$
858,000    (1)
    
    The aggregate of fees billed or expected to be billed for the
    audit of our annual financial statements.(2)
    
    The aggregate of fees billed or expected to be billed for
    employee benefit plan audits, assistance with registration
    statements, consents and comfort letters related to debt
    issuance and other services approved by the Audit Committee.(3)
    
    The aggregate of fees billed or expected to be billed for
    services related to federal, state and international tax
    compliance and assistance with tax audits and appeals. Other tax
    services consist of fees billed for other miscellaneous tax
    consulting and planning.(4)
    
    The aggregate of fees billed or expected to be billed for due
    diligence services.  Pre-Approval
    Policies and Procedures
     48




---



##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  The following documents are filed as part of this
    report:
  Page1.


K&F Industries,
    Inc.  Consolidated Financial Statements:Report of
    Independent Registered Public Accounting Firm


F-1Consolidated
    Balance Sheets as of December 31, 2006 and 2005


F-2Consolidated
    Statements of Operations for the years ended December 31,
    2006 and 2005, for the period from November 18, 2004
    through December 31, 2004 and the period from
    January 1, 2004 through November 17, 2004
    (Predecessor)


F-3Consolidated
    Statements of Stockholders Equity for the years ended
    December 31, 2006 and 2005, for the period from
    November 18, 2004 through December 31, 2004 and the
    period from January 1, 2004 through November 17, 2004
    (Predecessor)


F-4Consolidated
    Statements of Cash Flows for the years ended December 31,
    2006 and 2005, for the period from November 18, 2004
    through December 31, 2004 and the period from
    January 1, 2004 through November 17, 2004
    (Predecessor)


F-5Notes to
    Consolidated Financial Statements


F-6     2.
    Exhibits  ExhibitNumber



Description of Exhibit2
.1



Stock Purchase Agreement dated as
    of October 15, 2004, entered into by and among K&F
    Industries Holdings, Inc. (K&F Holdings)
    (formerly K&F Parent, Inc. and AAKF Acquisition, Inc.),
    K&F Industries, Inc. (K&F Industries) and
    the stockholders of K&F Industries(1).2
.2



Agreement and Plan of Merger dated
    as of March 5, 2007 by and among K&F Industries
    Holdings, Inc., Ferndown Acquisition Corp. and Meggitt-USA,
    Inc.(10).3
.1



Amended and Restated Certificate
    of Incorporation of the Registrant(5).3
.2



Amended and Restated By-Laws of
    the Registrant(5).4
.2



Supplemental Indenture dated as of
    November 8, 2004 for the
    91/4% Senior
    Subordinated Notes between K&F Industries and U.S. Bank
    National Association (as successor to State Street Bank and
    Trust Company), as Trustee(3).4
.3



Indenture dated as of
    December 20, 2002 for the
    95/8% Senior
    Subordinated Notes between K&F Industries and U.S. Bank
    National Association (successor to State Street Bank and Trust
    Company), as Trustee(3).4
.4



Supplemental Indenture dated as of
    November 8, 2004 for the
    95/8% Senior
    Subordinated Notes between K&F Industries and U.S. Bank
    National Association (as successor to State Street Bank and
    Trust Company), as Trustee(3).4
.5



Indenture dated as of
    November 18, 2004 between K&F Acquisition, Inc., and
    U.S. Bank National Association, as Trustee(1).4
.6



First Supplemental Indenture dated
    as of November 18, 2004 between K&F Industries and
    U.S. Bank National Association, as Trustee(3).4
.7



Second Supplemental Indenture
    dated as of November 18, 2004 among Aircraft Braking
    Systems Corporation, Engineered Fabrics Corporation, Aircraft
    Braking Services, Inc. and U.S. Bank National Association,
    as Trustee(3). 49




---



##### Table of Contents



ExhibitNumber



Description of Exhibit10
.1



Employment Agreement dated as of
    November 15, 2004 between K&F Industries and Bernard L.
    Schwartz(3).10
.2



Employment Agreement dated as of
    November 15, 2004 between K&F Industries and Kenneth
    Schwartz(3).10
.3



Employment Agreement dated as of
    November 9, 2004 between K&F Industries and Dirkson R.
    Charles(3).10
.4



Employment Agreement dated as of
    November 18, 2004 between K&F Industries and Ronald
    Kisner(3).10
.5



Employment Agreement dated as of
    November 18, 2004 between K&F Industries and Frank P.
    Crampton(3).10
.8



Credit Agreement, dated as of
    November 18, 2004, among K&F Intermediate Holdco, Inc.,
    a Delaware corporation, K&F Acquisition, Inc., a Delaware
    corporation as Borrower, the several banks and other financial
    institutions or entities from time to time parties to this
    Agreement as the Lenders, Lehman Brothers Inc. and
    J.P. Morgan Securities Inc., as Advisors, J.P. Morgan
    Securities Inc., as Syndication Agent, Goldman Sachs Credit
    Partners L.P. and Citigroup Global Markets Inc., as
    Co-Documentation Agents and Lehman Commercial Paper Inc., as
    Administrative Agent(1).10
.9



K&F Industries, Inc.
    Retirement Plan for Salaried Employees(8).10
.10



K&F Industries, Inc. Savings
    Plan for Salaried Employees(8).10
.11



K&F Industries, Inc. Executive
    Deferred Bonus Plan(2).10
.12



K&F Industries, Inc.
    Supplemental Executive Retirement Plan(2).10
.13



Registration Rights Agreement,
    dated as of November 18, 2004 by and among K&F
    Acquisition, Lehman Brothers Inc., Goldman, Sachs &
    Co., Citigroup Global Markets Inc., and J.P. Morgan
    Securities Inc(1).10
.14



K&F Industries, Inc.
    Supplemental Executive Retirement Plan, as amended(2).10
.16



Form of Management Non-Qualified
    Option Agreement pursuant to the Registrants 2004 Stock
    Incentive Plan(3).10
.17



Form of Management Incentive
    Option Agreement pursuant to the Registrants 2004 Stock
    Incentive Plan(3).10
.18



Form of Non-Qualified Aurora
    Advisor Option Agreement pursuant to the Registrants 2004
    Stock Incentive Plan(3).10
.19



Form of Non-Qualified Director
    Option Agreement pursuant to the Registrants 2004 Stock
    Incentive Plan(3).10
.20



Consulting Agreement dated as of
    February 14, 2005 by and between Bernard L. Schwartz
    and K&F Industries(3).10
.21



Securityholders Agreement, dated
    as of November 18, 2004 among the Registrant and certain of
    its Stockholders, Optionholders and Warrantholders(4).10
.22



Amendment No. 1, dated as of
    December 27, 2004, to Securityholders Agreement among the
    Registrant and certain of its Stockholders, Optionholders and
    Warrantholders(4).10
.24



Noncompetition Agreement, dated as
    of November 18, 2004 by and among AAKF Acquisition, Inc.
    (as predecessor-in-interest to the Registrant), K&F
    Industries, Inc. and Bernard L. Schwartz(4).10
.25



Amendment No. 2, dated as of
    April 27, 2005, to Securityholders Agreement among the
    Registrant and certain of its Stockholders, Optionholders and
    Warrantholders(4).10
.26



Form of Director and Officer
    Indemnification Agreements(5).10
.27



Amended and Restated 2004 Stock
    Incentive Plan(6).10
.28



Amended and Restated Management
    Services Agreement dated as of August 12, 2005 by and among
    the Registrant, K&F Industries, Inc. and Aurora Management
    Partners LLC(6).10
.29



First Amendment, dated as of
    October 17, 2005, among K&F Intermediate Holdco, Inc.,
    K&F Industries as Borrower, the several banks and other
    financial institutions or entities from time to time parties
    thereto as the Lenders, Lehman Brothers Inc. and J.P. Morgan
    Securities Inc., as exclusive advisors, joint lead arrangers and
    joint bookrunners, J.P. Morgan Securities Inc., as Syndication
    Agent, Goldman Sachs Credit Partners, L.P. and Citigroup Global
    Markets Inc., as
    Co-Documentation
    Agents and Lehman Commercial Paper Inc., as Administrative
    Agent(7). 50




---



##### Table of Contents



ExhibitNumber



Description of Exhibit10
.30



Stockholders Agreement dated as of
    March 5, 2007 by and among Meggitt USA, Inc., K&F
    Industries Holdings, Inc. and Aurora Equity Partners III L.P.,
    Aurora Equity Partners II L.P., Aurora Overseas Equity Partners
    III, L.P. and Aurora Overseas Equity Partners II, L.P. (10).10
.31



Stockholders Agreement dated as of
    March 5, 2007 by and among Meggitt USA, Inc., K&F
    Industries Holdings, Inc. and certain of its stockholders (10).10
.32



Stockholders Agreement dated as of
    March 5, 2007 by and among Meggitt USA, Inc., K&F
    Industries Holdings, Inc. and Jack O. Peiffer, Thomas A. Johnson
    and J. Thomas Zusi (10).10
.33



Stockholders Agreement dated as of
    March 5, 2007 by and among Meggitt USA, Inc., K&F
    Industries Holdings, Inc. and General Electric Pension Trust and
    General Electric Insurance Plan Trust (10).10
.34



Guaranty and Undertakings
    Agreement dated as of March 5, 2007 by and among Meggitt
    PLC and K&F Industries Holdings, Inc. (10).12
.1



Statement regarding computation of
    ratio of earnings to fixed charges(5).21
.1



Subsidiaries of the Registrant(9).24
.1*



Powers of Attorney (included as
    part of the signature pages to this Annual Report).31
.1*



Certification of Chief Executive
    Officer pursuant to
    Rule 13a-14(a)
    and
    Rule 15d-14(a)
    of the Securities Exchange Act of 1934, as amended.31
.2*



Certification of Chief Financial
    Officer pursuant to
    Rule 13a-14(a)
    and
    Rule 15d-14(a)
    of the Securities Exchange Act of 1934, as amended.32
.1*



Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    section 906 of the Sarbanes-Oxley Act of 2002.32
.2*



Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    section 906 of the Sarbanes-Oxley Act of 2002.     *
    
    Filed herewith(1)
    
    Previously filed as an exhibit to the Registrants Current
    Report on
    Form 8-K
    dated November 23, 2004 and incorporated herein by
    reference.(2)
    
    Previously filed as an exhibit to the Registrants
    Registration Statement on
    Form S-4,
    No. 333-102658
    and incorporated herein by reference.(3)
    
    Previously filed as on exhibit to the Registrants
    Registration Statement on
    Form S-4,
    No. 333-122672
    and incorporated herein by reference.(4)
    
    Previously filed as an exhibit to K&F Holdings
    Registration Statement on Form S-4, No. 333-124870 and
    incorporated herein by reference.(5)
    
    Previously filed as an exhibit to K&F Holdings
    Registration Statement on
    Form S-4,
    No. 333-125117
    and incorporated herein by reference.(6)
    
    Previously filed as an exhibit to the Registrants Current
    Report of
    Form 8-K
    dated August 12, 2005 and incorporated herein by reference.(7)
    
    Previously filed as an exhibit to the Registrants Current
    Report on
    Form 8-K
    dated October 17, 2005 and incorporated herein by reference.(8)
    
    Previously filed as an exhibit to K&F Holdings Annual
    Report on
    Form 10-K
    for the year ended December 31, 2005 and incorporated
    herein by reference.(9)
    
    Previously filed as an exhibit to K&F Holdings Annual
    Report on
    Form 10-K
    for the year ended December 31, 2006 and incorporated
    herein by reference.(10)
    
    Previously filed as an exhibit to K&F Holdings Current
    Report on
    Form 8-K
    dated March 6, 2007 and incorporated herein by reference. 51




---



##### Table of Contents



SIGNATURES      By:
    /s/  Kenneth
    M. Schwartz            Signature

Title

Date/s/  Lawrence
    A. BossidyLawrence
    A. Bossidy

Chairman of the Board

March 16, 2007/s/  Kenneth
    M. SchwartzKenneth
    M. Schwartz

President, Chief Executive Officer
    and Director (principal executive officer)

March 16, 2007/s/  Dirkson
    R. CharlesDirkson
    R. Charles

Executive Vice President and Chief
    Financial Officer (principal financial and accounting officer)

March 16, 2007/s/  Dale
    F. FreyDale
    F. Frey

Director

March 16, 2007/s/  Thomas
    A. JohnsonThomas
    A. Johnson

Director

March 16, 2007/s/  John
    T. MapesJohn
    T. Mapes

Director

March 16, 2007/s/  Gerald
    L. ParskyGerald
    L. Parsky

Director

March 16, 2007/s/  Jack
    O. PeifferJack
    O. Peiffer

Director

March 16, 2007/s/  J.
    Thomas ZusiJ.
    Thomas Zusi

Director

March 16, 2007  52




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM              
     F-1




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS
  December 31,


December 31,2006


2005ASSETSCurrent assets:Cash and cash equivalents

$
16,347,000


$
34,731,000Accounts receivable  net


59,014,000



47,586,000Inventory


71,436,000



53,979,000Other current assets


5,166,000



5,979,000Deferred income taxes


15,341,000



15,133,000Total current assets


167,304,000



157,408,000Property, plant and
    equipment  net


108,418,000



101,885,000Other long-term assets


2,002,000



1,490,000Debt issuance costs  net


17,506,000



22,517,000Program participation
    costs  net


224,303,000



201,023,000Intangible assets  net


53,540,000



58,546,000Goodwill


850,428,000



841,049,000Total assets

$
1,423,501,000


$
1,383,918,000LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
25,584,000


$
18,223,000Current portion of long-term debt






11,018,000Current portion of capital lease
    obligation


844,000



Interest payable


3,426,000



5,171,000Income taxes payable


11,149,000



7,230,000Other current liabilities


48,240,000



49,141,000Total current liabilities


89,243,000



90,783,000Pension liabilities


58,963,000



54,348,000Deferred income tax liabilities


54,678,000



43,234,000Postretirement benefit obligations
    other than pensions


99,769,000



92,625,000Other long-term liabilities


7,855,000



5,491,000Capital lease obligation


10,153,000



Note payable


3,000,000



Long-term debt


707,000,000



755,559,000Commitments and contingencies
    (Notes 12 and 13)Stockholders equity:Common stock, $.01 par
    value  authorized, 1,000 shares; issued and
    outstanding, 1,000 shares






Additional paid-in capital


309,810,000



309,810,000Retained earnings


88,387,000



34,001,000Accumulated other comprehensive
    loss


(5,357,000
)


(1,933,000
)Total stockholders equity


392,840,000



341,878,000Total liabilities and
    stockholders equity

$
1,423,501,000


$
1,383,918,000     F-2




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF OPERATIONS
  November 18, 2004



January 1, 2004Year Ended


through



throughDecember 31,


December 31,



November 17,2006


2005


2004



2004(Predecessor)Net sales

$
424,134,000


$
384,630,000


$
53,448,000



$
299,868,000Cost of sales (including inventory
    purchase accounting charges of $1,174,000, $12,084,000 and
    $6,748,000 for the years ended December 31, 2006 and 2005
    and for the period November 18, 2004 through
    December 31, 2004, respectively)


228,244,000



215,710,000



33,315,000




174,223,000Gross profit


195,890,000



168,920,000



20,133,000




125,645,000Independent research and
    development


16,067,000



15,974,000



1,770,000




12,048,000Selling, general and
    administrative expenses


36,340,000



36,934,000



4,519,000




27,650,000Amortization of intangible assets


5,615,000



10,753,000



1,440,000




4,196,000Acquisition transaction expenses










5,350,000




101,533,000Operating income (loss)


137,868,000



105,259,000



7,054,000




(19,782,000
)Interest expense, net of interest
    income of $3,148,000, $519,000, $41,000 and $517,000


57,240,000



56,149,000



6,410,000




34,287,000Income (loss) before income taxes


80,628,000



49,110,000



644,000




(54,069,000
)Income tax (provision) benefit


(26,242,000
)


(15,989,000
)


236,000




25,082,000Net income (loss)

$
54,386,000


$
33,121,000


$
880,000



$
(28,987,000
)     F-3




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITY
  Preferred














AccumulatedStock


Common Stock


Additional


Retained


OtherShares





Shares





Paid-in


Earnings


Comprehensive


ComprehensiveIssued


Amount


Issued


Amount


Capital


(Deficit)


Income (Loss)


Income (Loss)PredecessorBalance, January 1, 2004





$




740,398


$
7,000


$
(263,259,000
)

$
104,039,000


$
(27,758,000
)Net loss






















(28,987,000
)





$
(28,987,000
)Cumulative translation adjustments


























121,000



121,000Additional minimum pension
    liability (net of tax of $3,057,000)


























(4,881,000
)


(4,881,000
)Balance, November 17, 2004










740,398



7,000



(263,259,000
)


75,052,000



(32,518,000
)

$
(33,747,000
)SuccessorElimination of historical
    stockholders deficiency upon consummation of the
    acquisition










(740,398
)


(7,000
)


263,259,000



(75,052,000
)


32,518,000Net income






















880,000






$
880,000Equity contributions from K&F
    Intermediate Holdco, Inc.


9,250







1,000







309,790,000Cumulative translation adjustments


























69,000



69,000Balance, December 31, 2004


9,250







1,000







309,790,000



880,000



69,000


$
949,000Net income






















33,121,000






$
33,121,000Cumulative translation adjustments


























(211,000
)


(211,000
)Additional minimum pension
    liability (net of tax of $1,106,000)


























(1,791,000
)


(1,791,000
)Equity contributions from K&F
    Intermediate Holdco, Inc.


















20,000Redemption of preferred stock


(9,250
)


Balance, December 31, 2005










1,000







309,810,000



34,001,000



(1,933,000
)


31,119,000
)Net income






















54,386,000






$
54,386,000Cumulative translation adjustments


























263,000



263,000Additional minimum pension
    liability (net of tax of $1,106,000)


























1,791,000



1,791,000Adoption of SFAS No. 158 (net
    of tax of $3,169,000)


























(5,478,000
)


(5,478,000
)Balance, December 31, 2006





$




1,000


$



$
309,810,000


$
88,387,000


$
(5,357,000
)

$
50,962,000    F-4




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  November 18,2004



January 1, 2004Year Ended


through



throughDecember 31,


December 31,



November 17,2006


2005


2004



2004(Predecessor)Cash Flows From Operating
    Activities:Net income (loss)

$
54,386,000


$
33,121,000


$
880,000



$
(28,987,000
)Adjustments to reconcile net income
    (loss) to net cash provided (used) by operating activities:Depreciation and amortization


12,595,000



10,824,000



1,223,000




6,271,000Amortization of program
    participation costs(a)


9,251,000



3,955,000



247,000




Amortization of intangible assets(a)


7,390,000



10,753,000



1,440,000




4,196,000Loss on disposal of equipment


1,624,000



841,000








Inventory purchase accounting
    charges


1,174,000



12,084,000



6,748,000




Stock-based compensation


940,000



65,000








Non-cash interest
    expense  amortization/write-off of debt issuance costs


5,011,000



6,566,000



512,000




8,168,000(Gain) loss on change in fair
    market value of interest rate swaps
    and caps


(102,000
)


(1,125,000
)


5,000




Provision for losses on accounts
    receivable


24,000



411,000








20,000Cancellation of stock options















46,156,000Defeasance costs of senior
    subordinated notes















44,084,000Deferred income taxes


12,300,000



12,514,000



(631,000
)



(17,502,000
)Changes in assets and liabilities,
    net of acquisitions:Accounts receivable


(10,284,000
)


(5,760,000
)


(1,707,000
)



1,059,000Inventory


(14,726,000
)


(4,932,000
)


4,932,000




(3,928,000
)Other current assets


(12,000
)


(1,657,000
)


(2,667,000
)



(14,716,000
)Other long-term assets


(410,000
)






(351,000
)



Program participation
    costs  equipment


(29,031,000
)


(26,302,000
)


(2,787,000
)



Program participation
    costs  cash payments


(3,500,000
)


(1,000,000
)







(6,283,000
)Accounts payable


9,884,000



(78,000
)


(1,794,000
)



1,795,000Interest payable


(1,745,000
)


1,666,000



(7,930,000
)



7,638,000Other current liabilities


4,751,000



21,148,000



(2,296,000
)



1,239,000Pension liability


3,523,000



3,202,000



619,000




6,856,000Postretirement benefit obligations
    other than pensions


2,486,000



356,000



411,000




(1,184,000
)Other long-term liabilities


1,864,000



246,000



(504,000
)



741,000Net cash provided (used) by
    operating activities


67,393,000



76,898,000



(3,650,000
)



55,623,000Cash Flows From Investing
    Activities:Capital expenditures


(21,181,000
)


(12,826,000
)


(1,810,000
)



(2,902,000
)Payment for acquisitions, net of
    cash acquired


(16,016,000
)






(640,935,000
)



Payment of deferred purchase price






(14,682,000
)







Cancellation of stock options










(42,047,000
)



Other acquisition and transaction
    costs










(11,110,000
)



Net cash used in investing
    activities


(37,197,000
)


(27,508,000
)


(695,902,000
)



(2,902,000
)Cash Flows From Financing
    Activities:Proceeds from sale and leaseback
    transaction


10,997,000












Payments of senior term loan


(59,000,000
)


(24,000,000
)







Payments of long-term debt
    including defeasance costs of senior subordinated notes


(577,000
)






(443,507,000
)



Debt issuance costs






(315,000
)


(29,280,000
)



Proceeds from issuance of senior
    term loan










480,000,000




Proceeds from issuance of senior
    subordinated notes










315,000,000




Equity contributions






20,000



309,790,000




Net cash (used) provided in
    financing activities


(48,580,000
)


(24,295,000
)


632,003,000




Net (decrease) increase in cash and
    cash equivalents


(18,384,000
)


25,095,000



(67,549,000
)



52,721,000Cash and cash equivalents,
    beginning of period


34,731,000



9,636,000



77,185,000




24,464,000Cash and cash equivalents, end of
    period

$
16,347,000


$
34,731,000


$
9,636,000



$
77,185,000Supplemental Information:Interest paid during the period

$
57,926,000


$
49,731,000


$
13,772,000



$
25,549,000Income taxes paid during the period

$
6,704,000


$
767,000


$




$
6,419,000Income tax refund received during
    the period

$



$
15,425,000


$




$
     Excluded from the consolidated
    statement of cash flows during the year ended December 31,
    2006 is a $3.0 million note payable issued in connection
    with the acquisition of Nasco Aircraft Brake, Inc.(a)
    
    During the year ended
    December 31, 2005, the Company finalized the allocation of
    the purchase price relating to the  November 17, 2004
    acquisition. This resulted in the reallocation of approximately
    $126 million from intangible assets to program
    participation costs. See Note 14.   F-5




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS
  1.
    Description
    of Business    Acquisition
    of Nasco Aircraft Brake, Inc.
      Fair value of assets acquired,
    including goodwill

$
21,618,000Cash paid, net of cash acquired


(16,016,000
)Issuance of note payable


(3,000,000
)Liabilities assumed

$
2,602,000   The
    Acquisition of K&F Industries
    3 4 3 4
 F-6




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Transaction
    Expenses
    November 18, 2004


January 1, 2004through


throughDecember 31,


November 17,2004


2004(Predecessor)Compensation costs recognized for
    the cancellation of stock options

$



$
46,156,000Premiums paid to redeem the
    95/8% notes
    and the
    91/4% notes






45,282,000Write-off of debt issuance costs
    associated with the redemption of the
    95/8% notes
    and the
    91/4% notes






6,551,000Investment banker fees






1,525,000Other fees and expenses






2,019,000Write-off of interim loan facility
    commitment fee and other fees and expenses


5,350,000



$
5,350,000


$
101,533,000   2.
    Summary
    of Significant Accounting Policies  Principles of Consolidation
  Cash and Cash Equivalents
  Revenue and Expense Recognition
  Accounts Receivable
  Inventory
 F-7




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Property, Plant and Equipment
  Goodwill and Other Intangible Assets
    on-going
    Derivative Financial Instruments
  Debt Issuance Costs 3 4
  Program Participation Costs FAA-certification FAA-certification
 F-8




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Intangible Assets
  Evaluation of Long-Lived Assets
  Warranty
  Business and Credit Concentrations
  Use of Estimates
  Stock-Based Compensation Plans
 F-9




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Accounting Changes st
      Current Accounting Pronouncements
 F-10




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          3.
    Accounts
    Receivable  December 31,2006


2005Accounts receivable, principally
    from commercial and general aviation customers

$
50,623,000


$
43,626,000Accounts receivable on
    U.S. government and other long-term contracts


9,937,000



5,587,000Allowances


(1,546,000
)


(1,627,000
)Total

$
59,014,000


$
47,586,000  F-11




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    November 18, 2004



January 1, 2004through



throughYear Ended December 31,


December 31,



November 17,2006


2005


2004



2004(Predecessor)Balance at beginning of period

$
1,627,000


$
1,236,000


$
1,236,000



$
1,216,000Current period provisions


24,000



411,000








20,000Write-off


(105,000
)


(20,000
)







Balance at end of period

$
1,546,000


$
1,627,000


$
1,236,000



$
1,236,000     4.
    Inventory  December 31,2006


2005Raw materials and
    work-in-process

$
40,431,000


$
29,689,000Finished goods


12,796,000



11,920,000Inventoried costs related to
    U.S. government and other long-term contracts


18,209,000



12,370,000Total

$
71,436,000


$
53,979,000   5.
    Property,
    Plant and Equipment  December 31,2006


2005Land

$
3,809,000


$
3,809,000Buildings and improvements


36,470,000



36,334,000Machinery, equipment, furniture
    and fixtures


91,362,000



73,105,000Total


131,641,000



113,248,000Less accumulated depreciation and
    amortization


23,223,000



11,363,000Total

$
108,418,000


$
101,885,000        F-12




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  6.
    Other
    Current Liabilities  December 31,2006


2005Accrued payroll costs

$
14,313,000


$
14,128,000Accrued property and other taxes


2,067,000



2,507,000Accrued costs on long-term
    contracts


3,225,000



3,963,000Accrued warranty costs


10,840,000



12,327,000Customer credits


6,784,000



7,264,000Postretirement benefit obligations
    other than pensions


5,889,000



6,000,000Other


5,122,000



2,952,000Total

$
48,240,000


$
49,141,000   7.
    Note
    Payable and Long-Term Debt  December 31,2006


2005Note payable

$
3,000,000


$
Senior term loan

$
392,000,000


$
439,982,00073/4% senior
    subordinated notes due 2014


315,000,000



315,000,00095/8% senior
    subordinated notes due 2010






577,000Total long-term debt


707,000,000



755,559,000Current portion of long-term debt






11,018,000Total debt

$
707,000,000


$
766,577,000   Note Payable
  Credit Facility
   F-13




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              Senior Subordinated Notes 1 4 1 4 5 8 5 8 1 4 5 8
  3 4 3 4 3 4 3 4
  3 4 3 4
  3 4
 F-14




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ending December 31,

Amount2007

$
2008


2009


3,000,0002010


2011


Thereafter


707,000,000Total

$
710,000,000     8.
    Fair
    Value of Financial Instruments    3 4
    
    a 3 month LIBOR interest rate cap at 6% from December 2005
    to December 2007 for an increasing notional amount starting at
    $144.6 million, increasing to $161.2 million;
    a swap arrangement for a portion of its term loans from a
    variable 3 month LIBOR interest rate to a fixed rate of
    4.0375%, beginning January 24, 2006. The notional amount of
    the swap is initially $95.4 million and declines to
    $78.8 million on January 24, 2008 at the termination
    of the swap agreement; and
    a swap arrangement for a portion of its term loans from a
    variable 3 month LIBOR interest rate to a fixed rate of
    4.506%, beginning on January 24, 2006. The notional amount
    of the swap is initially $47.7 million and declines to
    $39.4 million on January 24, 2008 at the termination
    of the swap agreement.           F-15




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    9.
    Capital
    Stock and Stock Options  Common Stock
  Stock Options
       F-16




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    November 18,



January 1Year Ended


2004 through



throughDecember 31, 2005


December 31, 2004



November 17, 2004(Predecessor)Reported net income (loss)

$
33,121,000


$
880,000



$
(28,987,000
)Add: Stock-based compensation
    expense included in net income, net of related tax effects


40,000








Deduct: Total stock-based employee
    and director compensation expense determined under fair value
    method for all awards, net of related tax effects


(559,000
)







Pro forma net income (loss)

$
32,602,000


$
880,000



$
(28,987,000
)     Year EndedDecember 31,2006


2005Volatility


27.56%



32.88%Risk free interest rate


4.97%



3.97%Dividend yield


0.0%



0.0%Expected life


7.0 years



7.0 years  F-17




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    WeightedAverageRemaining


AggregateWeighted


Contractual


IntrinsicAverage


Term


ValueNumber of Options


Exercise Price


(Years)


(In thousands)Outstanding at January 1, 2005





$
Granted


1,404,821



5.50Exercised






Forfeited or cancelled






Outstanding at December 31,
    2005


1,404,821



5.50Granted


326,150



17.70Exercised


(54,062
)


5.22Forfeited or expired


(2,486
)


5.22Outstanding at December 31,
    2006


1,674,423


$
7.88



8.3


$
24,800Vested or expected to vest at
    December 31, 2006


1,674,423


$
7.88



8.3


$
24,800Exercisable at December 31,
    2006


249,368


$
5.54



8.0


$
4,300       Options Outstanding


Options ExercisableNumber


Weighted Average


Weighted Average


Number


Weighted Average


Weighted AverageExercise Price

Outstanding


Life (Years)


Exercise Price


Exercisable


Life (Years)


Exercise Price$ 5.22


1,314,192



8.0


$
5.22



242,552



8.0


$
5.2215.16


5,000



8.9



15.16



1,000



8.9



15.1616.00


30,900



9.6



16.00











17.00


29,081



8.8



17.00



5,816



8.8



17.0017.80


235,250



9.3



17.80











18.17


60,000



9.7



18.17











1,674,423



8.3


$
7.88



249,368



8.0


$
5.54      F-18




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  10.
    Accumulated
    Other Comprehensive Income (Loss)    Amortization





AdditionalCumulative


of Transition





PostretirementEffect of


Adjustment


Additional


Benefit


AccumulatedCumulative


Change in


Included in


Minimum


Obligations


OtherTranslation


Accounting


Interest


Pension


Other Than


ComprehensiveAdjustments


Principle


Expense


Liability


Pensions


Income (Loss)PredecessorJanuary 1, 2004

$
293,000


$
(550,000
)

$
550,000


$
(28,051,000
)

$



$
(27,758,000
)January 1, 2004 through
    November 17, 2004 change


121,000











(4,881,000
)






(4,760,000
)November 17, 2004


414,000



(550,000
)


550,000



(32,932,000
)






(32,518,000
)SuccessorNovember 18, 2004 through
    December 31, 2004 change


(345,000
)


550,000



(550,000
)


32,932,000







32,587,000December 31, 2004


69,000



















69,0002005 change


(211,000
)










(1,791,000
)






(2,002,000
)December 31, 2005


(142,000
)










(1,791,000
)






(1,933,000
)2006 change


263,000











(700,000
)


(2,987,000
)


(3,424,000
)December 31, 2006

$
121,000


$



$



$
(2,491,000
)

$
(2,987,000
)

$
(5,357,000
)   11.
    Employee
    Benefit Plans      December 31, 2006Before





AfterAdoption


Adjustment


AdoptionDeferred income taxes

$
15,227,000


$
114,000


$
15,341,000Deferred income tax liabilities


57,733,000



(3,055,000
)


54,678,000Pension liabilities (long-term)


54,974,000



3,989,000



58,963,000Postretirement benefit obligations
    other than pensions (long-term)


95,111,000



4,658,000



99,769,000Accumulated other comprehensive
    income (loss)


121,000



(5,478,000
)


(5,357,000
)        F-19




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Pension Benefits


Postretirement BenefitsDecember 31,


December 31,2006


2005


2006


2005Change in Benefit
    Obligation:Benefit obligation at beginning of
    year

$
163,108,000


$
150,109,000


$
100,415,000


$
96,076,000Service cost


4,293,000



3,903,000



1,858,000



1,563,000Interest cost


9,231,000



8,905,000



5,931,000



5,609,000Plan participants
    contributions


408,000



400,000



1,255,000



1,170,000Amendments


5,025,000







(2,258,000
)


Actuarial (gain) loss


(5,614,000
)


6,926,000



4,903,000



1,984,000Benefits paid


(7,923,000
)


(7,135,000
)


(6,446,000
)


(5,987,000
)Benefit obligation at end of year


168,528,000



163,108,000



105,658,000



100,415,000Change in Plan
    Assets:Fair value of plan assets at
    beginning of year


104,808,000



102,286,000







Actual return on plan assets


11,154,000



8,793,000







Employer contributions


537,000



464,000



5,191,000



4,817,000Plan participants
    contributions


408,000



400,000



1,255,000



1,170,000Benefits paid


(7,923,000
)


(7,135,000
)


(6,446,000
)


(5,987,000
)Fair value of plan assets at end
    of year


108,984,000



104,808,000







Funded status


(59,544,000
)


(58,300,000
)


(105,658,000
)


(100,415,000
)Unrecognized actuarial loss


*



6,849,000



*



1,790,000Net amount recognized

$
(59,544,000
)

$
(51,451,000
)

$
(105,658,000
)

$
(98,625,000
)Amounts Recognized in the
    Consolidated Balance Sheets Consist of:Current liabilities

$
(581,000
)

$
*


$
(5,889,000
)

$
*Noncurrent liabilities


(58,963,000
)


*



(99,769,000
)


*Accrued benefit cost


*



(54,348,000
)


*



(98,625,000
)Accumulated other comprehensive
    loss


*



2,897,000



*



Net amount recognized

$
(59,544,000
)

$
(51,451,000
)

$
(105,658,000
)

$
(98,625,000
)Amounts Recognized in
    Accumulated Other Comprehensive Loss consist of:Net actuarial (gain) loss

$
(783,000
)

$
*


$
6,693,000


$
*Prior service cost (credit)


4,772,000



*



(2,035,000
)


*Net amount recognized

$
3,989,000


$
*


$
4,658,000


$
*     *
    
    Not applicable due to change in accounting standard. F-20




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2006


2005Projected benefit obligation

$
168,528,000


$
163,108,000Accumulated benefit obligation


161,975,000



155,887,000Fair value of plan assets


108,984,000



104,808,000     Pension Benefits



Postretirement BenefitsNovember 18,



January 1,









November 18,



January 1,2004



2004









2004



2004Year Ended


through



through



Year Ended


through



throughDecember 31,


December 31,



November 17,



December 31,


December 31,



November 17,2006


2005


2004



2004



2006


2005


2004



2004(Predecessor)













(Predecessor)Service cost

$
4,293,000


$
3,903,000


$
651,000



$
4,300,000



$
1,858,000


$
1,563,000


$
225,000



$
1,456,000Interest cost


9,231,000



8,905,000



1,118,000




7,323,000




5,931,000



5,609,000



717,000




4,820,000Expected return on plan assets


(9,135,000
)


(9,142,000
)


(1,142,000
)



(7,994,000
)
















Amortization of prior service cost


253,000












413,000




(223,000
)











(5,066,000
)Recognized actuarial loss















2,886,000

















1,317,000Net periodic benefit cost

$
4,642,000


$
3,666,000


$
627,000



$
6,928,000



$
7,566,000


$
7,172,000


$
942,000



$
2,527,000     Benefit Obligation


Net Periodic Benefit CostDecember 31,


Year ended December 31,2006


2005


2006


2005


2004Pension Benefits:Discount rate


6.00
%


5.75
%


5.75
%


6.00
%


6.25
%Expected return on plan assets










9.00
%


9.00
%


9.00
%Rate of compensation increase


4.00
%


4.00
%


4.00
%


4.00
%


4.00
%Postretirement
    Benefits:Discount rate


6.00
%


5.75
%


5.75
%


6.00
%


6.25
%Rate of compensation increase


4.00
%


4.00
%


4.00
%


4.00
%


4.00
%        F-21




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        December 31,2006


2005


TargetAsset Category

Percentage of Plan AssetsEquity securities


60
%


61
%


60
%Fixed income securities


35
%


34
%


35
%Other


5
%


5
%


5
%Total


100
%


100
%


100
%       No. 106-2, No. 106-1
  No. 106-1. No. 106-2
  No. 106-2.
  November 18, 2004


January 1, 2004through


throughDecember 31,


November 17,2004


2004(Predecessor)Service cost

$
30,000


$
175,000Interest cost


90,000



570,000Recognized actuarial gain






715,000Net periodic postretirement benefit

$
120,000


$
1,460,000  F-22




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2006


2005Health care cost trend rate
    assumed for next year


10.25
%


10.25
%Rate that the cost trend rate
    gradually declines to


5.00
%


5.00
%Year that the rate reaches the
    rate it is assumed to remain at


2013



2012     One-


One-Percentage-


Percentage-Point Increase


Point DecreaseEffect on total of service cost
    and interest cost components

$
972,000


$
(489,000
)Effect on postretirement benefit
    obligation


11,249,000



(6,056,000
)         Expected Benefit PaymentsPension


Postretirement


MedicareYear Ending December 31,

Benefits


Benefits


Subsidy*2007

$
8,262,000


$
6,526,000


$
456,0002008


8,889,000



7,119,000



513,0002009


9,456,000



7,768,000



571,0002010


10,064,000



8,388,000



638,0002011


10,549,000



8,977,000



705,0002012-2016


61,170,000



48,311,000



4,476,000     *
    
    Represents the expected Medicare Part D subsidy.   F-23




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  12.
    Commitments
    and Product Warranties  Leases
     Capital


OperatingYear Ending December 31,

Lease


Leases2007

$
1,385,000


$
1,890,0002008


1,440,000



966,0002009


1,440,000



936,0002010


1,440,000



850,0002011


1,440,000



606,000Thereafter


6,841,000



3,530,000Total minimum lease payments


13,986,000


$
8,778,000Less amount representing interest


(2,989,000
)Present value of minimum lease
    payments


10,997,000Less current portion of capital
    lease obligation


(844,000
)Long-term portion of capital lease
    obligation

$
10,153,000     Product
    Warranties
    November 18,



January 1,Year Ended


2004 through



2004 throughDecember 31,


December 31,



November 17,2006


2005


2004



2004(Predecessor)Balance at beginning of period

$
12,674,000


$
12,858,000


$
14,877,000



$
13,924,000Current provisions (credits)


7,872,000



6,402,000



(76,000
)



6,422,000Expenditures


(8,167,000
)


(6,586,000
)


(1,943,000
)



(5,469,000
)Balance at end of period

$
12,379,000


$
12,674,000


$
12,858,000



$
14,877,000  F-24




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2006


2005Current liabilities (See
    Note 6)

$
10,840,000


$
12,327,000Long-term liabilities


1,539,000



347,000Total

$
12,379,000


$
12,674,000   Purchase
    Commitments
    13.
    Contingencies    14.
    Goodwill,
    Intangible Assets, Debt Issuance Costs and Program Participation
    Costs    Aircraft Braking


EngineeredSystems


Fabrics


TotalBalance at December 31, 2005

$
765,380,000


$
75,669,000


$
841,049,000Increase


11,721,000







11,721,000Decrease


(2,045,000
)


(297,000
)


(2,342,000
)Balance at December 31, 2006

$
775,056,000


$
75,372,000


$
850,428,000    F-25




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    EstimatedDecember 31, 2006


WeightedGross Carrying


Accumulated





AverageAmount


Amortization


Net


Useful LifeDebt issuance costs

$
24,562,000


$
(7,056,000
)

$
17,506,000



9 yearsProgram Participation Costs

$
237,528,000


$
(13,225,000
)

$
224,303,000



25 yearsAmortized intangible assets:Customer
    relationships(1)

$
13,857,000


$
(5,628,000
)

$
8,229,000



22 yearsEngineering drawings


20,881,000



(2,459,000
)


18,422,000



18 yearsContract
    backlog(1)


12,401,000



(8,150,000
)


4,251,000



3 yearsIn-house libraries


8,297,000



(977,000
)


7,320,000



18 yearsTechnology
    licenses(1)


7,464,000



(1,553,000
)


5,911,000



10 yearsPatents


4,017,000



(815,000
)


3,202,000



11 yearsTotal amortizable intangible assets


66,917,000



(19,582,000
)


47,335,000Indefinite-lived
    trademarks(1)


6,205,000







6,205,000Total intangible assets

$
73,122,000


$
(19,582,000
)

$
53,540,000   (1)
    
    Increases in gross carrying amounts from December 31, 2005
    represent intangible assets acquired in connection with the
    acquisition of NASCO. EstimatedDecember 31, 2005


WeightedGross Carrying


Accumulated





AverageAmount


Amortization


Net


Useful LifeDebt issuance costs

$
26,599,000


$
(4,082,000
)

$
22,517,000



9 yearsProgram Participation Costs

$
205,225,000


$
(4,202,000
)

$
201,023,000



25 yearsAmortized intangible assets:Customer relationships

$
12,749,000


$
(4,938,000
)

$
7,811,000



24 yearsEngineering drawings


20,881,000



(1,299,000
)


19,582,000



18 yearsContract backlog


12,203,000



(4,225,000
)


7,978,000



3 yearsIn-house libraries


8,297,000



(516,000
)


7,781,000



18 yearsTechnology licenses


7,003,000



(784,000
)


6,219,000



10 yearsPatents


4,017,000



(430,000
)


3,587,000



11 yearsTotal amortizable intangible assets


65,150,000



(12,192,000
)


52,958,000Indefinite-lived trademarks


5,588,000







5,588,000Total intangible assets

$
70,738,000


$
(12,192,000
)

$
58,546,000    F-26




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Program


DebtIntangible


Participation


IssuanceYear Ending December 31,

Assets


Costs


Costs2007

$
7,000,000


$
9,500,000


$
3,100,0002008


4,100,000



9,500,000



3,000,0002009


3,300,000



9,500,000



2,800,0002010


3,300,000



9,500,000



2,700,0002011


3,100,000



9,500,000



2,400,000   15.
    Income
    Taxes    November 18, 2004



January 1, 2004through



throughYear Ended December 31,


December 31,



November 17,2006


2005


2004



2004(Predecessor)U.S.

$
77,449,000


$
47,927,000


$
329,000



$
(55,546,000
)Foreign


3,179,000



1,183,000



315,000




1,477,000Income (loss) before income taxes

$
80,628,000


$
49,110,000


$
644,000



$
(54,069,000
)  F-27




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    November 18, 2004



January 1, 2004through



throughYear Ended December 31,


December 31,



November 17,2006


2005


2004



2004(Predecessor)Current domestic (provision)
    benefit

$
(12,988,000
)

$
(3,120,000
)

$
(300,000
)


$
8,023,000Foreign provision


(954,000
)


(355,000
)


(95,000
)



(443,000
)Deferred (provision) benefit


(12,300,000
)


(12,514,000
)


631,000




17,502,000Income tax (provision) benefit

$
(26,242,000
)

$
(15,989,000
)

$
236,000



$
25,082,000     November 18, 2004



January 1, 2004Year Ended


through



throughDecember 31,


December 31,



November 17,2006


2005


2004



2004(Predecessor)Statutory federal income tax rate


35.0
%


35.0
%


35.0
%



(35.0
)%State and local tax


1.5



1.1



2.8




(1.2
)Change in state tax rate


0.2



(1.8
)







Tax reserves


0.1



3.8








(6.3
)Extraterritorial income exclusion
    benefit


(2.5
)


(4.5
)


(48.9
)



(4.9
)IRC Sec. 199 benefit


(0.6
)











Tax credits


(1.0
)











Foreign taxes and other


(0.2
)


(1.0
)


(25.6
)



1.0Effective income tax rate


32.5
%


32.6
%


(36.7
)%



(46.4
)%    F-28




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2006


2005Deferred tax assets:Federal and state operating loss
    carryforwards

$
1,583,000


$
2,251,000Tax credits carryforwards


777,000



5,518,000Postretirement and other employee
    benefits


65,713,000



60,997,000Warranty


4,442,000



4,525,000Other


3,528,000



3,829,00076,043,000



77,120,000Deferred tax liabilities:Intangible assets


16,317,000



14,062,000Program participation costs


80,480,000



71,775,000Depreciation


15,872,000



17,287,000Other


1,312,000



764,000113,981,000



103,888,000Net deferred tax liability before
    valuation allowance


37,938,000



26,768,000Valuation Allowance


1,399,000



1,333,000Net deferred tax liability

$
39,337,000


$
28,101,000            F-29




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  16.
    Related
    Party Transactions  Indemnification
    Bernard
    L. Schwartz
            Commitment
    Fee
    Purchasers
    of
    73/4% Notes
  3 4
  Management
    Services Agreement
   F-30




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Lehman
    Brothers
  3 4
  17.
    Segments   F-31




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    November 18, 2004through



January 1, 2004Year Ended December 31,


December 31,



through2006


2005


2004



November 17, 2004(Predecessor)Net Sales:Aircraft Braking Systems

$
349,766,000
(a)

$
319,885,000


$
46,005,000



$
247,843,000Engineered Fabrics


74,368,000



64,745,000



7,443,000




52,025,000$
424,134,000


$
384,630,000


$
53,448,000



$
299,868,000Operating Profit:Aircraft Braking Systems

$
127,133,000
(b)

$
99,616,000


$
11,582,000



$
73,861,000Engineered Fabrics


10,735,000



5,643,000



822,000




7,890,000Transaction expenses










(5,350,000
)



(101,533,000
)Operating income (loss)


137,868,000



105,259,000



7,054,000




(19,782,000
)Interest expense, net


57,240,000



56,149,000



6,410,000




34,287,000Income (loss) before income taxes

$
80,628,000


$
49,110,000


$
(644,000
)


$
(54,069,000
)Depreciation and Amortization:Aircraft Braking Systems

$
26,075,000


$
22,089,000


$
2,522,000



$
9,557,000Engineered Fabrics


3,161,000



3,443,000



388,000




910,000$
29,236,000


$
25,532,000


$
2,910,000



$
10,467,000Capital Expenditures:Aircraft Braking Systems

$
19,579,000


$
12,156,000


$
1,464,000



$
2,539,000Engineered Fabrics


1,581,000



581,000



346,000




353,000Total segments


21,160,000



12,737,000



1,810,000




2,892,000Corporate


21,000



89,000








10,000$
21,181,000


$
12,826,000


$
1,810,000



$
2,902,000    (a)
    Includes $2.4 million of sales relating to past due amounts owed
    under a licensing agreement.  (b)
    Includes a $2.5 million charge related to a retroactive price
    increase for certain raw materials purchased during the
    12 months ended June 30, 2006.  December 31,2006


2005Total Assets:Aircraft Braking Systems

$
1,264,725,000


$
1,221,962,000Engineered Fabrics


137,351,000



133,731,000Total Assets for Reportable
    Segments

$
1,402,076,000


$
1,355,693,000  F-32




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2006


2005Total Assets:Total assets for reportable
    segments

$
1,402,076,000


$
1,355,693,000Debt issuance costs not allocated
    to segments


17,506,000



22,517,000Corporate assets


3,919,000



5,708,000Consolidated Total

$
1,423,501,000


$
1,383,918,000     November 18, 2004



January 1, 2004through



throughYear Ended December 31,


December 31,



November 17,2006


2005


2004



2004(Predecessor)Braking systems

$
349,766,000


$
319,885,000


$
46,005,000



$
247,843,000Fuel tanks


58,343,000



49,274,000



5,054,000




40,720,000Other


16,025,000



15,471,000



2,389,000




11,305,000$
424,134,000


$
384,630,000


$
53,448,000



$
299,868,000     November 18, 2004



January 1, 2004through



throughYear Ended December 31,


December 31,



November 17,2006


2005


2004



2004(Predecessor)Net Sales:United States

$
254,227,000


$
232,937,000


$
31,681,000



$
176,107,000Europe


79,283,000



68,711,000



11,988,000




60,191,000Asia


48,994,000



40,852,000



3,658,000




33,008,000North America


24,858,000



22,746,000



2,197,000




22,690,000South America


14,063,000



17,108,000



3,510,000




6,119,000Australia


2,709,000



2,276,000



414,000




1,753,000$
424,134,000


$
384,630,000


$
53,448,000



$
299,868,000         19.
    Subsequent
    Event   F-33




---



##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   F-34