TABLE OF CONTENTS




|                                           |                                                                                 |  |  |  |  |  |  | 
|------------------------------------------ | ------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part I                                    
|                                           | Our Company                                                                    
|                                           | Discontinued Operations                                                        
|                                           | Business Strategy                                                              
|                                           | Our Principal Markets and Products                                             
|                                           | Our Business Segments                                                          
|                                           | Our Manufacturing Processes                                                    
|                                           | Our Quality Control Procedures                                                 
|                                           | Our International Operations                                                   
|                                           | Our Technology                                                                 
|                                           | Our Customers                                                                  
|                                           | How We Market and Sell Our Products                                            
|                                           | Our Competition                                                                
|                                           | The Suppliers and Prices of Raw Materials We Use                               
|                                           | Government Regulation of Our Businesses                                        
|                                           | Environmental, Health and Safety Matters                                       
|                                           | Our Intellectual Property                                                      
|                                           | Personnel                                                                      
|Part II                                   
|                                           | Quarterly Stock Prices                                                         
|                                           | Results of Operations                                                          
|                                           | Outlook for 2004                                                               
|                                           | Critical Accounting Policies                                                   
|                                           | Year Ended December 31, 2003 Compared to Year Ended December 31, 2002          
|                                           | Segment Sales Analysis                                                         
|                                           | Year Ended December 31, 2002 Compared to Year Ended December 31, 2001          
|                                           | Liquidity and Capital Resources                                                
|                                           | Primary Financing Requirements                                                 
|                                           | Selected Measures of Liquidity and Capital Resources from Continuing Operations
|                                           | Forward-Looking Statements                                                     
|                                           | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                            
|                                           | Audited Consolidated Financial Statements                                      
|REPORT OF INDEPENDENT AUDITORS            
|                                           | 11. Income Taxes                                                               
|Part III                                  
|Part IV                                   
|SIGNATURES                                
|AMENDMENT NO.1 TO CREDIT AGREEMENT        
|SETTLEMENT AGREEMENT                      
|TRANSITION AGREEMENT                      
|COMMON STOCK SELLING PLAN                 
|AMENDMENT NO 1 TO AMENDED AND RESTATED EMP
|FIRST AMENDMENT TO AMENDED AND RESTATED EM
|CODE OF BUSINESS CONDUCT AND ETHICS       
|SUBSIDIARIES OF THE REGISTRANT            
|CONSENT OF ERNST & YOUNG LLP              
|302 CERT OF CEO                           
|302 CERT OF CFO                           
|906 CERT OF CEO                           
|906 CERT OF CFO                           



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934




|                                            |                              
|------------------------------------------- | -----------------------------
|For the fiscal year ended December 31, 2003 | Commission File No. 001-13797

HAWK CORPORATION

(Exact name of registrant as specified in its
charter)


|                                                   |  |                                     
|-------------------------------------------------- |  | ------------------------------------
|Delaware                                           |  | 34-1608156                          
|                                                   |  |                                     
|(State of Incorporation)                           |  | (I.R.S. Employer Identification No.)
|                                                  
|200 Public Square, Suite 1500,
    Cleveland, Ohio |  | 44114-2301                          
|(Address of principal executive offices)           |  | (Zip Code)                          

Registrants telephone number, including
area code: (216) 861-3553

Securities registered pursuant to
Section 12(b) of the Act:

|                                     |  |                                     
|------------------------------------ |  | ------------------------------------
|Title of Each Class                  |  | Name of Exchange on Which Registered
|                                     |  |                                     
|Class A Common Stock, par value $.01 |  | American Stock Exchange             

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 o

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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).  YES o  NO x

The aggregate market value of the voting common
equity held by non-affiliates as of June 30, 2003 was
$19,469,887 (based on the closing price as quoted on the New
York Stock Exchange on that date).

As of February 27, 2004, the Registrant had
8,624,826 shares of Class A Common Stock, net of treasury
shares, and 0 shares of Class B non-voting Common Stock
outstanding. As of that date, non-affiliates held 5,705,003
shares of Class A Common Stock and 0 shares of Class B
non-voting Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2004 Proxy Statement of Hawk
Corporation are incorporated by reference into Part III of this
Form 10-K.

As used in this Form 10-K, the terms
Company, Hawk, Registrant,
we, us and our mean Hawk
Corporation and its consolidated subsidiaries, taken as a whole,
unless the context indicates otherwise. Except as otherwise
stated, the information contained in this Form 10-K is as
of December 31, 2003.



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Part I



|        |         
|------- | --------
|ITEM 1. | BUSINESS






Our Company


Hawk Corporation, founded in 1989, is a leading
supplier of friction products and powder metal precision
components for industrial, agricultural, powersports and
aerospace applications. Our common stock has been publicly
traded since 1998. We focus on designing, manufacturing and
marketing products requiring sophisticated engineering and
production techniques for applications in markets in which we
have achieved a significant market share. Our friction products
include parts for brakes, clutches and transmissions used in
construction vehicles, agricultural vehicles, trucks,
motorcycles and race cars, and brake parts for landing systems
used in commercial and general aviation. Our precision
components are used in pumps, motors, transmissions, anti-lock
brake systems and other applications for industrial equipment,
lawn and garden equipment, appliances, small hand tools and
trucks. Our friction and precision components are made
principally from proprietary formulations and designs of
composite materials and metal powders.

We benefit from a deep and diversified customer
base, with approximately 2,500 total customers, none of which
accounted for more than 8.5% of our net sales in 2003. We are a
preferred supplier to many of the worlds largest and well
known brand name original equipment manufacturers, deriving more
than 80% of our sales from products for which we are the sole
source provider for specific customer applications. We offer our
customers full service capabilities, from design through
production, and work closely with original equipment
manufacturers to improve performance and develop product
innovations to generate increased sales. We also benefit from a
diversified product list, with over 5,000 total products, none
of which accounted for more than 5% of our net sales in 2003. We
do not target the cyclical consumer automotive sector.
Consequently, less than 9% of our net sales in any of the last
five years were to the consumer automotive market. For the year
ended December 31, 2003, we generated net sales of
$202.6 million and income from operations of
$10.9 million. For the year ended December 31, 2002,
we had net sales of $185.9 million and income from operations of
$13.0 million.

Hawk is a holding company, the principal assets
of which consist of the capital stock of its manufacturing
subsidiaries, Friction Products Co., S.K. Wellman Corp., S.K.
Wellman SpA, S.K. Wellman of Canada Limited, Hawk Composites
(Suzhou) Company Limited, Hawk International Trading (Shanghai)
Company, Ltd., Helsel, Inc., Sinterloy Corporation, Allegheny
Clearfield, Inc., Net Shape Technologies LLC, Quarter Master
Industries, Inc., Tex Racing Enterprises, Inc. and Logan Metal
Stampings, Inc. Through our subsidiaries, we operate primarily
in three reportable segments: friction products, precision
components and performance racing. For the year ended
December 31, 2003, our sales by segment were:

Sales Segment Graph

2



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| |   |                  
| | - | -----------------
| |  | Friction Products



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We believe that, based on net sales, we are one
    of the top worldwide manufacturers of friction products used in
    industrial, agricultural, powersports and aerospace
    applications. Our friction products segment manufactures parts
    and components made from proprietary formulations of composite
    materials, primarily consisting of metal powders and synthetic
    and natural fibers. Friction products are used in brakes,
    clutches and transmissions to absorb vehicular energy and
    dissipate it through heat and normal mechanical wear. The
    principal markets served by our friction products segment
    include construction vehicles, agricultural vehicles, trucks,
    motorcycles, race cars, all-terrain vehicles (ATVs) and
    commercial and general aircraft. We believe we are:



| |   |                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a leading domestic and international supplier of
    friction products for construction equipment, agricultural
    equipment and trucks,                                                                                                                                                                                 
|
| |  | the leading North American independent supplier
    of friction materials for braking systems for new and existing
    series of many commercial aircraft models, including the Boeing
    737 and 757 and the MD-80, and several regional jets used by
    commuter airlines, including the Canadair regional jet series,
|
| |  | a leading domestic supplier of friction products
    into powersport and specialty markets such as motorcycles, race
    cars, ATVs and snowmobiles, and                                                                                                                                                                 
|
| |  | the largest supplier of friction materials for
    the growing general aviation market, including numerous new and
    existing series of Gulfstream, Cessna, Lear and Beech aircraft.                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the years ended December 31, 2003 and
    2002, our friction products segment generated net sales of
    $121.6 million and $106.1 million, representing 60.0%
    and 57.1% of our total net sales, respectively and income from
    operations of $8.3 million and $7.8 million,
    representing 76.1% and 60.0%, of our total income from
    operations, respectively. The foreign operations of our friction
    segment represented 37.3% of total friction segment net sales in
    2003 compared to 30.9% in 2002.



| |   |                     
| | - | --------------------
| |  | Precision Components



| |                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are a leading supplier of powder metal
    precision components for industrial equipment, lawn and garden
    equipment, appliances, hand tools and trucks. We use composite
    metal alloys in powder form to manufacture high quality
    custom-engineered metal components. Our precision components
    segment serves four specific areas of the powder metal
    marketplace:



| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | tight tolerance fluid power components such as
    pump elements and gears,                                                  
|
| |  | large powder metal components used primarily in
    construction equipment, agricultural equipment and trucks,               
|
| |  | high volume parts for the lawn and garden,
    appliance and other markets, and                                              
|
| |  | metal injection molded parts for a variety of
    industries, including small hand tools, medical and
    telecommunications.



| |                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the years ended December 31, 2003 and
    2002, our precision components segment generated net sales of
    $68.1 million and $67.2 million, representing 33.6%
    and 36.1% of our total net sales, respectively and income from
    operations of $2.2 million and $4.3 million,
    representing 20.2% and 33.1% of our total income from
    operations, respectively.



| |   |                   
| | - | ------------------
| |  | Performance Racing



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We engineer, manufacture and market premium
    branded clutch, transmissions and driveline systems for the
    performance racing market. Through this segment, we supply parts
    for the National Association for Stock Car Auto Racing
    (NASCAR) and the Indy Racing League (IRL) racing
    series and for the weekend enthusiasts in the Sports Car Club of
    America (SCCA) and the American Speed Association
    (ASA) racing clubs and other road racing and competition
    cars. For the years ended December 31, 2003 and 2002, our
    performance racing segment generated net sales of
    $12.9 million and $12.6 million,

3



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| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | representing 6.4% and 6.8% of our total net
    sales, respectively and income from operations of
    $0.4 million and $0.9 million, representing 3.7% and
    6.9% of our total income from operations, respectively.




Discontinued Operations

In the fourth quarter of 2003 we committed to a
plan to sell our motor segment, which has operations in Alton,
Illinois and Monterrey, Mexico. This segment, which manufactures
die-cast aluminum rotors for fractional and sub-fractional
horsepower electric motors, failed to achieve a certain level of
profitability, and, after completing extensive analysis, we
determined that a divestiture of this segment would allow us to
concentrate on our major segments of friction products and
precision components. We have initiated an active marketing plan
and anticipate selling the segment prior to the end of 2004.

Results of operations for this segment have been
restated to reclassify its net operations, assets and
liabilities as discontinued for all periods presented in this
report. Certain corporate expenses and interest expense
previously allocated to this segment have been reallocated to
our remaining continued operations, which have resulted in a
restatement of our results by business segment. The loss from
discontinued operations in 2003 includes a $4.5 million
pre-tax, non-cash charge to reduce the net assets of this
segment to its estimated fair value, less costs to sell.

Operating results from discontinued operations
are summarized as follows:

|                     |  |               |      |      |  |      |      |   |  |   |      |  
|-------------------- |  | ------------- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                     |  | 2003          |      | 2002 |  | 2001
|                     |  |               |      |      |  |     
|                     |  |              
|                     |  | (in millions)
|Net sales            |  | $             | 14.5 |      |  | $    | 11.4 |   |  | $ | 7.5  |  
|                     |  |               |      |      |  |      |      |   |  |   |      |  
|Net loss, net of tax |  | $             | (5.0 | )    |  | $    | (1.9 | ) |  | $ | (2.1 | )
|                     |  |               |      |      |  |      |      |   |  |   |      |  






Business Strategy


Our business strategy includes the following
principal elements:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Focus on High-Margin, Specialty Applications.We focus on markets that require
    sophisticated engineering and production techniques and in which
    we have achieved a significant market share. We seek to compete
    in markets requiring a high level of engineering expertise and
    technical capability, rather than in markets in which the
    primary competitive factor is product pricing. We believe
    margins for our products in these markets are higher than in
    other manufacturing markets that use standardized products. Our
    gross margins were 23.4% and 23.8% for the years ended
    December 31, 2003 and 2002, respectively.                                                                                                                                                                                                                                              
|
| |  | Introduce New Products.A key part of our strategy is the
    introduction of products for new applications, which incorporate
    improved performance characteristics or reduced costs in
    response to customer needs. Our engineers proactively focus on
    developing new product solutions that enhance performance and
    reduce manufacturing costs, including instances where we are the
    incumbent supplier. We also grow by applying our existing
    products and technologies to new specialized applications where
    our products have a performance or technological advantage.                                                                                                                                                                                                                                                                                                           
|
| |  | Expand Customer Relationships.We seek to provide advanced solutions
    to customers, enhancing our long-term relationships. Our
    engineers work closely with customers to develop and design new
    products and improve the performance of existing products. We
    believe that more than 80% of our net sales are from products
    and materials for which we are the sole source provider for
    specific customer applications. Our predecessors formed, and we
    have continued to build, relationships with a number of
    customers dating back over 50 years. Our commitment to
    quality, service and just-in-time delivery enables us to build
    and maintain strong and stable customer relationships. We
    believe that strong relationships with our customers provide us
    with significant competitive advantages in obtaining and
    maintaining new business opportunities.
|
| |  | Capitalize on Aftermarket Opportunities.Our aftermarket sales enable us to
    reduce our exposure to adverse economic cycles. Because friction
    products are the consumable, or wear-related, component of
    brake, clutch and transmission systems, the use of our friction
    products in conjunction with a new or                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | existing system provides us with the opportunity
    to supply the aftermarket for the life of the system, typically
    through sales to the original equipment manufacturer. For
    example, the ability to service the aftermarket for a particular
    aircraft braking system will likely provide us with a stable
    market for our friction products for the life of the product,
    which can be 30 years or more. We estimate that aftermarket
    sales of friction products have comprised approximately 40% of
    our friction product sales in recent years. Additionally, in
    2003 we instituted new marketing programs to expand our
    aftermarket sales into new markets and applications that are not
    served by our original equipment customers.                      
|
| |  | Selectively Expand Internationally.Through our friction and precision
    component segments, we have foreign manufacturing facilities in
    Italy, Canada and China, and through our friction segments
    worldwide distribution network, we continue to selectively
    expand our international operations in established markets
    throughout Europe, Asia, North America, South America and
    Australia. Our international net sales represented
    $47.8 million, or 23.6%, of our consolidated net sales for
    the year ended December 31, 2003, and $34.1 million,
    or 18.3%, of our consolidated net sales in 2002.                                                                                                                                                            
|
| |  | Lower Our Costs of Production.Through various cost reduction
    programs, lean manufacturing initiatives and Six Sigma projects,
    we continue to look for ways to lower the total cost of
    producing our product. In the fourth quarter of 2003, we
    committed to a plan to close our Brook Park, Ohio friction
    manufacturing facility and move all production to a new lower
    cost domestic facility. We expect that the annual pre-tax
    savings to us as a result of this relocation will be
    approximately $2.5 million at full production levels,
    primarily from reduced operating expenses in addition to various
    state and local incentive packages. The new leased facility is
    expected to begin construction in 2004 and be fully operational
    in 2005.




Our Principal Markets and Products

We focus on supplying the industrial,
agricultural, aerospace, and performance racing markets with
components that require sophisticated engineering and production
techniques for applications where we have achieved a significant
market share. We have diversified our end markets through
acquisitions and product line expansions. We believe that
diversification has reduced our economic exposure to the
cyclical effects of any particular industry. For the year ended
December 31, 2003, our sales by principal markets were:

Principal Markets Graph

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| |                  
| | -----------------
| | Friction Products

Friction products are the replacement elements
used in brakes, clutches and transmissions to absorb vehicular
energy and dissipate it through heat and normal mechanical wear.
For example, the friction components in construction vehicles
enable their braking systems to slow and stop the vehicles and
enable their clutches and transmissions to function in
controlling the motion of the vehicles. Our friction products
also include friction components for use in automatic and power
shift transmissions, clutch facings that serve as the main
contact point between an engine and a transmission, and brake
components for use in many truck, construction, agriculture,
aircraft and specialty vehicle braking systems. Our friction
products segment manufactures products made from proprietary
formulations of composite materials that primarily consist of
metal powders and synthetic and natural fibers.

Our friction products are custom-designed to meet
the performance requirements of a specific application and must
meet temperature, pressure, component life and noise level
criteria. The engineering required in designing a friction
material for a specific application dictates a balance between
the component life cycle and the performance application of the
friction material in, for example, stopping or starting
movement. Friction products are consumed through customary use
in a brake, clutch or transmission system and require regular
replacement. Because the friction material is the consumable, or
wear-related, component of these systems, new friction product
introduction in conjunction with a new system provides us with
the opportunity to supply the aftermarket with that friction
product for the life of the system.

The principal markets served by our friction
segment include manufacturers of truck clutches, transmissions,
heavy-duty construction and agricultural vehicle brakes,
aircraft brakes, motorcycle, snowmobile and racing and
performance automotive brakes. Based on net sales, we believe
that we are among the top worldwide manufacturers of friction
products used in industrial and aerospace applications. We
estimate that aftermarket sales of friction products have
comprised approximately 40% of our net friction product sales in
recent years. We believe that our aftermarket sales component
enables us to reduce our exposure to adverse economic cycles.

Construction/ Agriculture/ Trucks/ Powersport
and Specialty.We supply a variety of
friction products for use in brakes, clutches and transmissions
on construction and agriculture equipment, trucks and specialty
vehicles. These components are designed to precise friction
characteristics and mechanical tolerances permitting brakes to
stop or slow a moving vehicle and the clutch or transmission
systems to engage or disengage. We believe we are a leading
supplier to original equipment manufacturers and to the
aftermarket. We also believe that our trademarks, including
Velvetouch®, Fibertuff® and Hawk Performance®,
are well known in the aftermarket for these components. The use
of our friction products in conjunction with a new or existing
brake, clutch or transmission system provides us with the
opportunity to supply the aftermarket with the friction product
for the life of the system.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Construction Equipment.We supply friction products such as
    transmission discs, clutch facings and brake components to
    manufacturers of construction equipment, including Caterpillar.
    We believe we are one of the largest domestic supplier of these
    types of friction products. Replacement components for
    construction equipment are sold through original equipment
    manufacturers as well as various aftermarket distributors.  
|
| |  | Agriculture Equipment.We supply friction products such as
    clutch facings, transmission discs and brake components to
    manufacturers of agriculture equipment, including John Deere and
    CNH. We believe we are the one of the largest domestic suppliers
    of these friction products. Replacement components for
    agricultural equipment are sold through original equipment
    manufacturers, as well as various aftermarket distributors.
|
| |  | Medium and Heavy Trucks.We supply friction products for clutch
    buttons and facings used in medium and heavy trucks to original
    equipment manufacturers, such as Eaton and Sachs. We believe we
    are the leading domestic supplier of replacement friction
    products used in these applications. Replacement components are
    sold through original equipment manufacturers and various
    aftermarket distributors.                        
|
| |  | Powersport and Specialty Friction.We supply friction products for use in
    specialty applications, such as brake pads for Harley-Davidson
    motorcycles, General Motors Hummer and Bombardier, Polaris
    and Arctic Cat snowmobiles, race cars and performance automotive
    vehicles. We believe that these markets                                                                                                                                

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| |  |                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | are experiencing significant growth, and that we
    have increased our market share with our combination of superior
    quality and product performance. Our replacement components are
    sold through original equipment manufacturers and various
    aftermarket distributors.

Aerospace.We
believe we are a leading North American independent supplier of
friction materials to the manufacturers of braking systems for
the Boeing 727, 737 and 757, the DC-9, DC-10, MD-80 and
Bombardiers Canadair regional jet series used by commuter
airlines. We believe we are also the largest supplier of
friction materials to the general aviation (non-commercial
airline, non-military) market, supplying friction materials for
aircraft manufacturers such as Cessna, Lear, Gulfstream and
Beech.

Each aircraft braking system, including the
friction materials supplied by us, must meet stringent Federal
Aviation Administration criteria and certification requirements.
New model development and Federal Aviation Administration
testing for our aircraft braking system customers generally
begins two to five years before full scale production of new
braking systems. If we and our aircraft brake system
manufacturing partner are successful in obtaining the rights to
supply a particular model of aircraft, we will typically supply
our friction products for that models aircraft braking
system for as long as the model continues to fly because it is
generally not economically feasible to redesign a braking system
once it is certified by the Federal Aviation Administration.
Moreover, Federal Aviation Administration maintenance
requirements mandate that brake components be changed after a
specified number of take-offs and landings, which we expect to
result in a continued and steady market for our aerospace
friction products.

Our friction products for commercial aerospace
applications are primarily used on single-aisle
aircraft that are flown on shorter routes, resulting in more
takeoffs and landings than those experienced by wide
body aircraft. We believe our friction products provide an
attractive combination of performance and cost effectiveness in
these applications. According to Boeings 2003 Current
Market Outlook, approximately 75% of the 15,612 airplanes in the
world fleet are single-aisle or regional commercial aircraft.
The report also forecasts single-aisle and regional aircraft to
grow by approximately 9,550 to 25,162 by the end of 2022. The
Boeing report also states that world airline passenger traffic
is projected to increase 5.1% over the next twenty years. We
expect that long-term growth in world airline traffic, combined
with the increasing number of single-aisle and regional
aircraft, will cause long-term demand for our aerospace friction
products to be stable. However, this market remained soft in
2003 with our net aircraft sales increasing only 2.5% when
compared to 2002. As a result of the continued retirement of
certain older aircraft, which utilize our braking material and
the continued softness in air travel since September 2001,
we expect sales in this market to decline in 2004 by
approximately 6% to 8% compared to 2003.



| |                     
| | --------------------
| | Precision Components

Our precision components segment is a leading
supplier of powder metal components consisting primarily of
pump, motor and transmission elements, gears, pistons and other
component parts for applications ranging from lawn and garden
tractors to industrial equipment. Since we were founded, we have
participated in the growing powder metal products industry with
a focus on the North American industrial market. The Metal
Powder Industries Federation, an industry trade group, estimates
that the powder metal market for automotive and non-automotive
applications in North America had sales of over $5 billion
in 2002.

We manufacture a variety of components made from
powder metals for use in:



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fluid power applications, such as pumps and other
    hydraulic mechanisms,                                                                     
|
| |  | transmissions, other drive mechanisms and
    anti-lock braking systems used in trucks, off-road and lawn and
    garden equipment,             
|
| |  | gears and other components for use in home
    appliances, small hand tools, office equipment, medical, and
    telecommunication equipment, and
|
| |  | components used in automotive applications.                                                                                                     

Powder metal components can often be produced at
a lower cost per unit than products manufactured with forging,
casting or stamping technologies due to the elimination of, or
substantial reduction in, secondary

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machining, lower material costs and the virtual
elimination of raw material waste. In addition, we expect
advances in our core powder metal technology to permit
production of powder metal components with improved strength,
hardness and durability for demanding applications and with
greater design flexibility and dimensional precision. As a
result, we believe that the current trend of substituting powder
metal components for forged, cast or stamped components in
industrial applications will continue for the foreseeable
future, providing us with increased product and market
opportunities.


Our precision component segment proactively
targets four specific niches in the market place:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | High Precision.Our
    pressing and finishing capabilities enable us to specialize in
    tight tolerance fluid power components such as pump elements and
    gears. In addition, we believe that our machining capabilities
    provide us with a competitive advantage by giving us the ability
    to supply a completed part to our customers, typically without
    any subcontracted precision machining. We expect that our growth
    in this niche will be driven by existing customers new
    design requirements and new product applications primarily for
    pumps, motors and transmissions.                                                                                                               
|
| |  | Large Size Capability.We have the capability to make powder
    metal components that are among the largest used in North
    America. For example, we make reactor plates, which serve as an
    opposing surface to friction disks made by us, having diameters
    up to 19 inches for use in transmissions in construction
    equipment. We expect our sales of large powder metal components
    to continue to grow as we create new designs for existing
    customers and benefit from market growth, primarily in current
    construction, agricultural and truck applications.                                                                                                                                   
|
| |  | High Volume.We also
    target smaller, high volume parts where we can use efficient
    pressing and sintering capabilities to our best advantage. In
    this niche, our primary markets have been powder metal
    components for the lawn and garden, home appliance, power hand
    tool, truck, automotive and business equipment markets. We
    believe that our high volume capabilities provide us with
    opportunities to cross-sell numerous of our other precision
    components to customers of high precision and large size parts.
    Several of our leading original equipment customers have a
    variety of applications that we supply from both our friction
    and precision components segments.
|
| |  | Metal Injection Molding.We also manufacture small, complex
    metal injection molded parts for a variety of industries, such
    as small hand tools, medical and telecommunications. We believe
    that many of our traditional powder metal customers may also be
    attractive prospects for metal injected molded parts.                                                                                                                                                                                                                                                                                                                                                                                              

Performance
Racing

We supply premium clutch, transmissions and
driveline systems under our Quarter Master and Tex Racing
brands. These products are used by leading teams in NASCAR, IRL
and ASA racing series and by weekend enthusiasts in the SCCA
racing clubs, as well as in other road racing and oval track
competition cars. We supply the official brake pad of the SCCA
and are a participating manufacturer sponsor of the SCCA and
several other racing series.

8



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Our Business Segments

The following table sets forth comparative
operating results and total assets by each of our operating
segments:

|                                 |                          |                         |   |       |       |      |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |      |       |  
|-------------------------------- | ------------------------ | ----------------------- | - | ----- | ----- | ---- |  | ---- | ----- | - | - | ----- | ----- |  |  | ---- | ----- | - | - | ----- | ----- |  |  | ---- | ----- | -
|                                 |                          |                        
|                                 |                          | Year ended December 31,
|                                 |                          |                        
|                                 |                          |                         |   |       |       |     
|                                 |                          | 2003                    |   | 2002  |       | 2001
|                                 |                          |                         |   |       |       |     
|                                 |                          |                         |   |       |       |      |  |      |       |   |   |      
|                                 |                          |                        
|                                 |                          | (dollars in millions)  
|Net sales to external customers: |                          |                         |   |       |       |      |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |     
|                                 | Friction products (1)    |                         | $ | 121.6 |       |      |  | 60.0 | %     |   | $ | 106.1 |       |  |  | 57.1 | %     |   | $ | 104.1 |       |  |  | 58.9 | %    
|                                 | Precision components(2)  |                         |   | 68.1  |       |      |  | 33.6 | %     |   |   | 67.2  |       |  |  | 36.1 | %     |   |   | 59.8  |       |  |  | 33.8 | %    
|                                 | Performance racing(1)    |                         |   | 12.9  |       |      |  | 6.4  | %     |   |   | 12.6  |       |  |  | 6.8  | %     |   |   | 13.0  |       |  |  | 7.3  | %    
|                                 |                          |                         |   |       |       |      |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |     
|                                 |                          | Consolidated            |   | $     | 202.6 |      |  |      | 100.0 | % |   | $     | 185.9 |  |  |      | 100.0 | % |   | $     | 176.9 |  |  |      | 100.0 | %
|                                 |                          |                         |   |       |       |      |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |     
|Gross profit:                    |                          |                         |   |       |       |      |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |     
|                                 | Friction products(1)     |                         | $ | 29.5  |       |      |  | 62.2 | %     |   | $ | 25.4  |       |  |  | 57.5 | %     |   | $ | 24.9  |       |  |  | 61.2 | %    
|                                 | Precision components(2)  |                         |   | 14.5  |       |      |  | 30.6 | %     |   |   | 15.1  |       |  |  | 34.1 | %     |   |   | 12.0  |       |  |  | 29.5 | %    
|                                 | Performance racing(1)    |                         |   | 3.4   |       |      |  | 7.2  | %     |   |   | 3.7   |       |  |  | 8.4  | %     |   |   | 3.8   |       |  |  | 9.3  | %    
|                                 |                          |                         |   |       |       |      |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |     
|                                 |                          | Consolidated            |   | $     | 47.4  |      |  |      | 100.0 | % |   | $     | 44.2  |  |  |      | 100.0 | % |   | $     | 40.7  |  |  |      | 100.0 | %
|                                 |                          |                         |   |       |       |      |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |     
|Income from operations(3)        |                          |                         |   |       |       |      |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |     
|                                 | Friction products(1)     |                         | $ | 8.3   |       |      |  | 76.1 | %     |   | $ | 7.8   |       |  |  | 60.0 | %     |   | $ | 6.6   |       |  |  | 91.6 | %    
|                                 | Precision components (2) |                         |   | 2.2   |       |      |  | 20.2 | %     |   |   | 4.3   |       |  |  | 33.1 | %     |   |   | 0.3   |       |  |  | 4.2  | %    
|                                 | Performance racing(1)    |                         |   | 0.4   |       |      |  | 3.7  | %     |   |   | 0.9   |       |  |  | 6.9  | %     |   |   | 0.3   |       |  |  | 4.2  | %    
|                                 |                          |                         |   |       |       |      |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |     
|                                 |                          | Consolidated            |   | $     | 10.9  |      |  |      | 100.0 | % |   | $     | 13.0  |  |  |      | 100.0 | % |   | $     | 7.2   |  |  |      | 100.0 | %
|                                 |                          |                         |   |       |       |      |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |     

|              |                         |                       |   |       |       |  |   |      |       | 
|------------- | ----------------------- | --------------------- | - | ----- | ----- |  | - | ---- | ----- | 
|              |                         |                      
|              |                         | December 31,         
|              |                         |                      
|              |                         | 2003                  |   | 2002 
|              |                         |                       |   |      
|              |                         |                      
|              |                         | (in millions)        
|Total assets: |                         |                       |   |       |       |  |   |     
|              | Friction products(1)    |                       | $ | 101.2 |       |  | $ | 95.7 |      
|              | Precision components(2) |                       |   | 77.0  |       |  |   | 75.7 |      
|              | Performance racing(1)   |                       |   | 11.0  |       |  |   | 11.1 |      
|              |                         |                       |   |       |       |  |   |     
|              |                         | Continuing operations |   |       | 189.2 |  |   |      | 182.5 | 
|              | Discontinued operations |                       |   | 4.3   |       |  |   | 10.4 |      
|              |                         |                       |   |       |       |  |   |     
|              |                         | Consolidated          |   | $     | 193.5 |  |   | $    | 192.9 | 
|              |                         |                       |   |       |       |  |   |     



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As of January 1, 2002, we reclassified an
    operating unit formerly associated with our performance racing
    segment to our friction products segment as a result of changes
    in the internal operating responsibility of that unit. We have
    reclassified all prior periods discussed in this Form 10-K
    to reflect this change.                                                                                                              
|   
|(2) | A line of business formerly associated with our
    motor segment, which was discontinued as of December 31,
    2003, will be retained by us and has been reclassified to our
    precision components segment. Net sales from this line of
    business were $1.2 million, $1.3 million and
    $1.5 million for the years ended December 31, 2003,
    2002, and 2001, respectively. All prior periods have been
    reclassified to reflect this change.

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|    |                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | In accordance with the non-amortization
    provisions of SFAS No. 142 (see
    Note 2-Significant Accounting Policies to the
    accompanying consolidated financial statements beginning on
    page 32 of this Form 10-K), we discontinued the
    amortization of goodwill in 2002.



| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table illustrates the pro forma
    effect on income (loss) from operations had we applied the
    non-amortization provisions of SFAS 142 for the year ended
    December 31, 2001 by segment:

|                                         |                      |              |   |     |      |  |  |      |       |  
|---------------------------------------- | -------------------- | ------------ | - | --- | ---- |  |  | ---- | ----- | -
|                                         |                      |             
|                                         |                      | Year Ended  
|                                         |                      | December 31,
|                                         |                      | 2001        
|                                         |                      |             
|                                         |                      |              |   |    
|                                         |                      |             
|                                         |                      | (dollars in 
|                                         |                      | millions)   
|Pro forma income (loss) from operations: |                      |              |   |     |      |  |  |     
|                                         | Friction products    |              | $ | 7.8 |      |  |  | 77.2 | %    
|                                         | Precision components |              |   | 1.5 |      |  |  | 14.9 | %    
|                                         | Performance racing   |              |   | 0.8 |      |  |  | 7.9  | %    
|                                         |                      |              |   |     |      |  |  |     
|                                         |                      | Consolidated |   | $   | 10.1 |  |  |      | 100.0 | %
|                                         |                      |              |   |     |      |  |  |     




Our Manufacturing Processes

The manufacturing processes for most of our
friction products, performance racing brake products and powder
metal precision components are similar. In general, all use
composite metal alloys in powder form to make high quality
powder metal components. The basic manufacturing steps of
blending/compounding, molding/compacting, sintering (or bonding)
and secondary machining/treatment are as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Blending/compounding:Composite metal alloys in powder form
    are blended with lubricants and other additives according to
    scientific formulas, many of which are proprietary. The formulas
    are designed to produce precise performance characteristics
    necessary for a customers particular application. We often
    work together with our customers to develop new formulas that
    will produce materials with greater energy absorption
    characteristics, durability and strength.   
|
| |  | Molding/compacting:At room temperature, a specific amount
    of a powder alloy is compacted under pressure into a desired
    shape. Our molding presses are capable of producing pressures of
    up to 3,000 tons. We believe that we have some of the largest
    presses in the powder metal industry, enabling us to produce
    large, complex components. We can also create complex shapes not
    obtainable with conventional powder metal presses with our metal
    injection molding equipment.
|
| |  | Sintering:After
    compacting, molded parts are heated in furnaces to specific
    temperatures slightly below melting, enabling metal powders to
    metallurgically bond, harden and strengthen while retaining
    their desired shape. For friction materials, the friction
    composite part is also bonded directly to a steel plate or core,
    creating a strong continuous metallic part.                                                                                                        
|
| |  | Secondary machining/treatment:If required by customer
    specifications, a sintered part undergoes additional processing.
    This processing is generally necessary to attain increased
    hardness or strength, tighter dimensional tolerances or
    corrosion resistance. To achieve these specifications, parts are
    heat or steam treated, precision coined or flattened, ground,
    machined or treated with a corrosion resistant coating.                                                     

Some of our friction products, including those
used in oil-cooled brakes and power shift transmissions, do not
require all of the foregoing steps. For example, composite
friction materials are molded under high temperatures and cured
in electronically-controlled ovens and then bonded to a steel
plate or core with a resin-based polymer.




Our Quality Control Procedures

Throughout our design and manufacturing process,
we focus on quality control. For product design, each
manufacturing facility uses state-of-the-art testing equipment
to replicate virtually any application required by our
customers. This equipment is essential to our ability to
manufacture components that meet stringent customer
specifications. To ensure that tolerances have been met and that
the requisite quality is inherent in our finished products, we
use statistical process controls, a variety of electronic
measuring equipment and computer-

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controlled testing machinery. We have also
established programs within each of our facilities to detect and
prevent potential quality problems.


In 2001, we launched a Six Sigma initiative
focused on creating a culture of continuous improvement. Six
Sigma is a discipline that aims to eliminate costly process
variation in a companys operations and bring more value to
its customers. To achieve this, Six Sigma managers use
statistical analysis to locate process and product errors. As of
December 31, 2003 we have trained approximately 260
employees under the Six Sigma initiative.




Our International Operations

We operate friction manufacturing facilities in
Orzinuovi, Italy, Ontario, Canada and Suzhou, China. We operate
a powder metal manufacturing facility in Suzhou, China. Our
international operations are subject to the usual risks of
operating in foreign jurisdictions. Risks inherent in
international operations include the following:



| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Foreign countries may impose additional
    withholding taxes or otherwise tax our foreign income, impose
    tariffs or adopt other restrictions on foreign trade or
    investment, including exchange controls,                                   
|
| |  | Fluctuations in exchange rates may affect product
    demand and may adversely affect the profitability in U. S.
    dollars of products and services provided by us in foreign
    markets where payment for our products is made in local currency,
|
| |  | Unexpected adverse changes in foreign laws or
    regulatory requirements may occur,                                                                                                                                                                 
|
| |  | Compliance with a variety of foreign laws and
    regulations may be difficult, and                                                                                                                                                                  
|
| |  | Overlap of different tax laws may subject us to
    additional taxes.                                                                                                                                                                                

Our international net sales represented
$47.8 million, or 23.6% of our consolidated net sales in
2003 compared $34.1 million, or 18.3% of our consolidated
net sales in 2002.




Our Technology

We believe we are an industry leader in the
development of systems, processes and technologies that enable
the manufacturing of friction products with numerous performance
advantages, such as greater wear resistance, increased stopping
power, lower noise and smoother engagement. Our expertise is
evidenced by our aircraft brake components, which are currently
being installed on many of the braking systems of the Boeing
737-600, -700, -800 and -900 commercial airliners and
Bombardiers Canadair regional jet series of commuter
aircraft, as well as new series of industrial equipment from
various original equipment manufacturers.

We maintain an extensive library of proprietary
friction product formulas that serve as starting points for new
product development. Each formula has a specific set of
ingredients and processes to generate repeatability in
production. A slight change in a mixture can produce
significantly different performance characteristics. We use a
variety of technologies and materials in developing and
producing our products, such as graphitic and cellulose
composites. We believe our expertise in the development and
production of products using these different technologies and
materials gives us a competitive advantage over other friction
product manufacturers, which typically have expertise in only
one or two types of friction material.

We also believe that our precision components
business is able to produce a wide range of products from small
precise components to large parts. We have presses that produce
some of the largest powder metal parts in the world, and our
powder metal technology permits the manufacture of complex
components with specific performance characteristics and close
dimensional tolerances that would be impractical to produce
using conventional metalworking processes such as forging,
casting or stamping. With our metal injection molding
technology, we are able to create complex shapes previously not
available using conventional powder metal technology.




Our Customers

We seek to provide advanced solutions to
customers, enhancing our long-term relationships. Our engineers
work closely with our customers to develop and design new
products and improve the performance of existing

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##### Table of Contents



products. We believe that more than 80% of our
sales are from products and materials for which we are the sole
source provider for specific customer applications. Our
predecessors developed, and we have continued to build,
relationships with a number of customers dating back over
50 years. Our commitment to quality, service and
just-in-time delivery have enabled us to build and maintain
strong and stable customer relationships. We believe that strong
relationship with our customers provide us with significant
competitive advantages in obtaining and maintaining new business
opportunities.


Through various acquisitions since our formation,
we have broadened our product lines, increased our technological
capabilities, further enhanced our customer relationships and
further expanded our preferred supplier status. As a result of
our commitment to customer service and satisfaction, we are a
preferred supplier to many of the worlds leading original
equipment manufacturers, including Aircraft Braking Systems,
Goodrich, Caterpillar, Eaton, Deere, CNH, Hydro-Gear,
Sauer-Danfoss, Parker Hannifin, Electrolux and Haldex.

Our top five customers accounted for 26.6% of our
consolidated net sales in 2003 and 25.1% of our consolidated net
sales in 2002.

The following table describes some of our key
customers in each of our business segments, the approximate
number of years they have been our customers, the principal
products we sell to them and selected applications for those
products:

|                              |                          |                                                                                                                                                                                                                 |                                                                                                                        |                                                                                                                 |                                       |                                                                                                                                                                             |                                                                  
|----------------------------- | ------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------
|                              |                          | Selected Key Customers                                                                                                                                                                                          |                                                                                                                        | Principal                                                                                                       |                                       | Selected                                                                                                                                                                   
|Business Segment              |                          | (and Years as a Customer)                                                                                                                                                                                       |                                                                                                                        | Products Sold                                                                                                   |                                       | Applications                                                                                                                                                               
|                             
|                             
|Friction ProductsConstruction |                          | Caterpillar (55 years)
    Allison Transmission (55 years)
     Dana Clark Hurth (35 years)                                                                                                                     |                                                                                                                        | Brake Linings
    Transmission Discs                                                                            |                                       | Tractors, Motor Graders and Wheel Loaders
    Lift Trucks and Mining Trucks                                                                                                
|                             
|                              | Agriculture              |                                                                                                                                                                                                                 | John Deere (45 years)
    CNH (40 years)
    AGCO (35 years)                                                           |                                                                                                                 | Brake Linings
    Transmission Discs  |                                                                                                                                                                             | Tractors                                                         
|                             
|                              | Truck                    |                                                                                                                                                                                                                 | Eaton (30 years)
    ZF Meritor (2 years)                                                                              |                                                                                                                 | Clutch Buttons
    Transmission Discs |                                                                                                                                                                             | On-highway Trucks                                                
|                             
|                              | Aerospace                |                                                                                                                                                                                                                 | Aircraft Braking Systems (35 years)
    BFGoodrich (35 years)
    Parker Hannifin (20 years)
    Bombardier (10 years) |                                                                                                                 | Brake Linings                         |                                                                                                                                                                             | Commercial Airliners
    Commuter Planes
    Military Helicopters
|                             
|                              | Powersport and Specialty |                                                                                                                                                                                                                 | Hayes Brake (20 years)
    Bombardier (15 years)
    TRW (10 years)                                                    |                                                                                                                 | Brake Linings                         |                                                                                                                                                                             | Harley-Davidson Motorcycles
    Snowmobiles
    AM General Hummer
|                             
|Precision Components          |                          | Eaton (29 years)
    Electrolux Home Products (20 years)
    Parker Hannifin (20 years)
    MTD (20 years)
    Haldex Barnes (18 years)
    Hydro-Gear (15 years)
    Sauer-Danfoss (15 years)  Honda (8 years) |                                                                                                                        | Powder Metal Gears
    Rotors
    Transmission Components
    Hubs, Bearings, Spacers and Structural Components |                                       | Hydrostatic Transmissions
    Fluid Power Controls
    Construction Equipment
    Industrial Pumps
    Gasoline Pumps
    Truck Transmissions
    Lawn and Garden Equipment
|                             

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|                   |  |                                                                                                                                              |  |                                                                         |  |             
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- |  | ------------
|                   |  | Selected Key Customers                                                                                                                       |  | Principal                                                               |  | Selected    
|Business Segment   |  | (and Years as a Customer)                                                                                                                    |  | Products Sold                                                           |  | Applications
|                  
|                  
|Performance Racing |  | Petty Enterprises (22 years)
    Richard Childress Racing (25 years)
    Robert Yates Racing (19 years)
    Hendricks Motorsports (20 years) |  | Gears
    Transmission Components
    Clutch and Drive-train Components |  | Race Cars   
|                  




How We Market and Sell Our Products

We market our products globally through product
managers and direct sales professionals, who operate primarily
from our facilities in the United States, Italy, China and
Canada and sales offices in Germany and Argentina. Our product
managers and sales force work directly with our engineers who
provide the technical expertise necessary for the development
and design of new products and for the improvement of the
performance of existing products. Our friction products are sold
both directly to original equipment manufacturers and to the
aftermarket through our original equipment customers and a
network of distributors and representatives throughout the
world. We also sell our precision components to original
equipment manufacturers through independent sales
representatives. Sales to customers in our performance racing
segment are sold directly to race teams and distributors
throughout the United States.




Our Competition

The principal segments in which we operate are
competitive and fragmented, with many small manufacturers and
only a few manufacturers that generate annual sales in excess of
$50 million. Our success will depend on our ability to
continue to meet our customers changing specifications
with respect to reliability and timeliness of delivery,
technical expertise, product design capability, manufacturing
expertise, operational flexibility and customer service.

We compete for new business principally at the
beginning of the development of new applications and at the
redesign of existing applications by our customers. For example,
new model development for our aircraft braking system customers
generally begins two to five years before full-scale production
of new braking systems. Initiatives by customers to upgrade
existing products typically involve long lead times as well. We
also compete with manufacturers using different technologies,
such as carbon composite (carbon-carbon) friction materials for
aircraft braking systems. Carbon-carbon braking systems are
significantly lighter than the metallic aircraft braking systems
that we supply friction materials for, but are generally more
expensive. The carbon-carbon brakes are typically used on
wide-body aircraft, such as the Boeing 747 and 777, and on
military aircraft, where the advantages in reduced weight may
justify the additional expense.

In addition, as our powder metal components are
increasingly substituted for wrought steel or iron components
due to advances in our powder metal technology, we increasingly
compete with companies using forging, casting or stamping
technologies to produce precision components. Powder metal
components can often be produced at a lower cost per unit than
products manufactured with forging, casting or stamping
technologies due to the elimination of, or substantial reduction
in, secondary machining, lower material costs and the virtual
elimination of raw material waste.




The Suppliers and Prices of Raw Materials We
Use

We require substantial amounts of raw materials,
including copper and iron powders, steel and custom-fabricated
cellulose sheet and substantially all of the raw materials we
require are purchased from third party suppliers and are
generally in adequate supply. However, the availability and
costs of raw materials may be subject to change due to, among
other things, new laws or regulations, suppliers
allocations to other purchasers, interruptions in production by
suppliers and changes in exchange rates and worldwide price and
demand levels. We are not currently party to any long-term
supply agreements. Our inability to obtain adequate supplies of
raw materials for our products at favorable prices could have a
material adverse effect on our business, financial

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condition or results of operations by decreasing
our profit margins and by hindering our ability to deliver
products to our customers on a timely basis. Recently, we have
experienced an increase in the costs of our copper and iron
powders and steel. If we are not able to reduce or eliminate the
effect of these cost increases through lowering other costs of
production or successfully implementing price increases to our
customers, such cost increases from our vendors could have a
negative effect on our financial results.





Government Regulation of Our
Businesses

Our sales to manufacturers of aircraft braking
systems represented 11.1% of our consolidated net sales in 2003
and 11.8% of our consolidated net sales in 2002. Each aircraft
braking system, including the friction products supplied by us,
must meet stringent Federal Aviation Administration criteria and
testing requirements. We have been able to meet these
requirements in the past and we continuously review Federal
Aviation Administration compliance procedures to help ensure our
continued and future compliance.




Environmental, Health and Safety
Matters

We are subject to stringent environmental
standards imposed by federal, state, local and foreign
environmental laws and regulations, including those related to
air emissions, wastewater discharges, chemical and hazardous
waste management and disposal. Some of these environmental laws
hold owners or operators of land or businesses liable for their
own and for previous owners or operators releases of
hazardous or toxic substances, materials or wastes, pollutants
or contaminants. Our compliance with environmental laws also may
require the acquisition of permits or other authorizations for
some kinds of activities and compliance with various standards
or procedural requirements. We are also subject to the federal
Occupational Safety and Health Act and similar foreign and state
laws. The nature of our operations, the long history of
industrial uses at some of our current or former facilities, and
the operations of predecessor owners or operators of some of the
businesses expose us to risk of liabilities or claims with
respect to environmental and worker health and safety matters.
We review our procedures and policies for compliance with
environmental and health and safety laws and regulations and
believe that we are in substantial compliance with all material
laws and regulations applicable to our operations. Our costs of
complying with environmental, health and safety requirements
have not been material.




Our Intellectual Property

Our federally registered trademarks include
Hawk®, Wellman Friction Products®, Velvetouch®,
Fibertuff®, Feramic®, Velvetouch Feramic®,
Velvetouch Organik®, Hawk Brake®, Hawk
Performance®, Hawk Precision Components®, Quarter
Master® and Tex Racing®. Velvetouch®,
Fibertuff® and Hawk Performance® are our principal
trademarks for use in the friction products aftermarket segment.
We have applied for the registration of the Hawk Precision
Components Group, Hawk Racing International, Pro V and Wellman
Products Group trademarks. Although we maintain patents related
to our business, we do not believe that our competitive position
is dependent on patent protection or that our operations are
dependent on any individual patent. To protect our intellectual
property, we rely on a combination of internal procedures,
confidentiality agreements, patents, trademarks, trade secrets
law and common law, including the law of unfair competition.




Personnel

At December 31, 2003, we had approximately
1,170 domestic employees and 390 international employees at our
continuing operations. Approximately 185 employees at our Brook
Park, Ohio plant are covered under a collective bargaining
agreement with the Paper, Allied Industrial, Chemical and Energy
Workers International Union expiring in October 2005;
approximately 25 employees at our Akron, Ohio facility are
covered under a collective bargaining agreement with the United
Automobile Workers expiring in July 2005; and approximately
225 employees at our Orzinuovi, Italy plant are represented by a
national mechanics union agreement that expires in
December 2005. The Italian employees are also covered by a
local union agreement that expires in December 2004. We
have experienced no material work stoppages and believe we have
good relations with our employees and their unions. We have
previously announced our intention to close our Brook Park, Ohio
facility. We expect this closure to be completed in 2005.

14



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##### Table of Contents





|        |           
|------- | ----------
|ITEM 2. | PROPERTIES

Hawks world headquarters is located in
Cleveland, Ohio. We maintain manufacturing and research and
development facilities at our continuing operations in 15
locations in 4 countries. We are a lessee under operating leases
for some of our properties and equipment. Hawks principal
research facility is located in Solon, Ohio. In addition,
research is also performed in a number of the operating
divisions facilities. We believe that substantially all of
our property and equipment is maintained in good condition,
adequately insured and suitable for its present and intended use.



|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

We are involved in several lawsuits that have
arisen in the ordinary course of our business. We are contesting
each of these lawsuits vigorously and believe we have defenses
to the allegations that have been made. In our opinion, the
outcome of these legal actions will not have a material adverse
effect on our financial condition or results of operations.



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

No matters were submitted to a vote of security
holders during the fourth quarter of 2003.




Part II



|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY,
    RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES

Our Class A Common Stock has traded on the
American Stock Exchange under the symbol HWK since
January 7, 2004. From the period May 12, 1998 through
January 6, 2004, the stock traded on the New York Stock
Exchange. The following table sets forth, for the fiscal periods
indicated, the high and low closing prices of our Common Stock
as reported on the New York Stock Exchange.




Quarterly Stock Prices

|     |  |                    |  |      |      |     |  |   |      | 
|---- |  | ------------------ |  | ---- | ---- | --- |  | - | ---- | 
|     |  | Quarter Ended      |  | High |      | Low
|     |  |                    |  |      |      |    
|2003 |  |                    |  |      |      |     |  |   |      | 
|     |  | March 31, 2003     |  | $    | 2.75 |     |  | $ | 1.96 | 
|     |  | June 30, 2003      |  | $    | 4.53 |     |  | $ | 2.35 | 
|     |  | September 30, 2003 |  | $    | 4.35 |     |  | $ | 3.11 | 
|     |  | December 31, 2003  |  | $    | 4.10 |     |  | $ | 3.40 | 
|2002 |  |                    |  |      |      |     |  |   |      | 
|     |  | March 31, 2002     |  | $    | 5.20 |     |  | $ | 3.41 | 
|     |  | June 30, 2002      |  | $    | 5.35 |     |  | $ | 3.55 | 
|     |  | September 30, 2002 |  | $    | 3.80 |     |  | $ | 2.26 | 
|     |  | December 31, 2002  |  | $    | 2.66 |     |  | $ | 1.70 | 

The closing sale price for our common stock on
December 31, 2003 was $3.65.

Shareholders of record as of February 27,
2004 numbered 86. We estimate that an additional 1,000
shareholders own stock in their accounts at brokerage firms and
other financial institutions.

We have never declared or paid, and do not intend
to declare or pay, any cash dividends for the foreseeable future
and intend to retain earnings for the future operation and
expansion of our business. Currently, our Bank Facility and
Senior Note indenture prohibit the payment of cash dividends on
the Class A Common Stock.

15



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##### Table of Contents





|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

|                                                                                                                       |                                                                                                                      |                                      |       |      |   |      |       |       |   |      |       |      |   |   |       |      |   |   |       |      |  
|---------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ----- | ---- | - | ---- | ----- | ----- | - | ---- | ----- | ---- | - | - | ----- | ---- | - | - | ----- | ---- | -
|Years ended December 31,                                                                                               |                                                                                                                      | 2003                                 |       | 2002 |   | 2001 |       | 2000  |   | 1999
|                                                                                                                       |                                                                                                                      |                                      |       |      |   |      |       |       |   |     
|                                                                                                                       |                                                                                                                      |                                     
|                                                                                                                       |                                                                                                                      | (in millions, except per share data)
|Income Statement Data:                                                                                                 |                                                                                                                      |                                      |       |      |   |      |       |       |   |      |       |      |   |   |       |      |   |   |       |     
|Net sales                                                                                                              |                                                                                                                      | $                                    | 202.6 |      |   | $    | 185.9 |       |   | $    | 176.9 |      |   | $ | 195.9 |      |   | $ | 180.9 |     
|Gross profit                                                                                                           |                                                                                                                      |                                      | 47.4  |      |   |      | 44.2  |       |   |      | 40.7  |      |   |   | 53.9  |      |   |   | 47.3  |     
|Pension curtailment and contractual termination
    benefit costs(1)                                                   |                                                                                                                      |                                      | 1.9   |      |   |      |       |       |   |      |       |      |   |   |       |      |   |   |       |     
|Restructuring costs(2)                                                                                                 |                                                                                                                      |                                      |       |      |   |      |       |       |   |      | 1.1   |      |   |   |       |      |   |   |       |     
|Income from operations(3)                                                                                              |                                                                                                                      |                                      | 10.9  |      |   |      | 13.0  |       |   |      | 7.2   |      |   |   | 21.4  |      |   |   | 19.7  |     
|(Loss) income before discontinued operations and
    cumulative effect of change in accounting principle               |                                                                                                                      |                                      | (0.4  | )    |   |      | 0.8   |       |   |      | (2.2  | )    |   |   | 6.7   |      |   |   | 6.9   |     
|Discontinued operations, net of tax                                                                                    |                                                                                                                      |                                      | (5.0  | )    |   |      | (1.9  | )     |   |      | (2.1  | )    |   |   | (0.9  | )    |   |   | (0.6  | )   
|Cumulative effect of change in accounting
    principle, net of tax                                                    |                                                                                                                      |                                      |       |      |   |      | (17.2 | )     |   |      |       |      |   |   |       |      |   |   |       |     
|Net (loss) income                                                                                                      |                                                                                                                      |                                      | (5.4  | )    |   |      | (18.3 | )     |   |      | (4.3  | )    |   |   | 5.8   |      |   |   | 6.3   |     
|(Loss) Earnings Per Share:                                                                                             |                                                                                                                      |                                      |       |      |   |      |       |       |   |      |       |      |   |   |       |      |   |   |       |     
|                                                                                                                       | Basic (loss) earnings before discontinued
    operations and cumulative effect of change in accounting
    principle |                                      | $     | (.07 | ) |      | $     | .08   |   |      | $     | (.27 | ) |   | $     | .77  |   |   | $     | .78  |  
|                                                                                                                       | Discontinued operations                                                                                              |                                      |       | (.58 | ) |      |       | (.22  | ) |      |       | (.25 | ) |   |       | (.11 | ) |   |       | (.07 | )
|                                                                                                                       | Cumulative effect of change in accounting
    principle                                                              |                                      |       |      |   |      |       | (2.01 | ) |      |       |      |   |   |       |      |   |   |       |      |  
|                                                                                                                       |                                                                                                                      |                                      |       |      |   |      |       |       |   |      |       |      |   |   |       |      |   |   |       |     
|                                                                                                                       | Basic (loss) earnings per share                                                                                      |                                      | $     | (.65 | ) |      | $     | (2.15 | ) |      | $     | (.52 | ) |   | $     | .66  |   |   | $     | .71  |  
|                                                                                                                       |                                                                                                                      |                                      |       |      |   |      |       |       |   |      |       |      |   |   |       |      |   |   |       |     
|Diluted (loss) earnings before discontinued
    operations and cumulative effect of change in accounting
    principle |                                                                                                                      | $                                    | (.07  | )    |   | $    | .08   |       |   | $    | (.27  | )    |   | $ | .77   |      |   | $ | .78   |     
|                                                                                                                       | Discontinued operations                                                                                              |                                      |       | (.58 | ) |      |       | (.22  | ) |      |       | (.25 | ) |   |       | (.11 | ) |   |       | (.07 | )
|                                                                                                                       | Cumulative effect of change in accounting
    principle                                                              |                                      |       |      |   |      |       | (2.00 | ) |      |       |      |   |   |       |      |   |   |       |      |  
|                                                                                                                       |                                                                                                                      |                                      |       |      |   |      |       |       |   |      |       |      |   |   |       |      |   |   |       |     
|Diluted (loss) earnings per share                                                                                      |                                                                                                                      | $                                    | (.65  | )    |   | $    | (2.14 | )     |   | $    | (.52  | )    |   | $ | .66   |      |   | $ | .71   |     
|                                                                                                                       |                                                                                                                      |                                      |       |      |   |      |       |       |   |      |       |      |   |   |       |      |   |   |       |     
|Other Data:                                                                                                            |                                                                                                                      |                                      |       |      |   |      |       |       |   |      |       |      |   |   |       |      |   |   |       |     
|Depreciation                                                                                                           |                                                                                                                      | $                                    | 10.1  |      |   | $    | 10.2  |       |   | $    | 10.7  |      |   | $ | 10.4  |      |   | $ | 9.5   |     
|Amortization(4)                                                                                                        |                                                                                                                      |                                      | 0.8   |      |   |      | 0.8   |       |   |      | 3.8   |      |   |   | 3.4   |      |   |   | 3.0   |     
|Capital expenditures (including capital leases
    and financed capital expenditures)                                  |                                                                                                                      |                                      | 11.2  |      |   |      | 9.7   |       |   |      | 8.5   |      |   |   | 8.5   |      |   |   | 8.6   |     

|                                              |  |               |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|--------------------------------------------- |  | ------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- | 
|December 31,                                  |  | 2003          |       | 2002 |  | 2001 |       | 2000 |  | 1999
|                                              |  |               |       |      |  |      |       |      |  |     
|                                              |  |              
|                                              |  | (in millions)
|Balance Sheet Data:                           |  |               |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|Cash and cash equivalents                     |  | $             | 3.4   |      |  | $    | 1.7   |      |  | $    | 3.1   |  |  | $ | 4.0   |  |  | $ | 4.0   | 
|Working capital(5)                            |  |               | 13.5  |      |  |      | 9.1   |      |  |      | 31.5  |  |  |   | 36.5  |  |  |   | 33.5  | 
|Property plant and equipment, net             |  |               | 63.1  |      |  |      | 61.8  |      |  |      | 61.7  |  |  |   | 65.0  |  |  |   | 66.3  | 
|Assets of discontinued operations             |  |               | 4.3   |      |  |      | 10.4  |      |  |      | 14.7  |  |  |   | 13.4  |  |  |   | 11.6  | 
|Total assets                                  |  |               | 193.5 |      |  |      | 192.9 |      |  |      | 204.1 |  |  |   | 215.4 |  |  |   | 209.6 | 
|Liabilities of discontinued operations        |  |               | 3.7   |      |  |      | 2.8   |      |  |      | 1.4   |  |  |   | 1.1   |  |  |   | 1.1   | 
|Total indebtedness (including capital leases) |  |               | 95.0  |      |  |      | 108.3 |      |  |      | 97.8  |  |  |   | 104.2 |  |  |   | 106.3 | 
|Shareholders equity                          |  |               | 41.7  |      |  |      | 44.8  |      |  |      | 66.4  |  |  |   | 71.7  |  |  |   | 66.5  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reflects a one-time, non-cash charge related to
    the pension curtailment and contractual termination benefit
    costs associated with the announced closure of the Brook Park,
    Ohio friction segment facility.                                                                                                                                                                                                                                                            
|(2) | Reflects primarily a work force reduction at our
    domestic facilities of approximately 160 salaried and production
    personnel.                                                                                                                                                                                                                                                                                                                                              
|(3) | In accordance with the non-amortization
    provisions of SFAS 142 (see Note 2  Significant
    Accounting Policies to the accompanying consolidated
    financial statements beginning on page 32 of this
    Form 10-K), we discontinued the amortization of goodwill in
    2002.                                                                                                                                                                                           
|(4) | Amortization outlined in this table does not
    include deferred financing amortization of $0.8 million in
    2003; $0.6 million in 2002; $0.6 million in 2001; $0.6
    in 2000 and $0.6 in 1999, which is included in interest expense
    on the Statement of Operations.                                                                                                                                                                                                    
|(5) | Working capital is defined as current assets less
    current liabilities. Beginning in 2002, as required by
    EITF 95-22, the Bank Facility is included in working
    capital. As of December 31, 2003 and 2002, there was
    $24.1 million and $36.3 million outstanding under the
    Bank Facility, respectively. See Note 6 
    Financing Arrangements in the accompanying audited
    consolidated financials statements beginning on page 32 of
    this Form 10-K.

16



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##### Table of Contents





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion in conjunction
with the consolidated financial statements, notes and tables
included in Part II, Item 8 of this Form 10-K.
Managements discussion and analysis may contain
forward-looking statements that are provided to assist in the
understanding of anticipated future financial performance.
However, this performance involves risks and uncertainties that
may cause actual results to differ materially from those
expressed in the forward-looking statements. Some of the
important factors that could cause our actual results or
outcomes to differ from those discussed are listed under
Forward-Looking Statements.




Results of Operations

Through our subsidiaries, we operate primarily in
three reportable segments: friction products, precision
components and performance racing. Our results of operations are
affected by a variety of factors, including but not limited to,
general economic conditions, customer demand for our products,
competition, raw material pricing and availability, labor
relations with our personnel and political conditions in the
countries in which we operate. We sell a wide range of products
that have a corresponding range of gross margins. Our
consolidated gross margin is affected by product mix, selling
prices, material and labor costs as well as our ability to
absorb overhead costs resulting from fluctuations in demand for
our products.

In the fourth quarter of 2003, we committed to a
plan to sell our motor segment, which has operations in Alton,
Illinois and Monterrey, Mexico. This segment, which manufactures
die-cast aluminum rotors for fractional and sub-fractional
horsepower electric motors, failed to achieve a certain level of
profitability, and, after completing an extensive analysis, we
determined that a divestiture of this segment would allow us to
concentrate on our core segments of friction products and
precision components. We initiated an active marketing plan and
anticipate selling the segment prior to the end of 2004. Results
of operations for this segment have been restated to reclassify
its net operations, assets and liabilities as discontinued for
all periods presented in this report and are not included in
this discussion of our results of operations.

Also in the fourth quarter of 2003, we committed
to a restructuring program to achieve cost savings in our
friction products segment by moving operations at its Brook
Park, Ohio location to a new U.S. production facility. We have
signed a formal, non-binding letter of intent agreeing to the
terms on the construction of a new approximately 240,000 square
foot leased facility. The letter of intent is subject to due
diligence and other customary terms and conditions. In
connection with the planned closure of the Brook Park, Ohio
facility, we recorded a $1.9 million charge in the fourth
quarter of 2003 related to the curtailment and contractual
termination benefit costs of a defined benefit pension plan
covering certain union employees of the facility. In addition,
we anticipate future pre-tax charges of approximately
$2.0 million in 2004 and $3.0 million to
$3.5 million in 2005 related to the relocation of the Brook
Park, Ohio facility and employee severance expense.

In 2003, our income from operations decreased
$2.1 million to $10.9 million, or 16.2%, from the prior
year. This decrease was attributable primarily to the
$1.9 million pension curtailment and contractual
termination benefit costs we recorded in the fourth quarter of
2003, increased defined benefit pension costs of approximately
$1.3 million in 2003, increased incentive compensation
expense of $1.7 million and $1.0 million in
discretionary profit sharing contributions compared to no
contributions in 2002. Partially offsetting this decrease were
sales volume increases and improved absorption of fixed costs,
primarily in our friction segment, as well as cost reduction
initiatives.




Outlook for 2004

Based on a gradually improving economy and the
strength of our new product introductions, market share gains
and foreign operations, we expect full year 2004 revenues from
continuing operations to increase approximately 6% from 2003
revenues from continuing operations. We expect this increase,
despite our anticipation that 2004 sales to the aerospace market
will be 6% to 8% lower than 2003.

17



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##### Table of Contents






Critical Accounting Policies

Hawks critical accounting policies,
including the assumptions and judgments underlying them are more
fully described in Note 2  Significant Accounting
Policies of the notes to the accompanying audited
consolidated financial statements beginning on page 32 of
this Form 10-K. Some of our accounting policies require the
application of significant judgment by us in the preparation of
our financial statements. In applying these policies, we use our
best judgment to determine the underlying assumptions that are
used in calculating the estimates that affect the reported
values on our financial statements. On an ongoing basis, the
Company evaluates its estimates and judgments based on
historical experience and various other factors that are
believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different
assumptions or conditions.

Hawk reviews its financial reporting and
disclosure practices and accounting policies quarterly to ensure
that they provide accurate and transparent information relative
to the current economic and business environment. We base our
estimates and assumptions on historical experience and other
factors that we consider relevant. If these estimates differ
materially from actual results, the impact on our consolidated
financial statements may be material. However, historically our
estimates have not been materially different from actual
results. Hawks critical accounting policies include the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue Recognition.Revenues are recognized when products
    are shipped and title has transferred to the customer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Allowance for Doubtful Accounts.Our policy regarding the
    collectibility of accounts receivable is based on a number of
    factors. In circumstances where a specific customer is unable to
    pay its obligations, we record a specific allowance for bad
    debts against amounts due to reduce the net recognized
    receivable to the amount that we reasonably expect to collect.
    If circumstances change, estimates of the recoverability of the
    amounts due us could change.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Inventory Reserves.Reserves for slow moving and obsolete
    inventories are developed based on historical experience and
    product demand. We continuously evaluate the adequacy of our
    inventory reserves and make adjustments to the reserves as
    required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Goodwill.Goodwill
    represents the excess of the cost of companies we acquired over
    the fair value of their net assets as of the date of
    acquisition. In accordance with Statement of Financial
    Accounting Standard (SFAS) No. 142, Goodwill and
    Other Intangible Assets (SFAS 142), our policy is to
    evaluate the carrying value of our goodwill and indefinite-lived
    intangible assets at least annually, or more frequently if there
    is a significant adverse event or change in the environment in
    which one of our business unit operates. An impairment loss
    would be recorded in the period such determination is made. In
    assessing the recoverability of our goodwill, we consider
    changes in economic conditions and make assumptions regarding
    estimated future discounted cash flows and other factors.
    Estimates of future cash flows are highly subjective based on
    our experience and knowledge of operations. These estimates
    could be significantly impacted by many factors including
    changes in global and local business and economic conditions,
    operating costs, inflation and economic trends. If actual
    results are materially different than the assumptions used,
    impairment could result. See Note 2 
    Significant Accounting Policies of the notes to the
    accompanying audited consolidated financial statements beginning
    on page 32 of this Form 10-K.
|
| |  | Long-Lived Assets.Long-lived assets (excluding goodwill)
    are reviewed for impairment whenever events or changes in
    circumstances indicate that the carrying amount of an asset may
    not be recoverable. In assessing the recoverability of our
    long-lived assets, we consider changes in economic conditions
    and make assumptions regarding estimated future undiscounted
    cash flows and other factors. Estimates of future cash flows are
    highly subjective judgments based on our experience and
    knowledge of operations. These estimates can be significantly
    impacted by many factors including changes in global and local
    business and economic conditions, operating costs, inflation and
    competitive trends. If our estimates or underlying assumptions
    change in the future, we may be required to record impairment
    charges. Based on our review, we recorded a pre-tax, non-cash
    impairment charge of $4.5 million in the fourth quarter of
    2003 to our motor segment, which was reported as a discontinued
    operation for the year ended December 31, 2003. There were
    no impairment charges recorded in 2002 or 2001. (See Note
    3                                                                                                                                                                                                                                                            

18



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##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Discontinued Operations to the accompanying
    audited consolidated financial statements beginning on
    page 32 of this Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Pension Benefits.We
    account for our defined benefit pension plans in accordance with
    SFAS No. 87, Employers Accounting for
    Pensions (SFAS 87) which requires that amounts recognized
    in financial statements be determined on an actuarial basis. The
    most significant element in determining our pension income
    (expense) in accordance with SFAS 87 is the expected return
    on plan assets. We assumed that the expected weighted average
    long-term rate of return on plan assets will be 8.6% for 2004
    compared to 8.6% for 2003 and 9.3% for 2002. Based on our
    existing and forecasted asset allocation and related long-term
    investment performance results, we believe that our assumption
    of future returns is reasonable. However, should the rate of
    return differ materially from our assumed rate we could
    experience a material adverse effect on the funded status of our
    plans and our future pension expense. The assumed long-term rate
    of return on assets is applied to a calculated value of plan
    assets, which recognizes changes in the fair value of plan
    assets in a systematic manner over five years. This produces the
    expected return on plan assets that is included in pension
    income (expense). The difference between this expected return
    and the actual return on plan assets is deferred. The net
    deferral of past asset gains (losses) affects the
    calculated value of plan assets and, ultimately, future pension
    income (expense). Our cumulative unrecognized net actuarial loss
    on pension assets as of December 31, 2003 and 2002 was
    $8.0 million and $8.9 million, respectively.

We
determine the discount rate to be used to discount plan
liabilities at their measurement date, December 31. The
discount rate reflects the current rate at which the pension
liabilities could be effectively settled at the end of the year.
At December 31, 2003, we determined this rate to be 6.25%.
Changes in discount rates over the past three years have not
materially affected pension income (expense), and the net effect
of changes in the discount rate, as well as the net effect of
other changes in actuarial assumptions and experience, has been
deferred as permitted by SFAS 87.

We
expect pension expense to be approximately $1.2 million in
2004. This compares to $3.6 million (including pension
curtailment and contractual termination benefit costs of
$1.9 million) in 2003 and $0.4 million in 2002.

We
expect cash contributions to our pension plans to be
$1.9 million in 2004. This compares to contributions of
$1.1 million in 2003 and $1.3 million in 2002.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Insurance.We use a
    combination of insurance and self-insurance for a number of
    risks including property, general liability, directors and
    officers liability, workers compensation, vehicle
    liability and employee-related health care benefits. Liabilities
    associated with the risks that are retained are estimated by
    considering various historical trends and forward-looking
    assumptions. The estimated accruals for self-insured liabilities
    were $1.1 million in 2003 and $0.6 million in 2002.
    These accruals could be significantly affected if future
    occurrences and claims differ from these assumptions and
    historical trends.
|
| |  | Contingencies.Our
    treatment of contingent liabilities in the financial statements
    is based on the expected outcome of the applicable contingency.
    In the ordinary course of business, we consult with legal
    counsel on matters related to litigation and other experts both
    within and outside of the Company. We will accrue a liability if
    the likelihood of an adverse outcome is probable of occurrence
    and the amount is estimable. We will not accrue a liability if
    either the likelihood of an adverse outcome is only reasonably
    possible or an estimate is not determinable.                                                                  
|
| |  | Income Taxes.Our
    effective tax rate, taxes payable and other tax assets and
    liabilities reflect the current tax rates in the domestic and
    foreign tax jurisdictions in which we operate. Deferred income
    taxes reflect the net effect of temporary differences between
    the carrying amounts of assets and liabilities for reporting and
    income tax purposes. As of December 31, 2003 and 2002, we
    had net federal operating loss carryforwards of
    $7.9 million and $0, respectively, and alternative minimum
    tax (AMT) credit carryforwards of $1.1 million and
    $1.0 million, respectively.                                                         
|
| |  | Foreign Currency Translation and Transactions.Assets and liabilities of our foreign
    operations are translated using year-end exchange rates, and
    revenues and expenses are translated using exchange rates as
    determined throughout the year. Gains or losses resulting from
    translation are included in a separate                                                                                                                                                                                                                                                                                                                                                         

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | component of our shareholders equity. As of
    December 31, 2003 we recorded a translation gain through
    shareholders equity of $2.3 million. This gain was
    attributable to the strength of the Euro throughout 2003. In
    2002, we reported a translation gain of $0.7 million. Gains
    or losses resulting from foreign currency transactions are
    translated to local currency at the rates of exchange prevailing
    at the dates of the transactions. Accounts receivable or payable
    in foreign currencies, other than the subsidiarys local
    currency, are translated at the rates of exchange prevailing at
    the date of the transaction. The effect of the
    transactions gain or loss is included in other income
    (expense), net in our Statement of Operations. Foreign currency
    transaction losses were $0.1 million in 2003 compared to
    $0.2 million in 2002.




Year Ended December 31, 2003 Compared to
Year Ended December 31, 2002

Our manufacturing operations are organized into
three product focused strategic business units. These units
include friction products, precision components and performance
racing. In the fourth quarter of 2003 we committed to selling
our motor segment. As a result, we have classified this business
as discontinued. An operating component of the motor segment
will be retained by the Company as part of its continuing
operations. This line of business had net sales of
$1.2 million in 2003 and $1.3 million in 2002 and has
been reclassified into the results of the precision components
segment for all of the years presented.




Segment Sales Analysis

Net Sales.Our
consolidated net sales from continuing operations for 2003 were
$202.6 million, an increase of $16.7 million or 9.0%
from the same period in 2002. We experienced sales increases in
all of our segments, primarily a result of a gradual economic
recovery in 2003 in the industrial markets we serve, new product
introductions and market share gains in our friction segment
during the year. Foreign currency exchange rates caused net
sales from continuing operations for the full year 2003 to
increase by 3.2%.

|                     |              |                       |       |       |  |          |       |          |  |   |      |      |  |  |      |     |  
|-------------------- | ------------ | --------------------- | ----- | ----- |  | -------- | ----- | -------- |  | - | ---- | ---- |  |  | ---- | --- | -
|Net Segment Sales:   |              | 2003                  |       | 2002  |  | $ Change |       | % Change
|                     |              |                       |       |       |  |          |       |         
|                     |              |                      
|                     |              | (dollars in millions)
|Friction Products    |              | $                     | 121.6 |       |  | $        | 106.1 |          |  | $ | 15.5 |      |  |  | 14.6 | %  
|Precision Components |              |                       | 68.1  |       |  |          | 67.2  |          |  |   | 0.9  |      |  |  | 1.3  | %  
|Performance Racing   |              |                       | 12.9  |       |  |          | 12.6  |          |  |   | 0.3  |      |  |  | 2.4  | %  
|                     |              |                       |       |       |  |          |       |          |  |   |      |      |  |  |      |    
|                     | Consolidated |                       | $     | 202.6 |  |          | $     | 185.9    |  |   | $    | 16.7 |  |  |      | 9.0 | %
|                     |              |                       |       |       |  |          |       |          |  |   |      |      |  |  |      |    



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Friction Products.Net sales in the friction segment, our
    largest, were $121.6 million in 2003, an increase of
    $15.5 million, or 14.6%, compared to $106.1 million
    2002. As a result of new product introductions and market share
    gains, we experienced increases in most of our major markets,
    including construction, agriculture, heavy truck, aftermarket
    and fleet markets. This segment also experienced strong sales
    growth from our international operations in 2003. Net sales,
    exclusive of any translation gains, at our Italian facility
    increased 24.2% in 2003 compared to 2002, as a result of new
    product introductions and market share gains. Net sales at our
    Chinese facility were up 111.0% in 2003 compared to 2002.
    Foreign currency exchange rates caused the friction
    segments sales for the full year 2003 to increase by 5.6%.
    Our sales to the aerospace market increased approximately 2.5%
    in 2003 compared to 2002. However, sales to the aerospace market
    were down 7.9% during the last six months of 2003 when compared
    to the same period of 2002. When compared to the full year 2003,
    we expect sales to the aerospace market will be down
    approximately 6% to 8% in 2004 compared to 2003. Additionally,
    net sales in this segment decreased approximately
    $2.1 million from full year 2002 results, as a result of
    our decision to exit the automotive stamping market in
    June 2003.
|
| |  | Precision Components.Net sales in our precision components
    segment were $68.1 million in 2003, an increase of 1.3%
    compared to 2002. The increase in net sales was primarily
    attributable to gradually improving conditions in the general
    industrial segments of the domestic economy. We experienced
    sales increases in the lawn and garden, fluid power and power
    tool markets served by this segment. These increases were
    partially offset by declines in the automotive market as a
    result of vehicle production declines during the year as well as
    a decline in sales to the appliance market that we serve. Our
    precision                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |   |                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | component segment began production and sale of
    product from its new powder metal production facility in China
    during the fourth quarter of 2003.                                                                                                              
|
| |  | Performance Racing.Net sales in our performance racing
    segment were $12.9 million, an increase of 2.4% compared to
    net sales of $12.6 million in 2002. The increase in revenues was
    primarily attributable to the introduction of new clutch
    products.

Gross Profit.Gross
profit from continuing operations increased $3.2 million to
$47.4 million during 2003, a 7.2% increase compared to
gross profit of $44.2 million in 2002. The gross profit
margin decreased to 23.4% of net sales in 2003 from 23.8% of net
sales in the prior year period.

|                     |              |      |      |      |   |          |      |      |   |  |       |      |   
|-------------------- | ------------ | ---- | ---- | ---- | - | -------- | ---- | ---- | - |  | ----- | ---- | --
|Gross Profit Margin: |              | 2003 |      | 2002 |   | % Change
|                     |              |      |      |      |   |         
|Friction Products    |              |      | 24.3 | %    |   |          | 23.9 | %    |   |  | 1.7   | %   
|Precision Components |              |      | 21.3 | %    |   |          | 22.5 | %    |   |  | (5.3  | %)  
|Performance Racing   |              |      | 26.4 | %    |   |          | 29.4 | %    |   |  | (10.2 | %)  
|                     | Consolidated |      |      | 23.4 | % |          |      | 23.8 | % |  |       | (1.7 | %)



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Friction Products.Our friction products segment reported
    gross profit of $29.5 million or 24.3% of its net sales in
    2003 compared to $25.4 million or 23.9% of its net sales in
    2002. The increase in our gross profit margin was primarily the
    result of sales volume increases, product mix, our exit from the
    automotive stamping market and continued emphasis on cost
    reduction programs, as well as utilization of Six Sigma tools to
    lower our manufacturing costs. We achieved an increase in gross
    margin in 2003 despite increased defined benefit pension costs
    of $0.6 million as well as increased incentive compensation
    expense of $0.3 million and discretionary profit sharing
    contributions of $0.3 million in 2003 that were not made in
    2002.
|
| |  | Precision Components.Gross profit in our precision
    components segment was $14.5 million or 21.3% of its net
    sales in 2003 compared to $15.1 million or 22.5% of its net
    sales in 2002. The decrease in this segments margins was
    primarily the result of profit sharing contributions of
    $0.3 million that were made in 2003 compared to no
    contributions in 2002. Other factors that impacted gross profit
    were product mix, start-up and training costs associated with
    the installation of new equipment as well as start-up costs
    associated with this segments new operations in China. We
    will continue to provide start-up support to the China operation
    in 2004 and expect this operation to achieve profitability
    during 2005.                       
|
| |  | Performance Racing.Our performance racing segment
    reported gross profit of $3.4 million or 26.4% of net sales
    in 2003 compared to $3.7 million or 29.4% of net sales in 2002.
    The decline in gross profit was primarily the result of product
    mix.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Selling, Technical and Administrative
Expenses.Selling, technical and
administrative (ST&A) expenses increased $3.2 million,
or 10.5%, to $33.7 million in 2003 from $30.5 million
during 2002. As a percentage of net sales, ST&A increased to
16.6% in 2003 compared to 16.4% in 2002. The increase in
ST&A expenses resulted primarily from increased defined
benefit pension costs of $0.2 million, increased incentive
compensation expense of $1.5 million and discretionary
profit sharing contributions of $1.0 million in 2003 that
were not made in 2002. We spent $4.1 million, or 2.0% of
our net sales on product research and development compared to
$3.5 million, or 1.9%, in 2002.

Pension Curtailment and Contractual
Termination Benefit Costs.In 2003, we
recorded a charge of $1.9 million to reflect the
curtailment and contractual termination benefit costs relating
to a defined benefit pension plan resulting from our decision to
close our Brook Park, Ohio friction manufacturing facility.
There were no charges recorded in 2002.

Income from
Operations.Income from operations
decreased $2.1 million or 16.2% to $10.9 million in
2003 from $13.0 million in 2002. Income from operations as
a percentage of net sales decreased to 5.4% in 2003 from 7.0% in
2002. The decrease was primarily the result of increased defined
benefit pension costs of $1.3 million, a $1.9 pension
curtailment and contractual termination benefit cost recorded by
the friction segment during 2003, increased incentive
compensation expense of $1.7 million and discretionary
profit sharing

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contributions of $1.0 million in 2003
compared to no contributions in 2002. This reduction was
partially offset by increased sales volume, primarily in the
friction segment, improved absorption of fixed costs as a result
of the volume increases in the friction segment and continuing
cost reduction initiatives.


As a result of the items discussed above, income
from operations at each of our segments was as follows:

|                                   |              |                       |     |      |  |          |     |          |  |   |      |     |  |  |       |       |   
|---------------------------------- | ------------ | --------------------- | --- | ---- |  | -------- | --- | -------- |  | - | ---- | --- |  |  | ----- | ----- | --
|Income from Operations by Segment: |              | 2003                  |     | 2002 |  | $ Change |     | % Change
|                                   |              |                       |     |      |  |          |     |         
|                                   |              |                      
|                                   |              | (dollars in millions)
|Friction Products                  |              | $                     | 8.3 |      |  | $        | 7.8 |          |  | $ | 0.5  |     |  |  | 6.4   | %    
|Precision Components               |              |                       | 2.2 |      |  |          | 4.3 |          |  |   | (2.1 | )   |  |  | (48.8 | %)   
|Performance Racing                 |              |                       | 0.4 |      |  |          | 0.9 |          |  |   | (0.5 | )   |  |  | (55.6 | %)   
|                                   |              |                       |     |      |  |          |     |          |  |   |      |     |  |  |       |      
|                                   | Consolidated |                       | $   | 10.9 |  |          | $   | 13.0     |  |   | $    | 2.1 |  |  |       | (16.2 | %)
|                                   |              |                       |     |      |  |          |     |          |  |   |      |     |  |  |       |      

Other Income (Expense),
net.Other income was
$0.2 million in 2003 compared to expense of
$0.7 million in 2002. The primary source of income in 2003
was foreign exchange transaction gains generated primarily from
our Italian facility. The major expense items in 2002 included,
fees paid by us in the first quarter of 2002 to effect an
amendment to our Term Loan and Revolving Credit Facility, costs
associated with our termination of a product licensing agreement
in our precision components segment, and to a lesser extent,
foreign exchange transaction losses.

Interest Expense.Interest expense increased $0.4 million, or 3.8%, to
$10.8 million in 2003 from $10.4 million in 2002. The
increase is primarily attributable an increase in the interest
rate on our Senior Notes. Following our exchange offer in
October 2002, the interest rate on our Senior Notes
increased from 10.25% to 12%. This increase was partially offset
by reduced borrowings during the year as well as lower interest
rates paid under our Bank Facility, which we also entered into
in October 2002. Additionally, we recorded
$0.1 million in interest expense in December 2003 and
2002 respectively, to reflect the issuance of payment in kind
(PIK) interest in both periods under the terms of the
Senior Notes leverage ratio test for the periods ended
December 31.

Income Taxes.We
recorded a tax provision for continuing operations of
$0.9 million in 2003 compared to a benefit of
$0.7 million in 2002. An analysis of changes in our income
taxes and our effective tax rate is contained in Note 11
 Income Taxes in the accompanying audited
consolidated financial statements beginning on page 32 of this
Form 10-K.

Discontinued Operations, net of
tax.In the fourth quarter of 2003, we
committed to a plan to divest of our motor segment operations.
In accordance with accounting principles generally accepted in
the United States

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(GAAP), we have accounted for the motor segment
in our financial statements on the line item Discontinued
operations, net of tax. In addition to the segments
pre-tax net operating loss of $3.2 million for 2003, we
also recorded a pre-tax, non-cash long-lived asset impairment
charge of $4.5 million. In 2002, we reported a pre-tax net
operating loss of $2.7 million. An analysis of Discontinued
Operations is contained in Note 3  Discontinued
Operations in the accompanying audited consolidated
statements beginning on page 32 of this Form 10-K.


Net Loss.As a
result of the factors noted above, we reported a net loss of
$5.4 million in 2003, compared to a net loss of
$18.3 million in 2002.




Year Ended December 31, 2002 Compared to
Year Ended December 31, 2001

Net Sales.Our
consolidated net sales from continuing operations for 2002 were
$185.9 million, an increase of $9.0 million or 5.1%
percent from the same period in 2001. The increase in net sales,
primarily a result of a gradual economic recovery during the
year in the industrial markets we serve, positively impacted the
friction and precision components segments.

|                     |              |                       |       |       |  |          |       |          |  |   |      |     |  |  |      |     |  
|-------------------- | ------------ | --------------------- | ----- | ----- |  | -------- | ----- | -------- |  | - | ---- | --- |  |  | ---- | --- | -
|Net Segment Sales:   |              | 2002                  |       | 2001  |  | $ Change |       | % Change
|                     |              |                       |       |       |  |          |       |         
|                     |              |                      
|                     |              | (dollars in millions)
|Friction Products    |              | $                     | 106.1 |       |  | $        | 104.1 |          |  | $ | 2.0  |     |  |  | 1.9  | %  
|Precision Components |              |                       | 67.2  |       |  |          | 59.8  |          |  |   | 7.4  |     |  |  | 12.4 | %  
|Performance Racing   |              |                       | 12.6  |       |  |          | 13.0  |          |  |   | (0.4 | )   |  |  | (3.1 | %) 
|                     |              |                       |       |       |  |          |       |          |  |   |      |     |  |  |      |    
|                     | Consolidated |                       | $     | 185.9 |  |          | $     | 176.9    |  |   | $    | 9.0 |  |  |      | 5.1 | %
|                     |              |                       |       |       |  |          |       |          |  |   |      |     |  |  |      |    



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Friction Products.Net sales in the friction products
    segment, our largest, were $106.1 million in 2002, an
    increase of 1.9% compared to 2001. As a result of improved
    operating environments in the United States and Europe, we
    experienced increases in most of our major markets, including
    construction, agriculture and automotive. The notable exception
    was our aerospace market. As a result of the continuing softness
    in the commercial aerospace market during 2002, our sales to
    this market were down 16.0% from the comparable period in 2001.
    This segment also experienced strong sales growth out of our
    international operations in 2002. Net sales, exclusive of any
    translation gains, at our Italian facility increased 14.1%
    compared to 2001, as a result of new product introductions and
    market share gains. Net sales at our Chinese facility were up
    292.1% compared to 2001.
|
| |  | Precision Components.Net sales in the precision components
    segment were $67.2 million, an increase of 12.4% compared
    to 2001. The increase in net sales was primarily attributable to
    gradually improving conditions in the general industrial
    segments of the domestic economy. We experienced sales increases
    in nearly all of the major markets served by this segment,
    including pump and motor, lawn and garden, truck and appliance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Performance Racing.Net sales in our performance racing
    segment were $12.6 million, a decrease of 3.1% compared to
    net sales of $13.0 million in 2001. The decrease in
    revenues was primarily attributable to the softness in the end
    markets we serve from our clutch manufacturing operation. Net
    sales at our transmission and driveline systems manufacturing
    facility benefited from the continued popularity of racing,
    particularly in the NASCAR racing series.                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Gross Profit.Gross
profit increased $3.5 million to $44.2 million during
2002, an 8.6% increase compared to gross profit of
$40.7 million in 2001. The gross profit margin increased to
23.8% of net sales in 2002 from 23.0% of net sales in the
comparable period of 2001.

|                     |              |      |      |      |   |          |      |      |   |  |      |      |   
|-------------------- | ------------ | ---- | ---- | ---- | - | -------- | ---- | ---- | - |  | ---- | ---- | --
|Gross Profit Margin: |              | 2002 |      | 2001 |   | % Change
|                     |              |      |      |      |   |         
|Friction Products    |              |      | 23.9 | %    |   |          | 23.9 | %    |   |  | 0.0  | %   
|Precision Components |              |      | 22.5 | %    |   |          | 20.1 | %    |   |  | 12.0 | %   
|Performance Racing   |              |      | 29.4 | %    |   |          | 29.2 | %    |   |  | 0.7  | %   
|                     | Consolidated |      |      | 23.8 | % |          |      | 23.0 | % |  |      | (3.5 | %)

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Friction Products.Our friction products segment reported
    gross profit of $25.4 million or 23.9% of net sales in 2002
    compared to $24.9 million or 23.9% of net sales in 2001. The
    flat gross profit margin was primarily the result of product
    mix, especially in our aerospace market, as older aircraft,
    which have higher margins for us, were retired or put out of
    service by the commercial airlines. We also continued to support
    our new facility in China during 2002. Although the facility
    operated at negative margins for the full year, it achieved
    break even results for the last half of 2002. Gross margin
    benefited by reductions in incentive compensation costs during
    the period compared to 2001.
|
| |  | Precision Components.Gross profit in our precision
    components segment was $15.1 million or 22.5% of net sales
    in 2002 compared to $12.0 million or 20.1% of net sales in
    2001. The increase in this segments margins was primarily
    the result of the volume increases and our ability to leverage
    and absorb the fixed charges generated by the segment and
    reductions in incentive compensations costs.                                                                                                                                                                                                                                                                                                                                   
|
| |  | Performance Racing.Our performance racing segment
    reported gross profit of $3.7 million or 29.4% of net sales
    in 2002 compared to $3.8 million or 29.2% of net sales in 2001.
    The decline in gross profit was primarily the result of volume
    declines at our performance clutch manufacturing facility.                                                                                                                                                                                                                                                                                                                                                                                                                                             

Selling, Technical and Administrative
Expenses.ST&A expenses increased
$1.7 million, or 5.6%, to $30.5 million in 2002 from
$28.8 million during 2001. As a percentage of net sales,
ST&A increased slightly to 16.4% of net sales in 2002
compared to 16.3% in 2001. The increase in ST&A expenses
resulted primarily from continuing start-up expenditures
incurred at our Chinese friction material facility, increased
insurance and personnel costs associated with our long-term
sales and growth initiatives. Additionally, we incurred legal
expenses in our performance racing segment related to litigation
that was resolved in the second quarter of 2002. These cost
increases were partially offset by reductions in incentive
compensation costs. In 2002, we spent $3.5 million, or 1.9% of
our net sales on product research and development compared to
$3.9 million in 2001.

Amortization of Finite-Lived Intangible
Assets.Results for the year ended
December 31, 2002 were favorably impacted by the adoption
of SFAS 142 on January 1, 2002, which permitted us to
discontinue the amortization of goodwill and definite-lived
intangible assets. This accounting change reduced our
amortization expense for the year by $2.9 million compared
to 2001.

Income from
Operations.Income from operations
increased $5.8 million or 80.6% to $13.0 million in
2002 from $7.2 million in 2001. Income from operations as a
percentage of net sales increased to 7.0% in 2002 from 4.1% in
2001. The increase was primarily the result of the increased
sales volume, improved absorption of fixed costs as a result of
the volume increases, cost reduction initiatives and a reduction
of amortization expense of $2.9 million as a result of the
adoption of SFAS 142. This improvement to income from operations
was partially offset by continuing support of our operations in
China and continued support of our metal injection molding
facility during the year. During the year ended
December 31, 2001, we recognized an expense of $1.1 million
in restructuring charges to adjust our business plan to reflect
the economic slowdown. No such charge was taken in 2002.

As a result of the items discussed above, income
from operations at our segments was as follows:

|                                   |              |                       |     |      |  |          |     |          |  |   |     |     |  |  |         |      |  
|---------------------------------- | ------------ | --------------------- | --- | ---- |  | -------- | --- | -------- |  | - | --- | --- |  |  | ------- | ---- | -
|Income from Operations by Segment: |              | 2002                  |     | 2001 |  | % Change |     | $ Change
|                                   |              |                       |     |      |  |          |     |         
|                                   |              |                      
|                                   |              | (dollars in millions)
|Friction Products                  |              | $                     | 7.8 |      |  | $        | 6.6 |          |  | $ | 1.2 |     |  |  | 18.2    | %   
|Precision Components               |              |                       | 4.3 |      |  |          | 0.3 |          |  |   | 4.0 |     |  |  | 1,333.3 | %   
|Performance Racing                 |              |                       | 0.9 |      |  |          | 0.3 |          |  |   | 0.6 |     |  |  | 200.0   | %   
|                                   |              |                       |     |      |  |          |     |          |  |   |     |     |  |  |         |     
|                                   | Consolidated |                       | $   | 13.0 |  |          | $   | 7.2      |  |   | $   | 5.8 |  |  |         | 80.6 | %
|                                   |              |                       |     |      |  |          |     |          |  |   |     |     |  |  |         |     

Interest Expense.Interest expense increased $0.3 million, or 3.0%, to
$10.4 million in 2002 from $10.1 million in 2001. The
increase is primarily attributable to increased borrowings
during the year and an increase in the interest rate on our
Senior Notes. Following our exchange offer in October 2002, the
interest rate on our Senior Notes increased from 10.25% to 12%.
This increase was partially offset by lower interest rates paid
under our new Bank Facility, which was also entered into in
October 2002. Additionally, we recorded

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$0.1 million in interest expense in
December 2002, to reflect the issuance of PIK interest
under the terms of the Senior Notes leverage ratio test for the
period ended December 31, 2002.


Exchange Offer
Costs.During the year ended
December 31, 2002, we incurred third-party fees and
expenses of $1.9 million related to the exchange of our
Senior Notes for our then outstanding Old Senior Notes.

Other Income (Expense),
net.Other expense was
$0.7 million in 2002 compared to $0.5 million in 2001. The
major expense items in 2002 included fees paid by us in the
first quarter of 2002 to effect an amendment to our Term Loan
and Revolving Credit Facility, costs associated with our
termination of a product licensing agreement in our precision
components segment, and to a lesser extent, foreign exchange
transaction losses. In 2001, other expense was primarily
comprised of the recognition of the fair value of our then
outstanding swap agreement, in addition to foreign currency
transaction losses.

Income Taxes.We
recorded a tax benefit of $0.7 million in 2002 compared to
a benefit of $0.9 million. An analysis of changes in our
income taxes and our effective tax rate is contained in
Note 11  Income Taxes in the accompanying
audited consolidated financial statements beginning on
page 32 of this Form 10-K.

Cumulative Effect of Change in Accounting
Principle.In accordance with the
requirements of SFAS 142, we recorded a charge for the
cumulative effect of change in accounting principle of
$17.2 million for the year ended December 31, 2002.
See Note 2  Significant Accounting Policies in
the accompanying audited consolidated financial statements
beginning on page 32 of this Form 10-K. This charge
represents the write-off of $21.5 million of goodwill
($17.2 million, net of income taxes of $4.3 million).

Discontinued Operations, net of
tax.In the fourth quarter of 2003, we
committed to a plan to sell our motor segment. In accordance
with GAAP, we have accounted for the discontinued operations in
our financial statements on the line item Discontinued
operations, net of tax for all periods. In 2002, we reported a
pre-tax net loss of $2.7 million from discontinued
operations compared to $3.0 million in 2001. An analysis of
Discontinued Operations is contained in Note 3 
Discontinued Operations in the accompanying audited
consolidated statements beginning on page 32 of this
Form 10-K.

Net Loss.As a
result of the factors noted above, we reported a net loss of
$18.3 million in 2002, compared to a net loss of
$4.3 million in 2001.

25



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##### Table of Contents






Liquidity and Capital Resources




Primary
Financing Requirements

Our primary financing requirements are:



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | for capital expenditures for maintenance,
    replacement and acquisition of equipment, expansion of capacity,
    productivity improvements and product development,
|
| |  | for funding our day-to-day working capital
    requirements and                                                                                                      
|
| |  | to pay interest on, and to repay principal of,
    our indebtedness.                                                                                                 

Hawks primary source of funds for
conducting its business activities and servicing its
indebtedness has been cash generated from operations and
borrowings under our Bank Facility. The following selected
measures of liquidity and capital resources outline various
metrics that are reviewed by our management and are provided to
enhance the understanding of our business.




Selected Measures of Liquidity and Capital
Resources from Continuing Operations

|                                          |  |                       |           |      |  |   |           |  
|----------------------------------------- |  | --------------------- | --------- | ---- |  | - | --------- | -
|                                          |  | 2003                  |           | 2002
|                                          |  |                       |           |     
|                                          |  |                      
|                                          |  | (dollars in millions)
|Cash and cash equivalents                 |  | $                     | 3.4       |      |  | $ | 1.7       |  
|                                          |  |                       |           |      |  |   |           |  
|Working capital(1)                        |  | $                     | 13.5      |      |  | $ | 9.1       |  
|                                          |  |                       |           |      |  |   |           |  
|Current ratio(2)                          |  |                       | 1.2       |      |  |   | 1.1       |  
|                                          |  |                       |           |      |  |   |           |  
|Debt as a % of capitalization(3)          |  |                       | 69.5      | %    |  |   | 70.7      | %
|                                          |  |                       |           |      |  |   |           |  
|Average number of days sales in accounts  |  |                       |           |      |  |   |           |  
|receivable                                |  |                       | 58.5 days |      |  |   | 59.8 days |  
|                                          |  |                       |           |      |  |   |           |  
|Average number of days sales in inventory |  |                       | 75.3 days |      |  |   | 78.0 days |  
|                                          |  |                       |           |      |  |   |           |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Working capital is defined as current assets less
    current liabilities. Beginning in 2002, as required by
    EITF 95-22, the Bank Facility is included in working
    capital. As of December 31, 2003 and 2002, there was
    $24.1 million and $36.3 million outstanding under the
    Bank Facility, respectively. See Note 6 
    Financing Arrangements to the accompanying audited
    consolidated financials statements beginning on page 32 of
    this Form 10-K.    
|   
|(2) | Current ratio is defined as current assets
    divided by current liabilities. Beginning in 2002, as required
    by EITF 95-22, the Bank Facility is included in working
    capital. As of December 31, 2003 and 2002, there was
    $24.1 million and $36.3 million outstanding under the
    Bank Facility, respectively. See Note 6 
    Financing Arrangements to the accompanying audited
    consolidated financials statements beginning on page 32 of
    this Form 10-K.
|   
|(3) | Debt is defined as long-term debt, including
    current portion, short-term borrowings and Bank Facility.
    Capitalization is defined as debt plus shareholders equity.                                                                                                                                                                                                                                                                                                           

Indebtedness

The following table summarizes the components of
our indebtedness as of December 31:

|                 |                    |               |      |      |  |   |      |       | 
|---------------- | ------------------ | ------------- | ---- | ---- |  | - | ---- | ----- | 
|                 |                    | 2003          |      | 2002
|                 |                    |               |      |     
|                 |                    |              
|                 |                    | (in millions)
|Short-term debt  |                    | $             | 1.3  |      |  |   |      |      
|Old Senior Notes |                    |               |      |      |  | $ | 0.6  |      
|Senior Notes     |                    |               | 66.2 |      |  |   | 66.1 |      
|Bank Facility    |                    |               | 24.1 |      |  |   | 36.3 |      
|Other            |                    |               | 3.4  |      |  |   | 5.3  |      
|                 |                    |               |      |      |  |   |      |      
|                 | Total indebtedness |               | $    | 95.0 |  |   | $    | 108.3 | 
|                 |                    |               |      |      |  |   |      |      

26



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##### Table of Contents



In October 2002, we entered into a new
senior secured credit facility (Bank Facility). The Bank
Facility, which is available for general corporate purposes, has
a maximum commitment of $53.0 million, including a letter
of credit facility of up to $5.0 million, comprised of a
$50.0 million revolving credit component and a
$3.0 million capital expenditure loan component. The
capital expenditure loan component can be used to finance 80% of
the cost of new equipment purchased after October 18, 2002.
At the end of each calendar year, beginning with the year ending
December 31, 2003, the principal amount of all loans under
the capital expenditure facility borrowed during the applicable
calendar year will begin to amortize on a seven year,
straight-line basis. The remaining unamortized principal balance
under the capital expenditure loan facility is due and payable
on the final maturity date of the Bank Facility. As of
December 31, 2003, we had $22.1 million outstanding
under the revolving credit component of the facility and
$2.0 million outstanding under the capital expenditure
component of the facility. As of December 31, 2003, subject
to our borrowing base, we had approximately $15.9 million
available for future borrowings under the revolving credit
component of the Bank Facility and $1.0 million under the
capital expenditure loan component of the Bank Facility.

Our Bank Facility contains various debt
covenants. At December 31, 2003 we were in compliance with
all of those covenants.

On February 27, 2004, we entered into an
amendment to our Bank Facility, which modified certain financial
covenant tests for 2004. This amendment will allow us to proceed
with our previously announced repositioning plan to sell our
motor segment and move our Brook Park, Ohio friction products
facility. We expect to incur pre-tax expenses of approximately
$2.0 million in 2004 and $3.0 million to
$3.5 million in 2005 related to the relocation of the Brook
Park, Ohio facility and employee severance expense.

The Bank Facility is collateralized by a security
interest in the accounts receivable, inventory, equipment and
real estate and other assets of Hawk and our domestic
subsidiaries, and we have pledged the stock of all of our
domestic subsidiaries and up to 65% of the stock of certain of
our foreign subsidiaries as collateral. Restrictive terms of the
Bank Facility require that we maintain specified financial
ratios including leverage and fixed charge ratios, and comply
with other loan covenants. The interest rates on the Bank
Facility range from 225 to 375 basis points over the London
Interbank Offered Rates, or alternatively, 0 to 100 basis points
over the prime rate. The Bank Facility matures 120 days
prior to the maturity of the Senior Notes (described below) in
2006. The Bank Facility replaced the Term Loan and Revolving
Credit Facility.

Under EITF 95-22, Balance Sheet Classification
of Borrowings Outstanding under Revolving Credit Agreements That
Include both a Subjective Acceleration Clause and a Lock-Box
Arrangement, we are required to classify all of our
outstanding debt under the Bank Facility as a current liability.
Under the subjective acceleration clause of the Bank Facility,
the lending banks may declare a default if they reasonably
believe that any of the following events have occurred or could
reasonably be expected to occur:



| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a material adverse effect on our business,
    operations or condition (financial or otherwise),                                                                                                    
|
| |  | a material adverse effect on our ability, or any
    subsidiary borrower or guarantor, to comply with the terms and
    conditions of the Bank Facility,                                            
|
| |  | a material adverse effect on the enforceability
    of any Bank Facility document or the ability of the lending
    banks to enforce any rights or remedies under any Bank Facility
    document, or
|
| |  | a material adverse effect on the validity,
    perfection or priority of any lien arising under the Bank
    Facility.                                                                              

We do not believe that any of these material
adverse effects have occurred or can reasonably be expected to
occur. Therefore, we do not believe that the lending banks have
any rights to declare a default under the subjective
acceleration clause of our Bank Facility. Hawk intends to manage
the Bank Facility as long-term debt with a final maturity date
in 2006, as provided for in the agreement that we signed. We
expect the long-term availability under the revolving credit
portion of the Bank Facility to be $50.0 million for the
next twelve month period, subject to the borrowing base.
However, if in the future, the lending banks do believe that a
material adverse effect has occurred or could reasonably be
expected to occur, they may declare a default and declare that
all outstanding principal and interest under the Bank Facility
is due and payable. We do not have sufficient cash or other
credit facilities that would permit immediate repayment of the
Bank Facility. If we were not able to

27



---



##### Table of Contents



negotiate new terms with the lending banks or
other banks or lending sources, our financial condition and
liquidity would be materially and adversely affected.


In October 2002, we exchanged
$64.4 million of our $65.0 million, 10 1/4%
Senior Notes due December 1, 2003 (Old Senior Notes), for
12% Senior Notes due December 1, 2006 (Senior Notes). The
Senior Notes were issued on October 23, 2002. The remaining
principal of the Old Senior Notes in the amount of $0.6 million
matured and were paid on December 1, 2003. The holders of
the Old Senior Notes that participated in the exchange for
Senior Notes received a consent payment of $25.63, in the form
of Senior Notes, for each $1,000 of Old Senior Notes held as of
October 23, 2002. The entire debt refinancing transaction
was accounted for as a debt exchange in accordance with EITF
96-19, Debtors Accounting for a Modification or
Exchange of Debt Instruments. Accordingly, we recorded the
aggregate consent payments of $1.6 million as additional
Senior Notes, and we are amortizing the consent payments to
interest expense over the remaining life of the Senior Notes. We
also incurred $1.9 million of third party costs in
connection with the exchange. The Senior Notes are general
unsecured senior obligations of Hawk and are fully and
unconditionally guaranteed, on a joint and several basis, by all
of our domestic wholly-owned subsidiaries. The Senior Notes
accrue interest at a rate of 12% per annum on the principal
amount commencing October 23, 2002. Interest payments are
due semi-annually. In addition, in the event that our leverage
ratio (as defined) exceeds 4.0 to 1.0 for the most recently
ended four quarters beginning with the semi-annual period ended
December 31, 2002, we will be required to pay additional
PIK interest at a rate ranging from .25% to 2.00% until the next
semi-annual test period. Any interest payment under this test
will be made by issuing additional Senior Notes. As of
December 31, 2003, the leverage ratio test will require us
to issue $0.1 million of PIK interest, calculated at a rate
of 0.25%, in the form of additional Senior Notes.

We have the option to redeem the Senior Notes in
whole or in part during the twelve months beginning
December 1, 2003 at 102.5% of the aggregate principal
amount thereof and beginning December 1, 2004 at 100% of
the aggregate principal amount thereof together with any
interest accrued and unpaid to the redemption date. Upon a
change of control as defined in the Senior Note indenture, each
holder of the notes will have the right to require us to
repurchase all or any part of their notes at a purchase price
equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest to the date of purchase.

The Senior Notes permit Hawk and its subsidiaries
to incur additional indebtedness without limitation, provided
that we continue to meet a cash flow coverage ratio and an
adjusted consolidated leverage ratio. As of December 31,
2003, we did not meet the prescribed ratios. The failure to meet
the ratios does not constitute a default under the Senior Note
indenture. Rather, the Senior Note indenture continues to permit
indebtedness subject to limitations. Our Bank Facility, which is
secured by liens on all of our assets and the assets of our
subsidiaries, is permitted. We do not believe that our
operations will be materially impacted by the limitation on
indebtedness arising under the Senior Note indenture.

The Senior Notes prohibit the payment of cash
dividends on the Companys Class A Common Stock. The
Senior Notes also contain other covenants limiting our ability
to make certain restricted payments, make certain investments,
permit liens, incur dividend and other payment restrictions
affecting subsidiaries, enter into consolidation, merger,
conveyance, lease or transfer transactions, make asset sales,
enter into transactions with affiliates or engage in unrelated
lines of business. These covenants are subject to certain
exceptions and qualifications. The Senior Notes considers
non-compliance with the limitations events of default. In
addition to non-payment of interest and principal amounts, the
Senior Notes also considers default with respect to other
indebtedness in excess of $5.0 million an event of default.
In the event of a default, the principal and interest could be
accelerated upon written notice by 25% or more of the holders of
the notes.

28



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##### Table of Contents





| |          
| | ---------
| | Cash Flow

The following table summarizes the major
components of cash flow:

|                                                         |  |             |       |      |  |   |      |  
|-------------------------------------------------------- |  | ----------- | ----- | ---- |  | - | ---- | -
|                                                         |  | 2003        |       | 2002
|                                                         |  |             |       |     
|                                                         |  |            
|                                                         |  | (dollars in
|                                                         |  | millions)  
|Cash provided by (used in)
    operating activities      |  | $           | 23.7  |      |  | $ | (7.7 | )
|Cash used in investing activities                        |  |             | (10.1 | )    |  |   | (9.7 | )
|Cash (used in) provided by
    financing activities      |  |             | (14.0 | )    |  |   | 12.1 |  
|Effect of exchange rates on cash                         |  |             | 0.1   |      |  |   | 0.1  |  
|Cash provided by discontinued operations                 |  |             | 2.0   |      |  |   | 3.8  |  
|                                                         |  |             |       |      |  |   |      |  
|Net increase (decrease) in cash and cash
    equivalents |  | $           | 1.7   |      |  | $ | (1.4 | )
|                                                         |  |             |       |      |  |   |      |  

At December 31, 2003, we had cash and cash
equivalents of $3.4 million compared to $1.7 million
at December 31, 2002. The cash on the balance sheet at
December 31, 2003 and 2002 is primarily at our foreign
operations. All domestic cash is used to pay down the
outstanding loans of the revolving credit component of our Bank
Facility.

Net cash provided by operating activities was
$23.7 million in 2003 compared to cash used in operating
activities of $7.7 million in 2002. Cash provided by our
operations in 2003 was primarily attributable to significant
decreases in our working capital assets, exclusive of our Bank
Facility, during the period. Our net working capital, exclusive
of the outstanding debt under the Bank Facility, which is
classified as a current liability for accounting purposes, was
$37.6 million at year-end 2003 compared to
$45.4 million at year-end 2002. As part of our capital
management, we review certain working capital metrics on a
continuing basis. Our accounts receivable and inventory levels
are reviewed through the computation of days sales outstanding
and inventory turnover ratio, respectively. The number of days
sales outstanding as of December 31, 2003, was
approximately 59 days compared to the 60 days as of
December 31, 2002. Average inventory turns during 2003
decreased by approximately 2.7 days compared to 2002
levels. Our accounts payable and accrued interest increased by
approximately $12.2 million at December 31, 2003
compared to December 31, 2002 primarily as a result of
timing of payments. We have not changed our payment terms to
vendors. Additionally, we made a $4.0 million interest
payment on the Senior Notes on January 2, 2004.

We used cash in our investing activities of
$10.1 million in 2003 and $9.7 million in 2002 for the
purchase of property, plant and equipment.

Cash used in financing activities was
$14.0 million in 2003. As a result of our working capital
asset management programs, we were able to significantly reduce
the amounts outstanding under our Bank Facility by
$12.2 million in 2003. The increase in 2002 was primarily
the result of additional borrowings to support the increase in
our working capital assets, our production facility in China and
our purchases of property, plant and equipment during the year.

We believe that cash flow from operating
activities and borrowings under our Bank Facility will be
sufficient to satisfy our working capital, capital expenditures
and debt requirements and to finance our continued internal
growth needs and restructuring initiatives for the next twelve
months.




Forward-Looking Statements

Statements that are not historical facts,
including statements about our confidence in our prospects and
strategies and our expectations about growth of existing markets
and our ability to expand into new markets, to identify and
acquire complementary businesses and to attract new sources of
financing, are forward-looking statements that involve risks and
uncertainties. In addition to statements which are
forward-looking by reason of context, the words
believe, expect, anticipate,
intend, designed, goal,
objective, optimistic, will
and other similar expressions identify forward-looking
statements. In light of the risks and uncertainties inherent in
all future projections, the inclusion of the forward-looking
statements should not be regarded as

29



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##### Table of Contents



guarantees of performance or a representation by
us or any other person that our objectives or plans will be
achieved.


Our forward-looking statements are based on our
managements beliefs and assumptions, which in turn are
based on currently available information. Important assumptions
relating to the forward looking statements include, among
others, assumptions regarding demand for our products, the
expansion of product offerings geographically or through new
applications, the timing and cost of planned capital
expenditures, competitive conditions and general economic
conditions. These assumptions could prove inaccurate.
Forward-looking statements also involve risks and uncertainties,
which could cause actual results that differ materially and
adversely from those contained in any forward looking statement.
Many of these factors are beyond our ability to control or
predict and such incurrence could be material. Such factors
include, but are not limited to, the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to meet the terms of our Bank
    Facility and Senior Notes, each of which contain a number of
    significant financial covenants and other restrictions;                                                                                                                                                                                                                       
|
| |  | the effect of our debt service requirements on
    funds available for operations and future business opportunities
    and our vulnerability to adverse general economic and industry
    conditions and competition;                                                                                                                                                                       
|
| |  | the impact of the reduction in air travel on our
    aerospace business;                                                                                                                                                                                                                                                                                                                     
|
| |  | the impact on our gross profit margins as a
    result of changes in our product mix;                                                                                                                                                                                                                                                                                                        
|
| |  | our ability to effectively utilize all of our
    manufacturing capacity as the industrial and commercial
    end-markets we serve gradually improve or if improvement is not
    achieved as we anticipate;                                                                                                                                                                                 
|
| |  | the timely completion of the construction of the
    new facility in our friction products segment;                                                                                                                                                                                                                                                                                          
|
| |  | the ability to hire and train qualified people at
    the new facility;                                                                                                                                                                                                                                                                                                                      
|
| |  | the ability to transfer production to the new
    facility and commence production at the new facility without
    causing customer delays or dissatisfaction;                                                                                                                                                                                                                               
|
| |  | the ability to achieve the projected cost savings
    at the new facility, including whether the cost savings can be
    achieved in a timely manner;                                                                                                                                                                                                                                        
|
| |  | whether or not our motor segment can be sold and
    if sold whether the sale can take place in the time or at the
    price projected by us;                                                                                                                                                                                                                                                
|
| |  | whether or not the motor segment will be able to
    improve its operating performance during the selling process;                                                                                                                                                                                                                                                                           
|
| |  | higher than anticipated costs related to the
    relocation of the friction products segment facility and the
    sale of our motor segment;                                                                                                                                                                                                                                                 
|
| |  | our ability to generate profits at our facilities
    in China and to earn a profit at our start-up metal injection
    molding operation;                                                                                                                                                                                                                                                   
|
| |  | the effect of competition by manufacturers using
    new or different technologies;                                                                                                                                                                                                                                                                                                          
|
| |  | the effect on our international operations of
    unexpected changes in legal and regulatory requirements, export
    restrictions, currency controls, tariffs and other trade
    barriers, difficulties in staffing and managing foreign
    operations, political and economic instability, difficulty in
    accounts receivable collection and potentially adverse tax
    consequences;
|
| |  | the effect of fluctuations in foreign currency
    exchange rates as our non-U.S. sales continue to increase;                                                                                                                                                                                                                                                                                
|
| |  | our ability to negotiate new agreements, as they
    expire, with our unions representing certain of our employees,
    on terms favorable to us or without experiencing work stoppages;                                                                                                                                                                                                     
|
| |  | the effect of any interruption in our supply of
    raw materials or a substantial increase in the price of any of
    the raw materials;                                                                                                                                                                                                                                                    
|
| |  | the continuity of business relationships with
    major customers; and                                                                                                                                                                                                                                                                                                                       

30



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| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | the ability of our products to meet stringent
    Federal Aviation Administration criteria and testing
    requirements.

Forward-looking statements speak only as of the
date they are made, and we undertake no obligation to updated
publicly any of them in light of new information or future
events.

You must consider these risks and others that are
detailed in this Form 10-K in deciding whether to invest or
continue to own our common stock or Senior Notes.



|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK

Market Risk
Disclosures.The following discussion
about our market risk disclosures involves forward-looking
statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to
market risk related to changes in interest rates and foreign
currency exchange rates. In seeking to minimize the risks and/or
costs associated with market risk, we manage our exposures to
interest rates and foreign currency exchange rates through our
regular operating and financial activities, which could include
the use of derivative instruments in the future. We do not use
derivative financial instruments for speculative or trading
purposes.

Interest Rate
Sensitivity.At December 31,
2003, approximately 26.7%, or $25.4 million, of our total
indebtedness bears interest at a variable rate. Our primary
interest rate risk exposure results from floating rate debt. If
interest rates were to increase 100 basis points (1%) from
December 31, 2003 rates, and assuming no changes in debt
from December 31, 2003 levels, our additional annual
interest expense would be approximately $0.3 million. In
October 2002, we terminated a $10 million notional
amount interest rate swap. The cancellation did not have a
material impact on earnings.

The interest rates on our long-term debt reflect
market rates and therefore, the carrying value of long-term debt
approximates fair value. An analysis of our obligations is
further discussed in Note 6  Financing
Arrangements and Note 10  Lease
Obligations in the accompanying audited consolidated
financial statements beginning on page 32 of this Form 10-K.

The following table presents our total
contractual obligations and other commercial commitments as of
December 31, 2003:

|                              |                                             |       |       |      |  |             |     |            |  |   |      |      |  |   |     |     | 
|----------------------------- | ------------------------------------------- | ----- | ----- | ---- |  | ----------- | --- | ---------- |  | - | ---- | ---- |  | - | --- | --- | 
|                              |                                             | Total |       | 2004 |  | 2005  2008 |     | Thereafter
|                              |                                             |       |       |      |  |             |     |           
|Contractual obligations:      |                                             |       |       |      |  |             |     |            |  |   |      |      |  |   |     |    
|                              | Short-term debt (1)                         |       | $     | 1.3  |  |             | $   | 1.3        |  |   |      |      |  |   |     |     | 
|                              | Bank Facility (1)                           |       |       | 24.1 |  |             |     |            |  |   | $    | 24.1 |  |   |     |     | 
|                              | Senior Notes (2)                            |       |       | 66.2 |  |             |     |            |  |   |      | 66.2 |  |   |     |     | 
|                              | Capital lease and other
    obligations (2) |       |       | 3.4  |  |             |     | 1.1        |  |   |      | 1.9  |  |   | $   | 0.4 | 
|                              | Operating leases (2)                        |       |       | 10.1 |  |             |     | 2.6        |  |   |      | 5.5  |  |   |     | 2.0 | 
|                              |                                             |       |       |      |  |             |     |            |  |   |      |      |  |   |     |    
|Total contractual obligations |                                             | $     | 105.1 |      |  | $           | 5.0 |            |  | $ | 97.7 |      |  | $ | 2.4 |    
|                              |                                             |       |       |      |  |             |     |            |  |   |      |      |  |   |     |    
|Other commercial commitments: |                                             |       |       |      |  |             |     |            |  |   |      |      |  |   |     |    
|                              | Stand-by letters of credit                  |       | $     | 3.5  |  |             | $   | 3.5        |  |   |      |      |  |   |     |     | 
|                              |                                             |       |       |      |  |             |     |            |  |   |      |      |  |   |     |    



---



|    |                          
|--- | -------------------------
|(1) | Variable rate obligations
|   
|(2) | Fixed rate obligations   

Foreign Currency Exchange
Risk.The majority of our receipts and
expenditures are contracted in U.S. dollars, and we do not
consider the market risk exposure relating to currency exchange
to be material at this time. We currently do not hedge our
foreign currency exposure and, therefore, have not entered into
any forward foreign exchange contracts to hedge foreign currency
transactions. We have operations outside the United States with
foreign currency denominated assets and liabilities, primarily
denominated in Euros, Canadian dollars, Mexican pesos and
Chinese renminbi. Because we have foreign currency denominated
assets and liabilities, financial exposure may result, primarily
from the timing of transactions and the movement of exchange
rates. We do not expect that our unhedged foreign currency
balance sheet exposure as of December 31, 2003 will result
in a significant impact on our earnings or cash flows.

31



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##### Table of Contents








|        |                                                
|------- | -----------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA

AUDITED CONSOLIDATED FINANCIAL
STATEMENTS

Hawk Corporation and subsidiaries

December 31, 2003, 2002 and 2001


32



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Audited Consolidated Financial
Statements

|                                                    |  |  |    | 
|--------------------------------------------------- |  |  | -- | 
|Report of Independent Auditors                      |  |  | 34 | 
|Consolidated Balance Sheets                         |  |  | 35 | 
|Consolidated Statements of Operations               |  |  | 37 | 
|Consolidated Statements of
    Shareholders Equity |  |  | 38 | 
|Consolidated Statements of Cash Flows               |  |  | 39 | 
|Notes to Consolidated Financial Statements          |  |  | 40 | 

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REPORT OF INDEPENDENT AUDITORS

Shareholders and Board of Directors

Hawk Corporation


We have audited the accompanying consolidated
balance sheets of Hawk Corporation and subsidiaries as of
December 31, 2003 and 2002, and the related consolidated
statements of operations, shareholders equity, and cash
flows for each of the three years in the period ended
December 31, 2003. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
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, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Hawk
Corporation and subsidiaries at December 31, 2003 and 2002,
and the consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 2 to the consolidated
financial statements, in 2002 the Company changed its method of
accounting for goodwill.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

Cleveland, Ohio

February 27, 2004


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HAWK CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands, except share data)

|                                    |                                                                          |                                   |         |         |        |   |         |        |        | 
|----------------------------------- | ------------------------------------------------------------------------ | --------------------------------- | ------- | ------- | ------ | - | ------- | ------ | ------ | 
|                                    |                                                                          |                                  
|                                    |                                                                          | December 31                      
|                                    |                                                                          |                                  
|                                    |                                                                          | 2003                              |         | 2002   
|                                    |                                                                          |                                   |         |        
|Assets                              |                                                                          |                                   |         |         |        |   |         |       
|Current assets:                     |                                                                          |                                   |         |         |        |   |         |       
|                                    | Cash and cash equivalents                                                |                                   | $       | 3,365   |        |   | $       | 1,702  |       
|                                    | Accounts receivable, less allowance of $429 in
    2003 and $502 in 2002 |                                   |         | 32,272  |        |   |         | 29,475 |       
|                                    | Inventories:                                                             |                                   |         |         |        |   |         |        |       
|                                    |                                                                          | Raw materials and work-in-process |         |         | 21,277 |   |         |        | 20,211 | 
|                                    |                                                                          | Finished products                 |         |         | 14,147 |   |         |        | 12,470 | 
|                                    |                                                                          |                                   |         |         |        |   |         |       
|                                    |                                                                          |                                   | 35,424  |         |        |   | 32,681  |       
|                                    | Deferred income taxes                                                    |                                   |         | 3,551   |        |   |         | 745    |       
|                                    | Taxes receivable                                                         |                                   |         | 521     |        |   |         | 3,333  |       
|                                    | Other current assets                                                     |                                   |         | 4,032   |        |   |         | 3,909  |       
|                                    | Current assets of discontinued operations                                |                                   |         | 4,302   |        |   |         | 3,965  |       
|                                    |                                                                          |                                   |         |         |        |   |         |       
|Total current assets                |                                                                          |                                   | 83,467  |         |        |   | 75,810  |       
|Property, plant and equipment:      |                                                                          |                                   |         |         |        |   |         |       
|                                    | Land and improvements                                                    |                                   |         | 1,944   |        |   |         | 1,676  |       
|                                    | Buildings and improvements                                               |                                   |         | 19,937  |        |   |         | 19,415 |       
|                                    | Machinery and equipment                                                  |                                   |         | 104,370 |        |   |         | 93,180 |       
|                                    | Furniture and fixtures                                                   |                                   |         | 8,405   |        |   |         | 7,693  |       
|                                    | Construction in progress                                                 |                                   |         | 5,622   |        |   |         | 6,247  |       
|                                    |                                                                          |                                   |         |         |        |   |         |       
|                                    |                                                                          |                                   | 140,278 |         |        |   | 128,211 |       
|                                    | Less accumulated depreciation
    and amortization                       |                                   |         | 77,142  |        |   |         | 66,391 |       
|                                    |                                                                          |                                   |         |         |        |   |         |       
|Total property, plant and equipment |                                                                          |                                   | 63,136  |         |        |   | 61,820  |       
|Other assets:                       |                                                                          |                                   |         |         |        |   |         |       
|                                    | Goodwill                                                                 |                                   |         | 32,495  |        |   |         | 32,495 |       
|                                    | Other intangible assets                                                  |                                   |         | 9,904   |        |   |         | 10,701 |       
|                                    | Shareholder notes                                                        |                                   |         | 1,000   |        |   |         | 1,010  |       
|                                    | Other                                                                    |                                   |         | 3,547   |        |   |         | 4,636  |       
|                                    | Long-term assets of discontinued operations                              |                                   |         |         |        |   |         | 6,408  |       
|                                    |                                                                          |                                   |         |         |        |   |         |       
|Total other assets                  |                                                                          |                                   | 46,946  |         |        |   | 55,250  |       
|                                    |                                                                          |                                   |         |         |        |   |         |       
|Total assets                        |                                                                          | $                                 | 193,549 |         |        | $ | 192,880 |       
|                                    |                                                                          |                                   |         |         |        |   |         |       



See notes to consolidated financial
statements.


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HAWK CORPORATION


CONSOLIDATED BALANCE SHEETS 
(continued)

|                                               |                                                                                                                                                                                                           |             |         |        |   |   |         |        |  
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------- | ------ | - | - | ------- | ------ | -
|                                               |                                                                                                                                                                                                           |            
|                                               |                                                                                                                                                                                                           | December 31
|                                               |                                                                                                                                                                                                           |            
|                                               |                                                                                                                                                                                                           | 2003        |         | 2002  
|                                               |                                                                                                                                                                                                           |             |         |       
|Liabilities and shareholders
    equity       |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|Current liabilities:                           |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|                                               | Accounts payable                                                                                                                                                                                          |             | $       | 21,569 |   |   | $       | 16,104 |  
|                                               | Accrued compensation                                                                                                                                                                                      |             |         | 5,736  |   |   |         | 4,068  |  
|                                               | Accrued interest                                                                                                                                                                                          |             |         | 4,153  |   |   |         | 372    |  
|                                               | Other accrued expenses                                                                                                                                                                                    |             |         | 8,296  |   |   |         | 4,655  |  
|                                               | Short-term debt                                                                                                                                                                                           |             |         | 1,326  |   |   |         |        |  
|                                               | Bank Facility                                                                                                                                                                                             |             |         | 24,059 |   |   |         | 36,327 |  
|                                               | Current portion of long-term debt                                                                                                                                                                         |             |         | 1,148  |   |   |         | 3,103  |  
|                                               | Current liabilities of
    discontinued operations                                                                                                                                                        |             |         | 3,652  |   |   |         | 2,126  |  
|                                               |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|Total current liabilities                      |                                                                                                                                                                                                           |             | 69,939  |        |   |   | 66,755  |       
|Long-term liabilities:                         |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|                                               | Long-term debt                                                                                                                                                                                            |             |         | 68,443 |   |   |         | 68,890 |  
|                                               | Deferred income taxes                                                                                                                                                                                     |             |         | 4,360  |   |   |         | 5,245  |  
|                                               | Other                                                                                                                                                                                                     |             |         | 9,102  |   |   |         | 6,523  |  
|                                               | Long-term debt of discontinued operations                                                                                                                                                                 |             |         |        |   |   |         | 633    |  
|                                               |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|Total long-term liabilities                    |                                                                                                                                                                                                           |             | 81,905  |        |   |   | 81,291  |       
|Shareholders equity:                          |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|                                               | Series D preferred stock, $.01 par value; an
    aggregate liquidation value of $1,530, plus any unpaid dividends
    with 9.8% cumulative dividend (1,530 shares authorized, issued
    and outstanding) |             |         | 1      |   |   |         | 1      |  
|                                               | Series E preferred stock, $.01 par value;
    100,000 shares authorized; none issued or outstanding                                                                                                       |             |         |        |   |   |         |        |  
|                                               | Class A common stock, $.01 par value;
    75,000,000 shares authorized; 9,187,750 issued; and 8,588,720
    and 8,557,990 outstanding in 2003 and 2002, respectively                                      |             |         | 92     |   |   |         | 92     |  
|                                               | Class B common stock, $.01 par value;
    10,000,000 shares authorized; none issued or outstanding                                                                                                        |             |         |        |   |   |         |        |  
|                                               | Additional paid-in capital                                                                                                                                                                                |             |         | 54,483 |   |   |         | 54,616 |  
|                                               | Retained (deficit) earnings                                                                                                                                                                               |             |         | (4,344 | ) |   |         | 1,228  |  
|                                               | Accumulated other comprehensive loss                                                                                                                                                                      |             |         | (4,083 | ) |   |         | (6,436 | )
|                                               | Treasury stock, at cost, 599,030 and 629,760
    shares in 2003 and 2002, respectively                                                                                                                    |             |         | (4,444 | ) |   |         | (4,667 | )
|                                               |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|Total shareholders equity                     |                                                                                                                                                                                                           |             | 41,705  |        |   |   | 44,834  |       
|                                               |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|Total liabilities and
    shareholders equity |                                                                                                                                                                                                           | $           | 193,549 |        |   | $ | 192,880 |       
|                                               |                                                                                                                                                                                                           |             |         |        |   |   |         |       



See notes to consolidated financial
statements.


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HAWK CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In Thousands, except per share
data)

|                                                                                                                           |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |        |      |  
|-------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------- | ------ | ---- | ---- | ------- | ------ | ----- | - | ------- | ------ | ---- | -
|                                                                                                                           |                                                                   |                                                                                                           
|                                                                                                                           |                                                                   | Year ended December 31                                                                                    
|                                                                                                                           |                                                                   |                                                                                                           
|                                                                                                                           |                                                                   | 2003                                                                                                       |         | 2002   |      | 2001
|                                                                                                                           |                                                                   |                                                                                                            |         |        |      |     
|Net sales                                                                                                                  |                                                                   | $                                                                                                          | 202,551 |        |      | $    | 185,912 |        |       | $ | 176,888 |       
|Cost of sales                                                                                                              |                                                                   |                                                                                                            | 155,182 |        |      |      | 141,716 |        |       |   | 136,140 |       
|                                                                                                                           |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |       
|Gross profit                                                                                                               |                                                                   |                                                                                                            | 47,369  |        |      |      | 44,196  |        |       |   | 40,748  |       
|Operating expenses:                                                                                                        |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |       
|                                                                                                                           | Selling, technical and
    administrative expenses                |                                                                                                            |         | 33,731 |      |      |         | 30,474 |       |   |         | 28,782 |     
|                                                                                                                           | Restructuring costs                                               |                                                                                                            |         |        |      |      |         |        |       |   |         | 1,055  |     
|                                                                                                                           | Pension curtailment and contractual termination
    benefit costs |                                                                                                            |         | 1,920  |      |      |         |        |       |   |         |        |     
|                                                                                                                           | Amortization of finite-lived
    intangible assets                |                                                                                                            |         | 800    |      |      |         | 767    |       |   |         | 3,733  |     
|                                                                                                                           |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |       
|Total operating expenses                                                                                                   |                                                                   |                                                                                                            | 36,451  |        |      |      | 31,241  |        |       |   | 33,570  |       
|                                                                                                                           |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |       
|Income from operations                                                                                                     |                                                                   |                                                                                                            | 10,918  |        |      |      | 12,955  |        |       |   | 7,178   |       
|Interest expense                                                                                                           |                                                                   |                                                                                                            | (10,752 | )      |      |      | (10,366 | )      |       |   | (10,081 | )     
|Interest income                                                                                                            |                                                                   |                                                                                                            | 57      |        |      |      | 116     |        |       |   | 229     |       
|Exchange offer costs                                                                                                       |                                                                   |                                                                                                            |         |        |      |      | (1,851  | )      |       |   |         |       
|Other income (expense), net                                                                                                |                                                                   |                                                                                                            | 183     |        |      |      | (718    | )      |       |   | (480    | )     
|                                                                                                                           |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |       
|Income (loss) before income taxes,
    discontinued operations and cumulative effect of change in
    accounting principle |                                                                   |                                                                                                            | 406     |        |      |      | 136     |        |       |   | (3,154  | )     
|Income tax provision (benefit)                                                                                             |                                                                   |                                                                                                            | 855     |        |      |      | (669    | )      |       |   | (937    | )     
|                                                                                                                           |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |       
|(Loss) income before discontinued operations
    and cumulative effect of change in accounting principle                   |                                                                   |                                                                                                            | (449    | )      |      |      | 805     |        |       |   | (2,217  | )     
|Discontinued operations, net of tax of $2,700 in
    2003, $825 in 2002 and $921 in 2001                                   |                                                                   |                                                                                                            | (4,973  | )      |      |      | (1,850  | )      |       |   | (2,119  | )     
|Cumulative effect of change in accounting
    principle, net of tax of $4,252                                              |                                                                   |                                                                                                            |         |        |      |      | (17,200 | )      |       |   |         |       
|                                                                                                                           |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |       
|Net loss                                                                                                                   |                                                                   | $                                                                                                          | (5,422  | )      |      | $    | (18,245 | )      |       | $ | (4,336  | )     
|                                                                                                                           |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |       
|(Loss) earnings per share:                                                                                                 |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |       
|                                                                                                                           | Basic (loss) earnings per share:                                  |                                                                                                            |         |        |      |      |         |        |       |   |         |        |     
|                                                                                                                           |                                                                   | (Loss) earnings before discontinued operations
    and cumulative effect of change in accounting principle |         | $      | (.07 | )    |         | $      | .08   |   |         | $      | (.27 | )
|                                                                                                                           |                                                                   | Discontinued operations                                                                                    |         |        | (.58 | )    |         |        | (.22  | ) |         |        | (.25 | )
|                                                                                                                           |                                                                   | Cumulative effect of change in
    accounting principle                                                    |         |        |      |      |         |        | (2.01 | ) |         |        |      |  
|                                                                                                                           |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |       
|                                                                                                                           | Net loss per basic share                                          |                                                                                                            | $       | (.65   | )    |      | $       | (2.15  | )     |   | $       | (.52   | )   
|                                                                                                                           |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |       
|                                                                                                                           | Diluted (loss) earnings per share:                                |                                                                                                            |         |        |      |      |         |        |       |   |         |        |     
|                                                                                                                           |                                                                   | (Loss) earnings before discontinued operations
    and cumulative effect of change in accounting principle |         | $      | (.07 | )    |         | $      | .08   |   |         | $      | (.27 | )
|                                                                                                                           |                                                                   | Discontinued operations                                                                                    |         |        | (.58 | )    |         |        | (.22  | ) |         |        | (.25 | )
|                                                                                                                           |                                                                   | Cumulative effect of change in accounting
    principle                                                    |         |        |      |      |         |        | (2.00 | ) |         |        |      |  
|                                                                                                                           |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |       
|                                                                                                                           | Net loss per diluted share                                        |                                                                                                            | $       | (.65   | )    |      | $       | (2.14  | )     |   | $       | (.52   | )   
|                                                                                                                           |                                                                   |                                                                                                            |         |        |      |      |         |        |       |   |         |       



See notes to consolidated financial
statements.


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HAWK CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

(In Thousands)

|                             |                                                                                          |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   |        |   |        |     |  |   |        |         |        |  
|---------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------------------------- | - | ------ |  | ---------- | -- | --------- |  | -------------------- | ------ | --------- | - | -------- | ------ | ------- | - | - | ------ | - | ----- | - | ------ | - | ------ | - | ------ | --- |  | - | ------ | ------- | ------ | -
|                             |                                                                                          |                                                     |   |        |  |            |    |           |  |                      |        |           |   |         
|                             |                                                                                          |                                                     |   |        |  |            |    |           |  | Accumulated Other    |        |           |   |         
|                             |                                                                                          |                                                     |   |        |  |            |    |           |  | Comprehensive Income |        |           |   |         
|                             |                                                                                          |                                                     |   |        |  |            |    |           |  | (Loss)               |        |           |   |         
|                             |                                                                                          |                                                     |   |        |  |            |    |           |  |                      |        |           |   |         
|                             |                                                                                          |                                                     |   |        |  | Additional |    | Retained  |  | Foreign              |        | Minimum   |   |          |        |        
|                             |                                                                                          | Preferred                                           |   | Common |  | Paid-in    |    | Earnings  |  | Currency             |        | Pension   |   | Treasury |        |        
|                             |                                                                                          | Stock                                               |   | Stock  |  | Capital    |    | (Deficit) |  | Translation          |        | Liability |   | Stock    |        | Total  
|                             |                                                                                          |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |        
|Balance at January 1, 2001   |                                                                                          | $                                                   | 1 |        |  | $          | 92 |           |  | $                    | 54,631 |           |   | $        | 24,109 |         |   | $ | (2,326 | ) |       | $ | (83    | ) |        | $ | (4,735 | )   |  | $ | 71,689 |        
|                             | Net loss                                                                                 |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        | (4,336  | ) |   |        |   |       |   |        |   |        |   |        |     |  |   |        | (4,336  | )     
|                             | Other comprehensive loss:                                                                |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   |        |   |        |     |  |   |        |         |       
|                             |                                                                                          | Minimum pension liability, net of tax of $310       |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   | (495   | ) |        |     |  |   |        |         | (495   | )
|                             |                                                                                          | Foreign currency translation                        |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   | (297  | ) |        |   |        |   |        |     |  |   |        |         | (297   | )
|                             | Total comprehensive loss                                                                 |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   |        |   |        |     |  |   |        | (5,128  | )     
|                             | Preferred stock dividends                                                                |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        | (150    | ) |   |        |   |       |   |        |   |        |   |        |     |  |   |        | (150    | )     
|                             | Issuance of common stock from treasury
    as compensation                               |                                                     |   |        |  |            |    |           |  |                      |        | (5        | ) |          |        |         |   |   |        |   |       |   |        |   |        |   |        | 31  |  |   |        | 26      |       
|                             |                                                                                          |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   |        |   |        |     |  |   |        |        
|Balance at December 31, 2001 |                                                                                          | $                                                   | 1 |        |  | $          | 92 |           |  | $                    | 54,626 |           |   | $        | 19,623 |         |   | $ | (2,623 | ) |       | $ | (578   | ) |        | $ | (4,704 | )   |  | $ | 66,437 |        
|                             |                                                                                          |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   |        |   |        |     |  |   |        |        
|                             | Net loss                                                                                 |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        | (1,045  | ) |   |        |   |       |   |        |   |        |   |        |     |  |   |        | (1,045  | )     
|                             | Other comprehensive income (loss):                                                       |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   |        |   |        |     |  |   |        |         |       
|                             |                                                                                          | Minimum pension liability, net of tax of
    $2,435 |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   | (3,901 | ) |        |     |  |   |        |         | (3,901 | )
|                             |                                                                                          | Foreign currency translation                        |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   | 666   |   |        |   |        |   |        |     |  |   |        |         | 666    |  
|                             | Cumulative change in accounting principle, net
    of tax                                |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        | (17,200 | ) |   |        |   |       |   |        |   |        |   |        |     |  |   |        | (17,200 | )     
|                             | Total comprehensive loss                                                                 |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   |        |   |        |     |  |   |        | (21,480 | )     
|                             | Preferred stock dividends                                                                |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        | (150    | ) |   |        |   |       |   |        |   |        |   |        |     |  |   |        | (150    | )     
|                             | Issuance of common stock from treasury
    as compensation                               |                                                     |   |        |  |            |    |           |  |                      |        | (10       | ) |          |        |         |   |   |        |   |       |   |        |   |        |   |        | 37  |  |   |        | 27      |       
|                             |                                                                                          |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   |        |   |        |     |  |   |        |        
|Balance at December 31, 2002 |                                                                                          | $                                                   | 1 |        |  | $          | 92 |           |  | $                    | 54,616 |           |   | $        | 1,228  |         |   | $ | (1,957 | ) |       | $ | (4,479 | ) |        | $ | (4,667 | )   |  | $ | 44,834 |        
|                             |                                                                                          |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   |        |   |        |     |  |   |        |        
|                             | Net loss                                                                                 |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        | (5,422  | ) |   |        |   |       |   |        |   |        |   |        |     |  |   |        | (5,422  | )     
|                             | Other comprehensive income (loss):                                                       |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   |        |   |        |     |  |   |        |         |       
|                             |                                                                                          | Minimum pension liability, net of tax of $14        |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   | 23     |   |        |     |  |   |        |         | 23     |  
|                             |                                                                                          | Foreign currency translation                        |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   | 2,330 |   |        |   |        |   |        |     |  |   |        |         | 2,330  |  
|                             | Total comprehensive loss                                                                 |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   |        |   |        |     |  |   |        | (3,069  | )     
|                             | Preferred stock dividends                                                                |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        | (150    | ) |   |        |   |       |   |        |   |        |   |        |     |  |   |        | (150    | )     
|                             | Issuance of common stock from treasury as
    compensation and exercise of stock options |                                                     |   |        |  |            |    |           |  |                      |        | (133      | ) |          |        |         |   |   |        |   |       |   |        |   |        |   |        | 223 |  |   |        | 90      |       
|                             |                                                                                          |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   |        |   |        |     |  |   |        |        
|Balance at December 31, 2003 |                                                                                          | $                                                   | 1 |        |  | $          | 92 |           |  | $                    | 54,483 |           |   | $        | (4,344 | )       |   | $ | 373    |   |       | $ | (4,456 | ) |        | $ | (4,444 | )   |  | $ | 41,705 |        
|                             |                                                                                          |                                                     |   |        |  |            |    |           |  |                      |        |           |   |          |        |         |   |   |        |   |       |   |        |   |        |   |        |     |  |   |        |        



See notes to consolidated financial
statements.


38



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##### Table of Contents



HAWK CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In Thousands)

|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |        |        |  
|----------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | --------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                                                    |                                                                            |                            
|                                                                                    |                                                                            | Year ended December 31     
|                                                                                    |                                                                            |                            
|                                                                                    |                                                                            | 2003                        |         | 2002   |        | 2001
|                                                                                    |                                                                            |                             |         |        |        |     
|Cash flows from operating activities                                                |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|Net loss                                                                            |                                                                            | $                           | (5,422  | )      |        | $    | (18,245 | )      |        | $ | (4,336  | )     
|Adjustments to reconcile net loss to net cash
    provided by operating activities: |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|                                                                                    | Loss from discontinued operations, net of tax                              |                             |         | 4,973  |        |      |         | 1,850  |        |   |         | 2,119  |       
|                                                                                    | Cumulative effect of change in accounting
    principle, net of tax        |                             |         |        |        |      |         | 17,200 |        |   |         |        |       
|                                                                                    | Depreciation and amortization                                              |                             |         | 11,674 |        |      |         | 11,657 |        |   |         | 15,071 |       
|                                                                                    | Deferred income taxes                                                      |                             |         | (3,699 | )      |      |         | 1,406  |        |   |         | (637   | )     
|                                                                                    | Loss on fixed assets                                                       |                             |         | 204    |        |      |         | 47     |        |   |         | 385    |       
|                                                                                    | Changes in operating assets and liabilities:                               |                             |         |        |        |      |         |        |        |   |         |        |       
|                                                                                    |                                                                            | Accounts receivable         |         |        | (949   | )    |         |        | (4,047 | ) |         |        | 4,063  |  
|                                                                                    |                                                                            | Inventories                 |         |        | (1,656 | )    |         |        | (3,110 | ) |         |        | 2,552  |  
|                                                                                    |                                                                            | Other assets                |         |        | 3,048  |      |         |        | (6,962 | ) |         |        | (2,841 | )
|                                                                                    |                                                                            | Accounts payable            |         |        | 4,494  |      |         |        | 2,922  |   |         |        | 1,896  |  
|                                                                                    |                                                                            | Accrued expenses            |         |        | 4,090  |      |         |        | (7,208 | ) |         |        | 830    |  
|                                                                                    |                                                                            | Other liabilities and other |         |        | 6,904  |      |         |        | (3,161 | ) |         |        | (2,251 | )
|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|Net cash provided by (used in) operating
    activities of continuing operations    |                                                                            |                             | 23,661  |        |        |      | (7,651  | )      |        |   | 16,851  |       
|Net cash provided by (used in) operating
    activities of discontinued operations  |                                                                            |                             | 2,299   |        |        |      | 4,861   |        |        |   | (2,397  | )     
|Cash flows from investing activities                                                |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|Purchases of property, plant and equipment                                          |                                                                            |                             | (10,677 | )      |        |      | (9,729  | )      |        |   | (8,053  | )     
|Proceeds from sale of assets                                                        |                                                                            |                             | 568     |        |        |      |         |        |        |   |         |       
|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|Net cash used in investing activities of
    continuing operations                  |                                                                            |                             | (10,109 | )      |        |      | (9,729  | )      |        |   | (8,053  | )     
|Net cash used in investing activities of
    discontinued operations                |                                                                            |                             | (308    | )      |        |      | (1,075  | )      |        |   | (1,043  | )     
|Cash flows from financing activities                                                |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|Proceeds from short-term debt                                                       |                                                                            |                             | 1,326   |        |        |      |         |        |        |   |         |       
|Proceeds from long-term debt                                                        |                                                                            |                             | 627     |        |        |      | 53,370  |        |        |   | 40,457  |       
|Payments on long-term debt                                                          |                                                                            |                             | (2,960  | )      |        |      | (47,615 | )      |        |   | (46,520 | )     
|Payment on Old Senior Notes                                                         |                                                                            |                             | (583    | )      |        |      |         |        |        |   |         |       
|Pay off of Term Loan and Revolving
    Credit Facility                              |                                                                            |                             |         |        |        |      | (29,784 | )      |        |   |         |       
|Proceeds from Bank Facility                                                         |                                                                            |                             | 68,173  |        |        |      | 52,165  |        |        |   |         |       
|Payments on Bank Facility                                                           |                                                                            |                             | (80,441 | )      |        |      | (15,838 | )      |        |   |         |       
|Proceeds from exercise of stock options                                             |                                                                            |                             | 59      |        |        |      |         |        |        |   |         |       
|Payments of preferred stock dividends                                               |                                                                            |                             | (150    | )      |        |      | (150    | )      |        |   | (150    | )     
|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|Net cash (used in) provided by financing
    activities of continuing operations    |                                                                            |                             | (13,949 | )      |        |      | 12,148  |        |        |   | (6,213  | )     
|Effect of exchange rate changes on cash                                             |                                                                            |                             | 69      |        |        |      | 64      |        |        |   | (71     | )     
|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|Net cash (used in) provided by
    continuing operations                            |                                                                            |                             | (328    | )      |        |      | (5,168  | )      |        |   | 2,514   |       
|Net cash provided by (used in)
    discontinued operations                          |                                                                            |                             | 1,991   |        |        |      | 3,786   |        |        |   | (3,440  | )     
|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|Net increase (decrease) in cash and
    cash equivalents                            |                                                                            |                             | 1,663   |        |        |      | (1,382  | )      |        |   | (926    | )     
|Cash and cash equivalents at beginning
    of year                                  |                                                                            |                             | 1,702   |        |        |      | 3,084   |        |        |   | 4,010   |       
|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|Cash and cash equivalents at end of year                                            |                                                                            | $                           | 3,365   |        |        | $    | 1,702   |        |        | $ | 3,084   |       
|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|Supplemental cash
    flow information                                              |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|Cash payments for interest                                                          |                                                                            | $                           | 5,556   |        |        | $    | 9,975   |        |        | $ | 8,940   |       
|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|Cash (refunds) payments for income
    taxes, net                                   |                                                                            | $                           | (1,879  | )      |        | $    | (2,371  | )      |        | $ | 871     |       
|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|Noncash investing and financing activities:                                         |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|                                                                                    | Equipment purchased with capital leases and notes
    payable              |                             | $       | 546    |        |      | $       | 20     |        |   | $       | 422    |       
|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|                                                                                    | Issuance of common stock from treasury                                     |                             | $       | 30     |        |      | $       | 27     |        |   | $       | 26     |       
|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|                                                                                    | Issuance of payment in kind (PIK) payments in the
    form of Senior Notes |                             | $       | 124    |        |      |         |        |        |   |         |        |       
|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |       
|                                                                                    | Issuance of consent payments in the form of
    Senior Notes               |                             |         |        |        |      | $       | 1,642  |        |   |         |        |       
|                                                                                    |                                                                            |                             |         |        |        |      |         |        |        |   |         |       



See notes to consolidated financial
statements.


39



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##### Table of Contents



HAWK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Years Ended December 31, 2003, 2002 and
2001

(In Thousands, Except Share Data)




|   |                      
|-- | ---------------------
|1. | Basis of Presentation

Hawk Corporation (the Company) designs,
engineers, manufactures and markets specialized components used
in a wide variety of aerospace, industrial and commercial
applications.

The consolidated financial statements of the
Company include its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in the
accompanying financial statements.

Certain amounts have been reclassified in prior
periods to conform to the 2003 presentation.



|   |                                
|-- | -------------------------------
|2. | Significant Accounting Policies



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States (GAAP) requires management to make estimates and
assumptions that effect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates.



| |                 
| | ----------------
| | Cash Equivalents

The Company considers investments in highly
liquid investments with an initial maturity of three months or
less when purchased to be cash equivalents.



| |                  
| | -----------------
| | Trade Receivables

The Company has the intent and the ability to
hold all trade receivables until payments are received from
customers. Trade receivables are stated at outstanding amounts
as adjusted for an allowance for credits and doubtful accounts.
Trade receivables are evaluated on an ongoing basis and written
off to current operations when collection is no longer
reasonable assured.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost or
market. Cost includes materials, labor and overhead and is
determined by the first-in, first-out (FIFO) method.



| |                              
| | -----------------------------
| | Property, Plant and Equipment

Property, plant and equipment are stated at cost
and include expenditures for additions and major improvements.
Expenditures for repairs and maintenance are charged to
operations as incurred. The Company uses the straight-line and
double declining methods of depreciation for financial reporting
purposes. Buildings and improvements are depreciated over
periods ranging from 15 to 33 years. Machinery and equipment are
depreciated over periods ranging from 4 to 12 years.
Furniture and fixtures are depreciated over periods ranging from
3 to 10 years. Accelerated methods of depreciation are used
for federal income tax purposes. When assets are sold or
otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in
the Statement of Operations. The Companys depreciation
expense was $10,073 in 2003, $10,247 in 2002 and $10,720 in 2001.

Long-lived assets, except goodwill, are reviewed
for impairment whenever events or circumstances indicate the
carrying amount may not be recoverable. Events or circumstances
that would result in an impairment review primarily include
operations reporting losses, a significant change in the use of
an asset, or the planned disposal or sale of the asset. The
asset would be considered impaired when the future net
undiscounted cash flows

40



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

generated by the asset are less then its carrying
value. An impairment loss would be recognized based on the
amount by which the carrying value of the asset exceeds its fair
value.



| |                  
| | -----------------
| | Intangible Assets

In June 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 142 Goodwill and
Other Intangible Assets(SFAS 142). This Statement
eliminated the requirement to amortize goodwill and
indefinite-lived intangibles for 2002 and future years. The
Company adopted SFAS 142 as of January 1, 2002. The effect
of applying the non-amortization provisions of SFAS 142 for the
year ended December 31, 2001 would have been to decrease
amortization expense by approximately $2,928 ($2,354 after tax).

The following table illustrates the effect of
applying the non-amortization provisions of SFAS 142 on net
income and earnings per share before discontinued operations and
cumulative effect of change in accounting principle as of
December 31, 2001:

|                                                               |  |   |        |  
|-------------------------------------------------------------- |  | - | ------ | -
|Loss before discontinued operations,
    as reported           |  | $ | (2,217 | )
|Add back: Goodwill amortization, net of tax                    |  |   | 2,354  |  
|                                                               |  |   |        |  
|Adjusted income before discontinued operations                 |  | $ | 137    |  
|                                                               |  |   |        |  
|Earnings per share (basic and diluted):                        |  |   |        |  
|Loss per share before discontinued operations,
    as reported |  | $ | (.27   | )
|Goodwill amortization, net of tax                              |  |   | .27    |  
|                                                               |  |   |        |  
|Adjusted earnings per share before
    discontinued operations |  | $ | .00    |  
|                                                               |  |   |        |  

Upon adoption of SFAS 142, the Company changed
its accounting for goodwill and other indefinite-lived
intangible assets from an amortization methodology to an
impairment-only methodology. SFAS 142 provided for a six-month
transitional period, from the effective date of adoption, for
the Company to perform an initial assessment of whether goodwill
was impaired. The Company performed the assessment during the
second quarter of 2002, by comparing the fair value of each of
its reporting units to their respective carrying values as of
January 1, 2002. The Company, with the assistance of
independent valuation experts, concluded that as of
January 1, 2002 certain of its goodwill was impaired by
$21,452 ($17,200 after tax) or a loss of $2.01 per basic share
and $2.00 per diluted share, and such amount was reflected as a
cumulative effect of change in accounting principle. The
following is a summary of the pre-tax impairment charge by
affected business segment:

|                   |  |   |        | 
|------------------ |  | - | ------ | 
|Friction products  |  | $ | 11,100 | 
|Performance racing |  |   | 4,007  | 
|Motor              |  |   | 6,345  | 
|                   |  |   |        | 
|Total              |  | $ | 21,452 | 
|                   |  |   |        | 

The fair value of goodwill was estimated using a
combination of a discounted cash flow valuation model and a
market approach comparing the Companys reporting units to
similar peer group companies, as well as acquisitions having
similar characteristics. The discounted cash flow valuation
model was based on future estimated operating cash flows,
incorporating a discount rate commensurate with the risks for
each reporting unit and assumptions that were consistent with
the Companys operating plans and estimates used to manage
each of the underlying reporting units. The impairment resulted
from the carrying value exceeding the fair value of certain
reporting units, and was primarily due to a shortfall in current
and projected sales from levels anticipated at the time of the
respective acquisitions and other costs associated with the
Companys global expansion initiatives, as well as market
conditions as of January 1, 2002.

41



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

In accordance with SFAS No. 121
Accounting for the Impairment of Long-Lived Assets to be
Disposed Of(SFAS 121), management concluded that no asset
impairment charges were deemed necessary in 2001. The Company
determined that the estimated future undiscounted cash flows
associated with each unit tested exceeded the carrying values of
their respective long-lived assets. Consequently, no impairment
existed under SFAS 121.

SFAS 142 requires a review at least annually of
the carrying value of indefinite-lived assets and goodwill. The
Company performed the annual impairment test as of
October 31, 2003 and 2002 and concluded the fair value of
the reporting units exceeded their respective carrying values.



| |          
| | ---------
| | Insurance

The Company uses a combination of insurance and
self-insurance for a number of risks including property, general
liability, directors and officers liability,
workers compensation, vehicle liability and
employee-related health care benefits. Liabilities associated
with the risks that are retained are estimated by considering
various historical trends and forward-looking assumptions. The
estimated accruals for these self-insured liabilities at
December 31, 2003 and 2002 of $1,127 and $581,
respectively, could be significantly affected if future
occurrences and claims differ from these assumptions and
historical trends.



| |              
| | -------------
| | Contingencies

The Companys treatment of contingent
liabilities in the financial statements is based on the expected
outcome of the applicable contingency. In the ordinary course of
business the Company consults with legal counsel on matters
related to litigation and other experts both within and outside
of the Company. The Company will accrue a liability if the
likelihood of an adverse outcome is probable of occurrence and
the amount is estimable. The Company will not accrue a liability
if either the likelihood of an adverse outcome is only
reasonably possible or an estimate is not determinable.



| |                 
| | ----------------
| | Foreign Currency

The Companys primary functional currency is
the U.S. dollar. Assets and liabilities of the Company
denominated in foreign currencies are translated into U.S.
dollars at the balance sheet date, while revenues and expenses
are translated at weighted average exchange rates. Gains and
losses from foreign currency transactions are included in the
Statement of Operations. Gains and losses resulting from
translation are included in accumulated other comprehensive
loss, a component of shareholders equity.



| |                    
| | -------------------
| | Revenue Recognition

Revenue from the sale of the Companys
products is recognized upon shipment to the customer and when
title has transferred. Substantially all of the Companys
revenues are derived from fixed price purchase orders. Costs and
related expenses to manufacture the products are recorded as
costs of sales when the related revenue is recognized. Shipping
and handling are included in cost of products sold and are
included in the sales price when billed to customers. The
Company establishes bad debt reserves based on historical
experience and believes that the collection of receivables, net
of the bad debt reserves, is reasonably assured.



| |                           
| | --------------------------
| | Significant Concentrations

The Company provides credit, in the normal course
of its business, to original equipment and aftermarket
manufacturers. The Companys customers are not concentrated
in any specific geographic region. The Company performs ongoing
credit evaluations of its customers and maintains allowances for
potential credit losses which, when realized, have been within
the range of managements expectations.

42



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)



| |                                     
| | ------------------------------------
| | Product Research and
    Development

Product research and development costs are
expensed as incurred. The Companys expenditures for
product research and development and engineering were
approximately $4,102 in 2003, $3,470 in 2002, and $3,893 in 2001.



| |            
| | -----------
| | Advertising

All advertising costs are expensed as incurred.
The Companys expenditures for advertising were
approximately $400 in 2003, $610 in 2002, and $670 in 2001.



| |             
| | ------------
| | Income Taxes

The Company uses the liability method in
measuring the provision for income taxes and recognizing
deferred tax assets and liabilities in the balance sheet. The
liability method requires that deferred income taxes reflect the
tax consequences of currently enacted tax laws and rates for
differences between the tax and financial reporting basis of
assets and liabilities.



| |                   
| | ------------------
| | Stock Compensation

In accordance with the provisions of SFAS
No. 123, Accounting for Stock-Based Compensation,
(SFAS 123) the Company has elected to continue applying the
provisions of Accounting Principles Board Opinion No. 25
(APB 25) and related interpretations in accounting for its
stock-based compensation plans. Under the provisions of APB 25,
because the exercise price of the stock option equals the market
price of the underlying stock on the date of grant, no
compensation expense is recognized. The following illustrates
the pro forma effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of
SFAS 123 for the years ended 2003, 2002, and 2001:

|                        |                                                                                                     |                        |        |        |   |      |         |         |   |   |        |        |  
|----------------------- | --------------------------------------------------------------------------------------------------- | ---------------------- | ------ | ------ | - | ---- | ------- | ------- | - | - | ------ | ------ | -
|                        |                                                                                                     |                       
|                        |                                                                                                     | Year ended December 31
|                        |                                                                                                     |                       
|                        |                                                                                                     | 2003                   |        | 2002   |   | 2001
|                        |                                                                                                     |                        |        |        |   |     
|Net loss as reported    |                                                                                                     | $                      | (5,422 | )      |   | $    | (18,245 | )       |   | $ | (4,336 | )     
|                        | Employee stock-based compensation expense
    determined under fair value based methods, net of tax |                        |        | 663    |   |      |         | 1,020   |   |   |        | 822    |  
|                        |                                                                                                     |                        |        |        |   |      |         |         |   |   |        |       
|                        | Pro forma net loss                                                                                  |                        | $      | (6,085 | ) |      | $       | (19,265 | ) |   | $      | (5,158 | )
|                        |                                                                                                     |                        |        |        |   |      |         |         |   |   |        |       
|Basic loss per share:   |                                                                                                     |                        |        |        |   |      |         |         |   |   |        |       
|                        | As reported                                                                                         |                        | $      | (.65   | ) |      | $       | (2.15   | ) |   | $      | (.52   | )
|                        |                                                                                                     |                        |        |        |   |      |         |         |   |   |        |       
|                        | Pro forma                                                                                           |                        | $      | (.73   | ) |      | $       | (2.27   | ) |   | $      | (.62   | )
|                        |                                                                                                     |                        |        |        |   |      |         |         |   |   |        |       
|Diluted loss per share: |                                                                                                     |                        |        |        |   |      |         |         |   |   |        |       
|                        | As reported                                                                                         |                        | $      | (.65   | ) |      | $       | (2.14   | ) |   | $      | (.52   | )
|                        |                                                                                                     |                        |        |        |   |      |         |         |   |   |        |       
|                        | Pro forma                                                                                           |                        | $      | (.73   | ) |      | $       | (2.26   | ) |   | $      | (.62   | )
|                        |                                                                                                     |                        |        |        |   |      |         |         |   |   |        |       

43



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

The fair value of the options granted used to
compute pro forma net loss and loss per share is the estimated
present value at the grant date using the Black-Scholes
option-pricing model with the following assumptions:

|                                |  |                        |           |      |  |      |           |  |  |  |         | 
|------------------------------- |  | ---------------------- | --------- | ---- |  | ---- | --------- |  |  |  | ------- | 
|                                |  |                       
|                                |  | Year ended December 31
|                                |  |                       
|                                |  | 2003                   |           | 2002 |  | 2001
|                                |  |                        |           |      |  |     
|Dividend yield                  |  |                        | 0%        |      |  |      | 0%        |  |  |  | 0%      | 
|Expected volatility             |  |                        | 54.0%     |      |  |      | 66.5%     |  |  |  | 58.4%   | 
|Risk free interest rate         |  |                        | 4.00%     |      |  |      | 4.00%     |  |  |  | 5.00%   | 
|Expected average holding period |  |                        | 7.5 years |      |  |      | 7.5 years |  |  |  | 7 years | 



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The Companys financial instruments include
cash and cash equivalents, short-term trade receivables,
long-term notes receivable, notes payable and debt instruments.
For short-term instruments, the historical carrying value is a
reasonable estimate of fair value. Fair values for long-term
financial instruments that are not readily marketable are
estimated based upon the discounted future cash flows at
prevailing market interest rates. Based on these assumptions,
management believes that the fair market values of the
Companys financial instruments are not materially
different from their respective carrying values as of
December 31, 2003.



| |                                              
| | ---------------------------------------------
| | Recently Issued Accounting
    Pronouncements

In June 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities(SFAS 146), which addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force
(EITF) No. 94-3, Liability Recognition for Certain
Employee termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)(EITF 94-3). SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized
and measured initially at the fair value only when the liability
is incurred. Under EITF 94-3, a liability for an exit cost was
recognized at the date of an entitys commitment to an exit
plan. SFAS 146 is effective for exit and disposal activities
that are initiated after December 31, 2002, with no effect on
charges recorded for exit activities begun prior to 2003. The
adoption of this statement did not have a material effect on the
Companys financial position or results of operations.

In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of Accounting Research
Bulletin No. 51 (the Interpretation). The Interpretation
requires the consolidation of variable interest entities in
which an enterprise is the primary beneficiary. The primary
beneficiary absorbs a majority of the entitys expected
losses, receives a majority of the entitys expected
residual returns, or both, as a result of ownership, contractual
or other financial interest in the entity. Currently, entities
are generally consolidated by an enterprise that has a
controlling financial interest through ownership of a majority
voting interest in the entity. In December 2003, the FASB
issued a revised Interpretation that, among other things,
deferred the implementation date of the Interpretation until
periods ending after March 15, 2004 for variable interest
entities, other than those entities commonly referred to as
special purpose entities. The Company does not currently
maintain any relationships with variable interest entities and,
therefore, does not expect the adoption of FIN 46 to have a
material effect on the Companys financial position or
results of operations.



|   |                        
|-- | -----------------------
|3. | Discontinued Operations

During the fourth quarter of 2003, the Company
committed to a plan to sell its motor segment, which has
operations in Monterrey, Mexico and Alton, Illinois. This
segment, which manufactures die-cast aluminum rotors for
fractional and subfractional horsepower electric motors, failed
to achieve a certain level of profitability and, after
completing an extensive analysis, the Company determined that a
divestiture of this segment would allow

44



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

the Company to concentrate on its major business
segments. The Company has initiated an active marketing plan and
anticipates selling the segment within the next twelve months.

Results of operations of the Company have been
restated to reclassify the net earnings, assets, and liabilities
of the motors segment as discontinued operations for all periods
presented. Corporate expenses previously allocated to this
segment have been reallocated to the remaining continuing
operations, resulting in a restatement of operating profit by
segment (see Note 14). The loss from discontinued
operations in 2003 includes a pre-tax, non-cash charge of $4,530
to reduce the net assets of this business to its estimated fair
value, less costs to sell.

Operating results from discontinued operations
are summarized as follows:

|                                         |  |                        |        |      |  |      |        |   |  |   |        |  
|---------------------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                         |  |                       
|                                         |  | Year ended December 31
|                                         |  |                       
|                                         |  | 2003                   |        | 2002 |  | 2001
|                                         |  |                        |        |      |  |     
|Net sales                                |  | $                      | 14,463 |      |  | $    | 11,374 |   |  | $ | 7,500  |  
|                                         |  |                        |        |      |  |      |        |   |  |   |        |  
|Loss from operations before income taxes |  | $                      | (7,673 | )    |  | $    | (2,675 | ) |  | $ | (3,040 | )
|Income tax benefit                       |  |                        | 2,700  |      |  |      | 825    |   |  |   | 921    |  
|                                         |  |                        |        |      |  |      |        |   |  |   |        |  
|Loss from operations, net of tax         |  | $                      | (4,973 | )    |  | $    | (1,850 | ) |  | $ | (2,119 | )
|                                         |  |                        |        |      |  |      |        |   |  |   |        |  

The assets and liabilities of this segment, which
have been classified as assets and liabilities of discontinued
operations in the Consolidated Balance Sheets, consist of the
following at December 31, 2003 and 2002:

|                                             |  |      |       |      |  |   |        | 
|-------------------------------------------- |  | ---- | ----- | ---- |  | - | ------ | 
|                                             |  | 2003 |       | 2002
|                                             |  |      |       |     
|Accounts receivable                          |  | $    | 2,801 |      |  | $ | 3,286  | 
|Inventory                                    |  |      | 739   |      |  |   | 580    | 
|Other current assets                         |  |      | 40    |      |  |   | 99     | 
|Property, plant and equipment                |  |      | 320   |      |  |   | 6,072  | 
|Other long-term assets                       |  |      | 402   |      |  |   | 336    | 
|                                             |  |      |       |      |  |   |        | 
|Total assets of discontinued operations      |  | $    | 4,302 |      |  | $ | 10,373 | 
|                                             |  |      |       |      |  |   |        | 
|Accounts payable                             |  | $    | 2,870 |      |  | $ | 1,747  | 
|Other accrued expenses                       |  |      | 465   |      |  |   | 379    | 
|Current portion of long-term debt            |  |      | 317   |      |  |   |        | 
|Long-term debt                               |  |      |       |      |  |   | 633    | 
|                                             |  |      |       |      |  |   |        | 
|Total liabilities of discontinued operations |  | $    | 3,652 |      |  | $ | 2,759  | 
|                                             |  |      |       |      |  |   |        | 



|   |              
|-- | -------------
|4. | Restructuring

In the fourth quarter of 2003, the Company
committed to a restructuring program to achieve cost savings in
its friction products segment by moving operations at its Brook
Park, Ohio location to a new U.S. production facility. The
Company has signed a formal, non-binding letter of intent
agreeing to the terms on the construction of a new approximately
240,000 square foot leased facility. The letter of intent is
subject to due diligence and other customary terms and
conditions. In connection with the planned closure of the Brook
Park, Ohio facility, the Company recorded a $1,920 charge in the
fourth quarter of 2003 related to the curtailment and
contractual termination benefit costs of a defined benefit
pension plan covering certain union employees of the facility.
In addition, the Company anticipates future pre-tax charges of
approximately $2,000 in 2004 and $3,000 to $3,500 in 2005
related to the relocation of the Brook Park, Ohio facility and
employee severance expense.

45



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

In June 2001, the Company announced a
restructuring program to reduce its production capacity to meet
expected near-term product demand levels in each of its
segments. The involuntary severance plan that was part of the
restructuring program resulted in employee reductions in almost
all areas of the Company, including operations, marketing, sales
and administrative areas. As a result of this plan, the Company
reduced its work force in the friction products and precision
components segments by approximately 160 positions. During 2001,
the Company recorded a charge of $1,055 consisting of employee
severance and related benefit costs as a result of this
restructuring program. The majority of the costs associated with
this program were paid in cash and charged against the
liability. Employee reductions and related benefit payments
under this plan were completed during 2002.

The following table sets forth the restructuring
accrual activity from June 30, 2001 to December 31,
2002:

|                                                                                            |  |   |       | 
|------------------------------------------------------------------------------------------- |  | - | ----- | 
|Amounts recognized as restructuring charges in
    the consolidated statement of operations |  | $ | 1,055 | 
|Payments in 2001                                                                            |  |   | 605   | 
|                                                                                            |  |   |       | 
|Accrued restructuring charge as of
    December 31, 2001                                    |  | $ | 450   | 
|                                                                                            |  |   |       | 
|Payments in 2002                                                                            |  |   | 378   | 
|Other                                                                                       |  |   | 72    | 
|                                                                                            |  |   |       | 
|Accrued restructuring charge as of
    December 31, 2002                                    |  | $ | 0     | 
|                                                                                            |  |   |       | 



|   |                  
|-- | -----------------
|5. | Intangible Assets

A summary of the Companys goodwill at
December 31, 2003 and 2002 by reportable operating segment
is as follows:

|                     |  |   |        | 
|-------------------- |  | - | ------ | 
|Precision components |  | $ | 28,109 | 
|Performance racing   |  |   | 4,386  | 
|                     |  |   |        | 
|Total                |  | $ | 32,495 | 
|                     |  |   |        | 

The components of finite-lived intangible assets
are as follows:

|                        |  |                   |        |                   |  |     |        |       |  |              |       |     |  |   |        |  |  |   |        |  |  |   |        | 
|----------------------- |  | ----------------- | ------ | ----------------- |  | --- | ------ | ----- |  | ------------ | ----- | --- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                        |  |                   |        |                  
|                        |  | December 31, 2003 |        | December 31, 2002
|                        |  |                   |        |                  
|                        |  |                   |        | Accumulated       |  |     |        |       |  | Accumulated  |       |    
|                        |  | Gross             |        | Amortization      |  | Net |        | Gross |  | Amortization |       | Net
|                        |  |                   |        |                   |  |     |        |       |  |              |       |    
|Product certifications  |  | $                 | 20,820 |                   |  | $   | 10,984 |       |  | $            | 9,836 |     |  | $ | 20,820 |  |  | $ | 10,264 |  |  | $ | 10,556 | 
|Other intangible assets |  |                   | 2,719  |                   |  |     | 2,651  |       |  |              | 68    |     |  |   | 2,719  |  |  |   | 2,574  |  |  |   | 145    | 
|                        |  |                   |        |                   |  |     |        |       |  |              |       |     |  |   |        |  |  |   |        |  |  |   |        | 
|                        |  | $                 | 23,539 |                   |  | $   | 13,635 |       |  | $            | 9,904 |     |  | $ | 23,539 |  |  | $ | 12,838 |  |  | $ | 10,701 | 
|                        |  |                   |        |                   |  |     |        |       |  |              |       |     |  |   |        |  |  |   |        |  |  |   |        | 

Product certifications were acquired and valued
based on the acquired companys position as a certified
supplier of friction materials to the major manufacturers of
commercial aircraft brakes.

The Company estimates that amortization expense
for finite-lived intangible assets for each of the next five
years will be approximately $800.

The weighted average amortization period for
product certifications and other intangible assets is
29 years and 14 years, respectively.

46



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)



|   |                       
|-- | ----------------------
|6. | Financing Arrangements

|                                         |  |             |        |      |  |   |         | 
|---------------------------------------- |  | ----------- | ------ | ---- |  | - | ------- | 
|                                         |  |            
|                                         |  | December 31
|                                         |  |            
|                                         |  | 2003        |        | 2002
|                                         |  |             |        |     
|Short-term debt                          |  | $           | 1,326  |      |  |   |         | 
|Old Senior Notes                         |  |             |        |      |  | $ | 583     | 
|Senior Notes                             |  |             | 66,183 |      |  |   | 66,059  | 
|Bank Facility                            |  |             | 24,059 |      |  |   | 36,327  | 
|Other                                    |  |             | 3,408  |      |  |   | 5,351   | 
|                                         |  |             |        |      |  |   |         | 
|                                         |  |             | 94,976 |      |  |   | 108,320 | 
|Less current portion and short-term debt |  |             | 26,533 |      |  |   | 39,430  | 
|                                         |  |             |        |      |  |   |         | 
|                                         |  | $           | 68,443 |      |  | $ | 68,890  | 
|                                         |  |             |        |      |  |   |         | 

In October 2002, the Company entered into a
new senior secured credit facility (Bank Facility). The Bank
Facility has a maximum commitment of $53,000, including a letter
of credit facility of up to $5,000, comprised of a $50,000
revolving credit component and a $3,000 capital expenditure loan
component. The capital expenditure loan component, available to
the Company after December 31, 2002, is being used to
finance 80% of the cost of new equipment purchased after
October 18, 2002. The Bank Facility matures 120 days
prior to the maturity of the Senior Notes (described below) in
2006. As of December 31, 2003 and 2002, $24,059 and $36,327
were outstanding under the Bank Facility, respectively,
including $2,000 and $0 outstanding under the capital
expenditure loan component, respectively.

The Bank Facility is collateralized by a security
interest in the accounts receivable, inventory, equipment and
real estate and other assets of the Company and its domestic
subsidiaries. The Company has also pledged the stock of all of
its domestic subsidiaries and up to 65% of the stock of certain
of its foreign subsidiaries as collateral. Restrictive terms of
the Bank Facility require that the Company maintain specified
financial ratios including leverage and fixed charge ratios, and
comply with other loan covenants. The interest rates on the Bank
Facility range from 225 to 375 basis points over the London
Interbank Offered Rates (LIBOR), or alternatively,
0 to 100 basis points over the prime rate. At
December 31, 2003 and 2002, the average interest rate on
the borrowings outstanding under the Bank Facility was 4.0% and
4.4%, respectively. The Company is required to pay a commitment
fee equal to 0.375% per annum on the unused amount of the Bank
Facility, payable quarterly, in arrears. As of December 31,
2003 and 2002, the Company had approximately $15,900 and $5,500,
respectively, available for future borrowings, as determined
under the borrowing base formula. Additionally, as of
December 31, 2003, the Company was in compliance with all
of the loan covenants under the Bank Facility.

The revolving credit component of the Bank
Facility is subject to a borrowing base formula. The borrowing
base formula is comprised of the Companys domestic
accounts receivable, domestic inventory and the Companys
domestic real estate, machinery and equipment. The components of
the borrowing base under the Bank Facility are as follows:



| |   |                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 85% of eligible accounts receivable, plus;                                                                                                                                                                                                                                                                                           
|
| |  | 65% of the cost of eligible inventory, excluding
    work-in-process, plus 25% of the cost of eligible
    work-in-process (limited to $4.0 million), plus;                                                                                                                                                                          
|
| |  | $13,000  The availability under this
    component of the borrowing base reduces on a 7 year
    straight-line amortization basis beginning March 31, 2003.
    Any reductions in the availability under this component of the
    borrowing base may be reborrowed, subject to availability, under
    the receivable and inventory

47



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)



| |  |                                                                                                                                                     
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | components of the borrowing base. The amortized
    availability under the borrowing base was $11,607 and $13,000 at
    December 31, 2003 and 2002.

Borrowings under the capital expenditure loan
component of the Bank Facility are available to the Company in
the following increments: a) up to $2,000 through
December 31, 2003, beginning January 1, 2003 and, b)
up to $1,000 thereafter. At the end of each borrowing period,
the principal amount of all borrowings under the capital
expenditure loan component borrowed during the applicable
borrowing period will begin to amortize monthly over a seven
year, straight-line basis. Any remaining unamortized principal
balance under the capital expenditure loan component is due and
payable on the final maturity date of the Bank Facility.

Pursuant to the guidance of EITF No. 95-22,
Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements That Include both a Subjective
Acceleration Clause and a Lock-Box Arrangement, the Company
is required to classify all of its outstanding debt under the
Bank Facility as a current liability. However, it is the
intention of the Company to manage the Bank Facility as
long-term debt with a final maturity date in 2006. The Company
expects the long-term availability under the revolving credit
portion of the Bank Facility to be $50,000 for the next
twelve-month period, subject to the borrowing base.

In October 2002, the Company exchanged
$64,417 of its $65,000, 10 1/4% Senior Notes due
December 1, 2003 (Old Senior Notes), for 12% Senior Notes
due December 1, 2006 (Senior Notes). The Senior Notes were
issued on October 23, 2002. The remaining outstanding
principal of the Old Senior Notes in the amount of $583 matured
and were paid on December 1, 2003. The holders of the Old
Senior Notes that participated in the exchange for Senior Notes
received a consent payment of $25.63, in the form of Senior
Notes, for each $1,000 of Old Senior Notes held as of
October 23, 2002. The entire debt refinancing transaction
was accounted for as a debt exchange in accordance with EITF
96-19, Debtors Accounting for a Modification or
Exchange of Debt Instruments. Accordingly, the Company
recorded the aggregate consent payments of $1,642 as additional
Senior Notes, and is amortizing the consent payments to interest
expense over the remaining life of the Senior Notes. In
connection with the debt exchange, the Company also expensed
$1,851 in third party transaction costs in 2002. The Senior
Notes are general unsecured senior obligations of the Company
and are fully and unconditionally guaranteed, on a joint and
several basis, by all domestic wholly-owned subsidiaries of the
Company. The Senior Notes accrue interest at a rate of 12% per
annum on the principal amount commencing October 23, 2002.
Interest payments are due semi-annually. In addition, in the
event that the Companys leverage ratio (as defined)
exceeds 4.0 to 1.0 for the most recently ended four quarters
beginning with the semi-annual period ended December 31,
2002, the Company will be required to pay additional payment in
kind (PIK) interest at a rate ranging from .25% to 2.00% until
the next semi-annual test period. Any interest payment under
this test will be made by issuing additional Senior Notes. As of
December 31, 2003 and 2002, the leverage ratio test
required the Company to issue $82 and $124 of PIK interest as
debt in 2004 and 2003, respectively, calculated at a rate of
..25% and 1.00%, respectively, in the form of additional Senior
Notes.

The Company has the option to redeem the Senior
Notes in whole or in part during the twelve months beginning
December 1, 2002 at 105% of the aggregate principal amount
thereof, beginning December 1, 2003 at 102.5% of the
aggregate principal amount thereof and beginning
December 1, 2004 at 100% of the aggregate principal amount
thereof together with any interest accrued and unpaid to the
redemption date. Upon a change of control as defined in the
Senior Note indenture, each holder of the notes will have the
right to require the Company to repurchase all or any part of
such holders notes at a purchase price equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase.

The Senior Notes permit the Company and its
subsidiaries to incur additional indebtedness without
limitation, provided that it meets a cash flow coverage ratio
and adjusted consolidated leverage ratio. As of
December 31, 2003 and 2002, the Company did not meet these
prescribed ratios. The failure to meet these ratios does not
constitute a default under the Senior Note indenture. Rather,
the Senior Note indenture continues to permit certain other
types of indebtedness subject to certain limitations. The
Companys Bank Facility, which is secured by liens on all
of the assets and the assets of the subsidiaries, is permitted.
The Company does not believe

48



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

that its operations will be materially impacted
by the limitation on indebtedness arising under the Senior Note
indenture.

The Senior Notes prohibit the payment of cash
dividends on the Companys Class A Common Stock. The
Senior Notes also contain other covenants limiting the
Companys ability and its subsidiaries to, among other
things, make certain other restricted payments, make certain
investments, permit liens, incur dividend and other payment
restrictions affecting subsidiaries, enter into consolidation,
merger, conveyance, lease or transfer transactions, make asset
sales, enter into transactions with affiliates or engage in
unrelated lines of business. These covenants are subject to
certain exceptions and qualifications. The Senior Notes
considers non-compliance with the limitations events of default.
In addition to non-payment of interest and principal amounts,
the Senior Notes also considers default with respect to other
indebtedness in excess of $5,000 an event of default. In the
event of a default, the principal and interest could be
accelerated upon written notice by 25% or more of the holders of
the notes.

At December 31, 2003 and 2002, the Company
had issued stand-by Letters of Credit totaling $3,468 and
$1,284, respectively.

Aggregate principal payments due on long-term
debt exclusive of the Bank Facility, which matures in 2006, as
of December 31, 2003 are as follows: 2004  $1,148;
2005  $1,374; 2006  $66,434;
2007  $168; 2008  $50; and thereafter
 $417.



|   |                     
|-- | --------------------
|7. | Shareholders Equity

Dividends on the Series D preferred stock
are cumulative at a rate of 9.8%. Each share of Series D
preferred stock is (1) entitled to a liquidation preference
equal to $1,000 per share plus any accrued or unpaid dividends,
(2) not entitled to vote, except in certain circumstances,
and (3) redeemable in whole, at the option of the Company,
for $1,000 per share plus all accrued dividends to the date of
redemption. The Company also has 100,000 authorized shares of
$.01 par value, Series E preferred stock, of which no
shares are issued or outstanding. Each share of Series E
preferred stock is (1) not redeemable and is entitled to
dividends in the amount of 1,000 times the per share dividend
received by the holders of common stock, (2) entitled to
1,000 votes per share, and (3) entitled to a liquidation
right of 1,000 times the aggregate amount distributed per share
to the holder of common stock.

On November 13, 1997, the Board of Directors
declared a dividend of one Series E preferred share
purchase right (a Right) for each outstanding share of common
stock. The dividend was payable to the shareholders of record as
of January 16, 1998, and with respect to common stock,
issued thereafter until the Distribution Date, as defined in the
Rights Agreement, and in certain circumstances, with respect to
common stock issued after the Distribution Date. Except as set
forth in the Rights Agreement, each Right, when it becomes
exercisable, entitles the registered holder to purchase from the
Company one one-thousandth of a share of Series E preferred
stock at a price of $70 per one one-thousandth share of a
Series E preferred stock, subject to adjustment.



|   |                           
|-- | --------------------------
|8. | Employee Stock Option Plan

The Company grants stock options to certain key
employees and non-employee directors under various plans, to
purchase shares of Class A common stock. During 2003, there
were no stock option grants issued under the Companys
plans. During 2002 and 2001, the Company granted stock options
to purchase an aggregate of 53,418, and 701,594 shares,
respectively, at exercise prices representing the closing market
price of the Companys common stock at the date of grant.
The options vest ratably over specific defined periods. Canceled
options are available for future issuance under the provisions
of the stock option plans.

49



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

The following table summarizes the stock option
activity for the years ended December 31, 2003, 2002 and
2001:

|                                                                   |  |         |           |          |  |         |       |          |  |         |           |          |  |   |      |  |  |  |           |   |  |   |       | 
|------------------------------------------------------------------ |  | ------- | --------- | -------- |  | ------- | ----- | -------- |  | ------- | --------- | -------- |  | - | ---- |  |  |  | --------- | - |  | - | ----- | 
|                                                                   |  |         |           |          |  |        
|                                                                   |  | 2003    |           | 2002     |  | 2001   
|                                                                   |  |         |           |          |  |        
|                                                                   |  |         |           | Weighted |  |         |       | Weighted |  |         |           | Weighted
|                                                                   |  |         |           | Average  |  |         |       | Average  |  |         |           | Average 
|                                                                   |  |         |           | Exercise |  |         |       | Exercise |  |         |           | Exercise
|                                                                   |  | Options |           | Price    |  | Options |       | Price    |  | Options |           | Price   
|                                                                   |  |         |           |          |  |         |       |          |  |         |           |         
|Options outstanding at beginning of year                           |  |         | 1,217,729 |          |  | $       | 6.63  |          |  |         | 1,324,646 |          |  | $ | 6.73 |  |  |  | 766,267   |   |  | $ | 10.51 | 
|Granted                                                            |  |         |           |          |  |         |       |          |  |         | 53,418    |          |  |   | 4.89 |  |  |  | 701,594   |   |  |   | 3.64  | 
|Exercised                                                          |  |         | (17,094   | )        |  |         | 3.40  |          |  |         |           |          |  |   |      |  |  |  |           |   |  |   |       | 
|Forfeited or Expired                                               |  |         | (378,854  | )        |  |         | 11.41 |          |  |         | (160,335  | )        |  |   | 6.81 |  |  |  | (143,215  | ) |  |   | 10.45 | 
|                                                                   |  |         |           |          |  |         |       |          |  |         |           |          |  |   |      |  |  |  |           |   |  |   |       | 
|Options outstanding at end of year                                 |  |         | 821,781   |          |  | $       | 4.54  |          |  |         | 1,217,729 |          |  | $ | 6.62 |  |  |  | 1,324,646 |   |  | $ | 6.73  | 
|Exercisable at the end of the year                                 |  |         | 718,306   |          |  | $       | 4.42  |          |  |         | 636,632   |          |  | $ | 7.69 |  |  |  | 242,169   |   |  | $ | 12.36 | 
|Weighted average fair value of options granted
    during the year |  |         |           |          |  |         |       |          |  |         |           |          |  | $ | 4.34 |  |  |  |           |   |  | $ | 2.56  | 
|Shares available for future grant                                  |  |         | 578,219   |          |  |         |       |          |  |         | 182,271   |          |  |   |      |  |  |  | 75,354    |   |  |   |       | 

On July 29, 2003, the Company offered its
employees who are not members of the Board of Directors the
opportunity to cancel all options outstanding with an exercise
price greater than $6.00 per share, in exchange for new options
to be granted at the closing price of the Companys common
stock as reported by the American Stock Exchange as of
January 30, 2004. As of December 31, 2003, 268,850
options had been forfeited and as a result, are included in the
caption forfeited or expired and in shares available for future
grant in the above table. On January 30, 2004, 254,630
options were granted at an exercise price of $5.05 per share.

Exercise prices for options outstanding as of
December 31, 2003 ranged from $3.40 to $17.94. A summary of
the options by range of exercise prices is as follows:

|                        |  |             |         |             |  |              |       |         |  |          |     |  |  |  |         |  |  |   |       | 
|----------------------- |  | ----------- | ------- | ----------- |  | ------------ | ----- | ------- |  | -------- | --- |  |  |  | ------- |  |  | - | ----- | 
|                        |  |             |         |             |  |             
|                        |  | Outstanding |         |            
|                        |  |             |         | Exercisable
|                        |  |             |         | Weighted    |  |             
|                        |  |             |         | Weighted    |  | Average      |       |         |  | Weighted
|                        |  |             |         | Average     |  | Remaining    |       |         |  | Average 
|                        |  |             |         | Exercise    |  | Contractual  |       |         |  | Exercise
|Range of Exercise Price |  | Options     |         | Price       |  | Life (years) |       | Options |  | Price   
|                        |  |             |         |             |  |              |       |         |  |         
|$ 3.40 to $ 3.50        |  |             | 312,542 |             |  | $            | 3.40  |         |  |          | 7.7 |  |  |  | 312,542 |  |  | $ | 3.40  | 
|$ 3.51 to $ 5.00        |  |             | 285,177 |             |  | $            | 3.85  |         |  |          | 7.7 |  |  |  | 263,966 |  |  | $ | 3.81  | 
|$ 5.01 to $ 6.00        |  |             | 135,362 |             |  | $            | 5.42  |         |  |          | 6.8 |  |  |  | 66,198  |  |  | $ | 5.46  | 
|$ 6.01 to $16.99        |  |             | 66,700  |             |  | $            | 6.86  |         |  |          | 5.6 |  |  |  | 53,600  |  |  | $ | 6.87  | 
|$17.00 to $17.94        |  |             | 22,000  |             |  | $            | 17.09 |         |  |          | 3.0 |  |  |  | 22,000  |  |  | $ | 17.09 | 



|   |                  
|-- | -----------------
|9. | Employee Benefits

The Company has several defined benefit pension
plans that cover certain employees. Benefits payable are based
primarily on compensation and years of service or a fixed annual
benefit for each year of service. Certain hourly employees are
also covered under collective bargaining agreements. The Company
funds the plans in amounts sufficient to satisfy the minimum
amounts required under the Employee Retirement Income Security
Act of 1974.

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

The components of the defined benefit pension
plans are as follows:

|                                                                      |                                   |                                                                   |                                     |        |        |        |        |        |        |        |  
|--------------------------------------------------------------------- | --------------------------------- | ----------------------------------------------------------------- | ----------------------------------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | -
|                                                                      |                                   |                                                                  
|                                                                      |                                   | December 31                                                      
|                                                                      |                                   |                                                                  
|                                                                      |                                   | 2003                                                              |                                     | 2002  
|                                                                      |                                   |                                                                   |                                     |       
|Accumulated benefit obligation                                        |                                   | $                                                                 | 21,208                              |        |        | $      | 17,925 |       
|                                                                      |                                   |                                                                   |                                     |        |        |        |        |       
|Change in benefit obligation:                                         |                                   |                                                                   |                                     |        |        |        |        |       
|                                                                      |                                   | Benefit obligation at beginning of year                           |                                     | $      | 19,268 |        |        | $      | 17,528 |       
|                                                                      |                                   | Service cost                                                      |                                     |        | 840    |        |        |        | 732    |       
|                                                                      |                                   | Interest cost                                                     |                                     |        | 1,329  |        |        |        | 1,292  |       
|                                                                      |                                   | Actuarial losses                                                  |                                     |        | 1,683  |        |        |        | 406    |       
|                                                                      |                                   | Plan amendments                                                   |                                     |        | 54     |        |        |        | 152    |       
|                                                                      |                                   | Foreign currency exchange rate impact                             |                                     |        | 162    |        |        |        | 11     |       
|                                                                      |                                   | Pension curtailment and contractual termination
    benefit costs |                                     |        | 2,093  |        |        |        |        |       
|                                                                      |                                   | Benefits paid                                                     |                                     |        | (1,024 | )      |        |        | (853   | )     
|                                                                      |                                   |                                                                   |                                     |        |        |        |        |       
|                                                                      | Benefit obligation at end of year |                                                                   | $                                   | 24,405 |        |        | $      | 19,268 |       
|                                                                      |                                   |                                                                   |                                     |        |        |        |        |       
|Change in plan assets:                                                |                                   |                                                                   |                                     |        |        |        |        |       
|                                                                      |                                   | Fair value of plan assets at beginning
    of year                |                                     | $      | 14,170 |        |        | $      | 19,399 |       
|                                                                      |                                   | Actual return on plan assets                                      |                                     |        | 3,516  |        |        |        | (5,371 | )     
|                                                                      |                                   | Foreign currency exchange rate impact                             |                                     |        | 193    |        |        |        | 17     |       
|                                                                      |                                   | Company contributions                                             |                                     |        | 1,560  |        |        |        | 978    |       
|                                                                      |                                   | Benefits paid                                                     |                                     |        | (1,024 | )      |        |        | (853   | )     
|                                                                      |                                   |                                                                   |                                     |        |        |        |        |       
|Fair value of plan assets at end of year                              |                                   | $                                                                 | 18,415                              |        |        | $      | 14,170 |       
|                                                                      |                                   |                                                                   |                                     |        |        |        |        |       
|Funded status of the plans                                            |                                   | $                                                                 | (5,990                              | )      |        | $      | (5,098 | )     
|Unrecognized net actuarial losses                                     |                                   |                                                                   | 7,975                               |        |        |        | 8,904  |       
|Unrecognized initial net obligation                                   |                                   |                                                                   | 92                                  |        |        |        | 98     |       
|Foreign currency exchange rate impact                                 |                                   |                                                                   | 40                                  |        |        |        |        |       
|Unamortized prior service cost                                        |                                   |                                                                   | 440                                 |        |        |        | 572    |       
|                                                                      |                                   |                                                                   |                                     |        |        |        |        |       
|Net prepaid benefit cost                                              |                                   | $                                                                 | 2,557                               |        |        | $      | 4,476  |       
|                                                                      |                                   |                                                                   |                                     |        |        |        |        |       
|Amounts recognized in the balance sheet consist
    of the following: |                                   |                                                                   |                                     |        |        |        |        |       
|                                                                      |                                   |                                                                   | Prepaid benefit cost                |        | $      | 701    |        |        | $      | 604    |  
|                                                                      |                                   |                                                                   | Accrued benefit liability           |        |        | (5,891 | )      |        |        | (4,069 | )
|                                                                      |                                   |                                                                   | Intangible asset                    |        |        | 502    |        |        |        | 659    |  
|                                                                      |                                   |                                                                   | Cumulative other comprehensive loss |        |        | 7,245  |        |        |        | 7,282  |  
|                                                                      |                                   |                                                                   |                                     |        |        |        |        |       
|Net amount recognized                                                 |                                   | $                                                                 | 2,557                               |        |        | $      | 4,476  |       
|                                                                      |                                   |                                                                   |                                     |        |        |        |        |       

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

Amounts applicable to the Companys
under-funded pension plans at December 31, 2003 and 2002 are as
follows:

|                                                      |  |             |        |      |  |   |        | 
|----------------------------------------------------- |  | ----------- | ------ | ---- |  | - | ------ | 
|                                                      |  |            
|                                                      |  | December 31
|                                                      |  |            
|                                                      |  | 2003        |        | 2002
|                                                      |  |             |        |     
|Projected benefit obligation                          |  | $           | 23,415 |      |  | $ | 18,522 | 
|Accumulated benefit obligation                        |  | $           | 20,435 |      |  | $ | 17,333 | 
|Fair value of plan assets                             |  | $           | 17,263 |      |  | $ | 13,264 | 
|Amounts recognized as accrued
    benefit liabilities |  | $           | 5,891  |      |  | $ | 4,069  | 
|Amounts recognized as intangible asset                |  | $           | 502    |      |  | $ | 659    | 

|                                         |                                      |                        |       |        |   |      |     |        |   |   |     |        |  
|---------------------------------------- | ------------------------------------ | ---------------------- | ----- | ------ | - | ---- | --- | ------ | - | - | --- | ------ | -
|                                         |                                      |                       
|                                         |                                      | Year ended December 31
|                                         |                                      |                       
|                                         |                                      | 2003                   |       | 2002   |   | 2001
|                                         |                                      |                        |       |        |   |     
|Components of net periodic pension cost: |                                      |                        |       |        |   |      |     |        |   |   |     |       
|                                         | Service cost                         |                        | $     | 840    |   |      | $   | 732    |   |   | $   | 550    |  
|                                         | Interest cost                        |                        |       | 1,329  |   |      |     | 1,292  |   |   |     | 1,148  |  
|                                         | Expected return on plan assets       |                        |       | (1,269 | ) |      |     | (1,798 | ) |   |     | (1,585 | )
|                                         | Amortization of prior service cost   |                        |       | 71     |   |      |     | 80     |   |   |     | 76     |  
|                                         | Contractual termination benefit cost |                        |       | 1,836  |   |      |     |        |   |   |     |        |  
|                                         | Pension curtailment                  |                        |       | 386    |   |      |     |        |   |   |     |        |  
|                                         | Recognized net actuarial loss        |                        |       | 362    |   |      |     | 60     |   |   |     | 10     |  
|                                         |                                      |                        |       |        |   |      |     |        |   |   |     |       
|                                         |                                      | $                      | 3,555 |        |   | $    | 366 |        |   | $ | 199 |       
|                                         |                                      |                        |       |        |   |      |     |        |   |   |     |       

The plans assets are primarily invested in
fixed income and equity securities. In addition, one of the
Companys defined benefit plans also contains investments
in the Companys stock. As of December 31, 2003,
60,000 shares of the Companys Class A common stock
were held by a defined benefit plan at a cost of $717. The
market value of such investment as of December 31, 2003, was
$219. The Company does not pay dividends on its Class A
common stock.

The weighted-average plan asset allocation at
December 31, 2003 and 2002, by asset category are as
follows:

|                              |       |             |    |      |   |  |    |     |  
|----------------------------- | ----- | ----------- | -- | ---- | - |  | -- | --- | -
|                              |       |            
|                              |       | December 31
|                              |       |            
|                              |       | 2003        |    | 2002
|                              |       |             |    |     
|Asset Category                |       |             |    |      |   |  |    |    
|Equity securities             |       |             | 75 | %    |   |  | 68 | %  
|Debt securities               |       |             | 21 | %    |   |  | 27 | %  
|Hawk Corporation common stock |       |             | 1  | %    |   |  | 1  | %  
|Other                         |       |             | 3  | %    |   |  | 4  | %  
|                              |       |             |    |      |   |  |    |    
|                              | Total |             |    | 100  | % |  |    | 100 | %
|                              |       |             |    |      |   |  |    |    

The objectives of the Companys investment
strategies are as follows: (a) to provide a total return that,
over the long term, maximizes investment return on assets, at a
level of risk deemed appropriate, (b) to maximize return on
assets by investing primarily in equity securities, and
(c) to diversify investments within asset classes to reduce
the impact of losses in any single investment. The range of
target asset allocations have been determined after giving
consideration to the expected returns of each asset class, the
expected variability or volatility of the asset class returns
over time, and the complementary nature or correlation of the
asset classes within the portfolio. The Company also employs an
active management approach for the portfolio. Each asset class
is managed by one

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

or more external money managers with the
objective of generating returns, net of management fees that
exceed market-based benchmarks.

The following assumptions were used in accounting
for the defined benefit plans:

|                                                                                                            |                                          |      |  |      |   |  |  |      |  
|----------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ---- |  | ---- | - |  |  | ---- | -
|                                                                                                            |                                          | 2003 |  | 2002
|                                                                                                            |                                          |      |  |     
|Weighted average rates used to compute the
    projected benefit obligation as of December 31:              |                                          |      |  |      |   |  |  |     
|                                                                                                            | Discount rate                            |      |  | 6.25 | % |  |  | 6.75 | %
|                                                                                                            | Rate of compensation increase            |      |  | 3.03 | % |  |  | 3.02 | %
|                                                                                                            | Expected long-term return on plan assets |      |  | 8.59 | % |  |  | 8.59 | %
|Weighted average rates used to determine the net
    periodic benefit cost for the years ended December 31: |                                          |      |  |      |   |  |  |     
|                                                                                                            | Discount rate                            |      |  | 6.75 | % |  |  | 7.26 | %
|                                                                                                            | Rate of compensation increase            |      |  | 3.02 | % |  |  | 3.06 | %
|                                                                                                            | Expected long-term return on plan assets |      |  | 8.59 | % |  |  | 9.34 | %

The measurement date used to determine the
pension benefit measurements for all plans in all periods
presented is December 31. The Company has reviewed
historical rates of return specific to its respective plans to
determine the expected long-term rate of return on assets.

The Company expects to contribute a total of
$1,927 to the defined benefit plans in 2004.

Estimated benefit payments for the next five
years and in the aggregate for the five years thereafter are:

|     |           |                  |  |   |       | 
|---- | --------- | ---------------- |  | - | ----- | 
|Year |           | Pension Benefits
|     |           |                 
|     | 2004      |                  |  | $ | 1,193 | 
|     | 2005      |                  |  | $ | 1,325 | 
|     | 2006      |                  |  | $ | 1,368 | 
|     | 2007      |                  |  | $ | 1,434 | 
|     | 2008      |                  |  | $ | 1,540 | 
|     | 2009-2013 |                  |  | $ | 8,876 | 

The Company also sponsors several defined
contribution plans which provide voluntary employee
contributions and, in certain plans, matching and discretionary
employer contributions. Aggregate defined contribution plan
expenses were approximately $1,272 in 2003, which included $992
in discretionary employer contributions, $241 in 2002 and $581
in 2001. In 2002 and 2001, the Company made no discretionary
employer contributions.



|    |                  
|--- | -----------------
|10. | Lease Obligations

The Company has capital lease commitments for
buildings, machinery and equipment. Assets recorded under
capital lease agreements included in property, plant and
equipment consist of the following:

|                                 |  |             |       |      |  |   |       | 
|-------------------------------- |  | ----------- | ----- | ---- |  | - | ----- | 
|                                 |  |            
|                                 |  | December 31
|                                 |  |            
|                                 |  | 2003        |       | 2002
|                                 |  |             |       |     
|Buildings and improvements       |  | $           | 1,026 |      |  | $ | 846   | 
|Machinery and equipment          |  |             | 1,056 |      |  |   | 507   | 
|                                 |  |             |       |      |  |   |       | 
|Gross assets under capital lease |  |             | 2,082 |      |  |   | 1,353 | 
|Accumulated amortization         |  |             | 350   |      |  |   | 250   | 
|                                 |  |             |       |      |  |   |       | 
|Net assets under capital lease   |  | $           | 1,732 |      |  | $ | 1,103 | 
|                                 |  |             |       |      |  |   |       | 

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

Amortization of assets recorded under capital
leases is included with depreciation expense. Future minimum
annual rentals are: 2004  $391; 2005  $320; 2006
 $168; 2007  $116; 2008  $50 and thereafter
 $0. Amount representing interest is $67. Total capital
lease obligations are included in other long-term debt.

The Company leases certain office and warehouse
facilities and equipment under operating leases. Certain of
these operating leases provide the Company with a renewal option
after the initial lease term. Rental expense was approximately
$2,212 in 2003, $2,117 in 2002, and $2,045 in 2001. Future
non-cancelable minimum lease commitments under these agreements
that have an original or existing term in excess of one year as
of December 31, 2003 are as follows: 2004  $2,577;
2005  $2,064; 2006  $1,484; 2007  $1,048; 2008
 $986; and thereafter  $1,952.




11. Income Taxes

The provision (benefit) for income taxes
from continuing operations consists of the following:

|                                     |                 |                        |        |        |   |      |        |        |   |   |        |        |  
|------------------------------------ | --------------- | ---------------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                     |                 |                       
|                                     |                 | Year ended December 31
|                                     |                 |                       
|                                     |                 | 2003                   |        | 2002   |   | 2001
|                                     |                 |                        |        |        |   |     
|Current:                             |                 |                        |        |        |   |      |        |        |   |   |        |       
|                                     | Federal         |                        |        |        |   |      | $      | (3,602 | ) |   | $      | (1,842 | )
|                                     | State and local |                        | $      | 45     |   |      |        | (38    | ) |   |        | (55    | )
|                                     | Foreign         |                        |        | 1,885  |   |      |        | 574    |   |   |        | 297    |  
|                                     |                 |                        |        |        |   |      |        |        |   |   |        |       
|                                     |                 |                        | 1,930  |        |   |      | (3,066 | )      |   |   | (1,600 | )     
|Deferred:                            |                 |                        |        |        |   |      |        |        |   |   |        |       
|                                     | Federal         |                        |        | (1,059 | ) |      |        | 2,333  |   |   |        | 1,118  |  
|                                     | State and local |                        |        | (12    | ) |      |        | 18     |   |   |        | 62     |  
|                                     | Foreign         |                        |        | (4     | ) |      |        | 46     |   |   |        | (517   | )
|                                     |                 |                        |        |        |   |      |        |        |   |   |        |       
|                                     |                 |                        | (1,075 | )      |   |      | 2,397  |        |   |   | 663    |       
|                                     |                 |                        |        |        |   |      |        |        |   |   |        |       
|Total income tax provision (benefit) |                 | $                      | 855    |        |   | $    | (669   | )      |   | $ | (937   | )     
|                                     |                 |                        |        |        |   |      |        |        |   |   |        |       

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes.
Significant components of the Companys deferred tax assets
and liabilities as of December 31 are as follows:

|                               |                                          |      |        |        |  |   |        |       | 
|------------------------------ | ---------------------------------------- | ---- | ------ | ------ |  | - | ------ | ----- | 
|                               |                                          | 2003 |        | 2002  
|                               |                                          |      |        |       
|Deferred tax assets:           |                                          |      |        |        |  |   |        |      
|                               | NOL and AMT carryforward                 |      | $      | 3,755  |  |   | $      | 988   | 
|                               | Accrued vacation                         |      |        | 618    |  |   |        | 555   | 
|                               | Employee benefits                        |      |        | 2,616  |  |   |        | 1,852 | 
|                               | Other accruals                           |      |        | 3,484  |  |   |        | 1,498 | 
|                               | Foreign net operating loss carryforwards |      |        |        |  |   |        | 352   | 
|                               | Book over tax goodwill amortization      |      |        | 1,109  |  |   |        | 2,161 | 
|                               | Inventory                                |      |        | 557    |  |   |        | 527   | 
|                               |                                          |      |        |        |  |   |        |      
|Total deferred tax assets      |                                          |      | 12,139 |        |  |   | 7,933  |      
|Deferred tax liabilities:      |                                          |      |        |        |  |   |        |      
|                               | Tax over book depreciation               |      |        | 10,066 |  |   |        | 9,409 | 
|                               | Tax over book intangibles amortization   |      |        | 2,192  |  |   |        | 1,708 | 
|                               | Foreign leased property                  |      |        | 353    |  |   |        | 340   | 
|                               | Debt financing costs                     |      |        | 178    |  |   |        | 746   | 
|                               | Other                                    |      |        | 159    |  |   |        | 230   | 
|                               |                                          |      |        |        |  |   |        |      
|Total deferred tax liabilities |                                          |      | 12,948 |        |  |   | 12,433 |      
|                               |                                          |      |        |        |  |   |        |      
|Net deferred tax liabilities   |                                          | $    | 809    |        |  | $ | 4,500  |      
|                               |                                          |      |        |        |  |   |        |      

As of December 31, 2003 and 2002 the Company
had net federal operating loss (NOL) carryforwards of
$7,883 and $0, respectively. The NOL expires in 2023. At
December 31, 2003 and 2002, the Company had alternative
minimum tax carryforwards (AMT) of $1,075 and $988,
respectively. The AMT has no date of expiration.

The provision (benefit) for income taxes
from continuing operations differs from the amounts computed by
applying the federal statutory rate as follows:

|                                                                            |  |             |     |      |  |      |      |   |  |   |        |  
|--------------------------------------------------------------------------- |  | ----------- | --- | ---- |  | ---- | ---- | - |  | - | ------ | -
|                                                                            |  |            
|                                                                            |  | December 31
|                                                                            |  |            
|                                                                            |  | 2003        |     | 2002 |  | 2001
|                                                                            |  |             |     |      |  |     
|Income tax expense (benefit) at federal
    statutory rate                  |  | $           | 142 |      |  | $    | 47   |   |  | $ | (1,104 | )
|State and local tax, net of federal
    tax benefit                         |  |             | 21  |      |  |      | (16  | ) |  |   | 48     |  
|Nondeductible goodwill amortization                                         |  |             |     |      |  |      |      |   |  |   | 251    |  
|Nondeductible intangible amortization                                       |  |             | 60  |      |  |      | 52   |   |  |   | 55     |  
|Taxes on foreign income which differs from United
    States statutory rate |  |             | 560 |      |  |      | 99   |   |  |   | 81     |  
|Foreign tax withholding                                                     |  |             | 87  |      |  |      | 128  |   |  |   |        |  
|Adjustment to worldwide tax accrual and other                               |  |             | (15 | )    |  |      | (979 | ) |  |   | (268   | )
|                                                                            |  |             |     |      |  |      |      |   |  |   |        |  
|Provision for income taxes                                                  |  | $           | 855 |      |  | $    | (669 | ) |  | $ | (937   | )
|                                                                            |  |             |     |      |  |      |      |   |  |   |        |  

55



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

The following table illustrates the domestic and
foreign components of the Companys continuing income
(loss) before income taxes:

|                                                                                                                            |          |                        |     |        |   |      |     |    |  |   |        |        |  
|--------------------------------------------------------------------------------------------------------------------------- | -------- | ---------------------- | --- | ------ | - | ---- | --- | -- |  | - | ------ | ------ | -
|                                                                                                                            |          |                       
|                                                                                                                            |          | Year ended December 31
|                                                                                                                            |          |                       
|                                                                                                                            |          | 2003                   |     | 2002   |   | 2001
|                                                                                                                            |          |                        |     |        |   |     
|Income (loss) before income taxes,
    discontinued operations and cumulative effect of change in
    accounting principle: |          |                        |     |        |   |      |     |    |  |   |        |       
|                                                                                                                            | Domestic |                        | $   | (2,185 | ) |      | $   | 41 |  |   | $      | (1,441 | )
|                                                                                                                            | Foreign  |                        |     | 2,591  |   |      |     | 95 |  |   |        | (1,713 | )
|                                                                                                                            |          |                        |     |        |   |      |     |    |  |   |        |       
|As reported                                                                                                                 |          | $                      | 406 |        |   | $    | 136 |    |  | $ | (3,154 | )     
|                                                                                                                            |          |                        |     |        |   |      |     |    |  |   |        |       

In accordance with accounting principles
generally accepted in the United States, the Company established
an accrual prior to 2001, in the amount of $1,041 for tax
exposures related to certain deductions taken on its income tax
returns. The Company believed that the deductions were valid
under applicable tax laws and regulations. During 2002, the
applicable statute of limitations expired and the Company
reversed the tax accrual, which resulted in substantially all of
the $979 adjustment in the Companys reconciliation of its
effective 2002 tax rate.

Undistributed earnings of the Companys
foreign subsidiaries amounted to approximately $8,885 and $7,053
at December 31, 2003 and 2002. These earnings are
considered to be indefinitely reinvested and, accordingly, no
provision for U.S. federal and state income taxes has been
provided. The Company cannot determine in any practical manner
the amount of income tax liability that would result if such
earnings would be repatriated. Upon distribution of these
earnings in the form of dividends or otherwise, the Company
would be subject to both U.S. income taxes, which may be offset
by foreign tax credits, and withholding taxes payable to various
foreign countries.

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)



|    |                          
|--- | -------------------------
|12. | (Loss) Earnings Per Share

Basic and diluted (loss) earnings per share
are computed as follows:

|                                                                                                                                              |                            |                                                                                                                        |        |      |       |      |         |       |       |   |        |      |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ------ | ---- | ----- | ---- | ------- | ----- | ----- | - | ------ | ---- | ----- | -
|                                                                                                                                              |                            |                                                                                                                       
|                                                                                                                                              |                            | Year ended December 31                                                                                                
|                                                                                                                                              |                            |                                                                                                                       
|                                                                                                                                              |                            | 2003                                                                                                                   |        | 2002 |       | 2001
|                                                                                                                                              |                            |                                                                                                                        |        |      |       |     
|(Loss) income before discontinued operations
    and cumulative effect of change in accounting principle                                      |                            | $                                                                                                                      | (449   | )    |       | $    | 805     |       |       | $ | (2,217 | )   
|Less: Preferred stock dividends                                                                                                               |                            |                                                                                                                        | 150    |      |       |      | 150     |       |       |   | 150    |     
|                                                                                                                                              |                            |                                                                                                                        |        |      |       |      |         |       |       |   |        |     
|(Loss) income before discontinued operations
    and cumulative effect of change in accounting principle
    available to common shareholders |                            | $                                                                                                                      | (599   | )    |       | $    | 655     |       |       | $ | (2,367 | )   
|Net loss                                                                                                                                      |                            | $                                                                                                                      | (5,422 | )    |       | $    | (18,245 | )     |       | $ | (4,336 | )   
|Less: Preferred stock dividends                                                                                                               |                            |                                                                                                                        | 150    |      |       |      | 150     |       |       |   | 150    |     
|                                                                                                                                              |                            |                                                                                                                        |        |      |       |      |         |       |       |   |        |     
|Net loss available to common shareholders                                                                                                     |                            | $                                                                                                                      | (5,572 | )    |       | $    | (18,395 | )     |       | $ | (4,486 | )   
|                                                                                                                                              |                            |                                                                                                                        |        |      |       |      |         |       |       |   |        |     
|Weighted average shares outstanding (in
    thousands):                                                                                       |                            |                                                                                                                        |        |      |       |      |         |       |       |   |        |     
|Basic weighted average shares outstanding                                                                                                     |                            |                                                                                                                        | 8,571  |      |       |      | 8,557   |       |       |   | 8,552  |     
|                                                                                                                                              |                            |                                                                                                                        |        |      |       |      |         |       |       |   |        |     
|                                                                                                                                              |                            | Diluted:                                                                                                               |        |      |       |      |         |       |       |   |        |      |       |  
|                                                                                                                                              |                            | Basic from above outstanding                                                                                           |        |      | 8,571 |      |         |       | 8,557 |   |        |      | 8,552 |  
|                                                                                                                                              |                            | Dilutive effect of stock options                                                                                       |        |      |       |      |         |       | 40    |   |        |      |       |  
|                                                                                                                                              |                            |                                                                                                                        |        |      |       |      |         |       |       |   |        |     
|Diluted weighted average shares outstanding                                                                                                   |                            |                                                                                                                        | 8,571  |      |       |      | 8,597   |       |       |   | 8,552  |     
|                                                                                                                                              |                            |                                                                                                                        |        |      |       |      |         |       |       |   |        |     
|(Loss) earnings per share:                                                                                                                    |                            |                                                                                                                        |        |      |       |      |         |       |       |   |        |     
|                                                                                                                                              |                            | Basic (loss) earnings before discontinued
    operations and cumulative effect of change in
    accounting principle   |        | $    | (.07  | )    |         | $     | .08   |   |        | $    | (.27  | )
|                                                                                                                                              |                            | Discontinued operations                                                                                                |        |      | (.58  | )    |         |       | (.22  | ) |        |      | (.25  | )
|                                                                                                                                              |                            | Cumulative effect of change in accounting
    principle                                                                |        |      |       |      |         |       | (2.01 | ) |        |      |       |  
|                                                                                                                                              |                            |                                                                                                                        |        |      |       |      |         |       |       |   |        |     
|                                                                                                                                              | Net loss per basic share   |                                                                                                                        | $      | (.65 | )     |      | $       | (2.15 | )     |   | $      | (.52 | )    
|                                                                                                                                              |                            |                                                                                                                        |        |      |       |      |         |       |       |   |        |     
|                                                                                                                                              |                            | Diluted (loss) earnings before discontinued
    operations and cumulative effect of change in
    accounting principle |        | $    | (.07  | )    |         | $     | .08   |   |        | $    | (.27  | )
|                                                                                                                                              |                            | Discontinued operations                                                                                                |        |      | (.58  | )    |         |       | (.22  | ) |        |      | (.25  | )
|                                                                                                                                              |                            | Cumulative effect of change in accounting
    principle                                                                |        |      |       |      |         | $     | (2.00 | ) |        |      |       |  
|                                                                                                                                              |                            |                                                                                                                        |        |      |       |      |         |       |       |   |        |     
|                                                                                                                                              | Net loss per diluted share |                                                                                                                        | $      | (.65 | )     |      | $       | (2.14 | )     |   | $      | (.52 | )    
|                                                                                                                                              |                            |                                                                                                                        |        |      |       |      |         |       |       |   |        |     

All outstanding stock options at
December 31, 2003 and 2001 are antidilutive.



|    |                
|--- | ---------------
|13. | Related Parties

In July 1995, certain shareholders of the
Company issued interest-bearing notes to the Company in the
amount of $2,000, enabling them to repay certain indebtedness
incurred by them with respect to an acquisition. The notes are
due and payable on July 1, 2005, with the exception of $10,
which is due and payable on July 1, 2004. The notes bear
interest at the prime rate. The balance of current and long-term
shareholder notes outstanding at December 31, 2003 and 2002
was $1,010.

57



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)



|    |                  
|--- | -----------------
|14. | Business Segments

The Company operates in three primary business
segments: friction products, precision components and
performance racing. The Companys reportable segments are
strategic business units that offer different products and
services. They are managed separately based on fundamental
differences in their operations.

The friction products segment engineers,
manufactures and markets specialized components, used in a
variety of aerospace, industrial and commercial applications.
The Company, through this segment, is a worldwide supplier of
friction components for brakes, clutches and transmissions.

The precision components segment engineers,
manufactures and markets specialized powder metal components,
used primarily in industrial applications. The Company, through
this segment, targets four areas of the powder metal component
marketplace: high precision components that are used in fluid
power applications, large structural powder metal parts used in
construction, agricultural and truck applications, smaller
high-volume parts and metal injected molded parts for a variety
of industries.

The performance racing segment engineers,
manufactures and markets high performance friction material for
use in racing car brakes in addition to premium branded clutch
and drive train components. The Company, through this segment,
targets leading teams in the NASCAR racing series, as well as
high-performance street vehicles and other road race and oval
track competition cars.

58



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

Information by segment is as follows:

|                                                  |                         |                              |         |         |  |      |         |         |  |   |         |         | 
|------------------------------------------------- | ----------------------- | ---------------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                                  |                         |                             
|                                                  |                         | Year ended December 31(1)(4)
|                                                  |                         |                             
|                                                  |                         | 2003                         |         | 2002    |  | 2001
|                                                  |                         |                              |         |         |  |     
|Net sales to external customers:                  |                         |                              |         |         |  |      |         |         |  |   |         |        
|                                                  | Friction products(1)    |                              | $       | 121,569 |  |      | $       | 106,134 |  |   | $       | 104,127 | 
|                                                  | Precision components(4) |                              |         | 68,213  |  |      |         | 67,151  |  |   |         | 59,794  | 
|                                                  | Performance racing(1)   |                              |         | 12,859  |  |      |         | 12,627  |  |   |         | 12,967  | 
|                                                  |                         |                              |         |         |  |      |         |         |  |   |         |        
|Consolidated                                      |                         | $                            | 202,551 |         |  | $    | 185,912 |         |  | $ | 176,888 |        
|                                                  |                         |                              |         |         |  |      |         |         |  |   |         |        
|Depreciation and amortization:(2)(3)              |                         |                              |         |         |  |      |         |         |  |   |         |        
|Friction products(1)                              |                         | $                            | 7,135   |         |  | $    | 7,277   |         |  | $ | 8,772   |        
|                                                  | Precision components(4) |                              |         | 3,511   |  |      |         | 3,537   |  |   |         | 4,939   | 
|                                                  | Performance racing(1)   |                              |         | 227     |  |      |         | 200     |  |   |         | 742     | 
|                                                  |                         |                              |         |         |  |      |         |         |  |   |         |        
|Consolidated                                      |                         | $                            | 10,873  |         |  | $    | 11,014  |         |  | $ | 14,453  |        
|                                                  |                         |                              |         |         |  |      |         |         |  |   |         |        
|Gross profit:                                     |                         |                              |         |         |  |      |         |         |  |   |         |        
|                                                  | Friction products(1)    |                              | $       | 29,510  |  |      | $       | 25,403  |  |   | $       | 24,899  | 
|                                                  | Precision components(4) |                              |         | 14,458  |  |      |         | 15,082  |  |   |         | 11,995  | 
|                                                  | Performance racing(1)   |                              |         | 3,401   |  |      |         | 3,711   |  |   |         | 3,854   | 
|                                                  |                         |                              |         |         |  |      |         |         |  |   |         |        
|Consolidated                                      |                         | $                            | 47,369  |         |  | $    | 44,196  |         |  | $ | 40,748  |        
|                                                  |                         |                              |         |         |  |      |         |         |  |   |         |        
|Income from operations:(2)                        |                         |                              |         |         |  |      |         |         |  |   |         |        
|Friction products(1)                              |                         | $                            | 8,284   |         |  | $    | 7,794   |         |  | $ | 6,643   |        
|                                                  | Precision components(4) |                              |         | 2,254   |  |      |         | 4,287   |  |   |         | 282     | 
|                                                  | Performance racing(1)   |                              |         | 380     |  |      |         | 874     |  |   |         | 253     | 
|                                                  |                         |                              |         |         |  |      |         |         |  |   |         |        
|Consolidated                                      |                         | $                            | 10,918  |         |  | $    | 12,955  |         |  | $ | 7,178   |        
|                                                  |                         |                              |         |         |  |      |         |         |  |   |         |        
|Capital expenditures: (including capital leases): |                         |                              |         |         |  |      |         |         |  |   |         |        
|                                                  | Friction products(1)    |                              | $       | 5,151   |  |      | $       | 5,742   |  |   | $       | 5,000   | 
|                                                  | Precision components(4) |                              |         | 5,889   |  |      |         | 3,486   |  |   |         | 3,304   | 
|                                                  | Performance racing(1)   |                              |         | 183     |  |      |         | 521     |  |   |         | 171     | 
|                                                  |                         |                              |         |         |  |      |         |         |  |   |         |        
|Consolidated                                      |                         | $                            | 11,223  |         |  | $    | 9,749   |         |  | $ | 8,475   |        
|                                                  |                         |                              |         |         |  |      |         |         |  |   |         |        

59



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                      |                         |             |         |         |  |   |         |        | 
|--------------------- | ----------------------- | ----------- | ------- | ------- |  | - | ------- | ------ | 
|                      |                         |            
|                      |                         | December 31
|                      |                         |            
|                      |                         | 2003        |         | 2002   
|                      |                         |             |         |        
|Total assets:         |                         |             |         |         |  |   |         |       
|                      | Friction products(1)    |             | $       | 101,169 |  |   | $       | 95,668 | 
|                      | Precision components(4) |             |         | 77,026  |  |   |         | 75,743 | 
|                      | Performance racing(1)   |             |         | 11,052  |  |   |         | 11,096 | 
|                      |                         |             |         |         |  |   |         |       
|Continuing operations |                         |             | 189,247 |         |  |   | 182,507 |       
|                      | Discontinued operations |             |         | 4,302   |  |   |         | 10,373 | 
|                      |                         |             |         |         |  |   |         |       
|Consolidated          |                         | $           | 193,549 |         |  | $ | 192,880 |       
|                      |                         |             |         |         |  |   |         |       



---



|    |                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | An operating unit formerly associated with the
    Companys performance racing segment was reclassified as of
    January 1, 2002 to the Companys friction products
    segment as a result of changes in the internal operating
    responsibility of that unit. All prior periods have been
    reclassified to reflect this change.
|   
|(2) | In accordance with the non-amortization
    provisions of SFAS 142 (see Note 2), the Company discontinued
    the amortization of goodwill in 2002.                                                                                                                                                                                     

The following table illustrates the pro forma
effect by operating segment, on depreciation and amortization,
and income from operations had the Company applied the
non-amortization provisions of SFAS 142 for the year ended
December 31, 2001:

|                                         |                      |   |        |       | 
|---------------------------------------- | -------------------- | - | ------ | ----- | 
|Pro forma depreciation and amortization: |                      |   |        |      
|                                         | Friction products    |   | $      | 7,620 | 
|                                         | Precision components |   |        | 3,751 | 
|                                         | Performance racing   |   |        | 154   | 
|                                         |                      |   |        |      
|Consolidated                             |                      | $ | 11,525 |      
|                                         |                      |   |        |      
|Pro forma income (loss) from operations: |                      |   |        |      
|                                         | Friction products    |   | $      | 7,795 | 
|                                         | Precision components |   |        | 1,470 | 
|                                         | Performance racing   |   |        | 841   | 
|                                         |                      |   |        |      
|Consolidated                             |                      | $ | 10,106 |      
|                                         |                      |   |        |      



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Depreciation and amortization outlined in this
    table does not include deferred financing amortization of $801
    in 2003, $643 in 2002, and $618 in 2001, which is included in
    Interest expense on the Statement of Operations.                                                                                                                                                                                                                                 
|   
|(4) | A line of business formerly associated with the
    Companys motors segment, which was discontinued as of
    December 31, 2003, will be retained by the Company and has
    been reclassified to the Companys precision components
    segment. Net sales from this line of business were $1,235,
    $1,341, and $1,522 for the years ended December 31, 2003,
    2002, and 2001, respectively. All prior periods have been
    reclassified to reflect this change.

60



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

Geographic information for the years ended
December 31, 2003, 2002 and 2001 is as follows:

|                                                                    |  |                |         |            |  |       |        |            |  |            |         |       |  |            |         |            |  |       |        |   |  |   |         |   |  |   |         |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------- |  | -------------- | ------- | ---------- |  | ----- | ------ | ---------- |  | ---------- | ------- | ----- |  | ---------- | ------- | ---------- |  | ----- | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                    |  |                |         |            |  |      
|                                                                    |  | 2003           |         | 2002       |  | 2001 
|                                                                    |  |                |         |            |  |      
|                                                                    |  | Domestic       |         | Foreign    |  |       |        | Domestic   |  | Foreign    |         |       |  | Domestic   |         | Foreign    |  |      
|                                                                    |  | Operations     |         | Operations |  | Total |        | Operations |  | Operations |         | Total |  | Operations |         | Operations |  | Total
|                                                                    |  |                |         |            |  |       |        |            |  |            |         |       |  |            |         |            |  |      
|                                                                    |  |               
|                                                                    |  | (In thousands)
|Net sales                                                           |  | $              | 160,262 |            |  | $     | 42,289 |            |  | $          | 202,551 |       |  | $          | 158,497 |            |  | $     | 27,415 |   |  | $ | 185,912 |   |  | $ | 154,815 |   |  | $ | 22,073 |   |  | $ | 176,888 |  
|Income (loss) from operations                                       |  |                | 7,818   |            |  |       | 3,100  |            |  |            | 10,918  |       |  |            | 12,163  |            |  |       | 792    |   |  |   | 12,955  |   |  |   | 8,311   |   |  |   | (1,133 | ) |  |   | 7,178   |  
|Discontinued operations, net of tax                                 |  |                | (620    | )          |  |       | (4,353 | )          |  |            | (4,973  | )     |  |            | (77     | )          |  |       | (1,773 | ) |  |   | (1,850  | ) |  |   | 513     |   |  |   | (2,632 | ) |  |   | (2,119  | )
|Cumulative effect of change in accounting
    principle, net of tax |  |                |         |            |  |       |        |            |  |            |         |       |  |            | (17,200 | )          |  |       |        |   |  |   | (17,200 | ) |  |   |         |   |  |   |        |   |  |   |         |  
|Net (loss) income                                                   |  |                | (1,866  | )          |  |       | (3,556 | )          |  |            | (5,422  | )     |  |            | (16,075 | )          |  |       | (2,170 | ) |  |   | (18,245 | ) |  |   | (211    | ) |  |   | (4,125 | ) |  |   | (4,336  | )
|Total assets of continuing operations                               |  | $              | 159,406 |            |  | $     | 29,841 |            |  | $          | 189,247 |       |  | $          | 165,702 |            |  | $     | 16,805 |   |  | $ | 182,507 |   |  | $ | 167,733 |   |  | $ | 21,701 |   |  | $ | 189,434 |  

The Company has continuing foreign operations in
Canada, Italy, and China. Included in discontinued operations is
the Companys operation in Mexico.



|    |                                   
|--- | ----------------------------------
|15. | Supplemental Guarantor Information

As discussed in Note 6, each of the Guarantor
Subsidiaries has fully and unconditionally guaranteed, on a
joint and several basis, to pay principal, premium, and interest
with respect to the Senior Notes. The Guarantor Subsidiaries are
direct or indirect wholly-owned subsidiaries of the Company.



| |                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following supplemental consolidating
    condensed financial statements present consolidating condensed
    balance sheets as of December 31, 2003 and December 31,
    2002, consolidating condensed statements of operations for the
    years ended December 31, 2003, 2002 and 2001 and
    consolidating condensed statements of cash flows for the years
    ended December 31, 2003, 2002 and 2001.
|
| | Hawk Corporation (Parent), combined Guarantor
    Subsidiaries and combined Non-Guarantor Subsidiaries consisting
    of the Companys subsidiaries in Canada, Italy, and China
    with their investments in subsidiaries accounted for using the
    equity method.                                                                                                                                         
|
| | Elimination entries necessary to consolidate the
    Parent and all of its subsidiaries.                                                                                                                                                                                                                                                                                                                      
|
| | Management does not believe that separate
    financial statements of the Guarantor Subsidiaries are material
    to investors. Therefore, separate financial statements and other
    disclosures concerning the Guarantor Subsidiaries are not
    presented.                                                                                                                                               

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                               |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |        | 
|---------------------------------------------- | -------------------------------------------------- | ----------------- | ------- | ------------ | - | ------------- | ------- | ------------ |  | ------------ | ------ | ------ |  | - | -------- | -------- | - | - | ------- | ------ | 
|                                               |                                                    |                  
|                                               |                                                    | December 31, 2003
|                                               |                                                    |                  
|                                               |                                                    |                   |         | Combined     |   | Combined      |         |             
|                                               |                                                    |                   |         | Guarantor    |   | Non-Guarantor |         |             
|                                               |                                                    | Parent            |         | Subsidiaries |   | Subsidiaries  |         | Eliminations |  | Consolidated
|                                               |                                                    |                   |         |              |   |               |         |              |  |             
|Assets                                         |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       
|Current assets:                                |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       
|                                               | Cash and cash equivalents                          |                   | $       | 39           |   |               | $       | 129          |  |              | $      | 3,197  |  |   |          |          |   |   | $       | 3,365  | 
|                                               | Accounts receivable, net                           |                   |         |              |   |               |         | 20,718       |  |              |        | 11,554 |  |   |          |          |   |   |         | 32,272 | 
|                                               | Inventories                                        |                   |         |              |   |               |         | 26,036       |  |              |        | 9,789  |  |   | $        | (401     | ) |   |         | 35,424 | 
|                                               | Deferred income taxes                              |                   |         | 3,089        |   |               |         |              |  |              |        | 462    |  |   |          |          |   |   |         | 3,551  | 
|                                               | Taxes receivable                                   |                   |         | 521          |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         | 521    | 
|                                               | Other current assets                               |                   |         | 1,428        |   |               |         | 1,690        |  |              |        | 914    |  |   |          |          |   |   |         | 4,032  | 
|                                               | Current assets of discontinued operations          |                   |         |              |   |               |         | 1,730        |  |              |        | 2,572  |  |   |          |          |   |   |         | 4,302  | 
|                                               |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       
|Total current assets                           |                                                    |                   | 5,077   |              |   |               | 50,303  |              |  |              | 28,488 |        |  |   | (401     | )        |   |   | 83,467  |       
|Investment in subsidiaries                     |                                                    |                   | 794     |              |   |               |         |              |  |              |        |        |  |   | (794     | )        |   |   |         |       
|Inter-company advances, net                    |                                                    |                   | 157,379 |              |   |               | 14,062  |              |  |              | (6,322 | )      |  |   | (165,119 | )        |   |   |         |       
|Property, plant and equipment, net             |                                                    |                   | 628     |              |   |               | 52,962  |              |  |              | 9,546  |        |  |   |          |          |   |   | 63,136  |       
|Other assets:                                  |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       
|                                               | Goodwill and other intangible assets               |                   |         | 72           |   |               |         | 42,327       |  |              |        |        |  |   |          |          |   |   |         | 42,399 | 
|                                               | Other                                              |                   |         | 1,143        |   |               |         | 3,713        |  |              |        | 701    |  |   |          | (1,010   | ) |   |         | 4,547  | 
|                                               | Long-term assets of discontinued operations        |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |        | 
|                                               |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       
|Total other assets                             |                                                    |                   | 1,215   |              |   |               | 46,040  |              |  |              | 701    |        |  |   | (1,010   | )        |   |   | 46,946  |       
|                                               |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       
|Total assets                                   |                                                    | $                 | 165,093 |              |   | $             | 163,367 |              |  | $            | 32,413 |        |  | $ | (167,324 | )        |   | $ | 193,549 |       
|                                               |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       
|Liabilities and shareholders
    equity       |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       
|Current liabilities:                           |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       
|                                               | Accounts payable                                   |                   |         |              |   |               | $       | 14,100       |  |              | $      | 7,469  |  |   |          |          |   |   | $       | 21,569 | 
|                                               | Accrued compensation                               |                   | $       | 1,099        |   |               |         | 3,393        |  |              |        | 1,244  |  |   |          |          |   |   |         | 5,736  | 
|                                               | Accrued interest                                   |                   |         | 4,153        |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         | 4,153  | 
|                                               | Other accrued expenses                             |                   |         | 2,410        |   |               |         | 4,047        |  |              |        | 1,910  |  |   | $        | (71      | ) |   |         | 8,296  | 
|                                               | Short-term debt                                    |                   |         |              |   |               |         |              |  |              |        | 1,326  |  |   |          |          |   |   |         | 1,326  | 
|                                               | Bank Facility                                      |                   |         | 24,059       |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         | 24,059 | 
|                                               | Current portion of long-term debt                  |                   |         |              |   |               |         | 866          |  |              |        | 282    |  |   |          |          |   |   |         | 1,148  | 
|                                               | Current liabilities of
    discontinued operations |                   |         |              |   |               |         | 1,437        |  |              |        | 2,215  |  |   |          |          |   |   |         | 3,652  | 
|                                               |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       
|Total current liabilities                      |                                                    |                   | 31,721  |              |   |               | 23,843  |              |  |              | 14,446 |        |  |   | (71      | )        |   |   | 69,939  |       
|Long-term liabilities:                         |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       
|                                               | Long-term debt                                     |                   |         | 66,184       |   |               |         | 1,040        |  |              |        | 1,219  |  |   |          |          |   |   |         | 68,443 | 
|                                               | Deferred income taxes                              |                   |         | 3,860        |   |               |         | 1            |  |              |        | 499    |  |   |          |          |   |   |         | 4,360  | 
|                                               | Other                                              |                   |         | (2,782       | ) |               |         | 9,594        |  |              |        | 2,290  |  |   |          |          |   |   |         | 9,102  | 
|                                               | Long-term liabilities of discontinued operations   |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |        | 
|                                               | Inter-company advances, net                        |                   |         | 847          |   |               |         | 155,978      |  |              |        | 8,438  |  |   | $        | (165,263 | ) |   |         |        | 
|                                               |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       
|Total long-term liabilities                    |                                                    |                   | 68,109  |              |   |               | 166,613 |              |  |              | 12,446 |        |  |   | (165,263 | )        |   |   | 81,905  |       
|Shareholders equity                           |                                                    |                   | 65,263  |              |   |               | (27,089 | )            |  |              | 5,521  |        |  |   | (1,990   | )        |   |   | 41,705  |       
|                                               |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       
|Total liabilities and
    shareholders equity |                                                    | $                 | 165,093 |              |   | $             | 163,367 |              |  | $            | 32,413 |        |  | $ | (167,324 | )        |   | $ | 193,549 |       
|                                               |                                                    |                   |         |              |   |               |         |              |  |              |        |        |  |   |          |          |   |   |         |       

62



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                               |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |        | 
|---------------------------------------------- | ---------------------------------------------------- | ----------------- | ------- | ------------ |  | ------------- | ------- | ------------ | - | ------------ | ------ | ------ |  | - | -------- | -------- | - | - | ------- | ------ | 
|                                               |                                                      |                  
|                                               |                                                      | December 31, 2002
|                                               |                                                      |                  
|                                               |                                                      |                   |         | Combined     |  | Combined      |         |             
|                                               |                                                      |                   |         | Guarantor    |  | Non-Guarantor |         |             
|                                               |                                                      | Parent            |         | Subsidiaries |  | Subsidiaries  |         | Eliminations |   | Consolidated
|                                               |                                                      |                   |         |              |  |               |         |              |   |             
|Assets                                         |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       
|Current assets:                                |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       
|                                               | Cash and cash equivalents                            |                   | $       | 116          |  |               | $       | 351          |   |              | $      | 1,235  |  |   |          |          |   |   | $       | 1,702  | 
|                                               | Accounts receivable, net                             |                   |         |              |  |               |         | 20,629       |   |              |        | 8,846  |  |   |          |          |   |   |         | 29,475 | 
|                                               | Inventories                                          |                   |         |              |  |               |         | 24,513       |   |              |        | 8,412  |  |   | $        | (244     | ) |   |         | 32,681 | 
|                                               | Deferred income taxes                                |                   |         | 577          |  |               |         |              |   |              |        | 168    |  |   |          |          |   |   |         | 745    | 
|                                               | Taxes receivable                                     |                   |         | 3,333        |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         | 3,333  | 
|                                               | Other current assets                                 |                   |         | 2,427        |  |               |         | 689          |   |              |        |        |  |   |          | 793      |   |   |         | 3,909  | 
|                                               | Current assets of discontinued operations            |                   |         |              |  |               |         | 2,254        |   |              |        | 1,711  |  |   |          |          |   |   |         | 3,965  | 
|                                               |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       
|Total current assets                           |                                                      |                   | 6,453   |              |  |               | 48,436  |              |   |              | 21,165 |        |  |   | (244     | )        |   |   | 75,810  |       
|Investment in subsidiaries                     |                                                      |                   | 794     |              |  |               | (794    | )            |   |              |        |        |  |   |          |          |   |   |         |       
|Inter-company advances, net                    |                                                      |                   | 167,162 |              |  |               | 7,491   |              |   |              | (9,725 | )      |  |   | (164,928 | )        |   |   |         |       
|Property, plant and equipment, net             |                                                      |                   | 653     |              |  |               | 4,695   |              |   |              | 6,472  |        |  |   |          |          |   |   | 61,820  |       
|Other assets:                                  |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       
|                                               | Goodwill and other intangible assets                 |                   |         | 72           |  |               |         | 43,124       |   |              |        |        |  |   |          |          |   |   |         | 43,196 | 
|                                               | Other                                                |                   |         | 1,240        |  |               |         | 4,812        |   |              |        | 604    |  |   |          | (1,010   | ) |   |         | 5,646  | 
|                                               | Long-term assets of discontinued operations          |                   |         |              |  |               |         | 2,076        |   |              |        | 4,332  |  |   |          |          |   |   |         | 6,408  | 
|                                               |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       
|Total other assets                             |                                                      |                   | 1,312   |              |  |               | 50,012  |              |   |              | 4,936  |        |  |   | (1,010   | )        |   |   | 55,250  |       
|                                               |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       
|Total assets                                   |                                                      | $                 | 176,374 |              |  | $             | 160,634 |              |   | $            | 22,848 |        |  | $ | (166,976 | )        |   | $ | 192,880 |       
|                                               |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       
|Liabilities and shareholders
    equity       |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       
|Current liabilities:                           |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       
|                                               | Accounts payable                                     |                   |         |              |  |               | $       | 12,240       |   |              | $      | 3,864  |  |   |          |          |   |   | $       | 16,104 | 
|                                               | Accrued compensation                                 |                   | $       | 4            |  |               |         | 3,018        |   |              |        | 1,046  |  |   |          |          |   |   |         | 4,068  | 
|                                               | Accrued interest                                     |                   |         | 372          |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         | 372    | 
|                                               | Other accrued expenses                               |                   |         | 986          |  |               |         | 2,943        |   |              |        | 820    |  |   | $        | (94      | ) |   |         | 4,655  | 
|                                               | Short-term debt                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |        | 
|                                               | Bank Facility                                        |                   |         | 36,327       |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         | 36,327 | 
|                                               | Current portion of long-term debt                    |                   |         | 583          |  |               |         | 2,250        |   |              |        | 270    |  |   |          |          |   |   |         | 3,103  | 
|                                               | Current liabilities of
    discontinued operations   |                   |         |              |  |               |         | 1,360        |   |              |        | 766    |  |   |          |          |   |   |         | 2,126  | 
|                                               |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       
|Total current liabilities                      |                                                      |                   | 38,272  |              |  |               | 21,811  |              |   |              | 6,766  |        |  |   | (94      | )        |   |   | 66,755  |       
|Long-term liabilities:                         |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       
|                                               | Long-term debt                                       |                   |         | 66,059       |  |               |         | 2,552        |   |              |        | 279    |  |   |          |          |   |   |         | 68,890 | 
|                                               | Deferred income taxes                                |                   |         | 7,813        |  |               |         | (2,777       | ) |              |        | 209    |  |   |          |          |   |   |         | 5,245  | 
|                                               | Other                                                |                   |         | 852          |  |               |         | 4,050        |   |              |        | 1,621  |  |   |          |          |   |   |         | 6,523  | 
|                                               | Long-term liabilities of
    discontinued operations |                   |         |              |  |               |         | 333          |   |              |        | 300    |  |   |          |          |   |   |         | 633    | 
|                                               | Inter-company advances, net                          |                   |         | 1,754        |  |               |         | 152,944      |   |              |        | 10,332 |  |   |          | (165,030 | ) |   |         |        | 
|                                               |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       
|Total long-term liabilities                    |                                                      |                   | 76,732  |              |  |               | 157,102 |              |   |              | 12,487 |        |  |   | (165,030 | )        |   |   | 81,291  |       
|Shareholders equity                           |                                                      |                   | 61,624  |              |  |               | (18,279 | )            |   |              | 3,341  |        |  |   | (1,852   | )        |   |   | 44,834  |       
|                                               |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       
|Total liabilities and
    shareholders equity |                                                      | $                 | 176,374 |              |  | $             | 160,634 |              |   | $            | 22,848 |        |  | $ | (166,976 | )        |   | $ | 192,880 |       
|                                               |                                                      |                   |         |              |  |               |         |              |   |              |        |        |  |   |          |          |   |   |         |       

63



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                                                  |                                                                   |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |        | 
|----------------------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------- | ------ | ------------ | - | ------------- | ------- | ------------ |  | ------------ | ------ | ----- |  | - | ------ | - |  | - | ------- | ------ | 
|                                                                  |                                                                   |                             
|                                                                  |                                                                   | Year ended December 31, 2003
|                                                                  |                                                                   |                             
|                                                                  |                                                                   |                              |        | Combined     |   | Combined      |         |             
|                                                                  |                                                                   |                              |        | Guarantor    |   | Non-Guarantor |         |             
|                                                                  |                                                                   | Parent                       |        | Subsidiaries |   | Subsidiaries  |         | Eliminations |  | Consolidated
|                                                                  |                                                                   |                              |        |              |   |               |         |              |  |             
|Net sales                                                         |                                                                   |                              |        |              |   | $             | 169,770 |              |  | $            | 42,289 |       |  | $ | (9,508 | ) |  | $ | 202,551 |       
|Cost of sales                                                     |                                                                   |                              |        |              |   |               | 129,655 |              |  |              | 34,833 |       |  |   | (9,306 | ) |  |   | 155,182 |       
|                                                                  |                                                                   |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Gross profit                                                      |                                                                   |                              |        |              |   |               | 40,115  |              |  |              | 7,456  |       |  |   | (202   | ) |  |   | 47,369  |       
|Expenses:                                                         |                                                                   |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|                                                                  | Selling, technical and administrative expenses                    |                              | $      | (229         | ) |               |         | 29,604       |  |              |        | 4,356 |  |   |        |   |  |   |         | 33,731 | 
|                                                                  | Pension curtailment and contractual termination
    benefit costs |                              |        |              |   |               |         | 1,920        |  |              |        |       |  |   |        |   |  |   |         | 1,920  | 
|                                                                  | Amortization of finite-lived intangible assets                    |                              |        | 9            |   |               |         | 791          |  |              |        |       |  |   |        |   |  |   |         | 800    | 
|                                                                  |                                                                   |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Total expenses                                                    |                                                                   |                              | (220   | )            |   |               | 32,315  |              |  |              | 4,356  |       |  |   |        |   |  |   | 36,451  |       
|                                                                  |                                                                   |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Income from operations                                            |                                                                   |                              | 220    |              |   |               | 7,800   |              |  |              | 3,100  |       |  |   | (202   | ) |  |   | 10,918  |       
|Interest income (expense), net                                    |                                                                   |                              | 3,556  |              |   |               | (13,778 | )            |  |              | (473   | )     |  |   |        |   |  |   | (10,695 | )     
|(Loss) income from equity investee                                |                                                                   |                              | (9,001 | )            |   |               | (3,556  | )            |  |              |        |       |  |   | 12,557 |   |  |   |         |       
|Other income (expense), net                                       |                                                                   |                              | (278   | )            |   |               | 497     |              |  |              | (36    | )     |  |   |        |   |  |   | 183     |       
|                                                                  |                                                                   |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|(Loss) income before income taxes and
    discontinued operations |                                                                   |                              | (5,503 | )            |   |               | (9,037  | )            |  |              | 2,591  |       |  |   | 12,355 |   |  |   | 406     |       
|Income tax provision (benefit)                                    |                                                                   |                              | (201   | )            |   |               | (656    | )            |  |              | 1,794  |       |  |   | (82    | ) |  |   | 855     |       
|                                                                  |                                                                   |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|(Loss) income before discontinued operations                      |                                                                   |                              | (5,302 | )            |   |               | (8,381  | )            |  |              | 797    |       |  |   | 12,437 |   |  |   | (449    | )     
|Discontinued operations, net of tax                               |                                                                   |                              |        |              |   |               | (620    | )            |  |              | (4,353 | )     |  |   |        |   |  |   | (4,973  | )     
|                                                                  |                                                                   |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Net loss                                                          |                                                                   | $                            | (5,302 | )            |   | $             | (9,001  | )            |  | $            | (3,556 | )     |  | $ | 12,437 |   |  | $ | (5,422  | )     
|                                                                  |                                                                   |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       

64



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                                                                                                           |                                                |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |        | 
|-------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ---------------------------- | ------- | ------------ | - | ------------- | ------- | ------------ |  | ------------ | ------ | ----- |  | - | ------ | - |  | - | ------- | ------ | 
|                                                                                                                           |                                                |                             
|                                                                                                                           |                                                | Year ended December 31, 2002
|                                                                                                                           |                                                |                             
|                                                                                                                           |                                                |                              |         | Combined     |   | Combined      |         |             
|                                                                                                                           |                                                |                              |         | Guarantor    |   | Non-Guarantor |         |             
|                                                                                                                           |                                                | Parent                       |         | Subsidiaries |   | Subsidiaries  |         | Eliminations |  | Consolidated
|                                                                                                                           |                                                |                              |         |              |   |               |         |              |  |             
|Net sales                                                                                                                  |                                                |                              |         |              |   | $             | 163,693 |              |  | $            | 27,415 |       |  | $ | (5,196 | ) |  | $ | 185,912 |       
|Cost of sales                                                                                                              |                                                |                              |         |              |   |               | 123,942 |              |  |              | 22,970 |       |  |   | (5,196 | ) |  |   | 141,716 |       
|                                                                                                                           |                                                |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Gross profit                                                                                                               |                                                |                              |         |              |   |               | 39,751  |              |  |              | 4,445  |       |  |   |        |   |  |   | 44,196  |       
|Expenses:                                                                                                                  |                                                |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|                                                                                                                           | Selling, technical and administrative expenses |                              | $       | (121         | ) |               |         | 26,942       |  |              |        | 3,653 |  |   |        |   |  |   |         | 30,474 | 
|                                                                                                                           | Amortization of finite-lived intangible assets |                              |         |              |   |               |         | 767          |  |              |        |       |  |   |        |   |  |   |         | 767    | 
|                                                                                                                           |                                                |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Total expenses                                                                                                             |                                                |                              | (121    | )            |   |               | 27,709  |              |  |              | 3,653  |       |  |   |        |   |  |   | 31,241  |       
|                                                                                                                           |                                                |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Income from operations                                                                                                     |                                                |                              | 121     |              |   |               | 12,042  |              |  |              | 792    |       |  |   |        |   |  |   | 12,955  |       
|Interest income (expense), net                                                                                             |                                                |                              | 3,495   |              |   |               | (13,157 | )            |  |              | (588   | )     |  |   |        |   |  |   | (10,250 | )     
|(Loss) income from equity investee                                                                                         |                                                |                              | (20,656 | )            |   |               | (2,170  | )            |  |              |        |       |  |   | 22,826 |   |  |   |         |       
|Other income (expense), net                                                                                                |                                                |                              | (2,239  | )            |   |               | (221    | )            |  |              | (109   | )     |  |   |        |   |  |   | (2,569  | )     
|                                                                                                                           |                                                |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|(Loss) income before income taxes,
    discontinued operations and cumulative effect of change in
    accounting principle |                                                |                              | (19,279 | )            |   |               | (3,506  | )            |  |              | 95     |       |  |   | 22,826 |   |  |   | 136     |       
|Income tax (provision) benefit                                                                                             |                                                |                              | (1,113  | )            |   |               | (48     | )            |  |              | 492    |       |  |   |        |   |  |   | (669    | )     
|                                                                                                                           |                                                |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|(Loss) income before discontinued operations                                                                               |                                                |                              | (18,166 | )            |   |               | (3,458  | )            |  |              | (397   | )     |  |   | 22,826 |   |  |   | 805     |       
|Discontinued operations, net of tax                                                                                        |                                                |                              |         |              |   |               | (77     | )            |  |              | (1,773 | )     |  |   |        |   |  |   | (1,850  | )     
|Cumulative effect of change in accounting
    principle, net of tax                                                        |                                                |                              | (79     | )            |   |               | (17,121 | )            |  |              |        |       |  |   |        |   |  |   | (17,200 | )     
|                                                                                                                           |                                                |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Net loss                                                                                                                   |                                                | $                            | (18,245 | )            |   | $             | (20,656 | )            |  | $            | (2,170 | )     |  | $ | 22,826 |   |  | $ | (18,245 | )     
|                                                                                                                           |                                                |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       

65



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                                         |                                                |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |        | 
|-------------------------------------------------------- | ---------------------------------------------- | ---------------------------- | ------ | ------------ | - | ------------- | ------- | ------------ |  | ------------ | ------ | ----- |  | - | ------ | - |  | - | ------- | ------ | 
|                                                         |                                                |                             
|                                                         |                                                | Year ended December 31, 2001
|                                                         |                                                |                             
|                                                         |                                                |                              |        | Combined     |   | Combined      |         |             
|                                                         |                                                |                              |        | Guarantor    |   | Non-Guarantor |         |             
|                                                         |                                                | Parent                       |        | Subsidiaries |   | Subsidiaries  |         | Eliminations |  | Consolidated
|                                                         |                                                |                              |        |              |   |               |         |              |  |             
|Net sales                                                |                                                |                              |        |              |   | $             | 158,517 |              |  | $            | 22,073 |       |  | $ | (3,702 | ) |  | $ | 176,888 |       
|Cost of sales                                            |                                                |                              |        |              |   |               | 120,243 |              |  |              | 19,599 |       |  |   | (3,702 | ) |  |   | 136,140 |       
|                                                         |                                                |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Gross profit                                             |                                                |                              |        |              |   |               | 38,274  |              |  |              | 2,474  |       |  |   |        |   |  |   | 40,748  |       
|Expenses:                                                |                                                |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|                                                         | Selling, technical and administrative expenses |                              | $      | (545         | ) |               |         | 25,720       |  |              |        | 3,607 |  |   |        |   |  |   |         | 28,782 | 
|                                                         | Restructuring costs                            |                              |        |              |   |               |         | 1,055        |  |              |        |       |  |   |        |   |  |   |         | 1,055  | 
|                                                         | Amortization of finite-lived intangible assets |                              |        | 9            |   |               |         | 3,724        |  |              |        |       |  |   |        |   |  |   |         | 3,733  | 
|                                                         |                                                |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Total expenses                                           |                                                |                              | (536   | )            |   |               | 30,499  |              |  |              | 3,607  |       |  |   |        |   |  |   | 33,570  |       
|                                                         |                                                |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Income (loss) from operations                            |                                                |                              | 536    |              |   |               | 7,775   |              |  |              | (1,133 | )     |  |   |        |   |  |   | 7,178   |       
|Interest income (expense), net                           |                                                |                              | 3,686  |              |   |               | (13,011 | )            |  |              | (527   | )     |  |   |        |   |  |   | (9,852  | )     
|Loss from equity investees                               |                                                |                              | (7,520 | )            |   |               | (4,125  | )            |  |              |        |       |  |   | 11,645 |   |  |   |         |       
|Other (expense) income                                   |                                                |                              | (579   | )            |   |               | 152     |              |  |              | (53    | )     |  |   |        |   |  |   | (480    | )     
|                                                         |                                                |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Loss before income taxes and discontinued
    operations |                                                |                              | (3,877 | )            |   |               | (9,209  | )            |  |              | (1,713 | )     |  |   | 11,645 |   |  |   | (3,154  | )     
|Income tax provision (benefit)                           |                                                |                              | 459    |              |   |               | (1,176  | )            |  |              | (220   | )     |  |   |        |   |  |   | (937    | )     
|                                                         |                                                |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Loss before discontinued operations                      |                                                |                              | (4,336 | )            |   |               | (8,033  | )            |  |              | (1,493 | )     |  |   | 11,645 |   |  |   | (2,217  | )     
|Discontinued operations, net of tax                      |                                                |                              |        |              |   |               | 513     |              |  |              | (2,632 | )     |  |   |        |   |  |   | (2,119  | )     
|                                                         |                                                |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Net loss                                                 |                                                | $                            | (4,336 | )            |   | $             | (7,520  | )            |  | $            | (4,125 | )     |  | $ | 11,645 |   |  | $ | (4,336  | )     
|                                                         |                                                |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       

66



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                                                                 |                                            |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |         |  
|-------------------------------------------------------------------------------- | ------------------------------------------ | ---------------------------- | ------- | ------------ | - | ------------- | ------ | ------------ | - | ------------ | ------ | ------ | - |  |  |  |  | - | ------- | ------- | -
|                                                                                 |                                            |                             
|                                                                                 |                                            | Year ended December 31, 2003
|                                                                                 |                                            |                             
|                                                                                 |                                            |                              |         | Combined     |   | Combined      |        |             
|                                                                                 |                                            |                              |         | Guarantor    |   | Non-Guarantor |        |             
|                                                                                 |                                            | Parent                       |         | Subsidiaries |   | Subsidiaries  |        | Eliminations |   | Consolidated
|                                                                                 |                                            |                              |         |              |   |               |        |              |   |             
|Net cash provided by operating activities
    of continuing operations           |                                            | $                            | 13,890  |              |   | $             | 8,982  |              |   | $            | 789    |        |   |  |  |  |  | $ | 23,661  |        
|Net cash provided by operating activities of
    discontinued operations         |                                            |                              |         |              |   |               | 912    |              |   |              | 1,387  |        |   |  |  |  |  |   | 2,299   |        
|Cash flows from investing activities:                                            |                                            |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|                                                                                 | Proceeds from sale of assets               |                              |         |              |   |               |        | 568          |   |              |        |        |   |  |  |  |  |   |         | 568     |  
|                                                                                 | Purchases of property, plant and equipment |                              |         |              |   |               |        | (7,818       | ) |              |        | (2,859 | ) |  |  |  |  |   |         | (10,677 | )
|                                                                                 |                                            |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|Net cash used in investing activities of
    continuing operations               |                                            |                              |         |              |   |               | (7,250 | )            |   |              | (2,859 | )      |   |  |  |  |  |   | (10,109 | )      
|Net cash used in investing activities of
    discontinued operations             |                                            |                              |         |              |   |               | (116   | )            |   |              | (192   | )      |   |  |  |  |  |   | (308    | )      
|Cash flows from financing activities:                                            |                                            |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|                                                                                 | Proceeds from short-term debt              |                              |         |              |   |               |        |              |   |              |        | 1,326  |   |  |  |  |  |   |         | 1,326   |  
|                                                                                 | Proceeds from long-term debt               |                              |         |              |   |               |        | 25           |   |              |        | 602    |   |  |  |  |  |   |         | 627     |  
|                                                                                 | Payments on long-term debt                 |                              |         |              |   |               |        | (2,775       | ) |              |        | (185   | ) |  |  |  |  |   |         | (2,960  | )
|                                                                                 | Payment on Old Senior Notes                |                              |         | (583         | ) |               |        |              |   |              |        |        |   |  |  |  |  |   |         | (583    | )
|                                                                                 | Proceeds from Bank Facility                |                              |         | 68,173       |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         | 68,173  |  
|                                                                                 | Payments on Bank Facility                  |                              |         | (80,441      | ) |               |        |              |   |              |        |        |   |  |  |  |  |   |         | (80,441 | )
|                                                                                 | Proceeds from exercise of stock options    |                              |         | 59           |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         | 59      |  
|                                                                                 | Payments of preferred stock dividends      |                              |         | (150         | ) |               |        |              |   |              |        |        |   |  |  |  |  |   |         | (150    | )
|                                                                                 |                                            |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|Net cash (used in) provided by financing
    activities of continuing operations |                                            |                              | (12,942 | )            |   |               | (2,750 | )            |   |              | 1,743  |        |   |  |  |  |  |   | (13,949 | )      
|Effect of exchange rate changes on cash                                          |                                            |                              |         |              |   |               |        |              |   |              | 69     |        |   |  |  |  |  |   | 69      |        
|                                                                                 |                                            |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|Net cash provided by (used in)
    continuing operations                         |                                            |                              | 948     |              |   |               | (1,018 | )            |   |              | (258   | )      |   |  |  |  |  |   | (328    | )      
|Net cash provided by discontinued operations                                     |                                            |                              |         |              |   |               | 796    |              |   |              | 1,195  |        |   |  |  |  |  |   | 1,991   |        
|                                                                                 |                                            |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|Net increase (decrease) in cash and
    cash equivalents                         |                                            |                              | 948     |              |   |               | (222   | )            |   |              | 937    |        |   |  |  |  |  |   | 1,663   |        
|Cash and cash equivalents, at beginning
    of period                            |                                            |                              | 370     |              |   |               | 351    |              |   |              | 981    |        |   |  |  |  |  |   | 1,702   |        
|                                                                                 |                                            |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|Cash and cash equivalents, at end of period                                      |                                            | $                            | 1,318   |              |   | $             | 129    |              |   | $            | 1,918  |        |   |  |  |  |  | $ | 3,365   |        
|                                                                                 |                                            |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        

67



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                                                                   |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |         |  
|---------------------------------------------------------------------------------- | ------------------------------------------------------ | ---------------------------- | ------- | ------------ | - | ------------- | ------ | ------------ | - | ------------ | ------ | ------ | - |  |  |  |  | - | ------ | ------- | -
|                                                                                   |                                                        |                             
|                                                                                   |                                                        | Year ended December 31, 2002
|                                                                                   |                                                        |                             
|                                                                                   |                                                        |                              |         | Combined     |   | Combined      |        |             
|                                                                                   |                                                        |                              |         | Guarantor    |   | Non-Guarantor |        |             
|                                                                                   |                                                        | Parent                       |         | Subsidiaries |   | Subsidiaries  |        | Eliminations |   | Consolidated
|                                                                                   |                                                        |                              |         |              |   |               |        |              |   |             
|Net cash provided by (used in) operating
    activities of continuing operations   |                                                        | $                            | (14,567 | )            |   | $             | 4,105  |              |   | $            | 2,811  |        |   |  |  |  |  | $ | (7,651 | )      
|Net cash provided by (used in) operating
    activities of discontinued operations |                                                        |                              |         |              |   |               | 6,276  |              |   |              | (1,415 | )      |   |  |  |  |  |   | 4,861  |        
|Cash flows from investing activities:                                              |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|                                                                                   | Purchases of property, plant and equipment             |                              |         |              |   |               |        | (8,491       | ) |              |        | (1,238 | ) |  |  |  |  |   |        | (9,729  | )
|                                                                                   |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Net cash used in investing activities of
    continuing operations                 |                                                        |                              |         |              |   |               | (8,491 | )            |   |              | (1,238 | )      |   |  |  |  |  |   | (9,729 | )      
|Net cash used in investing activities of
    discontinued operations               |                                                        |                              |         |              |   |               | (209   | )            |   |              | (866   | )      |   |  |  |  |  |   | (1,075 | )      
|Cash flows from financing activities:                                              |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|                                                                                   | Proceeds from long-term debt                           |                              |         | 53,160       |   |               |        | 75           |   |              |        | 135    |   |  |  |  |  |   |        | 53,370  |  
|                                                                                   | Payments on long-term debt                             |                              |         | (45,825      | ) |               |        | (1,588       | ) |              |        | (202   | ) |  |  |  |  |   |        | (47,615 | )
|                                                                                   | Pay off of Term Loan and Revolving
    Credit Facility |                              |         | (29,784      | ) |               |        |              |   |              |        |        |   |  |  |  |  |   |        | (29,784 | )
|                                                                                   | Proceeds from Bank Facility                            |                              |         | 52,165       |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        | 52,165  |  
|                                                                                   | Payments on Bank Facility                              |                              |         | (15,838      | ) |               |        |              |   |              |        |        |   |  |  |  |  |   |        | (15,838 | )
|                                                                                   | Payments of preferred stock dividends                  |                              |         | (150         | ) |               |        |              |   |              |        |        |   |  |  |  |  |   |        | (150    | )
|                                                                                   |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Net cash provided by (used in) financing
    activities of continuing operations   |                                                        |                              | 13,728  |              |   |               | (1,513 | )            |   |              | (67    | )      |   |  |  |  |  |   | 12,148 |        
|Effect of exchange rate changes on cash                                            |                                                        |                              |         |              |   |               |        |              |   |              | 64     |        |   |  |  |  |  |   | 64     |        
|                                                                                   |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Net cash (used in) provided by
    continuing operations                           |                                                        |                              | (839    | )            |   |               | (5,899 | )            |   |              | 1,570  |        |   |  |  |  |  |   | (5,168 | )      
|Net cash provided by discontinued operations                                       |                                                        |                              |         |              |   |               | 6,067  |              |   |              | (2,281 | )      |   |  |  |  |  |   | 3,786  |        
|                                                                                   |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Net (decrease) increase in cash and
    cash equivalents                           |                                                        |                              | (839    | )            |   |               | 168    |              |   |              | (711   | )      |   |  |  |  |  |   | (1,382 | )      
|Cash and cash equivalents, at beginning
    of period                              |                                                        |                              | 1,209   |              |   |               | 183    |              |   |              | 1,692  |        |   |  |  |  |  |   | 3,084  |        
|                                                                                   |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Cash and cash equivalents, at end of period                                        |                                                        | $                            | 370     |              |   | $             | 351    |              |   | $            | 981    |        |   |  |  |  |  | $ | 1,702  |        
|                                                                                   |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        

68



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                                                                 |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |         |  
|-------------------------------------------------------------------------------- | ------------------------------------------ | ---------------------------- | ------ | ------------ | - | ------------- | ------ | ------------ | - | ------------ | ------ | ------ | - |  |  |  |  | - | ------ | ------- | -
|                                                                                 |                                            |                             
|                                                                                 |                                            | Year ended December 31, 2001
|                                                                                 |                                            |                             
|                                                                                 |                                            |                              |        | Combined     |   | Combined      |        |             
|                                                                                 |                                            |                              |        | Guarantor    |   | Non-Guarantor |        |             
|                                                                                 |                                            | Parent                       |        | Subsidiaries |   | Subsidiaries  |        | Eliminations |   | Consolidated
|                                                                                 |                                            |                              |        |              |   |               |        |              |   |             
|Net cash provided by (used in) operating
    activities of continuing operations |                                            | $                            | 8,639  |              |   | $             | 9,463  |              |   | $            | (1,251 | )      |   |  |  |  |  | $ | 16,851 |        
|Net cash used in operating activities of
    discontinued operations             |                                            |                              |        |              |   |               | (2,079 | )            |   |              | (318   | )      |   |  |  |  |  |   | (2,397 | )      
|Cash flows from investing activities:                                            |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|                                                                                 | Purchases of property, plant and equipment |                              |        |              |   |               |        | (6,957       | ) |              |        | (1,096 | ) |  |  |  |  |   |        | (8,053  | )
|                                                                                 |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Net cash used in investing activities of
    continuing operations               |                                            |                              |        |              |   |               | (6,957 | )            |   |              | (1,096 | )      |   |  |  |  |  |   | (8,053 | )      
|Net cash used in investing activities of
    discontinued operations             |                                            |                              |        |              |   |               | (226   | )            |   |              | (817   | )      |   |  |  |  |  |   | (1,043 | )      
|Cash flows from financing activities:                                            |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|                                                                                 | Proceeds from long-term debt               |                              |        | 35,820       |   |               |        | 1,126        |   |              |        | 3,511  |   |  |  |  |  |   |        | 40,457  |  
|                                                                                 | Payments on long-term debt                 |                              |        | (44,015      | ) |               |        | (2,168       | ) |              |        | (337   | ) |  |  |  |  |   |        | (46,520 | )
|                                                                                 | Payment of preferred stock dividends       |                              |        | (150         | ) |               |        |              |   |              |        |        |   |  |  |  |  |   |        | (150    | )
|                                                                                 |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Net cash (used in) provided by financing
    activities of continuing operations |                                            |                              | (8,345 | )            |   |               | (1,042 | )            |   |              | 3,174  |        |   |  |  |  |  |   | (6,213 | )      
|Effect of exchange rate changes on cash                                          |                                            |                              |        |              |   |               |        |              |   |              | (71    | )      |   |  |  |  |  |   | (71    | )      
|                                                                                 |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Net cash provided by continuing operations                                       |                                            |                              | 294    |              |   |               | 1,464  |              |   |              | 756    |        |   |  |  |  |  |   | 2,514  |        
|Net cash used in discontinued operations                                         |                                            |                              |        |              |   |               | (2,305 | )            |   |              | (1,135 | )      |   |  |  |  |  |   | (3,440 | )      
|                                                                                 |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Net increase (decrease) in cash and
    cash equivalents                         |                                            |                              | 294    |              |   |               | (841   | )            |   |              | (379   | )      |   |  |  |  |  |   | (926   | )      
|Cash and cash equivalents, at beginning
    of period                            |                                            |                              | 915    |              |   |               | 1,024  |              |   |              | 2,071  |        |   |  |  |  |  |   | 4,010  |        
|                                                                                 |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Cash and cash equivalents, at end of period                                      |                                            | $                            | 1,209  |              |   | $             | 183    |              |   | $            | 1,692  |        |   |  |  |  |  | $ | 3,084  |        
|                                                                                 |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        

69



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)



|    |                                                           
|--- | ----------------------------------------------------------
|16. | Summary of Quarterly Results of Operations
    (Unaudited)

|                                                                                                                |                                                                                                                          |           |        |          |   |               |        |              |   |           |        |          |  |               |        |              |   |   |         |       |   |   |        |      |   |   |        |      |   |   |        |      |   | 
|--------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | --------- | ------ | -------- | - | ------------- | ------ | ------------ | - | --------- | ------ | -------- |  | ------------- | ------ | ------------ | - | - | ------- | ----- | - | - | ------ | ---- | - | - | ------ | ---- | - | - | ------ | ---- | - | 
|                                                                                                                |                                                                                                                          | March 31, |        | June 30, |   | September 30, |        | December 31, |   | March 31, |        | June 30, |  | September 30, |        | December 31,
|                                                                                                                |                                                                                                                          | 2003      |        | 2003     |   | 2003          |        | 2003         |   | 2002      |        | 2002     |  | 2002          |        | 2002        
|                                                                                                                |                                                                                                                          |           |        |          |   |               |        |              |   |           |        |          |  |               |        |             
|Net sales(1)                                                                                                    |                                                                                                                          | $         | 54,661 |          |   | $             | 52,193 |              |   | $         | 48,161 |          |  | $             | 47,536 |              |   | $ | 47,510  |       |   | $ | 48,203 |      |   | $ | 46,009 |      |   | $ | 44,190 |     
|Gross profit(1)                                                                                                 |                                                                                                                          |           | 12,986 |          |   |               | 13,202 |              |   |           | 11,233 |          |  |               | 9,948  |              |   |   | 10,730  |       |   |   | 11,905 |      |   |   | 10,291 |      |   |   | 11,270 |     
|(Loss) income before discontinued operations
    and cumulative effect of change in accounting
    principle(1) |                                                                                                                          |           | 396    |          |   |               | 1,206  |              |   |           | 131    |          |  |               | (2,182 | )            |   |   | (262    | )     |   |   | 740    |      |   |   | 207    |      |   |   | 120    |     
|Discontinued operations, net of tax                                                                             |                                                                                                                          |           | (277   | )        |   |               | (737   | )            |   |           | (48    | )        |  |               | (3,911 | )            |   |   | (338    | )     |   |   | (501   | )    |   |   | (484   | )    |   |   | (527   | )   
|Cumulative effect of change in accounting
    principle, net of tax                                             |                                                                                                                          |           |        |          |   |               |        |              |   |           |        |          |  |               |        |              |   |   | (17,200 | )     |   |   |        |      |   |   |        |      |   |   |        |     
|Net income (loss)(1)                                                                                            |                                                                                                                          | $         | 119    |          |   | $             | 469    |              |   | $         | 83     |          |  | $             | (6,093 | )            |   | $ | (17,800 | )     |   | $ | 239    |      |   | $ | (277   | )    |   | $ | (407   | )   
|                                                                                                                |                                                                                                                          |           |        |          |   |               |        |              |   |           |        |          |  |               |        |              |   |   |         |       |   |   |        |      |   |   |        |      |   |   |        |     
|Basic (loss) earnings per share:(1)                                                                             |                                                                                                                          |           |        |          |   |               |        |              |   |           |        |          |  |               |        |              |   |   |         |       |   |   |        |      |   |   |        |      |   |   |        |     
|                                                                                                                | (Loss) earnings per share before discontinued
    operations and cumulative effect of change in
    accounting principle |           | $      | .04      |   |               | $      | .14          |   |           | $      | .01      |  |               | $      | (.26         | ) |   | $       | (.03  | ) |   | $      | .08  |   |   | $      | .02  |   |   | $      | .01  |  
|                                                                                                                | Discontinued operations, net of tax                                                                                      |           |        | (.03     | ) |               |        | (.09         | ) |           |        | .00      |  |               |        | (.45         | ) |   |         | (.04  | ) |   |        | (.06 | ) |   |        | (.06 | ) |   |        | (.06 | )
|                                                                                                                | Cumulative effect of change in accounting
    principle, net of tax                                                      |           |        |          |   |               |        |              |   |           |        |          |  |               |        |              |   |   |         | (2.01 | ) |   |        |      |   |   |        |      |   |   |        |      |  
|                                                                                                                |                                                                                                                          |           |        |          |   |               |        |              |   |           |        |          |  |               |        |              |   |   |         |       |   |   |        |      |   |   |        |      |   |   |        |     
|                                                                                                                | Net (loss) earnings per basic share                                                                                      |           | $      | .01      |   |               | $      | .05          |   |           | $      | .01      |  |               | $      | (.71         | ) |   | $       | (2.08 | ) |   | $      | .02  |   |   | $      | (.04 | ) |   | $      | (.05 | )
|                                                                                                                |                                                                                                                          |           |        |          |   |               |        |              |   |           |        |          |  |               |        |              |   |   |         |       |   |   |        |      |   |   |        |      |   |   |        |     
|Diluted (loss) earnings
    per share:(1)                                                                       |                                                                                                                          |           |        |          |   |               |        |              |   |           |        |          |  |               |        |              |   |   |         |       |   |   |        |      |   |   |        |      |   |   |        |     
|                                                                                                                | (Loss) earnings per share before discontinued
    operations and cumulative effect of change in accounting
    principle |           | $      | .04      |   |               | $      | .14          |   |           | $      | .01      |  |               | $      | (.26         | ) |   | $       | (.03  | ) |   | $      | .08  |   |   | $      | .02  |   |   | $      | .01  |  
|                                                                                                                | Discontinued operations, net of tax                                                                                      |           |        | (.03     | ) |               |        | (.09         | ) |           |        | .00      |  |               |        | (.45         | ) |   |         | (.04  | ) |   |        | (.06 | ) |   |        | (.06 | ) |   |        | (.06 | )
|                                                                                                                | Cumulative effect of change in accounting
    principle, net of tax                                                      |           |        |          |   |               |        |              |   |           |        |          |  |               |        |              |   |   |         | (2.01 | ) |   |        |      |   |   |        |      |   |   |        |      |  
|                                                                                                                |                                                                                                                          |           |        |          |   |               |        |              |   |           |        |          |  |               |        |              |   |   |         |       |   |   |        |      |   |   |        |      |   |   |        |     
|                                                                                                                | Net (loss) earnings per diluted share                                                                                    |           | $      | .01      |   |               | $      | .05          |   |           | $      | .01      |  |               | $      | (.71         | ) |   | $       | (2.08 | ) |   | $      | .02  |   |   | $      | (.04 | ) |   | $      | (.05 | )
|                                                                                                                |                                                                                                                          |           |        |          |   |               |        |              |   |           |        |          |  |               |        |              |   |   |         |       |   |   |        |      |   |   |        |      |   |   |        |     



---



|    |                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Results of operations of the Company have been
    restated to reclassify the net earnings of the motors segment as
    discontinued operations for all periods presented. See
    Note 3.

70



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)



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

None.



|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

As of December 31, 2003, we evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Exchange Act Rule
13a-15(e)). The evaluation was carried out under the supervision
of and with the participation of our management, including our
Chief Executive Officer, Chief Financial Officer and Vice
President  Finance. Based on this evaluation, the
Chief Executive Officer, Chief Financial Officer and Vice
President  Finance concluded that our disclosure
controls and procedures are effective in timely alerting them to
material information relating to Hawk, including our
consolidated subsidiaries, required to be included in reports we
file with or submit to the Securities and Exchange Commission
under the Securities Exchange Act of 1934.

We continue to evaluate the need for improvements
in our disclosure controls and procedures, including further
formalizing our processes, procedures and policies.

There were no significant changes in our internal
controls over financial reporting (as defined in the Securities
and Exchange Act of 1934 Rules 13a-15(f) and 15-d-15(f)) during
the most recent fiscal quarter that we judged to have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.




Part III



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | ITEM
    10.                  DIRECTORS
    AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10,
including the adoption of a Code of Business Conduct and Ethics,
is incorporated herein by reference to the Registrants
definitive Proxy Statement relating to its 2004 Annual Meeting
of Stockholders (the Proxy Statement), under the
captions Board of Directors, Executive
Officers and Section 16(a) Beneficial Ownership
Reporting Compliance. This Proxy Statement will be filed
with the SEC prior to April 30, 2004.



|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

The information required by Item 11 is
contained under the caption Executive Compensation and
Other Information in the Proxy Statement and is
incorporated herein by reference.



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

Equity Compensation Plan Information at
December 31, 2003

|                                                               |  |                   |         |                        |  |                       |      |  |  |  |         | 
|-------------------------------------------------------------- |  | ----------------- | ------- | ---------------------- |  | --------------------- | ---- |  |  |  | ------- | 
|                                                               |  |                   |         |                        |  | Number of            
|                                                               |  | Number of         |         |                        |  | securities           
|                                                               |  | securities        |         |                        |  | remaining available  
|                                                               |  | to be issued upon |         |                        |  | for future issuance  
|                                                               |  | exercise of       |         |                        |  | under equity         
|                                                               |  | outstanding       |         | Weighted-average       |  | compensation plans   
|                                                               |  | options,          |         | exercise price of      |  | (excluding securities
|                                                               |  | warrants and      |         | outstanding options,   |  | reflected in         
|Plan category                                                  |  | rights(a)         |         | warrants and rights(b) |  | column(a))(c)        
|                                                               |  |                   |         |                        |  |                      
|Equity compensation plans approved by
    security holders     |  |                   | 821,781 |                        |  | $                     | 4.54 |  |  |  | 578,219 | 
|Equity compensation plans not approved by
    security holders |  |                   | 0       |                        |  |                       | 0    |  |  |  | 0       | 
|Total                                                          |  |                   | 821,781 |                        |  | $                     | 4.54 |  |  |  | 578,219 | 

For additional information regarding our equity
compensation plans, see Note 8  Employee
Stock Option Plan in the accompanying consolidated
financial statements beginning on page 32 of this
Form 10-K.

71



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##### Table of Contents



Additional information required by Item 12
is contained under the caption Principal
Stockholders in the Proxy Statement and is incorporated
herein by reference.



|         |                                                   
|-------- | --------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS

The information required by Item 13 is
contained under the caption Certain Relationships and
Related Transactions in the Proxy Statement and is
incorporated herein by reference.



|         |                                           
|-------- | ------------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND
    SERVICES

The information required by Item 14 is
contained under the caption Audit Committee
ReportPrincipal Accountant Fees and Services in the
Proxy Statement and is incorporated herein by reference.




Part IV



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

(a) Financial Statements

The following consolidated financial statements
of Hawk are included in Item 8:



| |       |                                                                                                         
| | ----- | --------------------------------------------------------------------------------------------------------
| | (i)   | Consolidated Balance Sheets at December 31,
    2003 and 2002                                           
|
| | (ii)  | Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001          
|
| | (iii) | Consolidated Statements of Shareholders
    Equity for the years ended December 31, 2003, 2002 and 2001
|
| | (iv)  | Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001          
|
| | (v)   | Notes to Consolidated Financial Statements for
    the years ended December 31, 2003, 2002 and 2001     

All consolidated financial schedules are omitted
because they are inapplicable, not required by the instructions
or the information is included in the consolidated financial
statements or notes thereto.

(b) Reports on Form 8-K:

We have filed five reports on Form 8-K since
September 30, 2003:

A report dated October 29, 2003 reporting a
temporary limitation in distribution and diversification in
employees individual accounts of various 401(k) plans
during the period beginning December 5, 2003, through
December 22, 2003, as a result of the consolidation of the
plans into a new Hawk Corporation 401(k) Savings and Retirement
Plan on January 1, 2004.

A report dated November 3, 2003 reporting
our financial results for the 3rd quarter of 2003 and for the
nine months ended September 30, 2003.

A report dated January 5, 2004, reporting
that we had been informed by the American Stock Exchange
(AMEX) that our application to list our shares of Class A
common stock on the AMEX was approved and that it was expected
that shares of our Common Stock would commence trading on
Wednesday January 7, 2004.

A report dated January 7, 2004, announcing a
strategic repositioning plan to focus on our two primary
business segments, Friction Products and Precision Components.

A report dated February 17, 2004, reporting
our financial results for the 4th quarter of 2003 and for the
full year of 2003.

72



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(c) Exhibits:

| |    |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3  | .1 |  | Form of the Companys Second Amended
    and Restated Certificate of Incorporation (Incorporated by
    reference to the Companys Registration Statement on
    Form S-1 as filed with the Securities and Exchange
    Commission (Reg. No. 333-40535))                                                                                                                                                                                                                                                                                                    
| | 3  | .2 |  | The Companys Amended and Restated By-laws
    (Incorporated by reference to the Companys Current Report
    on Form 8-K as filed with the Securities and Exchange
    Commission (Reg. No. 001-13797))                                                                                                                                                                                                                                                                                                                                                    
| | 4  | .1 |  | Form of Rights Agreement between the Company
    and Continental Stock Transfer & Trust Company, as Rights
    Agent (Incorporated by reference to the Companys
    Registration Statement on Form S-1 as filed with the
    Securities and Exchange Commission (Reg. No. 333-40535))                                                                                                                                                                                                                                                                      
| | 4  | .2 |  | Form of 10 1/4% Senior Note due 2003
    (Incorporated by reference to the Companys Registration
    Statement on Form S-4 as filed with the Securities and
    Exchange Commission(Reg. No. 333-18433))                                                                                                                                                                                                                                                                                                                                                   
| | 4  | .3 |  | Form of Series B 10 1/4% Senior Note
    due 2003 (Incorporated by reference to the Companys
    Registration Statement on Form S-4 as filed with the
    Securities and Exchange Commission(Reg. No. 333-18433))                                                                                                                                                                                                                                                                                                                                          
| | 4  | .4 |  | Stockholders Voting Agreement, effective as
    of November 27, 1996, by and among the Company, Norman C.
    Harbert, the Harbert Family Limited Partnership, Ronald E.
    Weinberg, the Weinberg Family Limited Partnership, Byron S.
    Krantz and the Krantz Family Limited Partnership (Incorporated
    by reference to the Companys Registration Statement on
    Form S-4 as filed with the Securities and Exchange
    Commission (Reg. No. 333-18433))                                                                                        
| | 4  | .5 |  | Letter agreement, dated January 5, 1998, amending
    the Stockholders Voting Agreement, effective as of
    November 27, 1996, by and among the Company, Norman C. Harbert,
    the Harbert Family Limited Partnership, Ronald E. Weinberg, the
    Weinberg Family Limited Partnership, Byron S. Krantz and the
    Krantz Family Limited Partnership (Incorporated by reference to
    the Companys Registration Statement on Form S-1 as
    filed with the Securities and Exchange Commission (Reg.
    No. 333-40535))                              
| | 4  | .6 |  | Supplemental Indenture among the Company, certain
    of its domestic subsidiaries from time to time a party thereto,
    as Guarantors, and HSBC Bank USA, as successor trustee to Bank
    One Trust Company, N.A., relating to the Companys Series A
    10.25% Senior Notes due December 1, 2003, and Series B 10.25%
    Senior Notes due December 1, 2002 (incorporated herein by
    reference to Amendment No. 1 to the Registration Statement
    on Form S-4 (Registration Number 333-90556), as filed with
    the Commission on August 1, 2002)
| | 4  | .7 |  | Indenture among the Company, certain of its
    domestic subsidiaries from time to time a party thereto, as
    Guarantors, and HSBC Bank USA, as trustee, relating to the
    Companys 12% Senior Notes due 2006 (Incorporated by
    reference to the Companys Form 10-K for the period
    ended December 31, 2002 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                           
| | 10 | .1 |  | Employment Agreement, dated as of November 1,
    1996, between the Company and Norman C. Harbert (Incorporated by
    reference to the Companys Registration Statement on
    Form S-4 as filed with the Securities and Exchange
    Commission (Reg. No. 333-18433))                                                                                                                                                                                                                                                                                     
| | 10 | .2 |  | Form of Amended and Restated Wage
    Continuation Agreement between the Company and Norman C. Harbert
    (Incorporated by reference to the Companys Registration
    Statement on Form S-1 as filed with the Securities and
    Exchange Commission (Reg. No. 333-40535))                                                                                                                                                                                                                                                                                
| | 10 | .3 |  | Employment Agreement, dated as of November 1,
    1996, between the Company and Ronald E. Weinberg (Incorporated
    by reference to the Companys Registration Statement on
    Form S-4 as filed with the Securities and Exchange
    Commission (Reg. No. 333-18433))                                                                                                                                                                                                                                                                                    
| | 10 | .4 |  | Amendment No. 1 to the Employment Agreement,
    dated as of October 24, 2000, between the Company and Norman C.
    Harbert (Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended March 31, 2001 as
    filed with the Securities and Exchange Commission)                                                                                                                                                                                                                                                              
| | 10 | .5 |  | Amendment No. 1 to the Employment Agreement,
    dated as of October 24, 2000, between the Company and Ronald E.
    Weinberg (Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended March 31, 2001 as
    filed with the Securities and Exchange Commission)                                                                                                                                                                                                                                                             
| | 10 | .6 |  | Amended and Restated Employment Agreement, dated
    as of December 31, 2001, by and among the Company, Friction
    Products Co. and Ronald E. Weinberg (Incorporated by reference
    to the Companys Form 10-K for the period ended
    December 31, 2001 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                     

73



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| |    |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .7  |  | Amended and Restated Employment Agreement, dated
    as of December 31, 2001, by and among the Company, Friction
    Products Co. and Norman C. Harbert (Incorporated by reference to
    the Companys Form 10-K for the period ended
    December 31, 2001 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 10 | .8  |  | Amended and Restated Wage Continuation Agreement,
    dated as of December 31, 2001, by and among the Company,
    Friction Products Co. and Norman C. Harbert (Incorporated by
    reference to the Companys Form 10-K for the period
    ended December 31, 2001 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 10 | .9  |  | Consultant Agreement, dated as of December 31,
    2001, by and among the Company, Friction Products Co. and Norman
    C. Harbert (Incorporated by reference to the Companys
    Form 10-K for the period ended December 31, 2001 as
    filed with the Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 10 | .10 |  | Form of the Promissory Notes, each dated
    June 30, 1995, issued by of Norman C. Harbert and Ronald E.
    Weinberg to the Company (Incorporated by reference to the
    Companys Registration Statement on Form S-4 as filed
    with the Securities and Exchange Commission (Reg.
    No. 333-18433))                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 10 | .11 |  | Letter agreement, dated October 1, 1996, amending
    the Promissory Notes, dated June 30, 1995, issued by each of
    Norman C. Harbert and Ronald E. Weinberg to the Company
    (Incorporated by reference to the Companys Registration
    Statement on Form S-4 as filed with the Securities and
    Exchange Commission (Reg. No. 333-18433))                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10 | .12 |  | Credit Agreement, dated as of May 1, 1998, among
    the Company and KeyBank National Association, as Swing Line
    Lender, Administrative Agent and as Syndication Agent
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended June 30, 1998 as filed with the
    Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10 | .13 |  | Subsidiary Guaranty, dated as of May 1, 1998,
    among the subsidiaries of the Company, as guarantors, and
    KeyBank National Association, as Administrative Agent
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended June 30, 1998 as filed with the
    Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 10 | .14 |  | Amendment No. 1, dated as of November 22,
    2000 to Credit Agreement among the Company and KeyBank National
    Association, as Lender, the Swing Line Lender, a Letter of
    Credit Issuer and as the Syndication Agent and the
    Administrative Agent (Incorporated by reference to the
    Companys Form 10-K for the period ended
    December 31, 2000 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                                                                                                                                            
| | 10 | .15 |  | Hawk Corporation 1997 Stock Option Plan
    (Incorporated by reference to the Companys Registration
    Statement on Form S-1 as filed with the Securities and
    Exchange Commission (Reg. No. 333-40535))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 10 | .16 |  | Hawk Corporation 2000 Long Term Incentive Plan
    (Incorporated by reference to the Companys Form 10-K
    for the period ended December 31, 2000 as filed with the
    Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 10 | .17 |  | Hawk Corporation Annual Incentive Compensation
    Plan (Incorporated by reference to the Companys
    Form 10-K for the period ended December 31, 2000 as
    filed with the Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 10 | .18 |  | Amendment No. 2 to Credit Agreement, dated
    as of July 31, 2001, by and among the Company, the Lenders
    identified therein and KeyBank National Association, a national
    banking association, as the Administrative Agent under the
    Credit Agreement (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    June 30, 2001 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                                                                                                                                 
| | 10 | .19 |  | Form of Security Agreement, dated as of
    August 10, 2001, by and between KeyBank National Association,
    the Company and each of the following subsidiaries of the
    Company: Allegheny Powder Metallurgy, Inc., Clearfield Powdered
    Metals, Inc., Friction Products Co., Hawk Brake, Inc., Hawk MIM,
    Inc., Helsel, Inc., Hawk Motors, Inc., Logan Metal Stampings,
    Inc., Net Shape Technologies LLC, Quarter Master Industries,
    Inc., S.K. Wellman Corp., S.K. Wellman Holdings, Inc., Sinterloy
    Corporation, Tex Racing Enterprises, Inc. and Wellman Friction
    Products U.K. Corp (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    June 30, 2001 as filed with the Securities and Exchange
    Commission)

74



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| |    |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .20 |  | Form of Pledge Agreement, dated as of August
    10, 2001, by and between KeyBank National Association, the
    Company and each of the following subsidiaries of the Company:
    Allegheny Powder Metallurgy, Inc., Clearfield Powdered Metals,
    Inc., Friction Products Co., Hawk Brake, Inc., Hawk MIM, Inc.,
    Helsel, Inc., Hawk Motors, Inc., Logan Metal Stampings, Inc.,
    Net Shape Technologies LLC, Quarter Master Industries, Inc.,
    S.K. Wellman Corp., S.K. Wellman Holdings, Inc., Sinterloy
    Corporation, Tex Racing Enterprises, Inc. and Wellman Friction
    Products U.K. Corp (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    June 30, 2001 as filed with the Securities and Exchange
    Commission)                
| | 10 | .21 |  | Form of Intellectual Property Security
    Agreement, dated as of August 10, 2001, by and between the
    Company and each of the following subsidiaries of the Company:
    Allegheny Powder Metallurgy, Inc., Clearfield Powdered Metals,
    Inc., Friction Products Co., Hawk Brake, Inc., Hawk MIM, Inc.,
    Helsel, Inc., Hawk Motors, Inc., Logan Metal Stampings, Inc.,
    Net Shape Technologies LLC, Quarter Master Industries, Inc.,
    S.K. Wellman Corp., S.K. Wellman Holdings, Inc., Sinterloy
    Corporation, Tex Racing Enterprises, Inc. and Wellman Friction
    Products U.K. Corp. (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    June 30, 2001 as filed with the Securities and Exchange
    Commission)                     
| | 10 | .22 |  | Form of Guaranty Agreement of Payment of
    Obligations, dated as of August 10, 2001, by and between KeyBank
    National Association and each of the following subsidiaries of
    the Company: Allegheny Powder Metallurgy, Inc., Clearfield
    Powdered Metals, Inc., Friction Products Co., Hawk Brake, Inc.,
    Hawk MIM, Inc., Helsel, Inc., Hawk Motors, Inc., Logan Metal
    Stampings, Inc., Net Shape Technologies LLC, Quarter Master
    Industries, Inc., S.K. Wellman Corp., S.K. Wellman Holdings,
    Inc., Sinterloy Corporation, Tex Racing Enterprises, Inc. and
    Wellman Friction Products U.K. Corp. (Incorporated by reference
    to the Companys Form 10-Q for the quarterly period
    ended June 30, 2001 as filed with the Securities and
    Exchange Commission)
| | 10 | .23 |  | Form of Open Ended Ohio Mortgage, executed
    as of August 10, 2001, in favor of KeyBank National
    Association by each of the following subsidiaries of the
    Company: Friction Products Co., Logan Metal Stampings, Inc. and
    S.K. Wellman Corp. (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    June 30, 2001 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                                                                                                                                                      
| | 10 | .24 |  | Form of Open Ended Pennsylvania Mortgage,
    executed as of August 10, 2001, in favor of KeyBank National
    Association by each of the following subsidiaries of the
    Company: Allegheny Powder Metallurgy, Inc. and Clearfield
    Powdered Metals, Inc. (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    June 30, 2001 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                                                                                                                                                 
| | 10 | .25 |  | Form of Mortgage, Assignment of Leases and
    Rents and Fixture Filing, executed as of August 10, 2001, in
    favor of KeyBank National Association by each of the following
    subsidiaries of the Company: Hawk Motors, Inc. and Helsel, Inc.
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended June 30, 2001 as filed with the
    Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                              
| | 10 | .26 |  | Common Stock Selling Plan of Thomas A. Gilbride
    pursuant Rule 10b5-1 of the Securities Exchange Act of 1934, as
    amended, effective as of June 6, 2001 (Incorporated by reference
    to the Companys Form 10-Q for the quarterly period
    ended June 30, 2001 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10 | .27 |  | Amendment No. 3 to Credit Agreement, dated
    as of November 9, 2001, by and among the Company, the
    Lenders identified therein and KeyBank National Association, a
    national banking association, as the Administrative Agent under
    the Credit Agreement (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    September 30, 2001 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                                                                                                                                                                                                       
| | 10 | .28 |  | Form of Pledge Agreement, dated as of
    November 9, 2001, by and between KeyBank National
    Association, the Company and each of the following subsidiaries
    of the Company: Allegheny Powder Metallurgy, Inc., Clearfield
    Powdered Metals, Inc., Friction Products Co., Hawk Brake, Inc.,
    Hawk MIM, Inc., Helsel, Inc., Hawk Motors, Inc., Logan Metal
    Stampings, Inc., Net Shape Technologies LLC, Quarter Master
    Industries, Inc., S.K. Wellman Corp., S.K. Wellman Holdings,
    Inc., Sinterloy Corporation, Tex Racing Enterprises, Inc. and
    Wellman Friction Products U.K. Corp (Incorporated by reference
    to the Companys Form 10-Q for the quarterly period
    ended September 30, 2001 as filed with the Securities and
    Exchange Commission)          

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| |     |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10  | .29  |  | Amendment No. 4 to Credit Agreement, dated
    as of March 25, 2002, by and among the Company, the Lenders
    identified therein and KeyBank National Association, a national
    banking association, as the Administrative Agent under the
    Credit Agreement (Incorporated by reference to the
    Companys Form 10-K for the period ended
    December 31, 2001 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                                        
| | 10  | .30  |  | Credit Agreement, dated as of October 18,
    2002, among the Company, and certain of its domestic
    subsidiaries from time to time party thereto, as Borrowers and
    Guarantors, the Lending Institutions party thereto, as Lenders,
    J.P. Morgan Business Credit Corp., as Advisor, JPMorgan Chase
    Bank, as Administrative Agent and Collateral Agent, Issuing Bank
    and Arranger, PNC Bank, National Association as a Documentation
    Agent and Fleet Capital Corp. as a Documentation Agent
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended September 30, 2002 as filed with
    the Securities and Exchange Commission)
| | 10  | .31  |  | Security and Pledge Agreement, dated as of
    October 18, 2002, among the Company, and its certain
    Subsidiaries as Grantors, the other Grantors from time to time
    party thereto, and JPMorgan Chase Bank, as Administrative and
    Collateral Agent (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    September 30, 2002 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                                  
| | 10  | .32  |  | Form of Ohio Open Ended Mortgage, Assignment
    of Leases and Rents and Fixture Filing, each dated as of October
    18, 2002, issued by each of Friction Products Co., Logan Metal
    Stampings, Inc. and S.K. Wellman Corp. and in Favor of JPMorgan
    Chase Bank (Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended September 30,
    2002 as filed with the Securities and Exchange Commission)                                                                                                                                                                                                                                            
| | 10  | .33  |  | Form of Pennsylvania Open Ended Mortgage
    Securing Future and/or Revolving Advances up to a Maximum
    Principal Amount of Fifty Three Million Dollars ($53,000,000)
    plus accrued interest and other Indebtedness as described in 42
    PA. C.S.A.ss.8143, dated as of October 18, 2002, issued by
    Allegheny Clearfield, Inc. in favor of JPMorgan Chase Bank
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended September 30, 2002 as filed
    with the Securities and Exchange Commission)                                                                                                                                     
| | 10  | .34  |  | Form of Illinois Mortgage, Assignment of
    Leases and Rents and Fixture Filing, dated as of
    October 18, 2002, issued by Hawk Motors, Inc. in favor of
    JPMorgan Chase Bank (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    September 30, 2002 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                                                                                                                                                                            
| | 10  | .35  |  | Form of Indiana Mortgage, Assignment of
    Leases and Rents and Fixture Filing, dated as of October 18,
    2002, issued by Helsel, Inc. in favor of JPMorgan Chase Bank
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended September 30, 2002 as filed
    with the Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                      
| | 10  | .36* |  | Amendment No. 1 to the Credit Agreement,
    dated as of February 27, 2004, by and among the Company and
    certain of its domestic subsidiaries from time to time party
    thereto, as Borrowers and Guarantors, the Lending Institutions
    party thereto, as Lenders, and JPMorgan Chase Bank, as
    Administrative Agent and Collateral Agent and Issuing Bank                                                                                                                                                                                                                                                                                                                   
| | 10  | .37* |  | Settlement Agreement, Release and Waiver, dated
    as of October 27, 2003, by and between the Company and Jeffrey
    H. Berlin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 10  | .38* |  | Transition Agreement, Release and Waiver, dated
    as of January 7, 2004, by and between the Company and Michael J.
    Corkran                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 10  | .39* |  | Common Stock Selling Plan of the Harbert
    Foundation pursuant to Rule 10b5-1 of the Securities Exchange
    Act of 1934, as amended, effective January 9, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10  | .40* |  | Amendment No. 1 to Amended and Restated
    Employment Agreement, dated as of March 3, 2004, by and
    among the Company, Friction Products Co. and Ronald E. Weinberg                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 10  | .41* |  | First Amendment to Amended and Restated
    Employment Agreement, dated as of December 31, 2003, by and
    among the Company, Friction Products Co. and Norman C. Harbert                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 14* |      |  | Code of Business Conduct and Ethics                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 21  | .1*  |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 23  | .1*  |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 31  | .1*  |  | Certification of the Chairman of the Board, Chief
    Executive Officer and President pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |    |     |  |                                                                                                                                                                                                       
| | -- | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31 | .2* |  | Certification of the Chief Financial Officer
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                            
| | 32 | .1* |  | Certification of the Chairman of the Board, Chief
    Executive Officer and President pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002
| | 32 | .2* |  | Certification of the Chief Financial Officer
    pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                         



---



|  |                            
|- | ---------------------------
|* | Filed or Furnished herewith

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SIGNATURES

Pursuant to the requirements of Section 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.



| |                 
| | ----------------
| | HAWK CORPORATION



| |     |                         
| | --- | ------------------------
| | BY: | /s/ JOSEPH J. LEVANDUSKI

| |                        
| | -----------------------
| |                        
| | Joseph J. Levanduski   
| | Chief Financial Officer

Date: March 26, 2004

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.

|                                             |  |                                                                                                          |  |                |  |     
|-------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | -------------- |  | ----
|                                             |  | SIGNATURE                                                                                                |  | TITLE          |  | DATE
|                                             |  |                                                                                                          |  |                |  |     
|                                            
|/s/ RONALD E. WEINBERGRonald E. Weinberg     |  | Chairman of the Board, Chief Executive Officer,
    President and Director (principal executive officer) |  | March 26, 2004
|                                            
|/s/ NORMAN C. HARBERTNorman C. Harbert       |  | Senior Chairman of the Board, Founder
    and Director                                                   |  | March 26, 2004
|                                            
|/s/ JOSEPH J. LEVANDUSKIJoseph J. Levanduski |  | Chief Financial Officer (principal financial
    accounting officer)                                     |  | March 26, 2004
|                                            
|/s/ BYRON S. KRANTZByron S. Krantz           |  | Secretary and Director                                                                                   |  | March 26, 2004
|                                            
|/s/ PAUL R. BISHOPPaul R. Bishop             |  | Director                                                                                                 |  | March 26, 2004
|                                            
|/s/ JACK F. KEMPJack F. Kemp                 |  | Director                                                                                                 |  | March 26, 2004
|                                            
|/s/ DAN T. MOORE, IIIDan T. Moore, III       |  | Director                                                                                                 |  | March 26, 2004
|                                            
|/s/ ANDREW T. BERLINAndrew T. Berlin         |  | Director                                                                                                 |  | March 26, 2004

78