<PAGE>   1

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

                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

[ ]   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)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      34-1614845
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NUMBER)

        600 THIRD AVENUE, NEW YORK, NY                             10016
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

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

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

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

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

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

     There is no trading market for the Company's common stock. As of March 1,
2001, there were 740,398 shares of common stock outstanding.

                   DOCUMENTS INCORPORATED BY REFERENCE:  NONE

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<PAGE>   2

                                     PART I

ITEM I.  BUSINESS

GENERAL

     K & F Industries, Inc. ("K & F" or the "Company") was incorporated in
Delaware on March 13, 1989. K & F, through its wholly owned subsidiary, Aircraft
Braking Systems Corporation ("Aircraft Braking Systems"), is one of the world's
leading manufacturers of aircraft wheels, brakes and brake control systems for
commercial transport, general aviation and military aircraft. K & F sells its
products to virtually all major airframe manufacturers and most commercial
airlines and to the United States and certain foreign governments. During the
year ended December 31, 2000, approximately 87% of the Company's total revenues
were derived from sales made by Aircraft Braking Systems. In addition, K & F
through its wholly owned subsidiary, Engineered Fabrics Corporation ("Engineered
Fabrics"), is the leading worldwide manufacturer of aircraft fuel tanks,
supplying approximately 80% of the worldwide general aviation and commercial
transport market and over one-half of the domestic military market for such
products. Engineered Fabrics also manufactures and sells iceguards and specialty
coated fabrics with storage, shipping, environmental and rescue applications for
commercial and military uses. During the year ended December 31, 2000,
approximately 13% of the Company's total revenues were derived from sales made
by Engineered Fabrics.

     Aircraft Braking Systems and its predecessors have been leaders in the
design and development of aircraft wheels, brakes and brake control systems,
investing significant resources to refine existing braking systems, develop new
technologies and design braking systems for new airframes. The Company has
carefully directed its efforts toward expanding Aircraft Braking Systems'
presence in the commercial and general aviation segments of the aircraft
industry, focusing particularly on medium- and short-range commercial aircraft.
These aircraft typically make more frequent landings than long-range commercial
aircraft and correspondingly require more frequent replacement of brake parts.

THE AIRCRAFT WHEEL AND BRAKE INDUSTRY

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

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

                                        2
<PAGE>   3

frequency of replacements required and the impact that the weight of the system
has on the airline's ability to load the aircraft with passengers, freight or
fuel, and the technical operating performance characteristics of the wheel and
brake systems. Once selected, airlines infrequently replace entire wheel and
brake systems because of the expense.

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

PRODUCTS

     AIRCRAFT BRAKING SYSTEMS.  Aircraft Braking Systems is one of the world's
leading manufacturers of wheels, steel and carbon brakes and brake control
systems for commercial transport, general aviation and military aircraft. Since
1989, Aircraft Braking Systems has carefully directed its efforts toward
expanding its presence in the commercial and general aviation segments of the
aircraft industry, focusing particularly on high-cycle, medium- and short-range
commercial aircraft and carbon equipped executive jets. As a result of this
strategic focus, during this period, Aircraft Braking Systems has added
approximately 1,800 medium- and short-range commercial aircraft to the portfolio
of aircraft using its products. These aircraft typically make frequent landings
and correspondingly require more frequent replacement of brake parts. The
braking systems produced by Aircraft Braking Systems are either carbon or
steel-based. While steel-based systems typically are sold for less than
carbon-based systems, such systems generally require more frequent replacement
because their steel brake pads tend to wear more quickly.

     Approximately 75% of Aircraft Braking Systems' revenues are derived from
the sales of replacement parts. As of December 31, 2000, Aircraft Braking
Systems' products had been installed on approximately 30,000 commercial
transport, general aviation and military aircraft. Current fleets of commercial
transport aircraft include the DC-9, DC-10, Fokker FO-100/70, Fokker F-28,
Fokker F-50/60, Fairchild Dornier DO-228, Canadair Regional Jet, Saab 340 and
Saab 2000 on all of which Aircraft Braking Systems is the sole-source supplier.
In addition, Aircraft Braking Systems is a supplier of spare parts for the
dual-sourced, MD-80 program.

     Aircraft Braking Systems' commercial transport fleet has benefitted not
only from an increase in the number of new aircraft entering service, but also
the slower than expected retirement rate of older aircraft. For example,
airlines have responded to FAA regulatory noise abatement requirements by
outfitting many of their older DC-9s with engine hushkits and by structural
overhauls which effectively add fifteen years of service life to the aircraft.
As of December 31, 2000, Aircraft Braking Systems estimates there were 638 DC-9
aircraft in service and engine hushkits were installed on 519 of them. Airlines
such as Northwest Airlines, Scandinavian Air Systems, Air Tran and Air Canada
have opted for DC-9 life extension refurbishment programs for a portion of their
fleet, to meet capacity needs. Aircraft Braking Systems expects to produce
replacement parts for these aircraft over their remaining lives.

     Aircraft Braking Systems has been successful in having its wheels and
brakes selected for use on a number of new high-cycle airframe designs including
the Airbus A-320, A-321 and the MD-90. Most recently, Aircraft Braking Systems
was selected for the CRJ-700 and CRJ-900, continuing its sole-source position on
the Bombardier regional jets. Since its introduction in late 1992, Bombardier
has received firm orders for over 763 Canadair Regional Jets with approximately
460 aircraft currently in service. The CRJ-700 is a 70 passenger plane and the
CRJ-900 is a 90 passenger plane, both stretch versions of the 50 passenger
Canadair Regional Jet. In addition, Aircraft Braking Systems has been selected
as the sole supplier of wheels and carbon brakes for the Embraer ERJ170,
ERJ190-100 and ERJ190-200, a family of regional jets being

                                        3
<PAGE>   4

introduced in 2001. In 2000, the Company became the supplier for the Fairchild
Dornier DO-328 Turboprop, the Dassault Falcon 900EX and the Gulfstream GIV-X.

     Aircraft Braking Systems is a supplier of wheels and carbon brakes on the
Airbus A-321, the 186-seat "stretch" version of the popular A-320 standard body
twin-jet. Airbus has booked orders for over 378 A-321 aircraft. Of the 172
aircraft delivered to date, Aircraft Braking Systems has provided wheels and
brakes for 119 of these aircraft.

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

     ENGINEERED FABRICS.  The Company believes Engineered Fabrics is the largest
manufacturer of flexible bladder type fuel tanks for aircraft in the world,
serving approximately 80% of the worldwide general aviation and commercial
transport market and over half of the domestic military market for such
products. Engineered Fabrics' programs include new production or replacement
parts programs for the U.S. Navy's F-18 C/D and E/F aircraft and F-14, F-15,
F-16 and C-130 aircraft. Military helicopter fuel tank programs include the
UH-60, SH-60, CH/MH-53 and RAH-66 platforms with Sikorsky, the CH-47 with
Boeing, and the V-22 with Bell/Boeing. Many of these platforms also utilize
Engineered Fabrics' iceguards for deicing and anti-icing of the rotor blades and
inlets. Commercial helicopter applications include the MD-500 and MD-600 and the
Bell 214ST and Bell 609. During the year ended December 31, 2000, approximately
13% of the Company's total revenues were derived from sales made by Engineered
Fabrics.

     Bladder fuel tanks, manufactured by combining multiple layers of coated
fabrics and adhesives, are sold for use in commercial transport, military and
general aviation aircraft. During the year ended December 31, 2000, sales of
fuel tanks accounted for approximately 78% of Engineered Fabrics' total
revenues. For military helicopter applications, Engineered Fabrics' fuel tanks
feature encapsulated layers of rubber which expand in contact with fuel thereby
sealing off holes or gashes caused by bullets or other projectiles penetrating
the walls of the fuel tank. Engineered Fabrics manufactures crash-resistant fuel
tanks for helicopters and military aircraft that significantly reduce the
potential for fires, leaks and spilled fuel following a crash. Engineered
Fabrics is the only known supplier of polyurethane fuel tanks for aircraft,
which are substantially lighter and more flexible than their metal or nitrile
counterparts and therefore cost-advantageous.

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

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

                                        4
<PAGE>   5

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

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                              2000      1999      1998
                                                              -----     -----     -----
<S>                                                           <C>       <C>       <C>
Wheels and brakes...........................................   81%       81%       80%
Brake control systems.......................................    6%        7%        8%
Fuel tanks..................................................   10%       10%        9%
                                                               --        --        --
          Total.............................................   97%       98%       97%
                                                               ==        ==        ==
</TABLE>

SALES AND CUSTOMERS

     K & F sells its products to more than 175 airlines, airframe manufacturers,
governments and distributors within each of the commercial transport, general
aviation and military aircraft markets. Sales to the U.S. government represented
approximately 17%, 15% and 14% of total sales for the years ended December 31,
2000, 1999 and 1998, respectively. No other customer accounted for more than 10%
of total sales.

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

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                              2000      1999      1998
                                                              -----     -----     -----
<S>                                                           <C>       <C>       <C>
Commercial transport........................................    61%       63%       64%
Military (U.S. and foreign).................................    20%       18%       18%
General aviation............................................    19%       19%       18%
                                                               ---       ---       ---
          Total.............................................   100%      100%      100%
                                                               ===       ===       ===
</TABLE>

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

     MILITARY.  The Company is the largest supplier of wheels, brakes and fuel
tanks to the U.S. military and also supplies the militaries of many foreign
governments. The Company's products are used on a variety of fighters, training
aircraft, transports, cargo planes, bombers and helicopters. Some of the U.S.
military aircraft using these products are the F-4, F-14, F-15, F-16, F-18,
F-117A, A-10, B-1B, B2, C-130, C-130J and C-141. Some of the foreign military
aircraft using these products include the F-2 (formerly the FS-X) in Japan, AIDC
Indigenous Defensive Fighter ("IDF") in Taiwan, Saab JAS-39 in Sweden, Alenia
C-27 in Italy and the Casa C-212 in Spain. Substantially all of the Company's
military products are sold to the Department of Defense, foreign governments or
to airframe manufacturers including the Lockheed Martin Corporation ("Lockheed
Martin"), Boeing, Sikorsky, Bell, Saab and AIDC in Taiwan. Some of the brake
control systems manufactured for the military are used on the F-16, F-117A, B-2,
Panavia Toronado, British Aerospace Hawk, JAS-39 and IDF aircraft.

     GENERAL AVIATION.  The Company believes it is the industry's largest
supplier of wheels, brakes and fuel tanks for general aviation aircraft (19
seats or less). This market includes personal, business and executive aircraft.
Customers include airframe manufacturers, such as Gulfstream, Raytheon Aircraft,
Learjet, Canadair, Cessna, Dassault and Israeli Aircraft Industries ("IAI"), and
distributors, such as Aviall. Brake control systems are supplied by the Company
to Gulfstream, Dassault and other aircraft manufacturers. General aviation
aircraft using the Company's wheels and brakes exclusively include the Beech
Starship and Beech 400 A/T series of aircraft, the Lear series 20, 30, 31A, 55
and 60, the Gulfstream G-I, G-II, G-III and

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<PAGE>   6

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

FOREIGN CUSTOMERS

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

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                              2000      1999      1998
                                                              -----     -----     -----
<S>                                                           <C>       <C>       <C>
Domestic sales..............................................    60%       58%       57%
Foreign sales...............................................    40%       42%       43%
                                                               ---       ---       ---
          Total.............................................   100%      100%      100%
                                                               ===       ===       ===
</TABLE>

INDEPENDENT RESEARCH AND DEVELOPMENT

     The Company employs scientific, engineering and other personnel to improve
its existing product lines and to develop new products and technologies in the
same or related fields. At December 31, 2000, the Company employed approximately
152 engineers (of whom 24 held advanced degrees); approximately 24 of such
engineers (including 10 holding advanced degrees) devoted all or part of their
efforts toward a variety of projects including refining carbon processing
techniques to create more durable braking systems, upgrading existing braking
systems to provide enhanced performance, and developing new technologies to
improve the Company's products.

     The costs incurred relating to independent research and development for the
years ended December 31, 2000, 1999 and 1998 were $15.8 million, $14.0 million
and $13.7 million, respectively.

PATENTS AND LICENSES

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

COMPETITION

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

BACKLOG

     Backlog at December 31, 2000 and 1999 amounted to approximately $148.2
million and $150.6 million, respectively. Backlog consists of firm orders for
the Company's products which have not been shipped. Approximately 91% of total
Company backlog at December 31, 2000 is expected to be shipped during the year
ending December 31, 2001, with the balance expected to be shipped over the
subsequent two-year period. No significant seasonality exists for sales of the
products manufactured by the Company.

     Of the total Company backlog at December 31, 2000, approximately 30% was
directly or indirectly for end use by the U.S. Government (the "Government"),
substantially all of which was for use by the Department of Defense. For certain
risks associated with Government contracts, see "Government Contracts" discussed
below.
                                        6
<PAGE>   7

GOVERNMENT CONTRACTS

     For the years ended December 31, 2000, 1999 and 1998, approximately 17%,
15% and 14%, respectively, of the Company's total sales were made to agencies of
the Government or to prime contractors or subcontractors of the Government.

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

     Companies supplying defense-related equipment to the Government are subject
to certain additional business risks peculiar to that industry. Among these
risks are the ability of the Government to unilaterally suspend the Company from
new contracts pending resolution of alleged violations of procurement laws or
regulations. Other risks include a dependence on appropriations by the
Government, changes in the Government's procurement policies (such as greater
emphasis on competitive procurements) and the need to bid on programs in advance
of design completion. A reduction in expenditures by the Government for aircraft
using products of the type manufactured by the Company, or lower margins
resulting from increasingly competitive procurement policies, or a reduction in
the volume of contracts or subcontracts awarded to the Company or substantial
cost overruns would have an adverse effect on the Company's cash flow and
results of operations.

SUPPLIES AND MATERIALS

     The principal raw materials used in the Company's wheel and brake
manufacturing operations are steel, aluminum forgings and carbon compounds. The
Company produces most of its carbon at its carbon manufacturing facility in
Akron, Ohio. Steel and aluminum forgings are purchased from several sources. The
principal raw materials used by Engineered Fabrics to manufacture fuel tanks and
related coated fabric products are nylon cloth, forged metal fittings and
various adhesives and coatings, whose formulae are internally developed and
proprietary. The Company has not experienced any shortage of raw materials to
date.

PERSONNEL

     At December 31, 2000, the Company had 1,483 full-time employees, of which
910 were employed by Aircraft Braking Systems (448 hourly and 462 salaried
employees) and 573 were employed by Engineered Fabrics (435 hourly and 138
salaried employees). All of Aircraft Braking Systems' hourly employees are
represented by the United Auto Workers' Union and all of Engineered Fabrics'
hourly employees are represented by the United Food and Commercial Workers'
Union.

     Aircraft Braking Systems' four-year contract with its union expires on May
31, 2002. Engineered Fabrics' three-year contract with its union was recently
extended and renewed, and now expires on February 5, 2004.

ITEM 2.  PROPERTIES

     UNITED STATES FACILITIES.  Aircraft Braking Systems and Engineered Fabrics
operate two manufacturing facilities in the United States which are individually
owned except as set forth below under "Akron Facility Arrangements." Aircraft
Braking Systems' facility is located in Akron, Ohio, and consists of
approximately 770,000 square feet of manufacturing, engineering and office
space. Engineered Fabrics' facility is located in Rockmart, Georgia, and
consists of approximately 564,000 square feet of manufacturing, engineering and

                                        7
<PAGE>   8

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

     FOREIGN FACILITIES.  The Company occupies approximately 19,000 square feet
of leased office and warehouse space in Slough, England, under a lease expiring
in 2020. The Company also maintains a sales and service office in Toulouse,
France.

     AKRON FACILITY ARRANGEMENTS.  The manufacturing facilities owned by
Aircraft Braking Systems are part of a larger complex owned by Lockheed Martin.
Aircraft Braking Systems and Lockheed Martin have various occupancy and service
agreements to provide for shared easements and services (including utility,
sewer, and steam). In addition to the 770,000 square feet owned by Aircraft
Braking Systems, the Company leases approximately 433,000 square feet of space
within the Lockheed Martin complex and is subject to annual occupancy payments
to Lockheed Martin. During the years ended December 31, 2000, 1999 and 1998,
Aircraft Braking Systems made occupancy payments to Lockheed Martin of $2.1
million, $1.9 million and $1.8 million, respectively. Certain access easements
and agreements regarding water, sanitary sewer, storm sewer, gas, electricity
and telecommunication are perpetual. In addition, Lockheed Martin and Aircraft
Braking Systems equally control Valley Association Corporation, an Ohio
corporation, which was formed to establish a single entity to deal with the City
of Akron and utility companies concerning governmental and utility services
which are furnished to Lockheed Martin's and Aircraft Braking Systems'
facilities.

ITEM 3.  LEGAL PROCEEDINGS

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

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

     None.

                                    PART II

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

     There is no trading market for the Company's common stock. All of the
common stock of the Company is owned by Bernard L. Schwartz ("BLS"), Chairman of
the Company, and by four limited partnerships of Lehman Brothers Holdings Inc.
(the "Lehman Investors"). (See "Security Ownership of Certain Beneficial Owners
and Management.")

ITEM 6.  SELECTED FINANCIAL DATA

     The selected financial data has been derived from, and should be read in
conjunction with, the related audited consolidated financial statements. The
selected financial data for the year ended December 31, 1996 and nine months
ended December 31, 1995 is unaudited. Effective December 31, 1996, the Company
changed its fiscal year-end from March 31 to December 31.

                                        8
<PAGE>   9

<TABLE>
<CAPTION>
                                                                                                      NINE MONTHS ENDED
                                                      YEAR ENDED DECEMBER 31,                           DECEMBER 31,
                                    -----------------------------------------------------------     ---------------------
                                      2000       1999        1998        1997            1996         1996         1995
                                    --------   ---------   ---------   ---------       --------     --------     --------
                                                                       (IN THOUSANDS)
<S>                                 <C>        <C>         <C>         <C>             <C>          <C>          <C>
Income Statement Data:
  Net sales.......................  $375,890   $ 355,951   $ 345,447   $ 304,331       $277,655     $212,703     $199,784
  Cost of sales...................   199,459     197,757     196,190     188,001        180,971      136,813      136,277
                                    --------   ---------   ---------   ---------       --------     --------     --------
  Gross Margin....................   176,431     158,194     149,257     116,330         96,684       75,890       63,507
  Independent research and
    development...................    15,763      13,996      13,705      10,873         11,781        8,623        6,610
  Selling, general and
    administrative expenses.......    37,666      33,245      35,332      40,182(a)      24,482       17,297       15,378
  Amortization....................     8,118       8,773      10,286      10,316         10,412        7,810        7,813
                                    --------   ---------   ---------   ---------       --------     --------     --------
  Operating income................   114,884     102,180      89,934      54,959         50,009       42,160       33,706
  Interest expense, net...........    35,993      40,396      44,830      34,091         36,957       27,197       31,288
                                    --------   ---------   ---------   ---------       --------     --------     --------
  Income (loss) before income
    taxes and extraordinary
    charge........................    78,891      61,784      45,104      20,868         13,052       14,963        2,418
  Income tax (provision)
    benefit.......................   (14,906)     12,136      (5,744)     (5,184)            81           81           --
  Extraordinary charge............        --          --          --     (29,513)(a)(b)  (9,142)(c)   (9,142)(c)   (1,913)(d)
                                    --------   ---------   ---------   ---------       --------     --------     --------
  Net income (loss)...............  $ 63,985   $  73,920   $  39,360   $ (13,829)      $  3,991     $  5,902     $    505
                                    ========   =========   =========   =========       ========     ========     ========
Balance Sheet Data (at end of
  period):
  Working capital.................  $ 45,695   $  76,622   $  38,839   $  31,953       $ 34,189     $ 34,189     $ 38,938
  Total assets....................   430,085     441,868     420,099     425,236        419,115      419,115      412,028
  Long-term debt..................   345,625     432,125     477,125     519,125(a)     287,000      287,000      293,000
  Stockholders' deficiency........   (78,006)   (141,734)   (215,610)   (256,459)(a)    (33,306)     (33,306)     (34,327)
Other Data (for the period):
  Capital expenditures............     9,845      10,413      14,873      10,016         21,166       14,091        3,343
  Depreciation and amortization...    16,128      17,268      19,961      19,680         19,305       14,644       14,260
</TABLE>

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

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

(c)  During the nine months ended December 31, 1996, the Company redeemed $180
     million principal amount of the 13 3/4% Senior Subordinated Debentures. In
     connection therewith, the Company recorded an extraordinary charge of $9.1
     million for the write-off of unamortized financing costs and redemption
     premiums.

(d) On December 28, 1995, the Company redeemed $30 million principal amount of
    the 13 3/4% Senior Subordinated Debentures. In connection therewith, the
    Company recorded an extraordinary charge of $1.9 million for the write-off
    of unamortized financing costs and redemption premiums.

                                        9
<PAGE>   10

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

GENERAL

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

     During the years ended December 31, 2000, 1999 and 1998, the Company spent
an aggregate of approximately $53.3 million, $50.8 million and $60.7 million,
respectively, for research, development, design, Program Investments, capital
expenditures and development participation costs. In prior years, the Company
was selected as the sole supplier of wheels and brakes for each of the Saab
2000, the Canadair Regional Jet and CRJ-700, the Lear 60 and Embraer's 70 and 90
passenger jets, a supplier of wheels and carbon brakes on the Airbus A-321 and
the sole supplier of wheels, carbon brakes and brake control systems on the
MD-90. In 2000, the Company became the supplier for the Canadair CRJ-900, the
Fairchild Dornier DO-328 Turboprop, the Dassault Falcon 900EX and the Gulfstream
GIV-X. Aircraft produced under these programs are in development or the early
stages of their life cycles and represent significant future revenue
opportunities for the Company.

RESULTS OF OPERATIONS

 Year Ended December 31, 2000 Compared with the Year Ended December 31, 1999

     During 2000, sales, operating income and income before income taxes were
the highest in the Company's history, reflecting the continued build-out of
customer fleets using Company products, new program awards and increased airline
industry traffic. These results were driven by growth in all market sectors of
the Company's business.

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

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

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

                                        10
<PAGE>   11

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

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

     EFFECTIVE TAX RATE.  The Company's effective tax rate of 18.9% for the year
ended December 31, 2000 differs from the statutory rate of 35% due to
utilization of tax net operating losses and foreign sales corporation tax
benefits, partially offset by a change in the valuation allowance and state and
local taxes. The effective tax rate of (19.6)% for year ended December 31, 1999
differs from the statutory rate of 35% due to a net decrease in the valuation
allowance and utilization of tax net operating loss, partially offset by state
and local income taxes. The increase in the effective rate in 2000 over 1999 is
primarily due to a net decrease in the valuation allowance in the prior year.

 Year Ended December 31, 1999 Compared with the Year Ended December 31, 1998

     SALES.  Sales for the year ended December 31, 1999 totaled $356.0 million,
reflecting an increase of $10.5 million or 3.0%, compared with $345.4 million
for the same period in the prior year. This increase was due to higher
commercial sales of wheels and brakes for commercial transport aircraft of $4.9
million, primarily on Fokker FO-100, A-321, MD-80, Fokker 27/28 and DC-10
programs, partially offset by lower sales on the MD-90 and DC-9 programs.
General aviation sales increased $3.8 million, primarily due to higher sales of
wheels and brakes on Gulfstream and Canadair aircraft. Military sales increased
$1.8 million, primarily due to higher sales of aircraft fuel tanks on the F-18
and AH-64 programs.

     GROSS MARGIN.  The gross margin for the year ended December 31, 1999 was
44.4% compared with 43.2% for the same period in the prior year. This increase
was primarily due to lower Program Investments and the overhead absorption
effect relating to the higher sales. However, the reduction in Program
Investments negatively affected overhead absorption and partially offset the
increase in operating margins.

     INDEPENDENT RESEARCH AND DEVELOPMENT.  Independent research and development
costs were $14.0 million for the year ended December 31, 1999 compared with
$13.7 million for the same period in the prior year. This increase was primarily
due to higher costs associated with the JAS-39 and Canadair CRJ-700 programs,
partially offset by lower costs on the Raytheon Hawker Horizon.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses were $33.2 million for the year ended December 31, 1999
compared with $35.3 million for the same period in the prior year. This decrease
was primarily due to lower costs incurred in 1999 associated with the
installation of a new computer system at Aircraft Braking Systems, partially
offset by higher performance-related incentive compensation.

     INTEREST EXPENSE, NET.  Interest expense, net was $40.4 million for the
year ended December 31, 1999 compared with $44.8 million for the same period in
the prior year. This decrease was due to a lower average debt balance and lower
interest rates on the Company's variable rate indebtedness.

     EFFECTIVE TAX RATE.  The Company's effective tax rate of (19.6)% for the
year ended December 31, 1999 differs from the statutory rate of 35% due to a net
decrease in the valuation allowance and utilization of tax net operating losses,
partially offset by state and local taxes. The effective tax rate of 12.7% for
year ended December 31, 1998 differs from the statutory rate of 35% due to
utilization of tax net operating losses, partially offset by state, local and
foreign income taxes. The decrease in the effective rate in 1999 over 1998 is
primarily due to the recording of a deferred tax asset to reflect the more
likely than not utilization of tax net operating loss carryforwards and the
expected reversal of temporary differences through December 31, 2000.

                                        11
<PAGE>   12

LIQUIDITY AND FINANCIAL CONDITION

     The Company expects that its principal use of funds for the next several
years will be to pay interest and principal on indebtedness, fund capital
expenditures and make Program Investments. The Company's primary source of funds
for conducting its business activities and servicing its indebtedness has been
cash generated from operations and borrowings under its revolving credit
facilities. The Company's total indebtedness decreased from $433.6 million at
December 31, 1999 to $347.1 million at December 31, 2000 due to $85.0 million of
voluntary principal prepayments and $1.5 million of scheduled principal payments
on its credit facility.

     At December 31, 2000, the Credit Facility consists of a term loan facility
in an aggregate principal amount of $142.1 million (the "Term Loans") and a
revolving credit facility in an aggregate principal amount of up to $50 million
(the "Revolving Loans"). The Term Loans consist of a Tranche A term loan ("Term
Loan A") in the principal amount of $48.4 million and a Tranche B term loan
("Term Loan B") in the principal amount of $93.7 million. The Credit Facility
bears interest at floating rates selected at the option of the Company. At
December 31, 2000 and 1999, the average interest rate on the Credit Facility was
8.6% and 8.3%, respectively. As a requirement of the Credit Facility, the
Company entered into an interest rate swap agreement to reduce the impact of
potential increases in interest rates on the Credit Facility. This interest rate
agreement effectively fixes the rate at 8.1% on $115 million of borrowings at
December 31, 2000. Any differences paid or received on the interest rate swap
agreement are recognized as adjustments to current interest expense. Obligations
under the Credit Facility are secured by a lien on substantially all of the
assets of the Subsidiaries and are guaranteed by K & F.

     Term Loan A is a six-year quarterly amortizing facility maturing October
15, 2003, with installments of $0.5 million per year due in years 2001 through
2002 and $47.4 million due in year 2003. Term Loan B is an eight-year quarterly
amortizing facility maturing October 15, 2005, with installments of $1.0 million
per year due in years 2001 through 2003, $67.0 million due in 2004 and $23.7
million due in 2005. The Company is required to make mandatory reductions in the
Credit Facility in the event of certain asset sales, the incurrence of certain
additional indebtedness, and annually from 50% of excess cash flow (as defined).
As a result of the excess cash flow calculation, $45.8 million was determined to
be due in 2001, however, this prepayment obligation has been satisfied by the
aforementioned $85.0 million voluntary prepayment in 2000.

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

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

     The Credit Facility contains certain covenants and events of default,
including limitations on additional indebtedness, liens, asset sales, making
certain restricted payments, capital expenditures, creating guarantee
obligations and material lease obligations. The Credit Facility also contains
certain financial ratio requirements including a cash interest coverage ratio, a
leverage ratio and maintenance of a minimum adjusted net worth. The Company was
in compliance with all covenants at December 31, 2000.

CASH FLOW

     During the year ended December 31, 2000, net cash provided by operating
activities amounted to $110.7 million and reflected $131.0 million of earnings
before interest, taxes, depreciation and amortization ("EBITDA"), decreases in
accounts receivable of $4.9 million, inventory of $4.7 million, increases in
accounts payable of 0.7 million, notes payable of $3.9 million, other current
liabilities of $6.7 million, decreases in other working capital of $1.2 million,
partially offset by prepaid pension costs of $5.9 million, interest payments of
$34.9 million and tax payments of $1.6 million. During the year ended December
31, 1999, net cash provided by operating activities amounted to $60.5 million
and reflected $119.4 million of EBITDA, decreases in inventory of $1.4 million,
increases in accounts payable of $2.4 million, decreases in

                                        12
<PAGE>   13

other working capital of $1.0 million, increases in long-term liabilities of
$1.3 million, partially offset by increases in accounts receivable of $16.1
million, prepaid pension costs of $4.0 million, decreases in other current
liabilities of $3.7 million, interest payments of $39.5 million and income tax
payments of $1.7 million. During the year ended December 31, 1998, net cash
provided by operating activities amounted to $52.2 million and reflected $109.9
million of EBITDA, decreases in accounts receivable of $4.0 million, other
working capital of $0.8 million, and increases in long-term liabilities of $1.2
million, partially offset by increases in inventory of $4.3 million, prepaid
pension costs of $3.3 million, decreases in accounts payable of $2.7 million,
other current liabilities of $9.5 million (primarily reflecting a portion of a
$5.0 million payment in settlement of litigation and approximately $4.5 million
paid to the bargaining workers at Aircraft Braking Systems in conjunction with
the ratification of a new contract), interest payments of $42.8 million and
income tax payments of $1.1 million.

     During the year ended December 31, 2000, net cash used in investing
activities amounted to $21.3 million due to $9.8 million of capital
expenditures, $5.8 million of program participation payments and $5.7 million
for the purchase of intellectual property for the Dornier 328 program. During
the year ended December 31, 1999, net cash used in investing activities amounted
to $18.3 million due to $10.4 million of capital expenditures and $7.9 million
of program participation payments. During the year ended December 31, 1998, net
cash used in investing activities amounted to $15.1 million primarily due to
capital expenditures. Capital spending for the year ended December 31, 2001 is
expected to be approximately $6.0 million.

     During the year ended December 31, 2000, net cash used in financing
activities amounted to $86.5 million due to the repayment of indebtedness.
During the year ended December 31, 1999, net cash used in financing activities
amounted to $45.5 million due to the repayment of indebtedness of $51.5 million,
partially offset by $6.0 million of proceeds received from a sale and leaseback
transaction. During the year ended December 31, 1998, net cash used in financing
activities amounted to $34.9 million due to the repayment of indebtedness of
$35.5 million, partially offset by $0.6 million of proceeds received from a sale
and leaseback transaction.

ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," is effective for all fiscal
years beginning after June 15, 2000. SFAS No. 133, as amended and interpreted,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. All derivatives, whether designated in hedging relationships
or not, will be required to be recorded on the balance sheet at fair value. SFAS
No. 133 defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use hedge
accounting. For a derivative that does not qualify as a hedge, changes in fair
value will be recognized in earnings.

     The Company expects that at January 1, 2001, it will record an after-tax
reduction in other comprehensive income of $0.5 million as a cumulative
transition adjustment relating to derivatives designated in cash flow-type
hedges prior to adopting SFAS No. 133.

     During the year ended December 31, 2000, the Company adopted Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements."
The adoption of SAB 101 had no impact on our financial position, results of
operation and cash flows.

INFLATION

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

                                        13
<PAGE>   14

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company has approximately $347.1 million of total debt outstanding at
December 31, 2000. Of this amount, $185 million is borrowed at a fixed rate of
9 1/4% and the balance is borrowed under the Credit Facility. The interest rate
for borrowings under the Credit Facility varies with LIBOR or the prime rate, at
the Company's option.

     As a requirement of the Credit Facility, the Company entered into an
interest rate swap agreement to reduce the impact of potential increases in
interest rates on the Credit Facility. The interest rate swap agreement fixes
the Company's LIBOR borrowing rate at 5.95% on $115 million at December 31, 2000
and matures on December 17, 2001 with an option for the counterparty to extend
the agreement to December 17, 2003. Therefore, the Company has effectively fixed
the interest on $300 million of its indebtedness at December 31, 2000. Given
that approximately 86% of the Company's borrowings at December 31, 2000 are at
fixed interest rates, a change in rates by 10% would not have a significant
impact on fair values, cash flows or earnings. The Company has no other
derivative financial instruments.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See the financial statements, together with the auditors' reports thereon,
appearing on pages F-1 to F-18 hereof.

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

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>
NAME                                        AGE             POSITION(S)             DIRECTOR SINCE
----                                        ---             -----------             --------------
<S>                                         <C>   <C>                               <C>
Bernard L. Schwartz*......................  75    Chairman of the Board and Chief        1989
                                                  Executive Officer
David J. Brand**..........................  40    Director                               1997
Herbert R. Brinberg*......................  75    Director                               1989
Robert B. Hodes*..........................  75    Director                               1997
Ronald H. Kisner*.........................  52    Director and Secretary                 1989
John R. Paddock*..........................  47    Director                               1989
A. Robert Towbin***.......................  65    Director                               1989
Alan H. Washkowitz**......................  60    Director                               1989
Donald E. Fogelsanger.....................  75    Vice Chairman
Kenneth M. Schwartz.......................  49    President and Chief Operating
                                                  Officer
Dirkson R. Charles........................  37    Chief Financial Officer
</TABLE>

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

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

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

                                        14
<PAGE>   15

     Mr. Bernard L. Schwartz has been Chairman and Chief Executive Officer of
the Company since 1989. Mr. Schwartz has been Chairman and Chief Executive
Officer of Loral Space & Communications Ltd. since April 1996. From 1972 to
April 1996 Mr. Schwartz was Chairman and Chief Executive Officer of Loral
Corporation. Mr. Schwartz is a member of The General Partners' Committee and
Chief Executive Officer of Globalstar, L.P., a Director of Globalstar
Telecommunications Limited, a Director of Loral Cyberstar, Inc., a Director of
Satelites Mexicanos, S.A. de C.V., a Director of Reliance Group Holdings, Inc.
and certain subsidiaries, a Director of First Data Corporation, a Trustee of
Mount Sinai-NYU Medical Center and Health System and a Trustee of Thirteen/WNET
Educational Broadcasting Corporation.

     Mr. Brand is a Managing Director of Lehman Brothers and a principal in the
Global Mergers & Acquisitions Group, leading Lehman Brothers' Technology Mergers
and Acquisitions business. Mr. Brand joined Lehman Brothers in 1987 and has been
responsible for merger and corporate finance advisory services for many of
Lehman Brothers' technology and defense industry clients. Mr. Brand is a
Director of L-3 Communications Corporation and L-3 Communications Holdings, Inc.

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

     Mr. Hodes is Counsel to the law firm of Willkie Farr & Gallagher with which
he has been associated since 1949. He is a Director of W.R. Berkley Corporation,
Globalstar Telecommunications, Ltd., LCH Investments N.V., Loral Space &
Communications Ltd., Mueller Industries, Inc., Restructured Capital Holdings
Ltd. and R.V.I. Guaranty Co., Ltd.

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

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

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

     Mr. Washkowitz is a Managing Director of Lehman Brothers and Head of the
Merchant Banking Group, and is responsible for the oversight of Merchant Banking
Fund II and its affiliated investment vehicles, as well as their predecessor,
Merchant Banking Fund I. He has served on the Investment Committee for 13 years,
and he also is a member of Lehman Brothers' Commitment Committee and Fairness
Opinion Committee. Mr. Washkowitz joined Kuhn Loeb & Co. in 1968. He became a
general partner of Lehman Brothers in 1977 when Kuhn Loeb was acquired and a
Managing Director of Lehman Brothers in 1978. Prior to joining the Merchant
Banking Group in 1988, Mr. Washkowitz headed the Financial Restructuring Group,
which advised distressed companies and their creditors on a wide range of
business and financial issues. Mr. Washkowitz is a Director of L-3
Communications Corporation, McBride plc, P&L Coal Holding Corporation and C.P.
Kelco.

                                        15
<PAGE>   16

     Mr. Fogelsanger has been Vice Chairman of the Company since March 2000. Mr.
Fogelsanger was President of the Company from January 1996 to March 2000. From
April 1989 to January 1996, Mr. Fogelsanger was the President of Aircraft
Braking Systems Corporation. From 1987 to 1989 he was President of Loral
Corporation's Aircraft Braking Systems Division. From January 1986 to March 1987
he was Vice President and General Manager of Goodyear Aerospace Corporation's
ABS division. From 1980 to 1986 he was General Manager of Goodyear's Aircraft
Tire Operations. In 1968, Mr. Fogelsanger directed Goodyear's development of a
crash-resistant fuel system for helicopters that was credited with saving
hundreds of lives during the Vietnam War. He joined Goodyear in 1951.

     Mr. Kenneth M. Schwartz has been President and Chief Operating Officer of
the Company since March 2000. Mr. Schwartz was Executive Vice President of the
Company from January 1996 to March 2000. From June 1989 to January 1996, Mr.
Schwartz held the positions of Chief Financial Officer, Treasurer and Secretary.
Previously he was the Corporate Director of Internal Audit for Loral Corporation
since late 1987. From 1984 to 1987, Mr. Schwartz held the position of Director
of Cost and Schedule Administration for Loral Electronic Systems. Prior to 1984,
Mr. Schwartz held various other positions with Loral Electronic Systems and the
accounting firm of Deloitte & Touche LLP.

     Mr. Charles has been Chief Financial Officer of the Company since May 1996.
From May 1993 to May 1996, Mr. Charles was the Controller of the Company.
Previously he was the Manager of Accounting and Financial Planning. Prior to
employment with the Company in 1989, Mr. Charles held various other positions
with the accounting firm of Arthur Andersen & Co. LLP, which he joined in 1984.

EXECUTIVE OFFICERS OF AIRCRAFT BRAKING SYSTEMS CORPORATION AND ENGINEERED
FABRICS CORPORATION

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

AIRCRAFT BRAKING SYSTEMS CORPORATION

<TABLE>
<CAPTION>
NAME                                                   AGE                POSITION
----                                                   ---                --------
<S>                                                    <C>    <C>
Frank P. Crampton....................................  57     Senior Vice
                                                              President -- Marketing
Richard W. Johnson...................................  57     Senior Vice President -- Finance
                                                              and Administration
James J. Williams....................................  45     Senior Vice
                                                              President -- Operations
Gary M. Rimlinger....................................  53     Vice President -- Engineering
</TABLE>

ENGINEERED FABRICS CORPORATION

<TABLE>
<CAPTION>
NAME                                                   AGE                POSITION
----                                                   ---                --------
<S>                                                    <C>    <C>
John A. Skubina......................................  46     President
Richard P. Arsenault.................................  43     Vice President -- Finance
Terry L. Lindsey.....................................  56     Vice President -- Marketing
Anthony G. McCann....................................  41     Vice President -- Operations
Dan C. Sydow.........................................  64     Vice President -- Engineering
</TABLE>

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

                                        16
<PAGE>   17

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

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

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

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

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

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

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

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

                                        17
<PAGE>   18

ITEM 11.  EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

     The following table sets forth the compensation for the years ended
December 31, 2000, 1999 and 1998, paid to the chief executive officer and each
of the other four most highly compensated executive officers of the Company and
the Company's subsidiaries.

<TABLE>
<CAPTION>
                                                                         LONG-TERM
                                                                        COMPENSATION
                                            ANNUAL COMPENSATION      ------------------    ALL OTHER
                                           ----------------------    OPTIONS     LTIP       COMPEN-
                                            SALARY        BONUS      GRANTED    PAYOUTS    SATION(A)
NAME AND PRINCIPAL POSITION        YEAR       ($)          ($)         (#)        ($)         ($)
---------------------------        ----    ---------    ---------    -------    -------    ---------
<S>                                <C>     <C>          <C>          <C>        <C>        <C>
Bernard L. Schwartz..............  2000    2,060,259(b) 7,300,200        --         --          --
  Chairman of the Board and        1999    2,084,224(b) 6,095,300        --         --          --
  Chief Executive Officer          1998    2,070,782(b) 5,055,300        --         --          --
Kenneth M. Schwartz..............  2000      476,155(b)   850,000(c)  2,500     55,000      11,140
  President and Chief Operating    1999      435,000(b)   175,000        --     48,333       5,856
  Officer of K & F Industries,
     Inc.                          1998      265,154      160,000     1,500     45,000       5,532
Donald E. Fogelsanger............  2000      235,000      410,000(c)     --     55,000      30,382
  Vice Chairman of                 1999      235,000      150,000        --     53,332      32,976
  K & F Industries, Inc.           1998      244,500      130,000        --     48,333      35,636
Dirkson R. Charles...............  2000      185,000      525,000(c)    750     39,333       7,888
  Chief Financial Officer of       1999      170,000       90,000        --     34,333       7,596
  K & F Industries, Inc.           1998      141,923       80,000     1,200     29,667       7,313
Ronald H. Kisner.................  2000      170,000      430,000(c)  1,250     35,000      11,552
  Director and Secretary of        1999      160,000       75,000        --     21,667      23,259
  K & F Industries, Inc.           1998(d)        --           --        --         --          --
</TABLE>

---------------
(a) Includes the following: (i) Company contributions to individual 401(k) plan
    accounts for the years ended December 31, 2000, 1999 and 1998, respectively:
    Mr. K. Schwartz -- $5,057, $4,800 and $4,517; Mr. Fogelsanger -- $5,086,
    $4,800 and $4,517; Mr. Charles -- $5,092, $4,800 and $4,517; Mr. Kisner --
    $5,096, $4,798 and $0; and (ii) the compensation element of supplemental
    life insurance programs for the years ended December 31, 2000, 1999 and
    1998, respectively: Mr. K. Schwartz -- $6,083, $1,056 and $1,015; Mr.
    Fogelsanger -- $25,296, $28,176 and $31,119; Mr. Charles -- $2,796, $2,796
    and $2,796; Mr. Kisner -- $6,456, $6,456 and $0. Mr. Kisner also received a
    Board of Director fee of $12,000 in 1999.

(b) The Company has an Advisory Agreement with BLS which provides for the
    payment of an aggregate of $200,000 per month of compensation to BLS and
    persons designated by him. BLS designated that $150,000 of the aggregate
    annual advisory fee be paid to Kenneth M. Schwartz, which is included in his
    salary for the years ended December 31, 2000 and 1999.

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

(c) Mr. Kisner has been employed by the Company since January 1999. Prior to
    that he was a Director and retained to provide legal services to the
    Company. Mr. Kisner received $150,000 and options for 900 shares during the
    year ended December 31, 1998. (See "Certain Relationships and Related
    Transactions.")

                       OPTION GRANTS IN LAST FISCAL YEAR

     The following sets forth information relating to the grant of stock options
by the Company during the year ended December 31, 2000 to the named executive
officers. The Company has two stock option plans, which

                                        18
<PAGE>   19

provide for the grant of non-qualified or incentive stock options to acquire a
total of 100,000 authorized but unissued shares of common stock. None of the
Company's stock is publicly traded. The options granted in 2000 become
exercisable in three equal installments on the first, second and third
anniversaries of the date of grant, and remain exercisable until 10 years from
the date of the grant.

<TABLE>
<CAPTION>
                                                                                     POTENTIAL REALIZABLE
                                            INDIVIDUAL GRANTS                          VALUE AT ASSUMED
                        ---------------------------------------------------------      ANNUAL RATES OF
                                        % OF TOTAL                                       STOCK PRICE
                                         OPTIONS                                       APPRECIATION FOR
                                        GRANTED TO      EXERCISE OR                      OPTION TERM
                         OPTIONS       EMPLOYEES IN     BASE PRICE     EXPIRATION    --------------------
NAME                    GRANTED(#)    FISCAL YEAR(%)      ($/SH)          DATE        5%($)       10%($)
----                    ----------    --------------    -----------    ----------    --------    --------
<S>                     <C>           <C>               <C>            <C>           <C>         <C>
Kenneth M. Schwartz...    2,500            21.1           250.00        04/24/10     393,059     996,089
Dirkson R. Charles....      750             6.3           250.00        07/24/10     117,918     298,826
Ronald H. Kisner......      750             6.3           250.00        07/24/10     117,918     298,826
Ronald H. Kisner......      500             4.2           250.00        12/01/10      78,612     199,218
</TABLE>

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

     The following sets forth information as to the exercise of stock options
during the year ended December 31, 2000 and the value of unexercised stock
options at year-end. The Company's stock is not publicly traded.

<TABLE>
<CAPTION>
                                                                                            VALUE OF
                                                                           NUMBER OF       UNEXERCISED
                                                                          UNEXERCISED     IN-THE-MONEY
                                                                          OPTIONS AT       OPTIONS AT
                                                                           FY-END(#)        FY-END($)
                                             SHARES                      -------------    -------------
                                           ACQUIRED ON       VALUE       EXERCISABLE/     EXERCISABLE/
NAME                                       EXERCISE(#)    REALIZED($)    UNEXERCISABLE    UNEXERCISABLE
----                                       -----------    -----------    -------------    -------------
<S>                                        <C>            <C>            <C>              <C>
Bernard L. Schwartz......................       0              0             0/0               0/0
Kenneth M. Schwartz......................       0              0         1,625/4,875           0/0
Donald E. Fogelsanger....................       0              0         1,250/1,250           0/0
Dirkson R. Charles.......................       0              0         1,425/2,775           0/0
Ronald H. Kisner.........................       0              0         1,100/2,800           0/0
</TABLE>

LONG-TERM INCENTIVE PLAN AWARDS

     Under the Company's long-term incentive plan designed to provide an
incentive to encourage attainment of Company objectives and retain and attract
key executives of the Company, a limited number of persons participate in a
Deferred Bonus Plan. Under the terms of the plan, generally no awards are
allocated to any participant unless the Company has achieved at least a 10%
growth in earnings before interest, taxes and amortization over the prior fiscal
year. Awards vest and are paid (unless deferred by recipient direction) in three
equal annual installments starting on January 15th following each fiscal
year-end. All amounts not vested are forfeited upon termination of employment
for any reason other than death or disability prior to the vesting date. The
following awards were earned for the individuals named in the Summary
Compensation Table during the years ended December 31, 2000, 1999 and 1998,
respectively: Mr. K. Schwartz $92,000, $70,000 and $60,000; Mr. Fogelsanger
$79,000, $65,000 and $55,000; Mr. Charles $67,000, $55,000 and $45,000 and Mr.
Kisner $61,000, $50,000 and $40,000.

THE RETIREMENT PLAN

     The Company established, effective May 1, 1989, as amended, the K & F
Industries Retirement Plan for Salaried Employees (the "Company Retirement
Plan"), a defined benefit pension plan. The Company has received a favorable
determination letter from the Internal Revenue Service that the Company
Retirement

                                        19
<PAGE>   20

Plan is a qualified plan under the Internal Revenue Code. The terms of the
Company Retirement Plan are as follows: a non-contributory benefit and a
contributory benefit. The cost of the former is borne by the Company; the cost
of the latter is borne partly by the Company and partly by the participants.
Salaried employees who have completed at least six months of service and
satisfied a minimum earnings level are eligible to participate in the
contributory portion of the Company Retirement Plan; salaried employees become
participants in the non-contributory portion on their date of hire. The Plan
provides a benefit of $20.00 per month for each year of credited service. For
participants who contribute to the Plan, in addition to the benefit of $20.00
per month for each year of credited service, the Plan provides an annual benefit
equal to the greater of: 60% of the participant's aggregate contributions; or,
average compensation earned (while contributing) during the last 10 years of
employment in excess of 90% of the Social Security Wage Base amount multiplied
by: (a) 2.4% times years of continuous service up to 10, plus, (b) 1.8% times
additional years of such service up to 20, plus, (c) 1.2% times additional years
of such service up to 30, plus, (d) 0.6% times all additional such service above
30 years.

     Effective January 1, 1990, the Plan was amended for eligible employees of K
& F Industries and Aircraft Braking Systems to provide an annual benefit equal
to (a) the accrued benefit described above as of December 31, 1989, plus (b) a
non-contributory benefit for each year of credited service after January 1,
1990, of 0.7% of annual earnings up to the Social Security Wage Base or $288,
whichever is greater, plus (c) for each year of contributory service on and
after January 1, 1990, a contributory benefit of (i) for 14 years of
contributory service or less, 1.05% of annual earnings between $19,800 and the
Social Security Wage Base plus 2.25% of annual earnings above the Social
Security Wage Base, and (ii) for more than 14 years of contributory service,
1.35% of annual earnings between $19,800 and the Social Security Wage Base plus
2.65% of annual earnings above the Social Security Wage Base. In no event will
the amount calculated in (c) above be less than 60% of the participant's
aggregate contributions made on and after January 1, 1990. Benefits are payable
upon normal retirement age at age 65 in the form of single life or joint and
survivor annuity or, at the participant's option with appropriate spouse
consent, in the form of an annuity with a term certain. A participant who has
(a) completed at least 30 years of continuous service, (b) attained age 55 and
completed at least 10 years of continuous service, or (c) attained age 55 and
the combination of such participant's age and service equals at least 70 years,
is eligible for early retirement benefits. If a participant elects early
retirement before reaching age 62, such benefits will be reduced except that the
non-contributory benefits of a participant with at least 30 years of credited
service will not be reduced. In addition, employees who retire after age 55 but
before age 62 with at least 30 years of service are entitled to a supplemental
non-contributory benefit until age 62. Annual benefits under the Company
Retirement Plan are subject to a statutory ceiling of $135,000 per participant.
Participants are fully vested in their accrued benefits under the Company
Retirement Plan after five years of credited service with the Company.

     The individuals named in the Summary Compensation Table also participate in
a supplemental plan which generally makes up for certain reductions in such
benefits caused by Internal Revenue Code limitations. Estimated annual benefits
upon retirement for these individuals who are participants in the amended plan
of K & F and Aircraft Braking Systems and the supplemental plan are $324,000 for
Mr. K. Schwartz; $159,000 for Mr. Fogelsanger; $207,000 for Mr. Charles; and
$87,000 for Mr. Kisner. BLS does not participate in either plan. The retirement
benefits have been computed on the assumption that (a) employment will be
continued until normal retirement at age 65 or current age if greater; (b)
current levels of creditable compensation and the Social Security Wage Base will
continue without increases or adjustments throughout the remainder of the
computation period; and (c) participation in the contributory portion of the
plan will continue at current levels. The Company has a similar plan at
Engineered Fabrics.

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

                                        20
<PAGE>   21

COMPENSATION OF DIRECTORS

     The Board of Directors held four meetings during the year ended December
31, 2000. Members of the Board of Directors are entitled to receive a director's
fee of $12,000 per year. Messrs. Brand, Kisner and Washkowitz did not receive
director's fees during the year ended December 31, 2000. All directors are
reimbursed for reasonable out-of-pocket expenses incurred in that capacity.
During the year ended December 31, 2000, Messrs. Brinberg, Hodes, Paddock and
Towbin received a special bonus award of $100,000 each.

ADVISORY AGREEMENT

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The Company has not in the past used a compensation committee to determine
executive officer compensation. The payments to BLS, the Company's Chairman and
Chief Executive Officer, are paid in accordance with the Advisory and
Stockholders Agreements. All other executive compensation decisions are made by
BLS in accordance with policies established in consultation with the Board of
Directors.

                                    PART IV

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth the ownership of the capital stock of the
Company as of December 31, 2000.

<TABLE>
<CAPTION>
                                                                NUMBER OF        PERCENTAGE
                                                                SHARES OF       OWNERSHIP OF
                                                              COMMON STOCK**    CAPITAL STOCK
                                                              --------------    -------------
<S>                                                           <C>               <C>
Bernard L. Schwartz.........................................     370,199            50.00%
*Lehman Brothers Merchant Banking Portfolio Partnership
  L.P.(a)...................................................     180,228            24.34
*Lehman Brothers Offshore Investment Partnership L.P.(b)....      48,880             6.60
*Lehman Brothers Offshore Investment Partnership -- Japan
  L.P.(b)...................................................      18,591             2.51
*Lehman Brothers Capital Partners II, L.P.(c)...............     122,500            16.55
                                                                 -------           ------
                                                                 740,398           100.00%
                                                                 =======           ======
</TABLE>

---------------
 *  Collectively referred to as the "Lehman Investors."

**  The executive officers named in Item 11 hold options covering 5,400 shares,
    and executive officers and directors as a group hold options covering 9,150
    shares, which may be acquired within 60 days pursuant to the exercise of the
    options.

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

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

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

STOCKHOLDERS AGREEMENT

     In connection with the Recapitalization, BLS and the Lehman Investors
(collectively, the "Stockholders") entered into a Stockholders Agreement (the
"Stockholders Agreement") dated as of October 15, 1997.

                                        21
<PAGE>   22

The Stockholders Agreement contains certain restrictions with respect to the
transferability of the Company's capital stock, subject to certain exceptions.
The Stockholders Agreement also includes provisions regarding designation of
members of the Board of Directors and other voting arrangements. The
Stockholders Agreement will terminate at such time as more than 75% of the
shares of common stock and shares of common stock issuable upon the exercise of
options or rights to acquire common stock or upon conversion of convertible
securities (collectively, "Common Equivalents") then outstanding have been sold
pursuant to one or more public offerings, except that the registration rights
continue as to any common stock held by the Stockholders as long as they own
their shares, and the voting provisions contained in the Stockholders Agreement
terminate on October 15, 2007.

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

     The Stockholders Agreement provides that any time after the earlier of (i)
the fifth anniversary of the Recapitalization, (ii) six months following the
death of BLS or (iii) upon the resignation or retirement of BLS as Chairman or
Chief Executive Officer; either the BLS Group or the Lehman Investors (the "Put
Party") may request an appraisal of the value of the capital stock of the
Company (the "Appraised Value") and may notify the other party of its desire to
sell all of its and its transferees' capital stock for a pro rata share of such
Appraised Value. The other party may elect to purchase such capital stock,
arrange for the purchase of such capital stock by a third party or notify the
Put Party that it does not intend to purchase, or arrange for the purchase by a
third party of, such capital stock. If the other party is unable or chooses not
to arrange for and consummate the purchase of such capital stock, the BLS Group
and the Lehman Investors shall cause the Company to be sold as an entirety if
such sale can be arranged for a price at least equal to the Appraised Value
(subject to reduction by no more than 10% under specified circumstances). Any
sale of the Company as an entirety shall include all Stockholders and the
proceeds thereof shall be allocated among the Stockholders in accordance with
their stock ownership.

     Notwithstanding other restrictions on transfer set forth in the
Stockholders Agreement, from and after March 3, 2001, the Lehman Investors will
have the right to transfer capital stock to a third party, subject to specified
conditions. The put-sale rights of the Lehman Investors described above and the
rights of the Lehman Investors to designate 50% of the members of the Board of
Directors upon the death, retirement, resignation or disability of BLS will
terminate upon any such transfer.

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

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

                                        22
<PAGE>   23

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

GENERAL

     BLS owns 50% of the capital stock of the Company and pursuant to the
Stockholders Agreement has the right to designate a majority of the Board of
Directors of the Company. In addition, BLS serves as Chairman of the Board of
Directors and Chief Executive Officer of the Company and devotes such time to
the business and affairs of the Company as he deems appropriate. BLS is also
Chairman and Chief Executive Officer of Loral Space & Communications Ltd.
("Loral Space"). Because BLS is Chairman of the Board of Directors and has the
right to designate a majority of the Directors to the Board of the Company, he
has operating control of the Company.

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

     The Company has a bonus plan pursuant to which the Company's Board of
Directors awards bonuses to BLS ranging from 5% to 10% of earnings in excess of
$50 million before interest, taxes and amortization. Bonuses earned under this
plan were $7,300,200, $6,095,300 and $5,055,300 for the years ended December 31,
2000, 1999 and 1998, respectively.

     The Company reimburses Loral Space (of which BLS is Chairman and Chief
Executive Officer), for rent and certain other services. The related charges
agreed upon were established to reimburse Loral Space for actual costs incurred
without profit or fee. The Company believes the arrangements are as favorable to
the Company as could have been obtained from unaffiliated parties. Payments to
Loral Space were $0.6 million, $0.6 million and $0.7 million for the years ended
December 31, 2000, 1999 and 1998, respectively.

     Pursuant to a financial advisory agreement between Lehman Brothers and the
Company, Lehman Brothers has agreed to act as exclusive financial adviser to the
Company and the Company has agreed to pay Lehman Brothers customary fees for
services when rendered. During the three years ended December 31, 2000 no
amounts were paid under this agreement. The Agreement may be terminated by the
Company or Lehman Brothers upon certain conditions. The Lehman Investors own 50%
of the outstanding capital stock of the Company and are entitled to elect three
directors (in addition to one independent director jointly designated by BLS and
the Lehman Investors) to the Company's Board of Directors. The Lehman Investors
have the benefit of certain additional rights under the Stockholders Agreement
and the Company's By-laws.

     Before 1999, the Company paid Ronald H. Kisner, who is Secretary and a
member of the Board of Directors of the Company, a monthly retainer of $6,000
for legal services. In addition, Mr. Kisner received bonuses and other
compensation of $78,000 during the year ended December 31, 1998. Mr. Kisner also
received stock options for 900 shares during the year ended December 31, 1998.
Since January 1999, Mr. Kisner has been employed by the Company.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Index to Financial Statements:

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
K & F Industries, Inc. -- Consolidated Financial Statements:
  Independent Auditors' Report..............................  F-1
  Consolidated Balance Sheets as of December 31, 2000 and
     1999...................................................  F-2
  Consolidated Statements of Operations for the Years Ended
     December 31, 2000, 1999 and 1998.......................  F-3
  Consolidated Statements of Stockholders' Deficiency for
     the Years Ended December 31, 2000, 1999 and 1998.......  F-4
  Consolidated Statements of Cash Flows for the Years Ended
     December 31, 2000, 1999 and 1998.......................  F-5
  Notes to Consolidated Financial Statements................  F-6
</TABLE>

                                        23
<PAGE>   24

     All other schedules and separate financial statements are omitted because
they are not applicable or the required information is shown in the financial
statements or notes thereto. Exhibits 10.04 through 10.09 and 10.11, 10.12,
10.19, 10.40 and 10.41 are management contracts or compensation plans.

(b) Reports on Form 8-K: No reports on Form 8-K were filed for the three months
    ended December 31, 2000.

     Exhibits:  See exhibit index below.

(c) Exhibits

<TABLE>
<C>    <S>  <C>
 1.01  --   Purchase Agreement dated as of October 9, 1997 between the
            Company and Lehman Brothers Inc. and Unterberg Harris(10)
 2.01  --   Agreement for Sale and Purchase of Assets dated March 26,
            1989 between Loral Corporation and the Registrant(1)
 2.02  --   Stock Purchase Agreement dated September 15, 1997 among the
            Company and the Stockholders of the Company(10)
 2.03  --   First Amendment to Stock Purchase Agreement dated as of
            October 15, 1997 among the Company and the Stockholders
            named therein(10)
 3.01  --   Amended and Restated Certificate of Incorporation of the
            Company(10)
 3.02  --   Amended and Restated By-Laws of the Company(10)
 4.01  --   Indenture dated October 15, 1997 for the 9 1/4% Notes
            between the Company and State Street Bank and Trust Company,
            as trustee(10)
 4.02  --   Indenture dated as of August 15, 1996 for the 10 3/8% Notes
            between the Company and Fleet National Bank, as trustee(9)
 4.03  --   Indenture dated as of June 1, 1992 for the 11 7/8% Notes
            between the Company and the Bank of New York, as trustee(5)
 4.04  --   Pledge Agreement dated as of June 10, 1992 between the
            Company and the Bank of New York, as collateral trustee(5)
10.01  --   Securities Purchase Agreement dated as of April 27, 1989,
            among the Company, BLS and Lehman Brothers Holdings Inc.
            ("LBH")(1)
10.02  --   Assumption Agreement dated as of April 27, 1989(1)
10.03  --   Shared Services Agreement dated as of April 27, 1996 between
            Lockheed Martin Tactical Defense Systems -- Akron and
            Aircraft Braking Systems(10)
10.04  --   Amended and Restated Director Advisory Agreement dated as of
            October 15, 1997, between the Company and BLS(10)
10.05  --   Non-Competition Agreement dated as of April 27, 1989,
            between the Company and BLS(1)
10.06  --   K & F Industries, Inc. Retirement Plan for Salaried
            Employees(5)
10.07  --   K & F Industries, Inc. Savings Plan for Salaried
            Employees(5)
10.08  --   Goodyear Aerospace Corporation Supplemental Unemployment
            Benefits Plan for Salaried Employees -- Plan A(1)
10.09  --   The Loral Systems Group Release and Separation Allowance
            Plan(1)
10.10  --   Letter Agreement dated April 27, 1989, between the Company
            and LBH(1)
10.11  --   K & F Industries, Inc. 1989 Stock Option Plan(2)
10.12  --   K & F Industries, Inc. Executive Deferred Bonus Plan(2)
10.13  --   Securities Purchase Agreement dated as of July 22, 1991
            among the Company, BLS and the Lehman Investors(4)
</TABLE>

                                        24
<PAGE>   25
<TABLE>
<C>    <S>  <C>
10.14  --   Securities Purchase Agreement among the Company, BLS and the
            Lehman Investors dated September 2, 1994(6)
10.15  --   Amended and Restated Stockholders Agreement dated as of
            September 2, 1994, by and among the Company, BLS, the Lehman
            Investors, Chase Capital Partners and Loral Space(6)
10.16  --   Agreement dated as of September 2, 1994, between the Company
            and Loral Space(6)
10.17  --   Amendment of Stockholders Agreement dated November 8,
            1994(6)
10.18  --   Securities Conversion Agreement among the Company and the
            Converting Stockholders, dated November 8, 1994(6)
10.19  --   K & F Industries, Inc. Supplemental Executive Retirement
            Plan(8)
10.20  --   Amended and Restated Credit Agreement dated as of August 14,
            1996, among Aircraft Braking Systems ("ABS"), Engineered
            Fabrics Corporation ("EFC"), the Lenders (as defined
            therein), Lehman Commercial Paper, Inc., as Documentation
            Agent and Chase Securities Inc., individually and as agent
            for the Lenders ("Chase")(9)
10.21  --   Amended and Restated Security Agreement dated as of August
            14, 1996, between ABS and Chase(9)
10.22  --   Amended and Restated Security Agreement dated as of August
            14, 1996, between EFC and Chase(9)
10.23  --   Revolving Credit Note dated as of August 14, 1996 executed
            by each of ABS and EFC in favor of NBD Bank(9)
10.24  --   Facility A Notes dated as of August 14, 1996 executed by
            each of ABS and EFC in favor of NBD Bank(9)
10.25  --   Amended and Restated K & F Agreement dated as of August 14,
            1996, between the Company and Chase(9)
10.26  --   Amended and Restated Subordination Agreement dated as of
            August 14, 1996, between ABS and Chase(9)
10.27  --   Amended and Restated Subordination Agreement dated as of
            August 14, 1996, between EFC and Chase(9)
10.28  --   Purchase Agreement dated August 12, 1996 among the Company,
            Lehman Brothers Inc. and Chase Securities Inc.(9)
10.29  --   Registration Rights Agreement dated as of August 15, 1996
            among the Company, Lehman Brothers Inc. and Chase Securities
            Inc.(9)
10.30  --   Credit Agreement dated as of October 15, 1997 among ABS,
            EFC, the Lenders (as defined therein), Lehman Commercial
            Paper, Inc. as Documentation Agent and The First National
            Bank of Chicago ("FNBC"), as Administrative Agent(10)
10.31  --   Guarantee and Collateral Agreement dated as of October 15,
            1997 among the Company, ABS, EFC, certain subsidiaries named
            therein and FNBC, as Collateral Agent(10)
10.32  --   Subordination Agreement dated as of October 15, 1997 between
            ABS and FNBC(10)
10.33  --   Subordination Agreement dated as of October 15, 1997 between
            EFC and FNBC(10)
10.34  --   Intercreditor Agreement dated as of October 15, 1997 among
            the Pension Benefit Guaranty Corporation ("PBGC"), FNBC,
            ABS, EFC and the Company(10)
10.35  --   K & F Agreement dated as of October 15, 1997 executed by the
            Company in favor of FNBC(10)
10.36  --   Settlement Agreement dated as of October 15, 1997 between
            the Company and PBGC(10)
10.37  --   Registration Rights Agreement dated as of October 15, 1997
            between the Company and Lehman Brothers Inc. and Unterberg
            Harris(10)
10.38  --   Dealer Manager Agreement dated as of September 15, 1997
            between Lehman Brothers Inc. and the Company(10)
</TABLE>

                                        25
<PAGE>   26
<TABLE>
<C>    <S>  <C>
10.39  --   Stockholders' Agreement dated as of October 15, 1997 between
            the Company and the Stockholders identified therein(10)
10.40  --   K & F Industries, Inc. 1998 Stock Option Plan(11)
10.41  --   K & F Industries, Inc. Supplemental Executive Retirement
            Plan, as amended(12)
10.42  --   Agreement dated as of January 1, 2000 between the Company
            and Loral Space
12.01  --   Statement of computations of ratio of earnings to fixed
            charges(10)
21.01  --   Subsidiaries of the Registrant(1)
24.01  --   Powers of Attorney (included on signature page)
27.01  --   Financial Data Schedule
</TABLE>

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

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

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

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

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

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

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

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

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

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

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

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

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

                                        26
<PAGE>   27

                                   SIGNATURES

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

                                          K & F INDUSTRIES, INC.

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

Date: March 29, 2001

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

<TABLE>
<CAPTION>
                     SIGNATURE                                     TITLE                     DATE
                     ---------                                     -----                     ----
<C>                                                  <S>                                <C>
                         *                           Chairman of the Board, Chief       March 29, 2001
---------------------------------------------------    Executive Officer and Director
                Bernard L. Schwartz                    (principal executive officer)

              /s/ KENNETH M. SCHWARTZ                President and Chief Operating      March 29, 2001
---------------------------------------------------    Officer
                Kenneth M. Schwartz

              /s/ DIRKSON R. CHARLES                 Chief Financial Officer            March 29, 2001
---------------------------------------------------    (principal financial and
                Dirkson R. Charles                     accounting officer)

                         *                           Director                           March 29, 2001
---------------------------------------------------
                  David J. Brand

                         *                           Director                           March 29, 2001
---------------------------------------------------
                Herbert R. Brinberg

                         *                           Director                           March 29, 2001
---------------------------------------------------
                  Robert B. Hodes

                         *                           Director                           March 29, 2001
---------------------------------------------------
                 Ronald H. Kisner

                         *                           Director                           March 29, 2001
---------------------------------------------------
                  John R. Paddock

                         *                           Director                           March 29, 2001
---------------------------------------------------
                 A. Robert Towbin

                         *                           Director                           March 29, 2001
---------------------------------------------------
                Alan H. Washkowitz

           *By: /s/ KENNETH M. SCHWARTZ              Attorney-in-Fact                   March 29, 2001
   ---------------------------------------------
                Kenneth M. Schwartz
</TABLE>

                                        27
<PAGE>   28

                          INDEPENDENT AUDITORS' REPORT

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

     We have audited the accompanying consolidated balance sheets of K & F
Industries, Inc. and subsidiaries (the "Company") as of December 31, 2000 and
1999, and the related consolidated statements of operations, stockholders'
deficiency, and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of K & F Industries, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.

DELOITTE & TOUCHE LLP

New York, New York
February 1, 2001

                                       F-1
<PAGE>   29

                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              DECEMBER 31,    DECEMBER 31,
                                                                  2000            1999
                                                              ------------    -------------
<S>                                                           <C>             <C>
ASSETS
Current Assets:
  Cash and cash equivalents.................................  $  6,477,000    $   3,584,000
  Accounts receivable -- net................................    46,765,000       51,870,000
  Inventory.................................................    63,983,000       68,848,000
  Other current assets......................................     1,634,000          801,000
  Deferred tax asset........................................     4,260,000       18,063,000
                                                              ------------    -------------
          Total current assets..............................   123,119,000      143,166,000
                                                              ------------    -------------
Property, Plant and Equipment -- Net........................    73,036,000       71,201,000
Prepaid Pension Cost........................................    23,683,000       17,814,000
Deferred Charges -- Net of amortization of $13,622,000
  and $10,445,000...........................................    32,120,000       30,534,000
Cost in Excess of Net Assets Acquired -- Net of amortization
  of $71,257,000 and $65,149,000............................   162,679,000      168,787,000
Intangible Assets -- Net of amortization of $35,060,000
  and $34,472,000...........................................    15,448,000       10,366,000
                                                              ------------    -------------
Total Assets................................................  $430,085,000    $ 441,868,000
                                                              ============    =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
  Accounts payable..........................................  $ 18,373,000    $  17,687,000
  Notes payable.............................................     3,900,000               --
  Current portion of long-term debt.........................     1,500,000        1,500,000
  Interest payable..........................................     4,148,000        4,506,000
  Other current liabilities.................................    49,503,000       42,851,000
                                                              ------------    -------------
          Total current liabilities.........................    77,424,000       66,544,000
                                                              ------------    -------------
Postretirement Benefit Obligation Other Than Pensions.......    79,687,000       78,667,000
Other Long-Term Liabilities.................................     5,355,000        6,266,000
Long-Term Debt..............................................   345,625,000      432,125,000
Commitments and Contingencies (Notes 12 and 13)
Stockholders' Deficiency:
  Common stock, $.01 par value -- authorized, 1,000,000
     shares; issued and outstanding, 740,398 shares.........         7,000            7,000
  Additional paid-in capital................................   (63,259,000)     (63,259,000)
  Deficit...................................................   (14,711,000)     (78,696,000)
  Accumulated other comprehensive (loss) income.............       (43,000)         214,000
                                                              ------------    -------------
          Total stockholders' deficiency....................   (78,006,000)    (141,734,000)
                                                              ------------    -------------
Total Liabilities and Stockholders' Deficiency..............  $430,085,000    $ 441,868,000
                                                              ============    =============
</TABLE>

                See notes to consolidated financial statements.

                                       F-2
<PAGE>   30

                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                   --------------------------------------------
                                                       2000            1999            1998
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Net sales........................................  $375,890,000    $355,951,000    $345,447,000
Cost of sales....................................   199,459,000     197,757,000     196,190,000
                                                   ------------    ------------    ------------
Gross margin.....................................   176,431,000     158,194,000     149,257,000
Independent research and development.............    15,763,000      13,996,000      13,705,000
Selling, general and administrative expenses.....    37,666,000      33,245,000      35,332,000
Amortization.....................................     8,118,000       8,773,000      10,286,000
                                                   ------------    ------------    ------------
Operating income.................................   114,884,000     102,180,000      89,934,000
Interest expense, net of interest income of
  $318,000, $281,000 and $356,000................    35,993,000      40,396,000      44,830,000
                                                   ------------    ------------    ------------
Income before income taxes.......................    78,891,000      61,784,000      45,104,000
Income tax (provision) benefit...................   (14,906,000)     12,136,000      (5,744,000)
                                                   ------------    ------------    ------------
Net income.......................................  $ 63,985,000    $ 73,920,000    $ 39,360,000
                                                   ============    ============    ============
</TABLE>

                See notes to consolidated financial statements.

                                       F-3
<PAGE>   31

                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                 COMMON STOCK                                     ACCUMULATED
                               ----------------    ADDITIONAL                        OTHER
                               SHARES               PAID-IN                      COMPREHENSIVE   COMPREHENSIVE
                               ISSUED    AMOUNT     CAPITAL         DEFICIT      INCOME (LOSS)   INCOME (LOSS)
                               -------   ------   ------------   -------------   -------------   -------------
<S>                            <C>       <C>      <C>            <C>             <C>             <C>
Balance, January 1, 1998.....  740,398   $7,000   $(63,259,000)  $(191,976,000)   $(1,231,000)
  Net Income.................                                       39,360,000                    $39,360,000
  Pension adjustment.........                                                       1,213,000       1,213,000
  Cumulative translation
     adjustments.............                                                         276,000         276,000
                               -------   ------   ------------   -------------    -----------     -----------
Balance, December 31, 1998...  740,398    7,000    (63,259,000)   (152,616,000)       258,000     $40,849,000
                                                                                                  ===========
  Net Income.................                                       73,920,000                    $73,920,000
  Cumulative translation
     adjustments.............                                                         (44,000)        (44,000)
                               -------   ------   ------------   -------------    -----------     -----------
Balance, December 31, 1999...  740,398    7,000    (63,259,000)    (78,696,000)       214,000     $73,876,000
                                                                                                  ===========
  Net Income.................                                       63,985,000                    $63,985,000
  Cumulative translation
     adjustments.............                                                        (257,000)       (257,000)
                               -------   ------   ------------   -------------    -----------     -----------
Balance, December 31, 2000...  740,398   $7,000   $(63,259,000)  $ (14,711,000)   $   (43,000)    $63,728,000
                               =======   ======   ============   =============    ===========     ===========
</TABLE>

                See notes to consolidated financial statements.
                                       F-4
<PAGE>   32

                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                     ------------------------------------------
                                                         2000           1999           1998
                                                     ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>
Cash Flows From Operating Activities:
  Net income.......................................  $ 63,985,000   $ 73,920,000   $ 39,360,000
  Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation..................................     8,010,000      8,495,000      9,675,000
     Amortization..................................     8,118,000      8,773,000     10,286,000
     Non-cash interest expense-amortization of
       deferred financing charges..................     1,755,000      1,836,000      1,932,000
     Provision for losses on accounts receivable...       109,000        161,000        140,000
     Deferred income taxes.........................    13,803,000    (13,258,000)     4,912,000
     Changes in assets and liabilities:
       Accounts receivable.........................     4,897,000    (16,058,000)     3,989,000
       Inventory...................................     4,707,000      1,421,000     (4,254,000)
       Other current assets........................       167,000       (128,000)      (114,000)
       Prepaid pension costs.......................    (5,869,000)    (4,007,000)    (3,283,000)
       Accounts payable............................       686,000      2,359,000     (2,651,000)
       Notes payable...............................     3,900,000              -              -
       Interest payable............................      (358,000)      (627,000)       408,000
       Other current liabilities...................     6,652,000     (3,652,000)    (9,491,000)
       Postretirement benefit obligation other than
          pensions.................................     1,020,000      2,711,000      1,414,000
       Other long-term liabilities.................      (911,000)    (1,398,000)      (166,000)
                                                     ------------   ------------   ------------
          Net cash provided by operating
            activities.............................   110,671,000     60,548,000     52,157,000
                                                     ------------   ------------   ------------
Cash Flows From Investing Activities:
  Capital expenditures.............................    (9,845,000)   (10,413,000)   (14,873,000)
  Deferred charges.................................    (5,763,000)    (7,892,000)      (203,000)
  Purchase of intellectual property................    (5,670,000)             -              -
                                                     ------------   ------------   ------------
          Net cash used in investing activities....   (21,278,000)   (18,305,000)   (15,076,000)
                                                     ------------   ------------   ------------
Cash Flows From Financing Activities:
  Payments of senior revolving loan................   (95,000,000)   (59,000,000)   (55,000,000)
  Borrowings under senior revolving loan...........   108,000,000     66,000,000     41,000,000
  Payments on long-term debt.......................   (99,500,000)   (58,500,000)   (21,500,000)
  Proceeds from sale and leaseback transaction.....             -      5,997,000        556,000
                                                     ------------   ------------   ------------
          Net cash used in financing activities....   (86,500,000)   (45,503,000)   (34,944,000)
                                                     ------------   ------------   ------------
Net increase (decrease) in cash and cash
  equivalents......................................     2,893,000     (3,260,000)     2,137,000
Cash and cash equivalents, beginning of period.....     3,584,000      6,844,000      4,707,000
                                                     ------------   ------------   ------------
Cash and cash equivalents, end of period...........  $  6,477,000   $  3,584,000   $  6,844,000
                                                     ============   ============   ============
Supplemental Information:
  Interest paid during the period..................  $ 34,914,000   $ 39,468,000   $ 42,846,000
                                                     ============   ============   ============
  Income taxes paid during the period..............  $  1,550,000   $  1,658,000   $  1,055,000
                                                     ============   ============   ============
</TABLE>

                See notes to consolidated financial statements.
                                       F-5
<PAGE>   33

                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

     K & F Industries, Inc. ("K & F") and subsidiaries (collectively, the
"Company") is primarily engaged in the design, development, manufacture and
distribution of wheels, brakes and brake control systems for commercial,
military and general aviation aircraft, and the manufacture of materials for
fuel tanks, iceguards, inflatable oil booms and various other products made from
coated fabrics for military and commercial uses. The Company serves the
aerospace industry and sells its products to airframe manufacturers and
commercial airlines throughout the world and to the United States and certain
foreign governments. The Company's activities are conducted through its two
wholly owned subsidiaries, Aircraft Braking Systems Corporation ("Aircraft
Braking Systems"), which generated approximately 87% of the Company's total
revenues during the year ended December 31, 2000 and Engineered Fabrics
Corporation ("Engineered Fabrics") (collectively, the "Subsidiaries"), which
generated approximately 13% of the Company's total revenues during the year
ended December 31, 2000.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

     Inventory -- Inventory is stated at average cost, not in excess of net
realizable value. In accordance with industry practice, inventoried costs may
contain amounts relating to contracts with long production cycles, a portion of
which will not be realized within one year.

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

     Deferred Charges -- Deferred charges consist primarily of financing costs
($6.1 million and $7.9 million, which is net of amortization (non-cash interest
expense) of $6.0 million and $4.2 million at December 31, 2000 and 1999,
respectively), and program participation costs ($26.0 million and $22.6 million,
which is net of amortization of $7.7 million and $6.3 million at December 31,
2000 and December 31, 1999, respectively) paid in connection with the award of
wheels, brakes and brake control equipment on various commercial programs.
Program participation costs are being amortized on a straight-line method over a
period of 20 years. Deferred financing charges are primarily being amortized on
an effective interest method over 6 to 10 years, which reflect the terms of the
Company's debt.

     Cost in Excess of Net Assets Acquired -- Cost in excess of net assets
acquired is being amortized on the straight-line method over a period of 40
years. The Company reviews the cost in excess of net assets acquired

                                       F-6
<PAGE>   34
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for recoverability on an ongoing basis using undiscounted cash flows.
Impairments would be recognized in operating results.

     Intangible Assets -- Intangible assets consist of patents, licenses and
computer software which are stated at cost and are being amortized on a
straight-line method over periods of 11 to 30 years. During the year ended
December 31, 2000, the Company purchased intellectual property (primarily
consisting of patents, licenses, trade names and drawings) in connection with
the Dornier 328 program in the amount of $5.7 million.

     Evaluation of Long-Lived Assets -- Long-lived assets are assessed for
recoverability on an ongoing basis in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121. In evaluating the value and future
benefits of long-lived assets, their carrying value would be compared to
management's estimate of the anticipated undiscounted future net cash flows of
the related long-lived asset. There were no adjustments to the carrying amount
of long-lived assets during the years ended December 31, 2000, 1999 and 1998
resulting from the Company's evaluations.

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

     Business and Credit Concentrations -- The Company's customers are
concentrated in the airline industry but are not concentrated in any specific
region. The U.S. government accounted for approximately 17%, 15% and 14% of
total sales for the years ended December 31, 2000, 1999 and 1998, respectively.
No other single customer accounted for 10% or more of consolidated revenues for
the years then ended, and there were no significant accounts receivable from a
single customer, except the U.S. government, at December 31, 2000 and December
31, 1999.

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

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

     Accounting Pronouncements -- SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," is effective for all fiscal years beginning
after June 15, 2000. SFAS No. 133, as amended and interpreted, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
All derivatives, whether designated in hedging relationships or not, will be
required to be recorded on the balance sheet at fair value. SFAS No. 133 defines
new requirements for designation and documentation of hedging relationships as
well as ongoing effectiveness assessments in order to use hedge accounting. For
a derivative that does not qualify as a hedge, changes in fair value will be
recognized in earnings.

     The Company expects that at January 1, 2001, it will record an after-tax
reduction in other comprehensive income of $0.5 million as a cumulative
transition adjustment relating to derivatives designated in cash flow-type
hedges prior to adopting SFAS No. 133.

     During the year ended December 31, 2000, the Company adopted Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements."
The adoption of SAB 101 had no impact on the Company's financial position,
results of operation and cash flows.
                                       F-7
<PAGE>   35
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

3. ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                    --------------------------
                                                       2000           1999
                                                    -----------    -----------
<S>                                                 <C>            <C>
Accounts receivable, principally from commercial
  customers.......................................  $40,816,000    $46,510,000
Accounts receivable on U.S. government and other
  long-term contracts.............................    6,093,000      5,634,000
Allowances........................................     (144,000)      (274,000)
                                                    -----------    -----------
          Total...................................  $46,765,000    $51,870,000
                                                    ===========    ===========
</TABLE>

4. INVENTORY

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                    --------------------------
                                                       2000           1999
                                                    -----------    -----------
<S>                                                 <C>            <C>
Raw materials and work-in-process.................  $36,058,000    $37,216,000
Finished goods....................................   18,642,000     22,069,000
Inventoried costs related to U.S. government and
  other long-term contracts.......................    9,283,000      9,563,000
                                                    -----------    -----------
          Total...................................  $63,983,000    $68,848,000
                                                    ===========    ===========
</TABLE>

5. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                  ----------------------------
                                                      2000            1999
                                                  ------------    ------------
<S>                                               <C>             <C>
Land............................................  $    661,000    $    661,000
Buildings and improvements......................    36,894,000      36,770,000
Machinery, equipment, furniture and fixtures....   127,820,000     121,900,000
                                                  ------------    ------------
          Total.................................   165,375,000     159,331,000
Less accumulated depreciation and
  amortization..................................    92,339,000      88,130,000
                                                  ------------    ------------
          Total.................................  $ 73,036,000    $ 71,201,000
                                                  ============    ============
</TABLE>

                                       F-8
<PAGE>   36
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. OTHER CURRENT LIABILITIES

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                    --------------------------
                                                       2000           1999
                                                    -----------    -----------
<S>                                                 <C>            <C>
Accrued payroll costs.............................  $25,256,000    $18,733,000
Accrued taxes.....................................    2,984,000      3,429,000
Accrued costs on long-term contracts..............    3,172,000      2,875,000
Accrued warranty costs............................   10,789,000      9,626,000
Customer credits..................................    2,693,000      3,312,000
Postretirement benefit obligation other than
  pensions........................................    3,000,000      3,000,000
Other.............................................    1,609,000      1,876,000
                                                    -----------    -----------
          Total...................................  $49,503,000    $42,851,000
                                                    ===========    ===========
</TABLE>

7. LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                  ----------------------------
                                                      2000            1999
                                                  ------------    ------------
<S>                                               <C>             <C>
Senior Revolving Loan...........................  $ 20,000,000    $  7,000,000
Senior Term Loan A..............................    48,375,000      48,875,000
Senior Term Loan B..............................    93,750,000     192,750,000
9 1/4% Senior Subordinated Notes due 2007.......   185,000,000     185,000,000
                                                  ------------    ------------
Total...........................................   347,125,000     433,625,000
Less current maturities.........................     1,500,000       1,500,000
                                                  ------------    ------------
          Total.................................  $345,625,000    $432,125,000
                                                  ============    ============
</TABLE>

     At December 31, 2000, the Credit Facility consists of a term loan facility
in an aggregate principal amount of $142.1 million (the "Term Loans") and a
revolving credit facility in an aggregate principal amount of up to $50 million
(the "Revolving Loan"). The Term Loans consist of a Tranche A term loan ("Term
Loan A") in the principal amount of $48.4 million and a Tranche B term loan
("Term Loan B") in the principal amount of $93.7 million. The interest rates
under the Credit Facility are, at the Company's option, either the LIBOR or
prime rate, in each case plus a margin. At December 31, 2000 and 1999, the
average interest rate on outstanding borrowings on the Credit Facility was 8.6%
and 8.3%, respectively. As a requirement of the Credit Facility, the Company
entered into an interest rate swap agreement to reduce the impact of potential
increases in interest rates on the Credit Facility. The interest rate swap
agreement fixes the Company's LIBOR borrowing rate at 5.95% and matures December
17, 2001 with an option for the counterparty to extend the agreement to December
17, 2003. At December 31, 2000, the notional value on the interest rate swap
agreement was $115 million and the fair value was approximately $0.9 million in
favor of the counterparty (taking into account interest rates in effect at
December 31, 2000), representing the amount the Company would pay if the
agreement was terminated. Any differences paid or received on the interest rate
swap agreement are recognized as adjustments to current interest expense. This
interest rate agreement effectively fixes the Company's borrowing rate at 8.1%
on $115 million of borrowings at December 31, 2000. Obligations under the Credit
Facility are secured by a lien on substantially all of the assets of the
Subsidiaries and are guaranteed by K & F.

     Term Loan A is a six-year quarterly amortizing facility maturing October
15, 2003, with installments of $0.5 million per year due in years 2001 through
2002 and $47.4 million due in 2003. Term Loan B is an eight-year quarterly
amortizing facility maturing October 15, 2005, with installments of $1.0 million
per year due in years 2001 through 2003, $67.0 million due in 2004 and $23.7
million due in 2005. The Company is required

                                       F-9
<PAGE>   37
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to make mandatory reductions in the Credit Facility in the event of certain
asset sales, the incurrence of certain additional indebtedness, and annually
from a portion of excess cash flow (as defined). As a result of the excess cash
flow calculation, $45.8 million was determined to be due in 2001, however, this
prepayment obligation has been satisfied by $85.0 million of voluntary
prepayments in 2000.

     Scheduled debt maturities of the Term Loans for the five years subsequent
to December 31, 2000 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,                                    AMOUNT
------------------------                                  -----------
<S>                                                       <C>
2001....................................................  $ 1,500,000
2002....................................................    1,500,000
2003....................................................   48,375,000
2004....................................................   67,000,000
2005....................................................   23,750,000
</TABLE>

     The Credit Facility provides for Revolving Loans not to exceed $50 million,
with up to $20 million available for letters of credit. The Revolving Loan
commitment terminates on October 15, 2003. At December 31, 2000 and 1999, the
Company had $23.6 million and $36.4 million available to borrow, respectively.
At December 31, 2000 and 1999, the Company had outstanding letters of credit of
$6.4 million and $6.6 million, respectively.

     The Credit Facility contains certain covenants and events of default,
including limitations on additional indebtedness, liens, asset sales, making
certain restricted payments, capital expenditures, creating guarantee
obligations and material lease obligations. The Credit Facility also contains
certain financial ratio requirements including a cash interest coverage ratio, a
leverage ratio and maintenance of a minimum adjusted net worth. The Company was
in compliance with all covenants at December 31, 2000.

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

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts of all financial instruments reported on the balance
sheet at December 31, 2000 and 1999 approximate their fair value, except as
discussed below. See Note 7 for disclosure of the fair value of the Company's
interest rate swap agreement.

     The fair value of the Company's total debt based on quoted market prices or
on current rates for similar debt with the same maturities was approximately
$340 million and $424 million at December 31, 2000 and 1999, respectively.

9. CAPITAL STOCK

     a. The Company has two stock option plans which provide for the grant of
non-qualified or incentive stock options to acquire an aggregate of 100,000
authorized but unissued shares of common stock. The options granted prior to
2000 are exercisable in four equal installments on the second, third, fourth and
fifth anniversaries of the date of grant. The options issued in 2000 are
exercisable in three equal installments on the first, second and third
anniversaries of the date of grant. All options remain exercisable until the
expiration of the option, which is 10 years from the date of the grant. All
options granted in 1998 and 1997 were issued with an exercise price of $175 per
share. All options granted in 2000 and 1999 were issued with an exercise price
of $250 per share.

                                       F-10
<PAGE>   38
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Stock option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                           --------------------------
                                                            2000      1999      1998
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Outstanding at beginning of year.........................  43,075    47,350    35,550
Granted..................................................  11,850       900    11,800
Exercised................................................      --        --        --
Canceled.................................................    (525)   (5,175)       --
                                                           ------    ------    ------
Outstanding at end of year...............................  54,400    43,075    47,350
                                                           ======    ======    ======
Exercisable options outstanding..........................  18,000     7,719         -
                                                           ======    ======    ======
Available for future grant...............................  28,650    40,500    41,400
                                                           ======    ======    ======
</TABLE>

     At December 31, 2000, there were outstanding options for 41,650 and 12,750
shares that were exercisable at $175 per share and $250 per share and with
weighted-average remaining contractual lives of 7.1 years and 9.5 years,
respectively. All options exercisable at December 31, 2000 were exercisable at
$175 per share.

     b. As permitted by SFAS No. 123, the Company accounts for its stock-based
compensation using the intrinsic value method in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS No. 123 requires the
disclosure of pro forma net income (loss) had the Company adopted the fair value
method. However, disclosure has been omitted because the pro forma effect on net
income (loss) required to be disclosed under SFAS No. 123 is not material to the
Company's results of operations.

10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

     Components of other comprehensive income (loss) consist of the following:

<TABLE>
<CAPTION>
                                                                               ACCUMULATED
                                                               CUMULATIVE         OTHER
                                            MINIMUM PENSION    TRANSLATION    COMPREHENSIVE
                                               LIABILITY       ADJUSTMENTS    INCOME (LOSS)
                                            ---------------    -----------    -------------
<S>                                         <C>                <C>            <C>
January 1, 1998...........................    $(1,213,000)      $ (18,000)     $(1,231,000)
1998 Change...............................      1,213,000         276,000        1,489,000
                                              -----------       ---------      -----------
December 31, 1998.........................             --         258,000          258,000
1999 Change...............................             --         (44,000)         (44,000)
                                              -----------       ---------      -----------
December 31, 1999.........................             --         214,000          214,000
2000 Change...............................             --        (257,000)        (257,000)
                                              -----------       ---------      -----------
December 31, 2000.........................    $        --       $ (43,000)     $   (43,000)
                                              ===========       =========      ===========
</TABLE>

     The tax benefit or expense related to the components of other comprehensive
income was not material.

11. EMPLOYEE BENEFIT PLANS

     The Company provides pension benefits to substantially all employees
through hourly and salaried pension plans. The plans provide benefits based
primarily on the participant's years of service. The salaried plan also includes
voluntary employee contributions. The Company's funding policy is to contribute
the lesser of (i) the amount required by the Employee Retirement Income Security
Act of 1974 ("ERISA") without considering the $10 million credit balance
accumulated by the Company per ERISA calculations on December 31, 1997 plus
interest, or (ii) the maximum deductible for tax purposes, or (iii) the excess
of the liability calculated under Section 4001(a) of ERISA over the fair market
value of the assets at year-end.

                                       F-11
<PAGE>   39
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

<TABLE>
<CAPTION>
                                          PENSION BENEFITS            POSTRETIREMENT BENEFITS
                                    ----------------------------    ----------------------------
                                            DECEMBER 31,                    DECEMBER 31,
                                    ----------------------------    ----------------------------
                                        2000            1999            2000            1999
                                    ------------    ------------    ------------    ------------
<S>                                 <C>             <C>             <C>             <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
  year............................  $ 86,110,000    $ 90,396,000    $ 76,127,000    $ 78,942,000
Service cost......................     2,405,000       2,900,000       1,720,000       2,044,000
Interest cost.....................     6,766,000       6,216,000       5,661,000       5,671,000
Plan participants'
  contributions...................       353,000         372,000         551,000         427,000
Amendments........................            --              --      (2,875,000)             --
Actuarial loss (gain).............     3,306,000     (10,112,000)        658,000      (7,888,000)
Benefits paid.....................    (4,880,000)     (4,236,000)     (3,198,000)     (3,069,000)
Special termination benefits......            --         574,000              --              --
                                    ------------    ------------    ------------    ------------
Benefit obligation at end of
  year............................    94,060,000      86,110,000      78,644,000      76,127,000
                                    ------------    ------------    ------------    ------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
  beginning of year...............   101,299,000      89,199,000              --              --
Actual return on plan assets......       978,000       9,292,000              --              --
Employer contributions............     5,013,000       6,672,000       2,647,000       2,642,000
Plan participants'
  contributions...................       353,000         372,000         551,000         427,000
Benefits paid.....................    (4,880,000)     (4,236,000)     (3,198,000)     (3,069,000)
                                    ------------    ------------    ------------    ------------
Fair value of plan assets at end
  of year.........................   102,763,000     101,299,000              --              --
                                    ------------    ------------    ------------    ------------
Funded status.....................     8,703,000      15,189,000     (78,644,000)    (76,127,000)
Unrecognized actuarial loss.......    14,336,000       1,513,000       9,601,000       9,195,000
Unrecognized prior service cost...       644,000       1,112,000     (13,644,000)    (14,735,000)
                                    ------------    ------------    ------------    ------------
Prepaid (accrued) benefit cost....  $ 23,683,000    $ 17,814,000    $(82,687,000)   $(81,667,000)
                                    ============    ============    ============    ============
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate.....................          7.75%           8.00%           7.75%           8.00%
Expected return on plan assets....          9.50            9.50              --              --
Rate of compensation increase.....          4.50            4.50            4.50            4.50
</TABLE>

                                       F-12
<PAGE>   40
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                      PENSION BENEFITS                       POSTRETIREMENT BENEFITS
                          ----------------------------------------   ---------------------------------------
                                  YEAR ENDED DECEMBER 31,                    YEAR ENDED DECEMBER 31,
                          ----------------------------------------   ---------------------------------------
                              2000          1999          1998          2000          1999          1998
                          ------------   -----------   -----------   -----------   -----------   -----------
<S>                       <C>            <C>           <C>           <C>           <C>           <C>
Service cost............  $  2,405,000   $ 2,900,000   $ 2,535,000   $ 1,720,000   $ 2,044,000   $ 1,824,000
Interest cost...........     6,766,000     6,216,000     5,830,000     5,661,000     5,671,000     5,195,000
Expected return on plan
  assets................   (10,498,000)   (8,459,000)   (7,518,000)           --            --            --
Amortization of prior
  service cost..........       467,000       467,000       467,000    (3,966,000)   (3,730,000)   (3,730,000)
Recognized actuarial
  loss..................         3,000       402,000       290,000       251,000     1,368,000     1,040,000
Special termination
  charge................            --       574,000            --            --            --            --
                          ------------   -----------   -----------   -----------   -----------   -----------
Net periodic benefit
  (income) cost.........  $   (857,000)  $ 2,100,000   $ 1,604,000   $ 3,666,000   $ 5,353,000   $ 4,329,000
                          ============   ===========   ===========   ===========   ===========   ===========
</TABLE>

     On October 28, 1999, the Company offered a voluntary early retirement
incentive program to certain employees. The special benefit was the addition of
three years of age and service to be immediately credited to their
non-contributory pension benefit as well as three years of age credited to their
contributory portion of such benefit. On December 1, 1999, 22 employees accepted
the offer.

     As a result of the early retirement incentive program, a $574,000 charge
was recorded as part of the 1999 net periodic benefit cost which also increased
the 1999 benefit obligation by the same amount.

     For measurement purposes, a 6.20% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2000. The rate was assumed
to decrease to 5.25% for 2001 and remain at that level thereafter.

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

<TABLE>
<CAPTION>
                                                        ONE-              ONE-
                                                    PERCENTAGE-       PERCENTAGE-
                                                   POINT INCREASE    POINT DECREASE
                                                   --------------    --------------
<S>                                                <C>               <C>
Effect on total of service cost and interest cost
  components.....................................    $1,028,000       $  (838,000)
Effect on postretirement benefit obligation......     9,943,000        (8,205,000)
</TABLE>

     Investments held by the Company's pension plans consist primarily of S&P
500 equity securities and investment grade fixed income securities.

     Eligible employees having one year of service also participate in one of
the Company's Savings Plans (hourly or salaried). The Company matches 60% of a
participating employee's contributions, up to 6% of compensation. The employer
contributions generally vest to participating employees after five years of
service. The matching contributions were $1,609,000, $1,530,000 and $1,205,000
for the years ended December 31, 2000, 1999 and 1998, respectively.

                                       F-13
<PAGE>   41
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. COMMITMENTS

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

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,                                     AMOUNT
------------------------                                   ----------
<S>                                                        <C>
2001...................................................    $3,573,000
2002...................................................     3,537,000
2003...................................................     3,187,000
2004...................................................     3,119,000
2005...................................................     2,754,000
Thereafter.............................................     6,465,000
</TABLE>

     Rental expense was $5,612,000, $5,991,000 and $5,410,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.

13. CONTINGENCIES

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

14. INCOME TAXES

     The components of the net deferred tax asset and corresponding valuation
allowance are as follows:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                          ----------------------------
                                                              2000            1999
                                                          ------------    ------------
<S>                                                       <C>             <C>
Tax net operating loss carryforwards....................  $ 24,708,000    $ 46,604,000
Temporary differences:
  Postretirement and other employee benefits............    32,669,000      34,525,000
  Intangibles...........................................    29,084,000      33,666,000
  Program participation costs...........................   (11,419,000)     (9,267,000)
  Other.................................................     9,660,000       9,543,000
                                                          ------------    ------------
Deferred tax benefit....................................    84,702,000     115,071,000
Valuation allowance.....................................   (80,442,000     (97,008,000)
                                                          ------------    ------------
Net deferred tax asset..................................  $  4,260,000    $ 18,063,000
                                                          ============    ============
</TABLE>

     At December 31, 2000, the Company recorded a deferred tax asset of $4.3
million which the Company believes is more likely than not to be realized in the
future based on its estimate of future earnings and expected reversal of
temporary differences. The Company continued to record a valuation allowance
against its deferred tax asset to the extent the realization of such tax asset
is uncertain as required by SFAS No. 109.

                                       F-14
<PAGE>   42
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                           --------------------------------------------
                                               2000            1999            1998
                                           ------------    ------------    ------------
<S>                                        <C>             <C>             <C>
Current domestic provision...............  $(32,235,000)   $(26,768,000)   $(17,135,000)
Foreign provision........................       309,000          (7,000)       (230,000)
Domestic utilization of net operating
  loss carryforwards.....................    30,823,000      20,848,000      11,621,000
Change in net deferred tax asset.........   (13,803,000)     18,063,000              --
                                           ------------    ------------    ------------
Income tax (provision) benefit...........  $(14,906,000)   $ 12,136,000    $ (5,744,000)
                                           ============    ============    ============
</TABLE>

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

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              2000     1999     1998
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Statutory federal income tax rate...........................   35.0%    35.0%    35.0%
Change in the valuation allowance...........................   19.7    (28.6)      --
Utilization of tax net operating losses.....................  (38.5)   (31.9)   (27.3)
State tax...................................................    5.3      5.9      4.9
Foreign sales corporation benefit...........................   (2.2)      --       --
Foreign subsidiaries tax provision..........................   (0.4)      --      0.1
                                                              -----    -----    -----
Effective income tax rate...................................   18.9%   (19.6)%   12.7%
                                                              =====    =====    =====
</TABLE>

     The Company has tax net operating loss carryforwards of approximately $60
million at December 31, 2000. The tax net operating losses expire from 2009
through 2019, with $28 million of carryforwards expiring in 2009.

15. RELATED PARTY TRANSACTIONS

     BLS owns 50% of the capital stock of the Company and pursuant to the
Stockholders Agreement has the right to designate a majority of the Board of
Directors of the Company. In addition, BLS serves as Chairman of the Board of
Directors and Chief Executive Officer of the Company and devotes such time to
the business and affairs of the Company as he deems appropriate. BLS is also
Chairman and Chief Executive Officer of Loral Space & Communications Ltd.
("Loral Space"). Because BLS is Chairman of the Board of Directors and has the
right to designate a majority of the Directors to the Board of the Company, he
has operating control of the Company.

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

     The Company has a bonus plan pursuant to which the Company's Board of
Directors awards bonuses to BLS ranging from 5% to 10% of earnings in excess of
$50 million before interest, taxes and amortization. Bonuses earned under this
plan were $7,300,200, $6,095,300 and $5,055,300 for the years ended December 31,
2000, 1999 and 1998, respectively.

     The Company reimburses Loral Space (of which BLS is Chairman and Chief
Executive Officer), for rent and certain other services. The related charges
agreed upon were established to reimburse Loral Space for actual costs incurred
without profit or fee. The Company believes the arrangements are as favorable to
the Company as could have been obtained from unaffiliated parties. Payments to
Loral Space were $0.6 million, $0.6 million and $0.7 million for the years ended
December 31, 2000, 1999 and 1998, respectively.

                                       F-15
<PAGE>   43
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Pursuant to a financial advisory agreement between Lehman Brothers and the
Company, Lehman Brothers has agreed to act as exclusive financial adviser to the
Company and the Company has agreed to pay Lehman Brothers customary fees for
services when rendered. During the three years ended December 31, 2000 no
amounts were paid under this agreement. The Agreement may be terminated by the
Company or Lehman Brothers upon certain conditions.

     The Lehman Investors own 50% of the outstanding capital stock of the
Company and are entitled to elect three directors (in addition to one
independent director jointly designated by BLS and the Lehman Investors) to the
Company's Board of Directors. The Lehman Investors have the benefit of certain
additional rights under the Stockholders' Agreement and the Company's By-laws.

     Before 1999, the Company paid Ronald H. Kisner, who is Secretary and a
member of the Board of Directors of the Company, a monthly retainer of $6,000
for legal services. In addition, Mr. Kisner received bonuses and other
compensation of $78,000 during the year ended December 31, 1998. Mr. Kisner also
received stock options for 900 shares during the year ended December 31, 1998.
Since January 1999, Mr. Kisner has been employed by the Company.

16. SEGMENTS

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

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

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                   --------------------------------------------
                                                       2000            1999            1998
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Sales:
  Aircraft Braking Systems.......................  $328,472,000    $313,475,000    $305,911,000
  Engineered Fabrics.............................    47,418,000      42,476,000      39,536,000
                                                   ------------    ------------    ------------
                                                   $375,890,000    $355,951,000    $345,447,000
                                                   ============    ============    ============
Earnings Before Interest, Taxes, Depreciation and
  Amortization:
  Aircraft Braking Systems.......................  $121,761,000    $111,457,000    $102,894,000
  Engineered Fabrics.............................     9,251,000       7,991,000       7,001,000
                                                   ------------    ------------    ------------
                                                   $131,012,000    $119,448,000    $109,895,000
                                                   ============    ============    ============
Operating Profits:
  Aircraft Braking Systems.......................  $107,596,000    $ 96,172,000    $ 84,927,000
  Engineered Fabrics.............................     7,288,000       6,008,000       5,007,000
                                                   ------------    ------------    ------------
     Operating Income............................   114,884,000     102,180,000      89,934,000
     Interest expense, net.......................    35,993,000      40,396,000      44,830,000
                                                   ------------    ------------    ------------
       Income before income taxes................  $ 78,891,000    $ 61,784,000    $ 45,104,000
                                                   ============    ============    ============
</TABLE>

                                       F-16
<PAGE>   44
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                   --------------------------------------------
                                                       2000            1999            1998
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Depreciation and Amortization:
  Aircraft Braking Systems.......................  $ 14,165,000    $ 15,285,000    $ 17,967,000
  Engineered Fabrics.............................     1,963,000       1,983,000       1,994,000
                                                   ------------    ------------    ------------
                                                   $ 16,128,000    $ 17,268,000    $ 19,961,000
                                                   ============    ============    ============

Capital Expenditures:
  Aircraft Braking Systems.......................  $  9,092,000    $  8,757,000    $ 13,726,000
  Engineered Fabrics.............................       714,000       1,600,000         886,000
                                                   ------------    ------------    ------------
     Total segments..............................     9,806,000      10,357,000      14,612,000
  Corporate......................................        39,000          56,000         261,000
                                                   ------------    ------------    ------------
                                                   $  9,845,000    $ 10,413,000    $ 14,873,000
                                                   ============    ============    ============
</TABLE>

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                   --------------------------------------------
                                                       2000            1999            1998
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Total Assets:
  Aircraft Braking Systems.......................  $360,070,000    $360,490,000    $352,057,000
  Engineered Fabrics.............................    59,235,000      55,055,000      57,773,000
                                                   ------------    ------------    ------------
                                                   $419,305,000    $415,545,000    $409,830,000
                                                   ============    ============    ============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                   --------------------------------------------
                                                       2000            1999            1998
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Total Assets:
  Total assets for reportable segments...........  $419,305,000    $415,545,000    $409,830,000
  Deferred financing costs not allocated to
     segments....................................     6,143,000       7,898,000       9,734,000
  Corporate assets...............................       377,000         362,000         535,000
  Deferred tax asset not allocated to segments...     4,260,000      18,063,000              --
                                                   ------------    ------------    ------------
     Consolidated Total..........................  $430,085,000    $441,868,000    $420,099,000
                                                   ============    ============    ============
</TABLE>

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

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                   --------------------------------------------
                                                       2000            1999            1998
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Braking systems..................................  $328,472,000    $313,475,000    $305,911,000
Fuel tanks.......................................    36,889,000      33,935,000      30,256,000
Other............................................    10,529,000       8,541,000       9,280,000
                                                   ------------    ------------    ------------
                                                   $375,890,000    $355,951,000    $345,447,000
                                                   ============    ============    ============
</TABLE>

                                       F-17
<PAGE>   45
                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following represents sales by geographic location:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                   --------------------------------------------
                                                       2000            1999            1998
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Sales:
  United States..................................  $226,082,000    $207,810,000    $197,268,000
  Europe.........................................    76,470,000      75,766,000      74,228,000
  Asia...........................................    35,255,000      34,052,000      35,845,000
  North America..................................    23,567,000      19,429,000      20,165,000
  South America..................................    10,000,000      14,105,000      13,042,000
  Australia......................................     4,516,000       4,789,000       4,899,000
                                                   ------------    ------------    ------------
                                                   $375,890,000    $355,951,000    $345,447,000
                                                   ============    ============    ============
</TABLE>

     Sales are attributed to geographic location based on the location of the
customer. Long-lived assets held outside of the United States were $266,000,
$322,000 and $318,000 as of December 31, 2000, 1999 and 1998, respectively.

     The U.S. government accounted for approximately 17%, 15% and 14% of the
Company's total sales, for the years ended December 31, 2000, 1999 and 1998,
respectively.

                                       F-18