TABLE OF CONTENTS




|                                   |                              |  |  |  |  |  |  | 
|---------------------------------- | ---------------------------- |  |  |  |  |  |  | 
|Part II                           
|                                   | Results of Operations       
|                                   | Outlook for 2005            
|                                   | Critical Accounting Policies
|EX-21.1 Subsidiaries of Registrant
|EX-23.1 Consent                   
|EX-31.1 Certification             
|EX-31.2 Certification             
|EX-32.1 Certification             
|EX-32.2                           



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##### Table of Contents









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, 2004 | Commission File No. 001-13797

HAWK CORPORATION




|                                               |  |                                     
|---------------------------------------------- |  | ------------------------------------
|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             
|83/4%
    Senior Notes due 2014      |  | American Stock Exchange             

Securities registered pursuant to Section 12(g) of the
Act: None


x o


o


o x






DOCUMENTS INCORPORATED BY REFERENCE














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##### Table of Contents



Part I




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

Our Company










2



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##### Table of Contents



2004 Sales by Segment







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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We believe that, based on net sales, we are one of the top
    worldwide manufacturers of friction products used in
    off-highway, on-highway, industrial, agricultural, performance
    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. Our friction products include parts for brakes,
    clutches and transmissions used in construction and mining
    vehicles, agricultural vehicles, trucks, motorcycles and race
    cars, and brake parts for landing systems used in commercial and
    general aviation. We believe we are:



| |   |                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a leading domestic and international supplier of friction
    products for construction and mining 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 including the
    Canadair regional jet series,
|
| |  | 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, and                                                                                                     
|
| |  | a leading domestic supplier of friction products into
    performance and specialty markets such as motorcycles, race
    cars, performance automobiles, ATVs and snowmobiles.                                                                                                                



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the years ended December 31, 2004 and 2003, our
    friction products segment generated net sales of
    $148.3 million and $121.6 million, representing 61.5%
    and 60.0% of our total net sales, respectively and reported
    income from operations of $13.1 million and
    $8.3 million, representing 75.7% and 76.1%, of our total
    income from operations, respectively. The foreign operations of
    our friction products segment represented 32.5% of total
    friction segment net sales in 2004 compared to 30.5% in 2003.

3



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are a leading supplier of powder metal and metal injection
    molded precision components used in industrial, consumer and
    other applications, such as pumps, motors and transmissions,
    lawn and garden equipment, appliances, small hand tools and
    telecommunications equipment. 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, 2004 and 2003, our
    precision components segment generated net sales of
    $78.6 million and $68.1 million, representing 32.6%
    and 33.6% of our total net sales, respectively and reported
    income from operations of $3.5 million and
    $2.2 million, representing 20.2% of our total income from
    operations in both 2004 and 2003.



| |   |                   
| | - | ------------------
| |  | 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), the American
    LeMans Series (ALMS) and by weekend enthusiasts in the Sports
    Car Club of America (SCCA) racing clubs as well as in other road
    racing and competition cars. For the years ended
    December 31, 2004 and 2003, our performance racing segment
    generated net sales of $14.3 million and
    $12.9 million, representing 5.9% and 6.4% of our total net
    sales, respectively and reported income from operations of
    $0.7 million and $0.4 million, representing 4.1% and
    3.7% of our total income from operations, respectively.

Discontinued Operations










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|                                 |  |               |      |   |      |   |      |      |  |   |      |  
|-------------------------------- |  | ------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                 |  | 2004          |      |   | 2003 |   |      | 2002 | 
|                                 |  |               |      |   |      |   |      |      | 
|                                 |  | (in millions) |     
|Net sales                        |  | $             | 13.0 |   |      | $ | 14.5 |      |  | $ | 11.4 |  
|                                 |  |               |      |   |      |   |      |      | 
|Loss from operations, net of tax |  | $             | (0.3 | ) |      | $ | (5.0 | )    |  | $ | (1.9 | )
|                                 |  |               |      |   |      |   |      |      | 

Business Strategy






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continued Product Innovation.We believe that 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. We are committed to maintaining our technological
    advantages. As a result, we are focusing our research and
    development efforts on improving our existing products and
    developing materials and technologies for new applications. For
    example, in our precision components segment, we have embarked
    on a strategic initiative by investing in advanced equipment
    containing proprietary technology. We believe this equipment,
    combined with product developments and new production
    techniques, will enable us to develop new applications for our
    existing end markets. For the year ended December 31, 2004, we
    spent $5.6 million on research and development which
    represents a 19.1% increase from 2003.         
|
| |  | 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 and that this strategy will continue to
    provide market stability going forward. Our gross margins were
    23.4% in each of the years ended December 31, 2004 and 2003.                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Capitalize on Aftermarket Opportunities.We estimate that
    aftermarket sales of friction products have comprised
    approximately 40% of friction product sales in recent years. Our
    aftermarket sales enable us to reduce our exposure to adverse
    economic cycles. Sales of our friction products can offer
    decades of continued sales for products such as aircraft brakes,
    heavy duty trucks and construction equipment. In the second
    quarter of 2004, we announced that Pep Boys launched a national
    rollout of the complete line of Hawk
    Performance® brand brake pads. We have also expanded
    our friction products segment sales force to focus on increasing
    direct aftermarket sales to fleets and retail customers. In
    October 2004, we created a new executive position at Hawk to
    focus on building brand equity and leading the growth of our
    direct aftermarket sales programs in our friction products
    segment. For the year ended December 31, 2004 our direct
    aftermarket sales were $25.2 million, an increase of 19.4%
    from 2003.
|
| |  | Institute Cost-Reduction Initiatives.To maintain our
    profit margins in highly competitive markets and in periods of
    rising raw material costs, we aggressively manage our operating
    cost structure. An example of this commitment to cost management
    is our plan to close our friction products manufacturing
    facility in Brook Park, Ohio and move production to a new state
    of the art facility in Oklahoma that is expected to result in
    annual pre-tax savings of approximately $2.5 million once full
    production levels are achieved. We began manufacturing
    production in the facility in the fourth quarter of 2004 and we
    expect it to become fully operational in late 2005. 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 products. We use an incentive
    based compensation system to further align our employees with
    our focus on providing products of the highest quality and at
    the lowest cost.             
|
| |  | Globalization.We have manufacturing facilities in Italy,
    Canada and China, a sales office in Argentina and a sourcing
    office in Singapore. Through our friction products
    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. In 2003, we constructed a second facility in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

5



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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | China to manufacture powder metal components. We experienced our
    first sales from this facility at the end of 2003, and
    anticipate achieving rapid sales growth at this facility in 2005
    and beyond, as many of our existing customers are looking to us
    to provide a high quality source of products for their
    facilities located in Asia. We also market to domestic Asian
    customers from this facility. Our international net sales
    represented $48.4 million, or 20.1%, of our consolidated
    net sales for the year ended December 31, 2004, and
    $37.1 million, or 18.3%, of our consolidated net sales in
    2003.



Our Principal Markets and Products




2004 Sales by Principal Markets







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



6



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Construction/ Mining/ Agriculture/ Trucks/ Performance and
Specialty.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Construction and Mining Equipment.We supply friction
    products such as transmission discs, clutch facings and brake
    components to manufacturers of construction and mining
    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 directly to
    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 types of friction products. Replacement components for
    agricultural equipment are sold through original equipment
    manufacturers, as well as directly to 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 ZF 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
    directly to aftermarket distributors.                                                                                                                                                                                                                                                                           
|
| |  | Performance and Specialty Friction.We supply friction
    products for use in specialty applications, such as brake pads
    for Harley-Davidson motorcycles, the military version of the
    Hummer and Bombardier, Polaris and Arctic Cat snowmobiles, race
    cars and performance automotive vehicles. We believe that these
    markets 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, directly to
    aftermarket distributors and through relationships with national
    automotive retailers such as Pep Boys.

Aerospace.


7



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







| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                     







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 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
    of up to 19 inches for use in transmissions in construction and
    mining 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
    construction, mining, agricultural and truck applications.

8



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 traditional powder
    metal customers may also be attractive prospects for metal
    injected molded parts.                                                                                                                                                                                                                                                                                                                                                                                             



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



Our Business Segments




|                                 |                              |                         |   |       |       |  |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |      |       |  
|-------------------------------- | ---------------------------- | ----------------------- | - | ----- | ----- |  |  | ---- | ----- | - | - | ----- | ----- |  |  | ---- | ----- | - | - | ----- | ----- |  |  | ---- | ----- | -
|                                 |                              | Year ended December 31, |  
|                                 |                              |                         |  
|                                 |                              | 2004                    |   |       | 2003  |  |  | 2002 |      
|                                 |                              |                         |   |       |       |  |  |      |      
|                                 |                              | (dollars in millions)   |  
|Net sales to external customers: |                              |                         |   |       |       |  |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |     
|                                 | Friction products            |                         | $ | 148.3 |       |  |  | 61.5 | %     |   | $ | 121.6 |       |  |  | 60.0 | %     |   | $ | 106.1 |       |  |  | 57.1 | %    
|                                 | Precision
    components (1) |                         |   | 78.6  |       |  |  | 32.6 | %     |   |   | 68.1  |       |  |  | 33.6 | %     |   |   | 67.2  |       |  |  | 36.1 | %    
|                                 | Performance racing           |                         |   | 14.3  |       |  |  | 5.9  | %     |   |   | 12.9  |       |  |  | 6.4  | %     |   |   | 12.6  |       |  |  | 6.8  | %    
|                                 |                              |                         |   |       |       |  |  |      |       |   |   |       |       |  |  |      |       |  
|                                 |                              | Consolidated            |   | $     | 241.2 |  |  |      | 100.0 | % |   | $     | 202.6 |  |  |      | 100.0 | % |   | $     | 185.9 |  |  |      | 100.0 | %
|                                 |                              |                         |   |       |       |  |  |      |       |   |   |       |       |  |  |      |       |  
|Gross profit:                    |                              |                         |   |       |       |  |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |     
|                                 | Friction products            |                         | $ | 36.5  |       |  |  | 64.6 | %     |   | $ | 29.5  |       |  |  | 62.2 | %     |   | $ | 25.4  |       |  |  | 57.5 | %    
|                                 | Precision
    components (1) |                         |   | 16.6  |       |  |  | 29.4 | %     |   |   | 14.5  |       |  |  | 30.6 | %     |   |   | 15.1  |       |  |  | 34.1 | %    
|                                 | Performance racing           |                         |   | 3.4   |       |  |  | 6.0  | %     |   |   | 3.4   |       |  |  | 7.2  | %     |   |   | 3.7   |       |  |  | 8.4  | %    
|                                 |                              |                         |   |       |       |  |  |      |       |   |   |       |       |  |  |      |       |  
|                                 |                              | Consolidated            |   | $     | 56.5  |  |  |      | 100.0 | % |   | $     | 47.4  |  |  |      | 100.0 | % |   | $     | 44.2  |  |  |      | 100.0 | %
|                                 |                              |                         |   |       |       |  |  |      |       |   |   |       |       |  |  |      |       |  
|Income from operations           |                              |                         |   |       |       |  |  |      |       |   |   |       |       |  |  |      |       |   |   |       |       |  |  |     
|                                 | Friction products            |                         | $ | 13.1  |       |  |  | 75.7 | %     |   | $ | 8.3   |       |  |  | 76.1 | %     |   | $ | 7.8   |       |  |  | 60.0 | %    
|                                 | Precision
    components (1) |                         |   | 3.5   |       |  |  | 20.2 | %     |   |   | 2.2   |       |  |  | 20.2 | %     |   |   | 4.3   |       |  |  | 33.1 | %    
|                                 | Performance racing           |                         |   | 0.7   |       |  |  | 4.1  | %     |   |   | 0.4   |       |  |  | 3.7  | %     |   |   | 0.9   |       |  |  | 6.9  | %    
|                                 |                              |                         |   |       |       |  |  |      |       |   |   |       |       |  |  |      |       |  
|                                 |                              | Consolidated            |   | $     | 17.3  |  |  |      | 100.0 | % |   | $     | 10.9  |  |  |      | 100.0 | % |   | $     | 13.0  |  |  |      | 100.0 | %
|                                 |                              |                         |   |       |       |  |  |      |       |   |   |       |       |  |  |      |       |  

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|              |                              |                       |   |       |       |  |   |       |       | 
|------------- | ---------------------------- | --------------------- | - | ----- | ----- |  | - | ----- | ----- | 
|              |                              | December 31,          |  
|              |                              |                       |  
|              |                              | 2004                  |   |       | 2003  | 
|              |                              |                       |   |       |       | 
|              |                              | (in millions)         |  
|Total assets: |                              |                       |   |       |       |  |   |      
|              | Friction products            |                       | $ | 114.6 |       |  | $ | 101.2 |      
|              | Precision
    components (1) |                       |   | 85.5  |       |  |   | 77.0  |      
|              | Performance racing           |                       |   | 12.4  |       |  |   | 11.0  |      
|              |                              |                       |   |       |       | 
|              |                              | Continuing operations |   |       | 212.5 |  |   |       | 189.2 | 
|              | Discontinued operations      |                       |   | 4.5   |       |  |   | 4.3   |      
|              |                              |                       |   |       |       | 
|              |                              | Consolidated          |   | $     | 217.0 |  |   | $     | 193.5 | 
|              |                              |                       |   |       |       | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | A line of business formerly associated with our motors segment,
    which was discontinued as of December 31, 2003, was
    retained by us and production was transferred to a facility
    within our precision components segment effective July 1,
    2004. Net sales from this line of business were
    $0.8 million through the date of transfer effective
    July 1, 2004 and $1.2 million and $1.3 million
    for the years ended December 31, 2003, and 2002,
    respectively. All prior periods have been reclassified to
    reflect this change.

Our Manufacturing Processes






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 and advanced technology
    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.                                                                                 



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Our Quality Control Procedures






Our Global Operations






| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 Technology








11



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Our Customers






How We Market and Sell Our Products




Our Competition








12



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##### Table of Contents





The Suppliers and Prices of Raw Materials We Use




Government Regulation of Our Businesses




Environmental, Health and Safety Matters




Our Intellectual Property




13



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Personnel






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





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





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






Part II




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



Quarterly Stock Prices


|     |  |                    |  |      |      |  |     |   |      | 
|---- |  | ------------------ |  | ---- | ---- |  | --- | - | ---- | 
|     |  | Quarter Ended      |  | High |      |  | Low |  
|     |  |                    |  |      |      |  |     |  
|2004 |  |                    |  |      |      |  |     |   |      | 
|     |  | March 31, 2004     |  | $    | 5.90 |  |     | $ | 3.62 | 
|     |  | June 30, 2004      |  | $    | 6.99 |  |     | $ | 4.25 | 
|     |  | September 30, 2004 |  | $    | 8.19 |  |     | $ | 6.26 | 
|     |  | December 31, 2004  |  | $    | 8.98 |  |     | $ | 7.42 | 
|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 | 

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

|                                                                                      |                                                                            |                                      |       |      |      |   |       |      |   |   |       |       |   |      |       |      |   |   |       |      |  
|------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------ | ----- | ---- | ---- | - | ----- | ---- | - | - | ----- | ----- | - | ---- | ----- | ---- | - | - | ----- | ---- | -
|Years ended December 31,                                                              |                                                                            | 2004                                 |       |      | 2003 |   |       | 2002 |   |   | 2001  |       |   | 2000 |      
|                                                                                      |                                                                            |                                      |       |      |      |   |       |      |   |   |       |       |   |      |      
|                                                                                      |                                                                            | (in millions, except per share data) |      
|Income Statement Data:                                                                |                                                                            |                                      |       |      |      |   |       |      |   |   |       |       |   |      |       |      |   |   |       |     
|Net sales                                                                             |                                                                            | $                                    | 241.2 |      |      | $ | 202.6 |      |   | $ | 185.9 |       |   | $    | 176.9 |      |   | $ | 195.9 |     
|Gross profit                                                                          |                                                                            |                                      | 56.5  |      |      |   | 47.4  |      |   |   | 44.2  |       |   |      | 40.7  |      |   |   | 53.9  |     
|Pension curtailment and contractual termination benefit
    costs(1)                  |                                                                            |                                      |       |      |      |   | 1.9   |      |   |   |       |       |   |      |       |      |   |   |       |     
|Restructuring
    costs(2)                                                            |                                                                            |                                      | 1.1   |      |      |   |       |      |   |   |       |       |   |      | 1.1   |      |   |   |       |     
|Income from
    operations(3)                                                         |                                                                            |                                      | 17.3  |      |      |   | 10.9  |      |   |   | 13.0  |       |   |      | 7.2   |      |   |   | 21.4  |     
|Income (loss) from continuing operations before income taxes                          |                                                                            |                                      | 1.5   |      |      |   | (0.4  | )    |   |   | 0.8   |       |   |      | (2.2  | )    |   |   | 6.7   |     
|Discontinued operations, net of tax                                                   |                                                                            |                                      | (0.3  | )    |      |   | (5.0  | )    |   |   | (1.9  | )     |   |      | (2.1  | )    |   |   | (0.9  | )   
|Cumulative effect of change in accounting principle, net of tax                       |                                                                            |                                      |       |      |      |   |       |      |   |   | (17.2 | )     |   |      |       |      |   |   |       |     
|Net income (loss)                                                                     |                                                                            | $                                    | 1.1   |      |      | $ | (5.4  | )    |   | $ | (18.3 | )     |   | $    | (4.3  | )    |   | $ | 5.8   |     
|Earnings (Loss) Per Share:                                                            |                                                                            |                                      |       |      |      |   |       |      |   |   |       |       |   |      |       |      |   |   |       |     
|                                                                                      | Basic earnings (loss) from continuing operations, after income
    taxes   |                                      | $     | .15  |      |   | $     | (.07 | ) |   | $     | .08   |   |      | $     | (.27 | ) |   | $     | .77  |  
|                                                                                      | Discontinued operations                                                    |                                      |       | (.04 | )    |   |       | (.58 | ) |   |       | (.22  | ) |      |       | (.25 | ) |   |       | (.11 | )
|                                                                                      | Cumulative effect of change in accounting principle                        |                                      |       |      |      |   |       |      |   |   |       | (2.01 | ) |      |       |      |   |   |       |      |  
|                                                                                      |                                                                            |                                      |       |      |      |   |       |      |   |   |       |       |   |      |      
|                                                                                      | Basic earnings (loss) per share                                            |                                      | $     | .11  |      |   | $     | (.65 | ) |   | $     | (2.15 | ) |      | $     | (.52 | ) |   | $     | .66  |  
|                                                                                      |                                                                            |                                      |       |      |      |   |       |      |   |   |       |       |   |      |      
|                                                                                      | Diluted earnings (loss) from continuing operations, after
    income taxes |                                      | $     | .15  |      |   | $     | (.07 | ) |   | $     | .08   |   |      | $     | (.27 | ) |   | $     | .77  |  
|                                                                                      | Discontinued operations                                                    |                                      |       | (.04 | )    |   |       | (.58 | ) |   |       | (.22  | ) |      |       | (.25 | ) |   |       | (.11 | )
|                                                                                      | Cumulative effect of change in accounting principle                        |                                      |       |      |      |   |       |      |   |   |       | (2.00 | ) |      |       |      |   |   |       |      |  
|                                                                                      |                                                                            |                                      |       |      |      |   |       |      |   |   |       |       |   |      |      
|                                                                                      | Diluted earnings (loss) per share                                          |                                      | $     | .11  |      |   | $     | (.65 | ) |   | $     | (2.14 | ) |      | $     | (.52 | ) |   | $     | .66  |  
|                                                                                      |                                                                            |                                      |       |      |      |   |       |      |   |   |       |       |   |      |      
|Other Data:                                                                           |                                                                            |                                      |       |      |      |   |       |      |   |   |       |       |   |      |       |      |   |   |       |     
|Depreciation                                                                          |                                                                            | $                                    | 10.1  |      |      | $ | 10.1  |      |   | $ | 10.2  |       |   | $    | 10.7  |      |   | $ | 10.4  |     
|Amortization(4)                                                                       |                                                                            |                                      | 0.7   |      |      |   | 0.8   |      |   |   | 0.8   |       |   |      | 3.8   |      |   |   | 3.4   |     
|Capital expenditures (including capital leases and financed
    capital expenditures) |                                                                            |                                      | 18.3  |      |      |   | 11.2  |      |   |   | 9.7   |       |   |      | 8.5   |      |   |   | 8.5   |     

|                                              |  |               |       |  |      |   |       |      |  |   |       |  |  |      |       |  |  |   |       | 
|--------------------------------------------- |  | ------------- | ----- |  | ---- | - | ----- | ---- |  | - | ----- |  |  | ---- | ----- |  |  | - | ----- | 
|December 31,                                  |  | 2004          |       |  | 2003 |   |       | 2002 |  |   | 2001  |  |  | 2000 |      
|                                              |  |               |       |  |      |   |       |      |  |   |       |  |  |      |      
|                                              |  | (In millions) |      
|Balance Sheet Data:                           |  |               |       |  |      |   |       |      |  |   |       |  |  |      |       |  |  |   |       | 
|Cash and cash equivalents                     |  | $             | 6.8   |  |      | $ | 3.4   |      |  | $ | 1.7   |  |  | $    | 3.1   |  |  | $ | 4.0   | 
|Working
    capital(5)                        |  |               | 51.4  |  |      |   | 13.5  |      |  |   | 9.1   |  |  |      | 31.5  |  |  |   | 36.5  | 
|Property plant and equipment, net             |  |               | 70.0  |  |      |   | 63.1  |      |  |   | 61.8  |  |  |      | 61.7  |  |  |   | 65.0  | 
|Assets of discontinued operations             |  |               | 4.5   |  |      |   | 4.3   |      |  |   | 10.4  |  |  |      | 14.7  |  |  |   | 13.4  | 
|Total assets                                  |  |               | 217.0 |  |      |   | 193.5 |      |  |   | 192.9 |  |  |      | 204.1 |  |  |   | 215.4 | 
|Liabilities of discontinued operations        |  |               | 4.3   |  |      |   | 3.7   |      |  |   | 2.8   |  |  |      | 1.4   |  |  |   | 1.1   | 
|Total indebtedness (including capital leases) |  |               | 113.0 |  |      |   | 95.0  |      |  |   | 108.3 |  |  |      | 97.8  |  |  |   | 104.2 | 
|Shareholders equity                          |  |               | 44.7  |  |      |   | 41.7  |      |  |   | 44.8  |  |  |      | 66.4  |  |  |   | 71.7  | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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) | In 2004, reflects planning, travel, severance and moving costs
    associated with the closure of the Brook Park, Ohio facility and
    the construction of the new facility in Catoosa, Oklahoma (see
    Note 4  Restructuring to the
    accompanying consolidated financial statements beginning on
    page 32 of this Form 10-K). In 2001, 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 $0.4 million in 2004,
    $0.8 million in 2003, $0.6 million in 2002,
    $0.6 million in 2001 and $0.6 million in 2000, which
    is included in interest expense on the Consolidated Statement of
    Operations.                                                                                                                                                                                                                                                                          
|(5) | Working capital is defined as current assets less current
    liabilities. Beginning in 2002 and through its retirement in the
    fourth quarter of 2004, our then existing bank facility was
    included as a liability in working capital, as required by EITF
    95-22. As of December 31, 2003 and 2002 there was
    $24.1 million and $36.3 million outstanding under the
    then existing bank facility, respectively. See
    Note 6  Financing Arrangements to
    the accompanying audited consolidated financial statements
    beginning on page 32 of this Form 10-K.

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






Results of Operations










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Outlook for 2005







Critical Accounting Policies








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 regularly 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 cash
    flows and other factors. Estimates of future discounted 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 actual results are
    materially different than the assumptions used, impairment could
    result. We performed the annual impairment test as of
    October 31, 2004 and 2003 and concluded that the fair value
    of the reporting units exceeded their carrying values. (See
    Note 2  Significant Accounting
    Policies to the accompanying audited consolidated
    financial statements beginning on page 32 of this
    Form 10-K).

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 cash flows and
    other factors. Estimates of future undiscounted 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. This segment is reported as a
    discontinued operation for all periods presented in this report.
    Other than as noted above, there were no impairment charges
    recorded in 2004, 2003 or 2002. (See
    Note 3  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
    2005 which is consistent with the rate used for 2004. 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, 2004 and 2003 was
    $7.8 million and $8.0 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, 2004, we determined this rate to be 6.0%.
    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 $1.1 million
    in 2005. This compares to $1.3 million in 2004 and
    $3.6 million (including pension curtailment and contractual
    termination benefit costs of $1.9 million) in 2003.                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | We expect cash contributions to our pension plans to be
    $1.8 million in 2005. This compares to contributions of
    $1.6 million in 2004 and $1.1 million in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, 2004 and 2003, we had net U.S. federal
    operating loss carryforwards (NOL) of $16.5 million and
    $7.9 million, respectively, and alternative minimum tax
    (AMT) credit carryforwards of $1.0 million and
    $1.1 million, respectively.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SFAS No 109, Accounting for Income Taxes,(SFAS 109)
    provides certain guidelines to follow in making the
    determination of the need for a valuation allowance. We must
    show that taxable income is expected to be available for future
    periods sufficient to realize the benefits of temporary
    differences and carryforwards to not record an allowance. We
    have identified strategies which, if implemented, would

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| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | enable us to realize the aforementioned tax benefits, and
    therefore, we have determined that no valuation allowance is
    required as of December 31, 2004.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 component of our shareholders equity. As of
    December 31, 2004 we recorded a translation gain through
    shareholders equity of $1.0 million. This gain was
    attributable to the strength of the Euro throughout 2004. In
    2003, we reported a translation gain of $2.3 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 consolidated statement of operations.
    Foreign currency transaction losses were $0.1 million in
    both 2004 and 2003.

Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003




Net Sales.


|                     |              |                       |       |       |      |   |       |          |   |   |          |      |  |  |      |      |  
|-------------------- | ------------ | --------------------- | ----- | ----- | ---- | - | ----- | -------- | - | - | -------- | ---- |  |  | ---- | ---- | -
|                     |              |                       |       |       |      | $ |       |          | % |  
|Net Segment Sales:   |              | 2004                  |       |       | 2003 |   |       | Increase |   |   | Increase |     
|                     |              |                       |       |       |      |   |       |          |   |   |          |     
|                     |              | (dollars in millions) |      
|Friction Products    |              | $                     | 148.3 |       |      | $ | 121.6 |          |   | $ | 26.7     |      |  |  | 22.0 | %   
|Precision Components |              |                       | 78.6  |       |      |   | 68.1  |          |   |   | 10.5     |      |  |  | 15.4 | %   
|Performance Racing   |              |                       | 14.3  |       |      |   | 12.9  |          |   |   | 1.4      |      |  |  | 10.9 | %   
|                     |              |                       |       |       |      |   |       |          |   |   |          |     
|                     | Consolidated |                       | $     | 241.2 |      |   | $     | 202.6    |   |   | $        | 38.6 |  |  |      | 19.1 | %
|                     |              |                       |       |       |      |   |       |          |   |   |          |     



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Friction Products.Net sales in the friction products
    segment, our largest, were $148.3 million in 2004, an
    increase of $26.7 million, or 22.0%, compared to
    $121.6 million 2003. As a result of new product
    introductions, market gains, and market share gains, we
    experienced increases in most of our major markets, including
    construction and mining, agriculture, heavy truck, aerospace,
    and direct aftermarket. This segment continued to experience
    strong sales growth from our international operations in 2004.
    Net sales, exclusive of any translation gains, at our Italian
    facility increased 27.2% in 2004 compared to 2003, as a result
    of new product introductions and market share gains. Net sales
    at our Chinese facility were up 206.4% in 2004 compared to 2003.
    Foreign currency exchange rates caused the friction
    segments sales for the full year 2004 to increase by 3.3%.
    Our sales to the construction and mining markets were up 40.8%
    in 2004 compared to 2003, as a result of strong economic
    conditions in that market as well as market share gains achieved
    by us. Our sales to the truck market increased by 28.2% in 2004
    compared to 2003 as our customers supported the continued growth
    in new truck builds and aftermarket service requirements to
    existing truck fleets during the year. Our sales to the
    agriculture market increased 19.7% during the year as we
    benefited from a strong farm economy in North America. Our sales
    to the aerospace market were up 6.8% in 2004 compared to 2003 as
    commercial air travel continued to show a positive growth trend.



| |                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2004, we refocused our efforts on the friction direct
    aftermarket that we service through the Velvetouch® and
    Hawk Performance® brand names. Sales in this product
    category were up 19.4% to $25.2 million in 2004 compared to
    2003. In the second quarter of 2004, we shipped an initial
    stocking

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| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | order to Pep Boys automotive retail outlets for the national
    rollout of Hawk Performance® brand brake pads throughout
    their chain.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Precision Components.Net sales in our precision
    components segment were $78.6 million in 2004, an increase
    of 15.4% compared to 2003. The increase in net sales was
    primarily attributable to continued improving conditions in the
    general industrial segments of the domestic economy served by
    this segment. We experienced sales increases in the fluid power,
    automotive, appliance, truck and power tool markets served by
    this segment. These increases were partially offset by a slight
    decline in the lawn and garden market during the year due
    primarily to an engineering change that eliminated a product
    previously supplied by us. Our precision 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 $14.3 million, an increase of 10.9% compared
    to net sales of $12.9 million in 2003. The increase in revenues
    was primarily attributable to the introduction of new clutch and
    transmission products during the year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

Gross Profit.


|                     |              |      |      |      |      |  |      |        |   |  |      |     |  
|-------------------- | ------------ | ---- | ---- | ---- | ---- |  | ---- | ------ | - |  | ---- | --- | -
|Gross Profit Margin: |              | 2004 |      |      | 2003 |  |      | Change |  
|                     |              |      |      |      |      |  |      |        |  
|Friction Products    |              |      | 24.6 | %    |      |  | 24.3 | %      |   |  | 0.3  | %  
|Precision Components |              |      | 21.1 | %    |      |  | 21.3 | %      |   |  | (0.2 | %) 
|Performance Racing   |              |      | 23.8 | %    |      |  | 26.4 | %      |   |  | (2.6 | %) 
|                     | Consolidated |      |      | 23.4 | %    |  |      | 23.4   | % |  |      | 0.0 | %



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Friction Products.Our friction products segment reported
    gross profit of $36.5 million or 24.6% of its net sales in
    2004 compared to $29.5 million or 24.3% of its net sales in
    2003. The increase in our gross profit margin was primarily the
    result of sales volume increases that provided a higher
    absorption of fixed manufacturing costs and continued emphasis
    on operational efficiencies. We achieved an increase in gross
    margin in 2004 despite increased raw material costs, changes in
    product mix and increased operating costs to support the higher
    sales volumes during the year.                                
|
| |  | Precision Components.Gross profit in our precision
    components segment was $16.6 million or 21.1% of its net
    sales in 2004 compared to $14.5 million or 21.3% of its net
    sales in 2003. The slight decrease in this segments
    margins was primarily the result of raw material cost increases
    in 2004 as well as continuing start-up costs associated with
    this segments new operation in China and start up costs
    associated with our new technology initiatives. We will continue
    to provide start-up support to the China operation and expect
    this operation to achieve profitability at the gross profit line
    during 2005.
|
| |  | Performance Racing.Our performance racing segment
    reported gross profit of $3.4 million or 23.8% of net sales
    in 2004 compared to $3.4 million or 26.4% of net sales in
    2003. The decline in gross profit in 2004 was primarily the
    result of product mix.                                                                                                                                                                                                                                                                                                                                                                                             

Selling, Technical and Administrative Expenses.


21



---



##### Table of Contents



Restructuring Costs.


Income from Operations.




|                                   |              |                       |      |      |      |   |     |            |  |   |            |     |  |  |      |      |  
|---------------------------------- | ------------ | --------------------- | ---- | ---- | ---- | - | --- | ---------- |  | - | ---------- | --- |  |  | ---- | ---- | -
|Income from Operations by Segment: |              | 2004                  |      |      | 2003 |   |     | $ Increase |  |   | % Increase |    
|                                   |              |                       |      |      |      |   |     |            |  |   |            |    
|                                   |              | (dollars in millions) |     
|Friction Products                  |              | $                     | 13.1 |      |      | $ | 8.3 |            |  | $ | 4.8        |     |  |  | 57.8 | %   
|Precision Components               |              |                       | 3.5  |      |      |   | 2.2 |            |  |   | 1.3        |     |  |  | 59.1 | %   
|Performance Racing                 |              |                       | 0.7  |      |      |   | 0.4 |            |  |   | 0.3        |     |  |  | 75.0 | %   
|                                   |              |                       |      |      |      |   |     |            |  |   |            |    
|                                   | Consolidated |                       | $    | 17.3 |      |   | $   | 10.9       |  |   | $          | 6.4 |  |  |      | 58.7 | %
|                                   |              |                       |      |      |      |   |     |            |  |   |            |    

Interest Expense.


Income Taxes.


Discontinued Operations, net of tax.


Net Income (Loss).


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


Net Sales.


22



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##### Table of Contents





|                     |              |                       |       |       |      |   |       |            |  |   |            |      |  |  |      |     |  
|-------------------- | ------------ | --------------------- | ----- | ----- | ---- | - | ----- | ---------- |  | - | ---------- | ---- |  |  | ---- | --- | -
|Net Segment Sales:   |              | 2003                  |       |       | 2002 |   |       | $ Increase |  |   | % Increase |     
|                     |              |                       |       |       |      |   |       |            |  |   |            |     
|                     |              | (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 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 Margin: |              | 2003 |      |      | 2002 |  |      | Change |  
|                     |              |      |      |      |      |  |      |        |  
|Friction Products    |              |      | 24.3 | %    |      |  | 23.9 | %      |   |  | 0.4  | %   
|Precision Components |              |      | 21.3 | %    |      |  | 22.5 | %      |   |  | (1.2 | %)  
|Performance Racing   |              |      | 26.4 | %    |      |  | 29.4 | %      |   |  | (3.0 | %)  
|                     | Consolidated |      |      | 23.4 | %    |  |      | 23.8   | % |  |      | (0.4 | %)



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 compensa-

23



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##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | tion 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.


Pension Curtailment and Contractual Termination Benefit
Costs.


Income from Operations.




|                                   |              |                       |     |      |      |   |     |          |  |   |          |      |   |  |       |       |   
|---------------------------------- | ------------ | --------------------- | --- | ---- | ---- | - | --- | -------- |  | - | -------- | ---- | - |  | ----- | ----- | --
|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.


Interest Expense.


24



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##### Table of Contents





Income Taxes.


Discontinued Operations, net of tax.


Net Loss.


Liquidity and Capital Resources


Primary Financing
Requirements






| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                     



Selected Measures of Liquidity and Capital Resources from
Continuing Operations


|                                                    |  |                       |           |   |      |   |           |  
|--------------------------------------------------- |  | --------------------- | --------- | - | ---- | - | --------- | -
|                                                    |  | 2004                  |           |   | 2003 |  
|                                                    |  |                       |           |   |      |  
|                                                    |  | (dollars in millions) |          
|Cash and cash equivalents                           |  | $                     | 6.8       |   |      | $ | 3.4       |  
|                                                    |  |                       |           |   |      |  
|Working
    capital(1)                              |  | $                     | 51.4      |   |      | $ | 13.5      |  
|                                                    |  |                       |           |   |      |  
|Current
    ratio(2)                                |  |                       | 2.0       |   |      |   | 1.2       |  
|                                                    |  |                       |           |   |      |  
|Debt as a % of
    capitalization(3)                |  |                       | 70.4      | % |      |   | 68.7      | %
|                                                    |  |                       |           |   |      |  
|Average number of days sales in accounts receivable |  |                       | 60.5 days |   |      |   | 58.5 days |  
|                                                    |  |                       |           |   |      |  
|Average number of days sales in inventory           |  |                       | 78.1 days |   |      |   | 75.3 days |  
|                                                    |  |                       |           |   |      |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Working capital is defined as current assets less current
    liabilities. Beginning in 2002 and through its retirement in the
    fourth quarter of 2004 our then existing bank facility was
    included as a liability in working capital, as required by EITF
    95-22. As of December 31, 2003 there was $24.1 million
    outstanding under our then existing bank facility. See
    Note 6  Financing Arrangements to the
    accompanying audited consolidated financial 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 and through its retirement in the
    fourth quarter of 2004 our then existing bank facility was
    included as a liability in working capital as required by EITF
    95-22. As of December 31, 2003                                                                                                                                                                                                                                    

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##### Table of Contents



| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | there was $24.1 million
    outstanding under our then existing bank facility. See
    Note 6  Financing Arrangements to the
    accompanying audited consolidated financial 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 in 2003 our then existing bank
    facility less cash. Capitalization is defined as debt plus
    shareholders equity.

Indebtedness




|                  |                    |               |       |       |      |   |      |      | 
|----------------- | ------------------ | ------------- | ----- | ----- | ---- | - | ---- | ---- | 
|                  |                    | 2004          |       |       | 2003 |  
|                  |                    |               |       |       |      |  
|                  |                    | (in millions) |      
|Short-term debt   |                    | $             | 1.0   |       |      | $ | 1.3  |     
|Senior Notes      |                    |               | 110.0 |       |      |   |      |     
|Old Senior Notes  |                    |               |       |       |      |   | 66.2 |     
|Bank Facility     |                    |               | 0.2   |       |      |   |      |     
|Old Bank Facility |                    |               |       |       |      |   | 24.1 |     
|Other             |                    |               | 1.8   |       |      |   | 3.4  |     
|                  |                    |               |       |       |      |  
|                  | Total indebtedness |               | $     | 113.0 |      |   | $    | 95.0 | 
|                  |                    |               |       |       |      |  

Senior Notes


3 4






|                             |  |            |          | 
|---------------------------- |  | ---------- | -------- | 
|For the period below         |  | Percentage |         
|                             |  |            |         
|On or after November 1, 2009 |  |            | 104.375% | 
|On or after November 1, 2010 |  |            | 103.281% | 
|On or after November 1, 2011 |  |            | 102.188% | 
|On or after November 1, 2012 |  |            | 101.094% | 
|On or after November 1, 2013 |  |            | 100.000% | 



26



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##### Table of Contents









| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | incur or guarantee additional debt or issue disqualified capital
    stock,            
|
| |  | pay dividends, redeem subordinated debt or make other restricted
    payments,         
|
| |  | issue preferred stock of our subsidiaries,                                             
|
| |  | transfer or sell assets, including capital stock of our
    subsidiaries,              
|
| |  | incur dividend or other payment restrictions affecting certain
    of our subsidiaries,
|
| |  | make certain investments or acquisitions,                                              
|
| |  | grant liens on our assets,                                                             
|
| |  | enter into certain transactions with affiliates, and                                   
|
| |  | merge, consolidate or transfer substantially all of our assets.                        







| |   |                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | there is no default or event of default,                                                                                                                                                                                                                                                                             
|
| |  | we meet the cash flow ratio, and                                                                                                                                                                                                                                                                                     
|
| |  | the amount of the dividend payment plus certain other payments
    is not in excess of a formula based on the sum of our
    consolidated net income after November 1, 2004, the cash
    proceeds of certain equity offerings by us after
    November 1, 2004 and the return on certain investments made
    by us.

Bank Facility






27



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##### Table of Contents







| |   |                                             
| | - | --------------------------------------------
| |  | there is no event of default, and           
|
| |  | availability is not less than $10.0 million.







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



|                                                                             |  |               |       |   |      |   |       |  
|---------------------------------------------------------------------------- |  | ------------- | ----- | - | ---- | - | ----- | -
|                                                                             |  | 2004          |       |   | 2003 |  
|                                                                             |  |               |       |   |      |  
|                                                                             |  | (in millions) |      
|Cash provided by operating activities of continuing operations               |  | $             | 6.0   |   |      | $ | 23.8  |  
|Cash used in investing activities of continuing operations                   |  |               | (17.4 | ) |      |   | (10.1 | )
|Cash provided by (used in) financing activities of continuing
    operations |  |               | 14.3  |   |      |   | (14.1 | )
|Effect of exchange rates on cash                                             |  |               | 0.3   |   |      |   | 0.1   |  
|Cash provided by discontinued operations                                     |  |               | 0.2   |   |      |   | 2.0   |  
|                                                                             |  |               |       |   |      |  
|Net increase in cash and cash equivalents                                    |  | $             | 3.4   |   |      | $ | 1.7   |  
|                                                                             |  |               |       |   |      |  











28



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##### Table of Contents



Forward-Looking Statements








| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 on our gross profit margins as a result of changes in
    our product mix;                                                                                                                                 
|
| |  | the effect of any interruption in our supply of raw materials or
    a substantial increase in the price of any of the raw materials;                                                                                 
|
| |  | 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 ability to hire and train qualified people at our new
    friction products 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;                                                                 
|
| |  | higher than anticipated costs related to the relocation of the
    friction products segment facility and the sale of our motor
    segment;                                                                          
|
| |  | whether or not the remaining facility of 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 remaining facility of our motor segment will
    be able to improve its operating performance during the selling
    process;                                                                      
|
| |  | our ability to generate profits at our facilities in China and
    to earn a profit at our metal injection molding operation;                                                                                         
|
| |  | the effect of competition by manufacturers using new or
    different technologies;                                                                                                                                   
|
| |  | the effect of domestic earnings or losses compared to foreign
    earnings or losses on our overall effective tax rate and our
    ability to use our NOL and AMT carryforwards in future periods;                    

29



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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; and                                                                                                                                                                                             
|
| |  | the continuity of business relationships with major customers.                                                                                                                                                                                                                                                                                                                           







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

Market Risk Disclosures.


Interest Rate Sensitivity.






|                                 |                                                  |       |       |       |      |   |      |             |  |   |            |      |  |   |       |       | 
|-------------------------------- | ------------------------------------------------ | ----- | ----- | ----- | ---- | - | ---- | ----------- |  | - | ---------- | ---- |  | - | ----- | ----- | 
|                                 |                                                  | Total |       |       | 2005 |   |      | 2006  2009 |  |   | Thereafter |     
|                                 |                                                  |       |       |       |      |   |      |             |  |   |            |     
|Contractual
    obligations (4): |                                                  |       |       |       |      |   |      |             |  |   |            |      |  |   |       |      
|                                 | Short-term
    debt (1)                          |       | $     | 1.0   |      |   | $    | 1.0         |  |   |            |      |  |   |       |       | 
|                                 | Bank
    Facility (1)                            |       |       | 0.2   |      |   |      |             |  |   | $          | 0.2  |  |   |       |       | 
|                                 | Senior
    Notes (2)                             |       |       | 110.0 |      |   |      |             |  |   |            |      |  |   | $     | 110.0 | 
|                                 | Capital lease and other debt
    obligations (2) |       |       | 1.8   |      |   |      | 0.6         |  |   |            | 0.9  |  |   |       | 0.3   | 
|                                 | Operating
    leases (2)                         |       |       | 31.4  |      |   |      | 2.4         |  |   |            | 10.4 |  |   |       | 18.6  | 
|                                 | Purchase
    obligations (3)                     |       |       | 19.8  |      |   |      | 19.8        |  |   |            |      |  |   |       |       | 
|                                 |                                                  |       |       |       |      |   |      |             |  |   |            |     
|Total contractual obligations    |                                                  | $     | 164.2 |       |      | $ | 23.8 |             |  | $ | 11.5       |      |  | $ | 128.9 |      
|                                 |                                                  |       |       |       |      |   |      |             |  |   |            |     
|Other commercial commitments:    |                                                  |       |       |       |      |   |      |             |  |   |            |      |  |   |       |      
|                                 | Stand-by letters of credit                       |       | $     | 3.0   |      |   | $    | 3.0         |  |   |            |      |  |   |       |       | 
|                                 |                                                  |       |       |       |      |   |      |             |  |   |            |     






|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Variable rate obligations                                                                                                                    
|   
|(2) | The Senior Notes due November 1, 2014, accrue interest at a
    fixed rate of
    83/4% per
    annum or $9.6 million per year.              
|   
|(3) | Purchase obligations primarily represent commitments for
    inventory purchases, services and capital expenditures under
    purchase order.

30



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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | This contractual obligation table does not include our defined
    benefit pension obligations. An analysis of our obligations
    under our defined benefit plans is contained in
    Note 8  Employee Benefits in the
    accompanying audited consolidated financial statements beginning
    on page 32 of this Form 10-K.

Foreign Currency Exchange Risk.


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

AUDITED CONSOLIDATED FINANCIAL STATEMENTS


Hawk Corporation and subsidiaries


December 31, 2004, 2003 and 2002


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Audited Consolidated Financial Statements


|                                                        |  |  |    | 
|------------------------------------------------------- |  |  | -- | 
|Report of Independent Registered Public Accounting Firm |  |  | 35 | 
|Consolidated Balance Sheets                             |  |  | 36 | 
|Consolidated Statements of Operations                   |  |  | 38 | 
|Consolidated Statements of Shareholders Equity         |  |  | 39 | 
|Consolidated Statements of Cash Flows                   |  |  | 40 | 
|Notes to Consolidated Financial Statements              |  |  | 41 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















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





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HAWK CORPORATION


CONSOLIDATED BALANCE SHEETS


(In Thousands, except share data)


|                                    |                                                                           |                                   |         |         |        |   |         |         |        | 
|----------------------------------- | ------------------------------------------------------------------------- | --------------------------------- | ------- | ------- | ------ | - | ------- | ------- | ------ | 
|                                    |                                                                           | December 31                       |        
|                                    |                                                                           |                                   |        
|                                    |                                                                           | 2004                              |         |         | 2003   |  
|                                    |                                                                           |                                   |         |         |        |  
|Assets                              |                                                                           |                                   |         |         |        |   |         |        
|Current assets:                     |                                                                           |                                   |         |         |        |   |         |        
|                                    | Cash and cash equivalents                                                 |                                   | $       | 6,785   |        |   | $       | 3,365   |       
|                                    | Accounts receivable, less allowance of $970 in 2004 and $429 in
    2003. |                                   |         | 39,044  |        |   |         | 32,272  |       
|                                    | Inventories:                                                              |                                   |         |         |        |   |         |         |       
|                                    |                                                                           | Raw materials and work-in-process |         |         | 24,043 |   |         |         | 21,277 | 
|                                    |                                                                           | Finished products                 |         |         | 17,507 |   |         |         | 14,147 | 
|                                    |                                                                           |                                   |         |         |        |  
|                                    |                                                                           |                                   | 41,550  |         |        |   | 35,424  |        
|                                    | Deferred income taxes                                                     |                                   |         | 4,583   |        |   |         | 3,551   |       
|                                    | Taxes receivable                                                          |                                   |         | 373     |        |   |         | 521     |       
|                                    | Shareholder notes                                                         |                                   |         | 600     |        |   |         | 10      |       
|                                    | Other current assets                                                      |                                   |         | 3,460   |        |   |         | 4,022   |       
|                                    | Current assets of discontinued operations                                 |                                   |         | 4,499   |        |   |         | 4,302   |       
|                                    |                                                                           |                                   |         |         |        |  
|Total current assets                |                                                                           |                                   | 100,894 |         |        |   | 83,467  |        
|Property, plant and equipment:      |                                                                           |                                   |         |         |        |   |         |        
|                                    | Land and improvements                                                     |                                   |         | 1,850   |        |   |         | 1,944   |       
|                                    | Buildings and improvements                                                |                                   |         | 20,705  |        |   |         | 19,937  |       
|                                    | Machinery and equipment                                                   |                                   |         | 116,663 |        |   |         | 104,370 |       
|                                    | Furniture and fixtures                                                    |                                   |         | 9,220   |        |   |         | 8,405   |       
|                                    | Construction in progress                                                  |                                   |         | 8,469   |        |   |         | 5,622   |       
|                                    |                                                                           |                                   |         |         |        |  
|                                    |                                                                           |                                   | 156,907 |         |        |   | 140,278 |        
|                                    | Less accumulated depreciation and amortization                            |                                   |         | 86,879  |        |   |         | 77,142  |       
|                                    |                                                                           |                                   |         |         |        |  
|Total property, plant and equipment |                                                                           |                                   | 70,028  |         |        |   | 63,136  |        
|Other assets:                       |                                                                           |                                   |         |         |        |   |         |        
|                                    | Goodwill                                                                  |                                   |         | 32,495  |        |   |         | 32,495  |       
|                                    | Other intangible assets                                                   |                                   |         | 9,170   |        |   |         | 9,904   |       
|                                    | Shareholder notes                                                         |                                   |         |         |        |   |         | 1,000   |       
|                                    | Other                                                                     |                                   |         | 4,430   |        |   |         | 3,547   |       
|                                    |                                                                           |                                   |         |         |        |  
|Total other assets                  |                                                                           |                                   | 46,095  |         |        |   | 46,946  |        
|                                    |                                                                           |                                   |         |         |        |  
|Total assets                        |                                                                           | $                                 | 217,017 |         |        | $ | 193,549 |        
|                                    |                                                                           |                                   |         |         |        |  



See notes to consolidated financial statements.


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HAWK CORPORATION


CONSOLIDATED BALANCE SHEETS  (continued)


|                                           |                                                                                                                                                                                                           |             |         |         |      |   |         |        |  
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------- | ------- | ---- | - | ------- | ------ | -
|                                           |                                                                                                                                                                                                           | December 31 |        
|                                           |                                                                                                                                                                                                           |             |        
|                                           |                                                                                                                                                                                                           | 2004        |         |         | 2003 |  
|                                           |                                                                                                                                                                                                           |             |         |         |      |  
|Liabilities and shareholders equity       |                                                                                                                                                                                                           |             |         |         |      |   |         |       
|Current liabilities:                       |                                                                                                                                                                                                           |             |         |         |      |   |         |       
|                                           | Accounts payable                                                                                                                                                                                          |             | $       | 25,554  |      |   | $       | 21,569 |  
|                                           | Accrued compensation                                                                                                                                                                                      |             |         | 8,173   |      |   |         | 5,736  |  
|                                           | Accrued interest                                                                                                                                                                                          |             |         | 1,630   |      |   |         | 4,153  |  
|                                           | Accrued taxes                                                                                                                                                                                             |             |         | 2,652   |      |   |         | 2,213  |  
|                                           | Other accrued expenses                                                                                                                                                                                    |             |         | 5,597   |      |   |         | 6,083  |  
|                                           | Short-term debt                                                                                                                                                                                           |             |         | 980     |      |   |         | 1,326  |  
|                                           | Bank Facility                                                                                                                                                                                             |             |         |         |      |   |         | 24,059 |  
|                                           | Current portion of long-term debt                                                                                                                                                                         |             |         | 639     |      |   |         | 1,148  |  
|                                           | Current liabilities of discontinued operations                                                                                                                                                            |             |         | 4,297   |      |   |         | 3,652  |  
|                                           |                                                                                                                                                                                                           |             |         |         |      |  
|Total current liabilities                  |                                                                                                                                                                                                           |             | 49,522  |         |      |   | 69,939  |       
|Long-term liabilities:                     |                                                                                                                                                                                                           |             |         |         |      |   |         |       
|                                           | Long-term debt                                                                                                                                                                                            |             |         | 111,402 |      |   |         | 68,443 |  
|                                           | Deferred income taxes                                                                                                                                                                                     |             |         | 3,631   |      |   |         | 4,360  |  
|                                           | Other                                                                                                                                                                                                     |             |         | 7,795   |      |   |         | 9,102  |  
|                                           |                                                                                                                                                                                                           |             |         |         |      |  
|Total long-term liabilities                |                                                                                                                                                                                                           |             | 122,828 |         |      |   | 81,905  |       
|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 8,782,121 and 8,588,720
    outstanding in 2004 and 2003, respectively                                      |             |         | 92      |      |   |         | 92     |  
|                                           | Class B common stock, $.01 par value; 10,000,000 shares
    authorized; none issued or outstanding                                                                                                        |             |         |         |      |   |         |        |  
|                                           | Additional paid-in capital                                                                                                                                                                                |             |         | 53,867  |      |   |         | 54,483 |  
|                                           | Retained deficit                                                                                                                                                                                          |             |         | (3,353  | )    |   |         | (4,344 | )
|                                           | Accumulated other comprehensive loss                                                                                                                                                                      |             |         | (2,791  | )    |   |         | (4,083 | )
|                                           | Treasury stock, at cost, 405,629 and 599,030 shares in 2004 and
    2003, respectively                                                                                                                    |             |         | (3,149  | )    |   |         | (4,444 | )
|                                           |                                                                                                                                                                                                           |             |         |         |      |  
|Total shareholders equity                 |                                                                                                                                                                                                           |             | 44,667  |         |      |   | 41,705  |       
|                                           |                                                                                                                                                                                                           |             |         |         |      |  
|Total liabilities and shareholders equity |                                                                                                                                                                                                           | $           | 217,017 |         |      | $ | 193,549 |       
|                                           |                                                                                                                                                                                                           |             |         |         |      |  



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                                             |        
|                                                                                          |                                                               |                                                                    |        
|                                                                                          |                                                               | 2004                                                               |         |        | 2003 |   |         | 2002   |     
|                                                                                          |                                                               |                                                                    |         |        |      |   |         |        |     
|Net sales                                                                                 |                                                               | $                                                                  | 241,188 |        |      | $ | 202,551 |        |      | $ | 185,912 |       
|Cost of sales                                                                             |                                                               |                                                                    | 184,662 |        |      |   | 155,182 |        |      |   | 141,716 |       
|                                                                                          |                                                               |                                                                    |         |        |      |   |         |        |     
|Gross profit                                                                              |                                                               |                                                                    | 56,526  |        |      |   | 47,369  |        |      |   | 44,196  |       
|Operating expenses:                                                                       |                                                               |                                                                    |         |        |      |   |         |        |      |   |         |       
|                                                                                          | Selling, technical and administrative expenses                |                                                                    |         | 37,405 |      |   |         | 33,731 |      |   |         | 30,474 |      
|                                                                                          | Restructuring costs                                           |                                                                    |         | 1,117  |      |   |         |        |      |   |         |        |      
|                                                                                          | Pension curtailment and contractual termination benefit costs |                                                                    |         |        |      |   |         | 1,920  |      |   |         |        |      
|                                                                                          | Amortization of intangibles                                   |                                                                    |         | 734    |      |   |         | 800    |      |   |         | 767    |      
|                                                                                          |                                                               |                                                                    |         |        |      |   |         |        |     
|Total operating expenses                                                                  |                                                               |                                                                    | 39,256  |        |      |   | 36,451  |        |      |   | 31,241  |       
|                                                                                          |                                                               |                                                                    |         |        |      |   |         |        |     
|Income from operations                                                                    |                                                               |                                                                    | 17,270  |        |      |   | 10,918  |        |      |   | 12,955  |       
|Interest expense                                                                          |                                                               |                                                                    | (10,265 | )      |      |   | (10,752 | )      |      |   | (10,366 | )     
|Interest income                                                                           |                                                               |                                                                    | 54      |        |      |   | 57      |        |      |   | 116     |       
|Exchange offer costs                                                                      |                                                               |                                                                    | (2,431  | )      |      |   |         |        |      |   | (1,851  | )     
|Other (expense) income, net                                                               |                                                               |                                                                    | (244    | )      |      |   | 183     |        |      |   | (718    | )     
|                                                                                          |                                                               |                                                                    |         |        |      |   |         |        |     
|Income from continuing operations before income taxes                                     |                                                               |                                                                    | 4,384   |        |      |   | 406     |        |      |   | 136     |       
|Income tax provision (benefit)                                                            |                                                               |                                                                    | 2,899   |        |      |   | 855     |        |      |   | (669    | )     
|                                                                                          |                                                               |                                                                    |         |        |      |   |         |        |     
|Income (loss) from continuing operations, after income taxes                              |                                                               |                                                                    | 1,485   |        |      |   | (449    | )      |      |   | 805     |       
|Discontinued operations, net of tax of $186 in 2004, $2,700 in
    2003 and $825 in 2002. |                                                               |                                                                    | (344    | )      |      |   | (4,973  | )      |      |   | (1,850  | )     
|Cumulative effect of change in accounting principle, net of tax
    of $4,252             |                                                               |                                                                    |         |        |      |   |         |        |      |   | (17,200 | )     
|                                                                                          |                                                               |                                                                    |         |        |      |   |         |        |     
|Net income (loss)                                                                         |                                                               | $                                                                  | 1,141   |        |      | $ | (5,422  | )      |      | $ | (18,245 | )     
|                                                                                          |                                                               |                                                                    |         |        |      |   |         |        |     
|Earnings (loss) per share:                                                                |                                                               |                                                                    |         |        |      |   |         |        |      |   |         |       
|                                                                                          | Basic earnings (loss) per share:                              |                                                                    |         |        |      |   |         |        |      |   |         |        |      
|                                                                                          |                                                               | Earnings (loss) from continuing operations, after income
    taxes |         | $      | .15  |   |         | $      | (.07 | ) |         | $      | .08   |  
|                                                                                          |                                                               | Discontinued operations                                            |         |        | (.04 | ) |         |        | (.58 | ) |         |        | (.22  | )
|                                                                                          |                                                               | Cumulative effect of change in accounting principle                |         |        |      |   |         |        |      |   |         |        | (2.01 | )
|                                                                                          |                                                               |                                                                    |         |        |      |   |         |        |     
|                                                                                          | Net earnings (loss) per basic share                           |                                                                    | $       | .11    |      |   | $       | (.65   | )    |   | $       | (2.15  | )    
|                                                                                          |                                                               |                                                                    |         |        |      |   |         |        |     
|                                                                                          | Diluted earnings (loss) per share:                            |                                                                    |         |        |      |   |         |        |      |   |         |        |      
|                                                                                          |                                                               | Earnings (loss) from continuing operations, after income
    taxes |         | $      | .15  |   |         | $      | (.07 | ) |         | $      | .08   |  
|                                                                                          |                                                               | Discontinued operations                                            |         |        | (.04 | ) |         |        | (.58 | ) |         |        | (.22  | )
|                                                                                          |                                                               | Cumulative effect of change in accounting principle                |         |        |      |   |         |        |      |   |         |        | (2.00 | )
|                                                                                          |                                                               |                                                                    |         |        |      |   |         |        |     
|                                                                                          | Net earnings (loss) per diluted share                         |                                                                    | $       | .11    |      |   | $       | (.65   | )    |   | $       | (2.14  | )    
|                                                                                          |                                                               |                                                                    |         |        |      |   |         |        |     



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, 2002   |                                                                                          | $                                               | 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 |        
|                             |                                                                                          |                                                 |   |  |        |            |    |         |          |                      |           |         |   |             |         |         |           |   |        |          |       |   |        |  
|                             | Net income                                                                               |                                                 |   |  |        |            |    |         |          |                      |           |         |   |             |         | 1,141   |           |   |        |          |       |   |        |   |        |   |        |       |  |   |        | 1,141   |       
|                             | Other comprehensive income:                                                              |                                                 |   |  |        |            |    |         |          |                      |           |         |   |             |         |         |           |   |        |          |       |   |        |   |        |   |        |       |  |   |        |         |       
|                             |                                                                                          | Minimum pension liability, net of tax of $152   |   |  |        |            |    |         |          |                      |           |         |   |             |         |         |           |   |        |          |       |   |        |   | 245    |   |        |       |  |   |        |         | 245    |  
|                             |                                                                                          | Foreign currency translation                    |   |  |        |            |    |         |          |                      |           |         |   |             |         |         |           |   |        |          | 1,047 |   |        |   |        |   |        |       |  |   |        |         | 1,047  |  
|                             |                                                                                          |                                                 |   |  |        |            |    |         |          |                      |           |         |   |             |         |         |           |   |        |          |       |   |        |  
|                             | Total comprehensive income                                                               |                                                 |   |  |        |            |    |         |          |                      |           |         |   |             |         |         |           |   |        |          |       |   |        |   |        |   |        |       |  |   |        | 2,433   |       
|                             | Preferred stock dividends                                                                |                                                 |   |  |        |            |    |         |          |                      |           |         |   |             |         | (150    | )         |   |        |          |       |   |        |   |        |   |        |       |  |   |        | (150    | )     
|                             | Issuance of common stock from treasury as compensation and
    exercise of stock options |                                                 |   |  |        |            |    |         |          |                      |           | (616    | ) |             |         |         |           |   |        |          |       |   |        |   |        |   |        | 1,295 |  |   |        | 679     |       
|                             |                                                                                          |                                                 |   |  |        |            |    |         |          |                      |           |         |   |             |         |         |           |   |        |          |       |   |        |  
|Balance at December 31, 2004 |                                                                                          | $                                               | 1 |  |        | $          | 92 |         |          | $                    | 53,867    |         |   | $           | (3,353  | )       |           | $ | 1,420  |          |       | $ | (4,211 | ) |        | $ | (3,149 | )     |  | $ | 44,667 |        
|                             |                                                                                          |                                                 |   |  |        |            |    |         |          |                      |           |         |   |             |         |         |           |   |        |          |       |   |        |  



See notes to consolidated financial statements.


39



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##### Table of Contents



HAWK CORPORATION


CONSOLIDATED STATEMENTS OF CASH FLOWS


(In Thousands)


|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |        |   |         |        |        |  
|------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------ | --------------------------- | -------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                                                                       |                                                                                | Year ended December 31      |         
|                                                                                                       |                                                                                |                             |         
|                                                                                                       |                                                                                | 2004                        |          |        | 2003   |   |         | 2002   |       
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       
|Cash flows from operating activities                                                                   |                                                                                |                             |          |        |        |   |         |        |        |   |         |       
|Net income (loss)                                                                                      |                                                                                | $                           | 1,141    |        |        | $ | (5,422  | )      |        | $ | (18,245 | )     
|Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities: |                                                                                |                             |          |        |        |   |         |        |        |   |         |       
|                                                                                                       | Loss from discontinued operations, net of tax                                  |                             |          | 344    |        |   |         | 4,973  |        |   |         | 1,850  |       
|                                                                                                       | Cumulative effect of change in accounting principle, net of tax                |                             |          |        |        |   |         |        |        |   |         | 17,200 |       
|                                                                                                       | Depreciation and amortization                                                  |                             |          | 11,180 |        |   |         | 11,674 |        |   |         | 11,657 |       
|                                                                                                       | Write-off of unamortized consent payments and deferred financing               |                             |          | 1,521  |        |   |         |        |        |   |         |        |       
|                                                                                                       | Deferred income taxes                                                          |                             |          | (1,602 | )      |   |         | (3,699 | )      |   |         | 1,406  |       
|                                                                                                       | Loss on fixed assets                                                           |                             |          | 996    |        |   |         | 204    |        |   |         | 47     |       
|                                                                                                       | Changes in operating assets and liabilities:                                   |                             |          |        |        |   |         |        |        |   |         |        |       
|                                                                                                       |                                                                                | Accounts receivable         |          |        | (5,949 | ) |         |        | (949   | ) |         |        | (4,047 | )
|                                                                                                       |                                                                                | Inventories                 |          |        | (5,657 | ) |         |        | (1,656 | ) |         |        | (3,110 | )
|                                                                                                       |                                                                                | Other assets                |          |        | 2,122  |   |         |        | 3,048  |   |         |        | (6,962 | )
|                                                                                                       |                                                                                | Accounts payable            |          |        | 3,311  |   |         |        | 4,494  |   |         |        | 2,922  |  
|                                                                                                       |                                                                                | Accrued expenses            |          |        | 125    |   |         |        | 4,214  |   |         |        | (7,208 | )
|                                                                                                       |                                                                                | Other liabilities and other |          |        | (1,516 | ) |         |        | 6,904  |   |         |        | (3,161 | )
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       
|Net cash provided by (used in) operating activities of
    continuing operations                       |                                                                                |                             | 6,016    |        |        |   | 23,785  |        |        |   | (7,651  | )     
|Net cash provided by operating activities of discontinued
    operations                               |                                                                                |                             | 368      |        |        |   | 2,299   |        |        |   | 4,861   |       
|Cash flows from investing activities                                                                   |                                                                                |                             |          |        |        |   |         |        |        |   |         |       
|Purchases of property, plant and equipment                                                             |                                                                                |                             | (18,297  | )      |        |   | (10,677 | )      |        |   | (9,729  | )     
|Proceeds from sale of assets                                                                           |                                                                                |                             | 881      |        |        |   | 568     |        |        |   |         |       
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       
|Net cash used in investing activities of continuing operations                                         |                                                                                |                             | (17,416  | )      |        |   | (10,109 | )      |        |   | (9,729  | )     
|Net cash used in investing activities of discontinued operations                                       |                                                                                |                             | (173     | )      |        |   | (308    | )      |        |   | (1,075  | )     
|Cash flows from financing activities                                                                   |                                                                                |                             |          |        |        |   |         |        |        |   |         |       
|Deferred financing                                                                                     |                                                                                |                             | (4,096   | )      |        |   |         |        |        |   |         |       
|Payments on short-term debt                                                                            |                                                                                |                             | (342     | )      |        |   |         |        |        |   |         |       
|Proceeds from short-term debt                                                                          |                                                                                |                             |          |        |        |   | 1,326   |        |        |   |         |       
|Proceeds from long-term debt                                                                           |                                                                                |                             |          |        |        |   | 503     |        |        |   | 53,370  |       
|Payments on long-term debt                                                                             |                                                                                |                             | (1,629   | )      |        |   | (2,960  | )      |        |   | (77,399 | )     
|Proceeds from Senior Notes                                                                             |                                                                                |                             | 110,000  |        |        |   |         |        |        |   |         |       
|Proceeds from Bank Facility                                                                            |                                                                                |                             | 13,575   |        |        |   |         |        |        |   |         |       
|Payments on Bank Facility                                                                              |                                                                                |                             | (13,355  | )      |        |   |         |        |        |   |         |       
|Payment on Old Senior Notes                                                                            |                                                                                |                             | (66,267  | )      |        |   | (583    | )      |        |   |         |       
|Proceeds from Old Bank Facility                                                                        |                                                                                |                             | 92,336   |        |        |   | 68,173  |        |        |   | 52,165  |       
|Payments on Old Bank Facility                                                                          |                                                                                |                             | (116,395 | )      |        |   | (80,441 | )      |        |   | (15,838 | )     
|Proceeds from exercise of stock options                                                                |                                                                                |                             | 679      |        |        |   | 59      |        |        |   |         |       
|Payments of preferred stock dividends                                                                  |                                                                                |                             | (150     | )      |        |   | (150    | )      |        |   | (150    | )     
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       
|Net cash provided by (used in) financing activities of
    continuing operations                       |                                                                                |                             | 14,356   |        |        |   | (14,073 | )      |        |   | 12,148  |       
|Effect of exchange rate changes on cash                                                                |                                                                                |                             | 269      |        |        |   | 69      |        |        |   | 64      |       
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       
|Net cash provided by (used in) continuing operations                                                   |                                                                                |                             | 3,225    |        |        |   | (328    | )      |        |   | (5,168  | )     
|Net cash provided by discontinued operations                                                           |                                                                                |                             | 195      |        |        |   | 1,991   |        |        |   | 3,786   |       
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       
|Net increase (decrease) in cash and cash equivalents                                                   |                                                                                |                             | 3,420    |        |        |   | 1,663   |        |        |   | (1,382  | )     
|Cash and cash equivalents at beginning of year                                                         |                                                                                |                             | 3,365    |        |        |   | 1,702   |        |        |   | 3,084   |       
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       
|Cash and cash equivalents at end of year                                                               |                                                                                | $                           | 6,785    |        |        | $ | 3,365   |        |        | $ | 1,702   |       
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       
|Supplemental cash flow information                                                                     |                                                                                |                             |          |        |        |   |         |        |        |   |         |       
|Cash payments for interest                                                                             |                                                                                | $                           | 12,189   |        |        | $ | 5,556   |        |        | $ | 9,975   |       
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       
|Cash payments (refunds) for income taxes, net                                                          |                                                                                | $                           | 3,252    |        |        | $ | (1,879  | )      |        | $ | (2,371  | )     
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       
|Noncash investing and financing activities:                                                            |                                                                                |                             |          |        |        |   |         |        |        |   |         |       
|                                                                                                       | Equipment purchased with capital leases and notes payable                      |                             |          |        |        |   | $       | 546    |        |   | $       | 20     |       
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       
|                                                                                                       | Issuance of common stock from treasury                                         |                             | $        | 40     |        |   | $       | 30     |        |   | $       | 27     |       
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       
|                                                                                                       | Issuance of payment in kind (PIK) payments in the form of
    Old Senior Notes |                             | $        | 83     |        |   | $       | 124    |        |   |         |        |       
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       
|                                                                                                       | Issuance of consent payments in the form of Old Senior Notes                   |                             |          |        |        |   |         |        |        |   | $       | 1,642  |       
|                                                                                                       |                                                                                |                             |          |        |        |   |         |        |       



See notes to consolidated financial statements.


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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2004, 2003 and 2002


(In Thousands, except share data)




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









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



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





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





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





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





| |                  
| | -----------------
| | Long-Lived Assets





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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)






| |         
| | --------
| | Goodwill

Goodwill and Other Intangible Assets




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







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



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




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





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





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





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





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





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





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



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




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

Accounting for Stock-Based Compensation,


|                                   |                                                                                                     |                        |       |     |      |   |        |        |   |   |         |         |  
|---------------------------------- | --------------------------------------------------------------------------------------------------- | ---------------------- | ----- | --- | ---- | - | ------ | ------ | - | - | ------- | ------- | -
|                                   |                                                                                                     | Year Ended December 31 |      
|                                   |                                                                                                     |                        |      
|                                   |                                                                                                     | 2004                   |       |     | 2003 |   |        | 2002   |  
|                                   |                                                                                                     |                        |       |     |      |   |        |        |  
|Net income (loss) as reported      |                                                                                                     | $                      | 1,141 |     |      | $ | (5,422 | )      |   | $ | (18,245 | )      
|                                   | Employee stock-based compensation expense determined under fair
    value based methods, net of tax |                        |       | 237 |      |   |        | 663    |   |   |         | 1,020   |  
|                                   |                                                                                                     |                        |       |     |      |   |        |        |  
|                                   | Pro forma net income (loss)                                                                         |                        | $     | 904 |      |   | $      | (6,085 | ) |   | $       | (19,265 | )
|                                   |                                                                                                     |                        |       |     |      |   |        |        |  
|Basic earnings (loss) per share:   |                                                                                                     |                        |       |     |      |   |        |        |   |   |         |        
|                                   | As reported                                                                                         |                        | $     | .11 |      |   | $      | (.65   | ) |   | $       | (2.15   | )
|                                   |                                                                                                     |                        |       |     |      |   |        |        |  
|                                   | Pro forma                                                                                           |                        | $     | .09 |      |   | $      | (.73   | ) |   | $       | (2.27   | )
|                                   |                                                                                                     |                        |       |     |      |   |        |        |  
|Diluted earnings (loss) per share: |                                                                                                     |                        |       |     |      |   |        |        |   |   |         |        
|                                   | As reported                                                                                         |                        | $     | .11 |      |   | $      | (.65   | ) |   | $       | (2.14   | )
|                                   |                                                                                                     |                        |       |     |      |   |        |        |  
|                                   | Pro forma                                                                                           |                        | $     | .08 |      |   | $      | (.73   | ) |   | $       | (2.26   | )
|                                   |                                                                                                     |                        |       |     |      |   |        |        |  



|                                |  |                        |            |  |      |  |            |      |  |  |            | 
|------------------------------- |  | ---------------------- | ---------- |  | ---- |  | ---------- | ---- |  |  | ---------- | 
|                                |  | Year Ended December 31 |           
|                                |  |                        |           
|                                |  | 2004                   |            |  | 2003 |  |            | 2002 | 
|                                |  |                        |            |  |      |  |            |      | 
|Dividend yield                  |  |                        | 0%         |  |      |  | 0%         |      |  |  | 0%         | 
|Expected volatility             |  |                        | 54.7%      |  |      |  | 54.0%      |      |  |  | 66.5%      | 
|Risk free interest rate         |  |                        | 4.33%      |  |      |  | 4.00%      |      |  |  | 4.00%      | 
|Expected average holding period |  |                        | 7.3  years |  |      |  | 7.3  years |      |  |  | 7.5  years | 



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





| |                               
| | ------------------------------
| | Recent Accounting Developments



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




Share-Based Payment Accounting for Stock
Based Compensation.


Inventory Costs




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









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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




|                                         |  |                        |        |   |      |   |        |      |  |   |        |  
|---------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                         |  | Year Ended December 31 |       
|                                         |  |                        |       
|                                         |  | 2004                   |        |   | 2003 |   |        | 2002 | 
|                                         |  |                        |        |   |      |   |        |      | 
|Net sales                                |  | $                      | 12,978 |   |      | $ | 14,463 |      |  | $ | 11,374 |  
|                                         |  |                        |        |   |      |   |        |      | 
|Loss from operations before income taxes |  | $                      | (530   | ) |      | $ | (7,673 | )    |  | $ | (2,675 | )
|Income tax benefit                       |  |                        | 186    |   |      |   | 2,700  |      |  |   | 825    |  
|                                         |  |                        |        |   |      |   |        |      | 
|Loss from operations, net of tax         |  | $                      | (344   | ) |      | $ | (4,973 | )    |  | $ | (1,850 | )
|                                         |  |                        |        |   |      |   |        |      | 



|                                             |  |      |       |  |      |   |       | 
|-------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | 
|                                             |  | 2004 |       |  | 2003 |  
|                                             |  |      |       |  |      |  
|Accounts receivable                          |  | $    | 3,069 |  |      | $ | 2,801 | 
|Inventory                                    |  |      | 673   |  |      |   | 739   | 
|Other current assets                         |  |      | 418   |  |      |   | 40    | 
|Property, plant and equipment                |  |      | 289   |  |      |   | 320   | 
|Other long-term assets                       |  |      | 50    |  |      |   | 402   | 
|                                             |  |      |       |  |      |  
|Total assets of discontinued operations      |  | $    | 4,499 |  |      | $ | 4,302 | 
|                                             |  |      |       |  |      |  
|Accounts payable                             |  | $    | 3,973 |  |      | $ | 2,870 | 
|Other accrued expenses                       |  |      | 324   |  |      |   | 465   | 
|Current portion of long-term debt            |  |      |       |  |      |   | 317   | 
|                                             |  |      |       |  |      |  
|Total liabilities of discontinued operations |  | $    | 4,297 |  |      | $ | 3,652 | 
|                                             |  |      |       |  |      |  



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





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



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

46



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




|                        |  |                   |        |             |                   |   |        |     |  |   |             |  |  |              |        |  |     |   |        |  |  |   |       | 
|----------------------- |  | ----------------- | ------ | ----------- | ----------------- | - | ------ | --- |  | - | ----------- |  |  | ------------ | ------ |  | --- | - | ------ |  |  | - | ----- | 
|                        |  | December 31, 2004 |        |             | December 31, 2003 |  
|                        |  |                   |        |             |                   |  
|                        |  |                   |        | Accumulated |                   |   |        |     |  |   | Accumulated |  |  |             
|                        |  | Gross             |        |             | Amortization      |   |        | Net |  |   | Gross       |  |  | Amortization |        |  | Net |  
|                        |  |                   |        |             |                   |   |        |     |  |   |             |  |  |              |        |  |     |  
|Product certifications  |  | $                 | 20,820 |             |                   | $ | 11,716 |     |  | $ | 9,104       |  |  | $            | 20,820 |  |     | $ | 10,984 |  |  | $ | 9,836 | 
|Other intangible assets |  |                   | 2,719  |             |                   |   | 2,653  |     |  |   | 66          |  |  |              | 2,719  |  |     |   | 2,651  |  |  |   | 68    | 
|                        |  |                   |        |             |                   |   |        |     |  |   |             |  |  |              |        |  |     |  
|                        |  | $                 | 23,539 |             |                   | $ | 14,369 |     |  | $ | 9,170       |  |  | $            | 23,539 |  |     | $ | 13,635 |  |  | $ | 9,904 | 
|                        |  |                   |        |             |                   |   |        |     |  |   |             |  |  |              |        |  |     |  









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

|                                         |  |             |         |  |      |   |        | 
|---------------------------------------- |  | ----------- | ------- |  | ---- | - | ------ | 
|                                         |  | December 31 |        
|                                         |  |             |        
|                                         |  | 2004        |         |  | 2003 |  
|                                         |  |             |         |  |      |  
|Short-term debt                          |  | $           | 980     |  |      | $ | 1,326  | 
|Senior Notes                             |  |             | 110,000 |  |      |   |        | 
|Old Senior Notes                         |  |             |         |  |      |   | 66,183 | 
|Bank Facility                            |  |             | 220     |  |      |   |        | 
|Old Bank Facility                        |  |             |         |  |      |   | 24,059 | 
|Other                                    |  |             | 1,821   |  |      |   | 3,408  | 
|                                         |  |             |         |  |      |  
|                                         |  |             | 113,021 |  |      |   | 94,976 | 
|Less current portion and short-term debt |  |             | 1,619   |  |      |   | 26,533 | 
|                                         |  |             |         |  |      |  
|                                         |  | $           | 111,402 |  |      | $ | 68,443 | 
|                                         |  |             |         |  |      |  

3 4




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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




|                             |  |            |          | 
|---------------------------- |  | ---------- | -------- | 
|For the period below         |  | Percentage |         
|                             |  |            |         
|On or after November 1, 2009 |  |            | 104.375% | 
|On or after November 1, 2010 |  |            | 103.281% | 
|On or after November 1, 2011 |  |            | 102.188% | 
|On or after November 1, 2012 |  |            | 101.094% | 
|On or after November 1, 2013 |  |            | 100.000% | 







| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | incur or guarantee additional debt or issue disqualified capital
    stock,            
|
| |  | pay dividends, redeem subordinated debt or make other restricted
    payments,         
|
| |  | issue preferred stock of our subsidiaries,                                             
|
| |  | transfer or sell assets, including capital stock of our
    subsidiaries,              
|
| |  | incur dividend or other payment restrictions affecting certain
    of our subsidiaries,
|
| |  | make certain investments or acquisitions,                                              
|
| |  | grant liens on our assets,                                                             
|
| |  | enter into certain transactions with affiliates, and                                   
|
| |  | merge, consolidate or transfer substantially all of our assets.                        







| |   |                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | there is no default or event of default,                                                                                                                                                                               
|
| |  | the Company meets the cash flow ratio, and                                                                                                                                                                             
|
| |  | the amount of the dividend payment plus certain other payments
    is not in excess of a formula based on the sum of the
    Companys consolidated net income after November 1,
    2004, the cash proceeds of certain

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




| |  |                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------
| |  | equity offerings by the Company after November 1, 2004 and
    the return on certain investments made by the Company.







| |   |                                       
| | - | --------------------------------------
| |  | there is no event of default, and     
|
| |  | availability is not less than $10,000.











7.     Shareholders Equity




49



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




8.     Employee Stock Option Plan






|                                                               |  |         |           |          |       |   |      |         |          |  |           |   |  |          |       |  |       |  |           |   |  |   |      | 
|-------------------------------------------------------------- |  | ------- | --------- | -------- | ----- | - | ---- | ------- | -------- |  | --------- | - |  | -------- | ----- |  | ----- |  | --------- | - |  | - | ---- | 
|                                                               |  | 2004    |           |          | 2003  |   |      | 2002    |         
|                                                               |  |         |           |          |       |   |      |         |         
|                                                               |  |         |           | Weighted |       |   |      |         | Weighted |  |           |   |  | Weighted |      
|                                                               |  |         |           | Average  |       |   |      |         | Average  |  |           |   |  | Average  |      
|                                                               |  |         |           | Exercise |       |   |      |         | Exercise |  |           |   |  | Exercise |      
|                                                               |  | Options |           |          | Price |   |      | Options |          |  | Price     |   |  | Options  |       |  | Price | 
|                                                               |  |         |           |          |       |   |      |         |          |  |           |   |  |          |       |  |       | 
|Options outstanding at beginning of year                       |  |         | 821,781   |          |       | $ | 4.54 |         |          |  | 1,217,729 |   |  | $        | 6.63  |  |       |  | 1,324,646 |   |  | $ | 6.73 | 
|Granted                                                        |  |         | 523,630   |          |       |   | 5.62 |         |          |  |           |   |  |          |       |  |       |  | 53,418    |   |  |   | 4.89 | 
|Exercised                                                      |  |         | (185,353  | )        |       |   | 3.66 |         |          |  | (17,094   | ) |  |          | 3.40  |  |       |  |           |   |  |   |      | 
|Forfeited or expired                                           |  |         | (48,758   | )        |       |   | 6.90 |         |          |  | (378,854  | ) |  |          | 11.41 |  |       |  | (160,335  | ) |  |   | 6.81 | 
|                                                               |  |         |           |          |       |   |      |         |          |  |           |   |  |          |       |  |       | 
|Options outstanding at end of year                             |  |         | 1,111,300 |          |       | $ | 5.09 |         |          |  | 821,781   |   |  | $        | 4.54  |  |       |  | 1,217,729 |   |  | $ | 6.62 | 
|Exercisable at the end of the year                             |  |         | 793,910   |          |       | $ | 4.72 |         |          |  | 718,306   |   |  | $        | 4.42  |  |       |  | 636,632   |   |  | $ | 7.69 | 
|Weighted average fair value of options granted during the year |  |         |           |          |       | $ | 3.49 |         |          |  |           |   |  |          |       |  |       |  |           |   |  | $ | 4.34 | 
|Shares available for future grant                              |  |         | 86,253    |          |       |   |      |         |          |  | 578,219   |   |  |          |       |  |       |  | 182,271   |   |  |   |      | 



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




|                        |  |             |         |          |             |   |             |              |  |  |         |          |  |       |         |  |  |   |      | 
|----------------------- |  | ----------- | ------- | -------- | ----------- | - | ----------- | ------------ |  |  | ------- | -------- |  | ----- | ------- |  |  | - | ---- | 
|                        |  | 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        |  |             | 159,009 |          |             | $ | 3.40        |              |  |  | 6.8     |          |  |       | 159,009 |  |  | $ | 3.40 | 
|$ 3.51 to $ 5.00        |  |             | 279,177 |          |             | $ | 3.86        |              |  |  | 2.4     |          |  |       | 266,369 |  |  | $ | 3.82 | 
|$ 5.01 to $ 6.00        |  |             | 423,114 |          |             | $ | 5.15        |              |  |  | 8.3     |          |  |       | 288,532 |  |  | $ | 5.16 | 
|$ 6.01 to $16.99        |  |             | 250,000 |          |             | $ | 7.42        |              |  |  | 8.0     |          |  |       | 80,000  |  |  | $ | 8.74 | 

9.     Employee Benefits






|                               |                                   |                                                               |        |        |        |   |        |        |        |  
|------------------------------ | --------------------------------- | ------------------------------------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                               |                                   | December 31                                                   |       
|                               |                                   |                                                               |       
|                               |                                   | 2004                                                          |        |        | 2003   |  
|                               |                                   |                                                               |        |        |        |  
|Accumulated benefit obligation |                                   | $                                                             | 24,956 |        |        | $ | 23,044 |       
|                               |                                   |                                                               |        |        |        |  
|Change in benefit obligation:  |                                   |                                                               |        |        |        |   |        |       
|                               |                                   | Benefit obligation at beginning of year                       |        | $      | 24,159 |   |        | $      | 19,268 |  
|                               |                                   | Service cost                                                  |        |        | 1,073  |   |        |        | 840    |  
|                               |                                   | Interest cost                                                 |        |        | 1,490  |   |        |        | 1,329  |  
|                               |                                   | Actuarial losses                                              |        |        | 480    |   |        |        | 1,683  |  
|                               |                                   | Plan amendments                                               |        |        |        |   |        |        | 54     |  
|                               |                                   | Foreign currency exchange rate impact                         |        |        | 102    |   |        |        | 162    |  
|                               |                                   | Pension curtailment and contractual termination benefit costs |        |        |        |   |        |        | 1,847  |  
|                               |                                   | Benefits paid                                                 |        |        | (1,189 | ) |        |        | (1,024 | )
|                               |                                   |                                                               |        |        |        |  
|                               | Benefit obligation at end of year |                                                               | $      | 26,115 |        |   | $      | 24,159 |       
|                               |                                   |                                                               |        |        |        |  

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)


|                                                                  |                                                |                                     |        |        |        |   |        |        |        |  
|----------------------------------------------------------------- | ---------------------------------------------- | ----------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                                                  |                                                | December 31                         |       
|                                                                  |                                                |                                     |       
|                                                                  |                                                | 2004                                |        |        | 2003   |  
|                                                                  |                                                |                                     |        |        |        |  
|Change in plan assets:                                            |                                                |                                     |        |        |        |   |        |       
|                                                                  | Fair value of plan assets at beginning of year |                                     | $      | 18,415 |        |   | $      | 14,170 |       
|                                                                  | Actual return on plan assets                   |                                     |        | 2,022  |        |   |        | 3,516  |       
|                                                                  | Foreign currency exchange rate impact          |                                     |        | 95     |        |   |        | 193    |       
|                                                                  | Company contributions                          |                                     |        | 1,605  |        |   |        | 1,560  |       
|                                                                  | Benefits paid                                  |                                     |        | (1,189 | )      |   |        | (1,024 | )     
|                                                                  |                                                |                                     |        |        |        |  
|Fair value of plan assets at end of year                          |                                                | $                                   | 20,948 |        |        | $ | 18,415 |       
|                                                                  |                                                |                                     |        |        |        |  
|Funded status of the plans                                        |                                                | $                                   | (5,167 | )      |        | $ | (5,744 | )     
|Unrecognized net actuarial losses                                 |                                                |                                     | 7,813  |        |        |   | 7,975  |       
|Unrecognized initial net obligation                               |                                                |                                     | 110    |        |        |   | 92     |       
|Foreign currency exchange rate impact                             |                                                |                                     | 61     |        |        |   | 39     |       
|Unamortized prior service cost                                    |                                                |                                     | 120    |        |        |   | 194    |       
|                                                                  |                                                |                                     |        |        |        |  
|Net prepaid benefit cost                                          |                                                | $                                   | 2,937  |        |        | $ | 2,556  |       
|                                                                  |                                                |                                     |        |        |        |  
|Amounts recognized in the balance sheet consist of the following: |                                                |                                     |        |        |        |   |        |       
|                                                                  |                                                | Prepaid benefit cost                |        | $      | 3,857  |   |        | $      | 3,785  |  
|                                                                  |                                                | Accrued benefit liability           |        |        | (7,943 | ) |        |        | (8,976 | )
|                                                                  |                                                | Intangible asset                    |        |        | 175    |   |        |        | 502    |  
|                                                                  |                                                | Cumulative other comprehensive loss |        |        | 6,848  |   |        |        | 7,245  |  
|                                                                  |                                                |                                     |        |        |        |  
|Net amount recognized                                             |                                                | $                                   | 2,937  |        |        | $ | 2,556  |       
|                                                                  |                                                |                                     |        |        |        |  



|                                                  |  |             |        |  |      |   |        | 
|------------------------------------------------- |  | ----------- | ------ |  | ---- | - | ------ | 
|                                                  |  | December 31 |       
|                                                  |  |             |       
|                                                  |  | 2004        |        |  | 2003 |  
|                                                  |  |             |        |  |      |  
|Projected benefit obligation                      |  | $           | 26,115 |  |      | $ | 23,169 | 
|Accumulated benefit obligation                    |  | $           | 24,956 |  |      | $ | 22,272 | 
|Fair value of plan assets                         |  | $           | 20,948 |  |      | $ | 17,263 | 
|Amounts recognized as accrued benefit liabilities |  | $           | 7,943  |  |      | $ | 8,976  | 
|Amounts recognized as intangible asset            |  | $           | 175    |  |      | $ | 502    | 

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)


|                                         |                                      |                        |       |        |      |   |       |        |   |   |     |        |  
|---------------------------------------- | ------------------------------------ | ---------------------- | ----- | ------ | ---- | - | ----- | ------ | - | - | --- | ------ | -
|                                         |                                      | Year ended December 31 |      
|                                         |                                      |                        |      
|                                         |                                      | 2004                   |       |        | 2003 |   |       | 2002   |  
|                                         |                                      |                        |       |        |      |   |       |        |  
|Components of net periodic pension cost: |                                      |                        |       |        |      |   |       |        |   |   |     |       
|                                         | Service cost                         |                        | $     | 1,073  |      |   | $     | 840    |   |   | $   | 732    |  
|                                         | Interest cost                        |                        |       | 1,490  |      |   |       | 1,329  |   |   |     | 1,292  |  
|                                         | Expected return on plan assets       |                        |       | (1,610 | )    |   |       | (1,269 | ) |   |     | (1,798 | )
|                                         | Amortization of prior service cost   |                        |       | 74     |      |   |       | 71     |   |   |     | 80     |  
|                                         | Contractual termination benefit cost |                        |       |        |      |   |       | 1,836  |   |   |     |        |  
|                                         | Pension curtailment                  |                        |       |        |      |   |       | 386    |   |   |     |        |  
|                                         | Recognized net actuarial loss        |                        |       | 251    |      |   |       | 362    |   |   |     | 60     |  
|                                         |                                      |                        |       |        |      |   |       |        |  
|                                         |                                      | $                      | 1,278 |        |      | $ | 3,555 |        |   | $ | 366 |       
|                                         |                                      |                        |       |        |      |   |       |        |  





|                              |       |             |    |     |      |  |    |     |  
|----------------------------- | ----- | ----------- | -- | --- | ---- |  | -- | --- | -
|                              |       | December 31 |   
|                              |       |             |   
|                              |       | 2004        |    |     | 2003 | 
|                              |       |             |    |     |      | 
|Asset Category                |       |             |    |     |      |  |    |    
|Equity securities             |       |             | 73 | %   |      |  | 75 | %  
|Debt securities               |       |             | 21 | %   |      |  | 21 | %  
|Hawk Corporation common stock |       |             | 3  | %   |      |  | 1  | %  
|Other                         |       |             | 3  | %   |      |  | 3  | %  
|                              |       |             |    |     |      | 
|                              | Total |             |    | 100 | %    |  |    | 100 | %
|                              |       |             |    |     |      | 



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




|                                                                                                            |                                          |      |  |      |      |  |  |      |   |  |  |      |  
|----------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ---- |  | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                                                                                                            |                                          | 2004 |  |      | 2003 |  |  | 2002 |  
|                                                                                                            |                                          |      |  |      |      |  |  |      |  
|Weighted average rates used to compute the projected benefit
    obligation as of December 31:              |                                          |      |  |      |      |  |  |      |   |  |  |     
|                                                                                                            | Discount rate                            |      |  | 6.00 | %    |  |  | 6.25 | % |  |  |      |  
|                                                                                                            | Rate of compensation increase            |      |  | 3.04 | %    |  |  | 3.03 | % |  |  |      |  
|                                                                                                            | Expected long-term return on plan assets |      |  | 8.57 | %    |  |  | 8.59 | % |  |  |      |  
|Weighted average rates used to determine the net periodic
    benefit cost for the years ended December 31: |                                          |      |  |      |      |  |  |      |   |  |  |     
|                                                                                                            | Discount rate                            |      |  | 6.25 | %    |  |  | 6.75 | % |  |  | 7.26 | %
|                                                                                                            | Rate of compensation increase            |      |  | 3.02 | %    |  |  | 3.02 | % |  |  | 3.06 | %
|                                                                                                            | Expected long-term return on plan assets |      |  | 8.57 | %    |  |  | 8.59 | % |  |  | 9.34 | %







|     |           |  |                  |   |       | 
|---- | --------- |  | ---------------- | - | ----- | 
|Year |           |  | Pension Benefits |  
|     |           |  |                  |  
|     | 2005      |  |                  | $ | 1,581 | 
|     | 2006      |  |                  | $ | 1,660 | 
|     | 2007      |  |                  | $ | 1,674 | 
|     | 2008      |  |                  | $ | 1,701 | 
|     | 2009      |  |                  | $ | 1,682 | 
|     | 2010-2014 |  |                  | $ | 9,117 | 



10.     Lease Obligations




|                                 |  |             |       |  |      |   |       | 
|-------------------------------- |  | ----------- | ----- |  | ---- | - | ----- | 
|                                 |  | December 31 |      
|                                 |  |             |      
|                                 |  | 2004        |       |  | 2003 |  
|                                 |  |             |       |  |      |  
|Buildings and improvements       |  | $           | 1,107 |  |      | $ | 1,026 | 
|Machinery and equipment          |  |             | 1,119 |  |      |   | 1,056 | 
|                                 |  |             |       |  |      |  
|Gross assets under capital lease |  |             | 2,226 |  |      |   | 2,082 | 
|Accumulated amortization         |  |             | 521   |  |      |   | 350   | 
|                                 |  |             |       |  |      |  
|Net assets under capital lease   |  | $           | 1,705 |  |      | $ | 1,732 | 
|                                 |  |             |       |  |      |  

54



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)






11.     Income Taxes




|                                     |                 |                        |        |        |      |   |        |        |   |   |        |        |  
|------------------------------------ | --------------- | ---------------------- | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                     |                 | Year ended December 31 |       
|                                     |                 |                        |       
|                                     |                 | 2004                   |        |        | 2003 |   |        | 2002   |  
|                                     |                 |                        |        |        |      |   |        |        |  
|Current:                             |                 |                        |        |        |      |   |        |        |   |   |        |       
|                                     | Federal         |                        |        |        |      |   |        |        |   |   | $      | (3,602 | )
|                                     | State and local |                        | $      | 744    |      |   | $      | 45     |   |   |        | (38    | )
|                                     | Foreign         |                        |        | 3,630  |      |   |        | 1,885  |   |   |        | 574    |  
|                                     |                 |                        |        |        |      |   |        |        |  
|                                     |                 |                        | 4,374  |        |      |   | 1,930  |        |   |   | (3,066 | )     
|Deferred:                            |                 |                        |        |        |      |   |        |        |   |   |        |       
|                                     | Federal         |                        |        | (1,248 | )    |   |        | (1,059 | ) |   |        | 2,333  |  
|                                     | State and local |                        |        | (135   | )    |   |        | (12    | ) |   |        | 18     |  
|                                     | Foreign         |                        |        | (92    | )    |   |        | (4     | ) |   |        | 46     |  
|                                     |                 |                        |        |        |      |   |        |        |  
|                                     |                 |                        | (1,475 | )      |      |   | (1,075 | )      |   |   | 2,397  |       
|                                     |                 |                        |        |        |      |   |        |        |  
|Total income tax provision (benefit) |                 | $                      | 2,899  |        |      | $ | 855    |        |   | $ | (669   | )     
|                                     |                 |                        |        |        |      |   |        |        |  

55



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




|                                      |                                        |      |        |        |      |   |        |        | 
|------------------------------------- | -------------------------------------- | ---- | ------ | ------ | ---- | - | ------ | ------ | 
|                                      |                                        | 2004 |        |        | 2003 |  
|                                      |                                        |      |        |        |      |  
|Deferred tax assets:                  |                                        |      |        |        |      |   |        |       
|                                      | NOL and AMT carryforward               |      | $      | 6,735  |      |   | $      | 3,755  | 
|                                      | Accrued vacation                       |      |        | 627    |      |   |        | 618    | 
|                                      | Employee benefits                      |      |        | 2,459  |      |   |        | 2,616  | 
|                                      | Other accruals                         |      |        | 3,521  |      |   |        | 3,484  | 
|                                      | Book over tax goodwill amortization    |      |        | 9,613  |      |   |        | 1,109  | 
|                                      | Inventory                              |      |        | 1,320  |      |   |        | 557    | 
|                                      |                                        |      |        |        |      |  
|Total deferred tax assets             |                                        |      | 24,275 |        |      |   | 12,139 |       
|Deferred tax liabilities:             |                                        |      |        |        |      |   |        |       
|                                      | Tax over book depreciation             |      |        | 10,909 |      |   |        | 10,066 | 
|                                      | Tax over book intangibles amortization |      |        | 11,577 |      |   |        | 2,192  | 
|                                      | Foreign leased property                |      |        | 353    |      |   |        | 353    | 
|                                      | Debt financing costs                   |      |        | 28     |      |   |        | 178    | 
|                                      | Other                                  |      |        | 456    |      |   |        | 159    | 
|                                      |                                        |      |        |        |      |  
|Total deferred tax liabilities        |                                        |      | 23,323 |        |      |   | 12,948 |       
|                                      |                                        |      |        |        |      |  
|Net deferred tax assets (liabilities) |                                        | $    | 952    |        |      | $ | (809   | )     
|                                      |                                        |      |        |        |      |  



Accounting for
Income Taxes,


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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




|                                                                            |  |             |       |  |      |   |     |      |  |   |      |  
|--------------------------------------------------------------------------- |  | ----------- | ----- |  | ---- | - | --- | ---- |  | - | ---- | -
|                                                                            |  | December 31 |      
|                                                                            |  |             |      
|                                                                            |  | 2004        |       |  | 2003 |   |     | 2002 | 
|                                                                            |  |             |       |  |      |   |     |      | 
|Income tax expense at federal statutory rate                                |  | $           | 1,534 |  |      | $ | 142 |      |  | $ | 47   |  
|State and local tax, net of federal tax benefit                             |  |             | 396   |  |      |   | 21  |      |  |   | (16  | )
|Nondeductible intangible amortization                                       |  |             | 53    |  |      |   | 60  |      |  |   | 52   |  
|Taxes on foreign income which differs from United States
    statutory rate |  |             | 505   |  |      |   | 560 |      |  |   | 99   |  
|Foreign tax withholding                                                     |  |             | 294   |  |      |   | 87  |      |  |   | 128  |  
|Adjustment to worldwide tax accrual and other                               |  |             | 117   |  |      |   | (15 | )    |  |   | (979 | )
|                                                                            |  |             |       |  |      |   |     |      | 
|Provision (benefit) for income taxes                                        |  | $           | 2,899 |  |      | $ | 855 |      |  | $ | (669 | )
|                                                                            |  |             |       |  |      |   |     |      | 



|                                                                  |          |                        |       |        |      |   |     |        |   |   |     |    | 
|----------------------------------------------------------------- | -------- | ---------------------- | ----- | ------ | ---- | - | --- | ------ | - | - | --- | -- | 
|                                                                  |          | Year ended December 31 |      
|                                                                  |          |                        |      
|                                                                  |          | 2004                   |       |        | 2003 |   |     | 2002   |  
|                                                                  |          |                        |       |        |      |   |     |        |  
|Income (loss) from continuing operations before income
    taxes: |          |                        |       |        |      |   |     |        |   |   |     |   
|                                                                  | Domestic |                        | $     | (2,911 | )    |   | $   | (2,185 | ) |   | $   | 41 | 
|                                                                  | Foreign  |                        |       | 7,295  |      |   |     | 2,591  |   |   |     | 95 | 
|                                                                  |          |                        |       |        |      |   |     |        |  
|As reported                                                       |          | $                      | 4,384 |        |      | $ | 406 |        |   | $ | 136 |   
|                                                                  |          |                        |       |        |      |   |     |        |  





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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




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



|                                                                                                  |                                       |                                                                |       |     |       |   |        |      |       |   |         |       |       |  
|------------------------------------------------------------------------------------------------- | ------------------------------------- | -------------------------------------------------------------- | ----- | --- | ----- | - | ------ | ---- | ----- | - | ------- | ----- | ----- | -
|                                                                                                  |                                       | Year Ended December 31                                         |      
|                                                                                                  |                                       |                                                                |      
|                                                                                                  |                                       | 2004                                                           |       |     | 2003  |   |        | 2002 |      
|                                                                                                  |                                       |                                                                |       |     |       |   |        |      |      
|Income (loss) from continuing operations, after income taxes                                      |                                       | $                                                              | 1,485 |     |       | $ | (449   | )    |       | $ | 805     |      
|Less: Preferred stock dividends                                                                   |                                       |                                                                | 150   |     |       |   | 150    |      |       |   | 150     |      
|                                                                                                  |                                       |                                                                |       |     |       |   |        |      |      
|Income (loss) from continuing operations, after income taxes
    available to common shareholders |                                       | $                                                              | 1,335 |     |       | $ | (599   | )    |       | $ | 655     |      
|Net income (loss)                                                                                 |                                       | $                                                              | 1,141 |     |       | $ | (5,422 | )    |       | $ | (18,245 | )    
|Less: Preferred stock dividends                                                                   |                                       |                                                                | 150   |     |       |   | 150    |      |       |   | 150     |      
|                                                                                                  |                                       |                                                                |       |     |       |   |        |      |      
|Net income (loss) available to common shareholders                                                |                                       | $                                                              | 991   |     |       | $ | (5,572 | )    |       | $ | (18,395 | )    
|                                                                                                  |                                       |                                                                |       |     |       |   |        |      |      
|Weighted average shares outstanding (in thousands):                                               |                                       |                                                                |       |     |       |   |        |      |       |   |         |      
|Basic weighted average shares outstanding                                                         |                                       |                                                                | 8,691 |     |       |   | 8,571  |      |       |   | 8,557   |      
|                                                                                                  |                                       |                                                                |       |     |       |   |        |      |      
|                                                                                                  |                                       | Diluted:                                                       |       |     |       |   |        |      |       |   |         |       |       |  
|                                                                                                  |                                       | Basic from above outstanding                                   |       |     | 8,691 |   |        |      | 8,571 |   |         |       | 8,557 |  
|                                                                                                  |                                       | Dilutive effect of stock options                               |       |     | 281   |   |        |      |       |   |         |       | 40    |  
|                                                                                                  |                                       |                                                                |       |     |       |   |        |      |      
|Diluted weighted average shares outstanding                                                       |                                       |                                                                | 8,972 |     |       |   | 8,571  |      |       |   | 8,597   |      
|                                                                                                  |                                       |                                                                |       |     |       |   |        |      |      
|Earnings (loss) per share:                                                                        |                                       |                                                                |       |     |       |   |        |      |       |   |         |      
|                                                                                                  | Basic earnings (loss) per share:      |                                                                |       |     |       |   |        |      |       |   |         |       |      
|                                                                                                  |                                       | Earnings (loss) from continuing operations, after income taxes |       | $   | .15   |   |        | $    | (.07  | ) |         | $     | .08   |  
|                                                                                                  |                                       | Discontinued operations                                        |       |     | (.04  | ) |        |      | (.58  | ) |         |       | (.22  | )
|                                                                                                  |                                       | Cumulative effect of change in accounting principle            |       |     |       |   |        |      |       |   |         |       | (2.01 | )
|                                                                                                  |                                       |                                                                |       |     |       |   |        |      |      
|                                                                                                  | Net earnings (loss) per basic share   |                                                                | $     | .11 |       |   | $      | (.65 | )     |   | $       | (2.15 | )    
|                                                                                                  |                                       |                                                                |       |     |       |   |        |      |      
|                                                                                                  | Diluted earnings (loss) per share:    |                                                                |       |     |       |   |        |      |       |   |         |       |      
|                                                                                                  |                                       | Earnings (loss) from continuing operations, after income taxes |       | $   | .15   |   |        | $    | (.07  | ) |         | $     | .08   |  
|                                                                                                  |                                       | Discontinued operations                                        |       |     | (.04  | ) |        |      | (.58  | ) |         |       | (.22  | )
|                                                                                                  |                                       | Cumulative effect of change in accounting principle            |       |     |       |   |        |      |       |   |         |       | (2.00 | )
|                                                                                                  |                                       |                                                                |       |     |       |   |        |      |      
|                                                                                                  | Net earnings (loss) per diluted share |                                                                | $     | .11 |       |   | $      | (.65 | )     |   | $       | (2.14 | )    
|                                                                                                  |                                       |                                                                |       |     |       |   |        |      |      





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



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)






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









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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




|                                                  |                             |                              |         |         |      |   |         |         |  |   |         |         | 
|------------------------------------------------- | --------------------------- | ---------------------------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                  |                             | Year ended December 31(1)(4) |        
|                                                  |                             |                              |        
|                                                  |                             | 2004                         |         |         | 2003 |   |         | 2002    | 
|                                                  |                             |                              |         |         |      |   |         |         | 
|Net sales to external customers:                  |                             |                              |         |         |      |   |         |         |  |   |         |        
|                                                  | Friction
    products(1)    |                              | $       | 148,242 |      |   | $       | 121,569 |  |   | $       | 106,134 | 
|                                                  | Precision
    components(4) |                              |         | 78,629  |      |   |         | 68,123  |  |   |         | 67,151  | 
|                                                  | Performance
    racing(1)   |                              |         | 14,317  |      |   |         | 12,859  |  |   |         | 12,627  | 
|                                                  |                             |                              |         |         |      |   |         |         | 
|Consolidated                                      |                             | $                            | 241,188 |         |      | $ | 202,551 |         |  | $ | 185,912 |        
|                                                  |                             |                              |         |         |      |   |         |         | 
|Depreciation and
    amortization:(2)(3)          |                             |                              |         |         |      |   |         |         |  |   |         |        
|                                                  | Friction
    products(1)    |                              | $       | 6,792   |      |   | $       | 7,135   |  |   | $       | 7,277   | 
|                                                  | Precision
    components(4) |                              |         | 3,791   |      |   |         | 3,511   |  |   |         | 3,537   | 
|                                                  | Performance
    racing(1)   |                              |         | 210     |      |   |         | 227     |  |   |         | 200     | 
|                                                  |                             |                              |         |         |      |   |         |         | 
|Consolidated                                      |                             | $                            | 10,793  |         |      | $ | 10,873  |         |  | $ | 11,014  |        
|                                                  |                             |                              |         |         |      |   |         |         | 
|Gross profit:                                     |                             |                              |         |         |      |   |         |         |  |   |         |        
|                                                  | Friction
    products(1)    |                              | $       | 36,483  |      |   | $       | 29,510  |  |   | $       | 25,403  | 
|                                                  | Precision
    components(4) |                              |         | 16,605  |      |   |         | 14,458  |  |   |         | 15,082  | 
|                                                  | Performance
    racing(1)   |                              |         | 3,438   |      |   |         | 3,401   |  |   |         | 3,711   | 
|                                                  |                             |                              |         |         |      |   |         |         | 
|Consolidated                                      |                             | $                            | 56,526  |         |      | $ | 47,369  |         |  | $ | 44,196  |        
|                                                  |                             |                              |         |         |      |   |         |         | 
|Income from
    operations:(2)                    |                             |                              |         |         |      |   |         |         |  |   |         |        
|                                                  | Friction
    products(1)    |                              | $       | 13,051  |      |   | $       | 8,284   |  |   | $       | 7,794   | 
|                                                  | Precision
    components(4) |                              |         | 3,508   |      |   |         | 2,254   |  |   |         | 4,287   | 
|                                                  | Performance
    racing(1)   |                              |         | 711     |      |   |         | 380     |  |   |         | 874     | 
|                                                  |                             |                              |         |         |      |   |         |         | 
|Consolidated                                      |                             | $                            | 17,270  |         |      | $ | 10,918  |         |  | $ | 12,955  |        
|                                                  |                             |                              |         |         |      |   |         |         | 
|Capital expenditures: (including capital leases): |                             |                              |         |         |      |   |         |         |  |   |         |        
|                                                  | Friction
    products(1)    |                              | $       | 9,126   |      |   | $       | 5,151   |  |   | $       | 5,742   | 
|                                                  | Precision
    components(4) |                              |         | 8,983   |      |   |         | 5,889   |  |   |         | 3,486   | 
|                                                  | Performance
    racing(1)   |                              |         | 188     |      |   |         | 183     |  |   |         | 521     | 
|                                                  |                             |                              |         |         |      |   |         |         | 
|Consolidated                                      |                             | $                            | 18,297  |         |      | $ | 11,223  |         |  | $ | 9,749   |        
|                                                  |                             |                              |         |         |      |   |         |         | 

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)


|                      |                             |             |         |         |      |   |         |         | 
|--------------------- | --------------------------- | ----------- | ------- | ------- | ---- | - | ------- | ------- | 
|                      |                             | December 31 |        
|                      |                             |             |        
|                      |                             | 2004        |         |         | 2003 |  
|                      |                             |             |         |         |      |  
|Total assets:         |                             |             |         |         |      |   |         |        
|                      | Friction
    products(1)    |             | $       | 114,608 |      |   | $       | 101,169 | 
|                      | Precision
    components(4) |             |         | 85,545  |      |   |         | 77,026  | 
|                      | Performance
    racing(1)   |             |         | 12,365  |      |   |         | 11,052  | 
|                      |                             |             |         |         |      |  
|Continuing operations |                             |             | 212,518 |         |      |   | 189,247 |        
|                      | Discontinued operations     |             |         | 4,499   |      |   |         | 4,302   | 
|                      |                             |             |         |         |      |  
|Consolidated          |                             | $           | 217,017 |         |      | $ | 193,549 |        
|                      |                             |             |         |         |      |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(3) | Depreciation and amortization outlined in this table does not
    include deferred financing amortization of $387 in 2004, $801 in
    2003, and $643 in 2002, 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, was retained by the Company and production was transferred
    to a facility within the Companys precision components
    segment effective July 1, 2004. Net sales from this line of
    business were $802 through the date of transfer effective
    July 1, 2004, $1,235, and $1,341 for the years ended
    December 31, 2003, and 2002, respectively. All prior
    periods have been reclassified to reflect this change.



|                                                                |  |                |         |   |            |   |        |       |  |          |            |   |         |            |         |   |       |          |        |            |         |   |            |   |  |       |         |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------------- |  | -------------- | ------- | - | ---------- | - | ------ | ----- |  | -------- | ---------- | - | ------- | ---------- | ------- | - | ----- | -------- | ------ | ---------- | ------- | - | ---------- | - |  | ----- | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                |  | 2004           |         |   | 2003       |   |        | 2002  | 
|                                                                |  |                |         |   |            |   |        |       | 
|                                                                |  | Domestic       |         |   | Foreign    |   |        |       |  | Domestic |            |   | Foreign |            |         |   |       | Domestic |        |            | Foreign |   |            |  
|                                                                |  | Operations     |         |   | Operations |   |        | Total |  |          | Operations |   |         | Operations |         |   | Total |          |        | Operations |         |   | Operations |   |  | Total |        
|                                                                |  |                |         |   |            |   |        |       |  |          |            |   |         |            |         |   |       |          |        |            |         |   |            |   |  |       |        
|                                                                |  | (In thousands) |        
|Net sales                                                       |  | $              | 192,836 |   |            | $ | 48,352 |       |  | $        | 241,188    |   |         | $          | 165,451 |   |       | $        | 37,100 |            |         | $ | 202,551    |   |  | $     | 160,259 |   |  | $ | 25,653 |   |  | $ | 185,912 |  
|Income from operations                                          |  |                | 10,298  |   |            |   | 6,972  |       |  |          | 17,270     |   |         |            | 7,818   |   |       |          | 3,100  |            |         |   | 10,918     |   |  |       | 12,163  |   |  |   | 792    |   |  |   | 12,955  |  
|Discontinued operations, net of tax                             |  |                | (662    | ) |            |   | 318    |       |  |          | (344       | ) |         |            | (620    | ) |       |          | (4,353 | )          |         |   | (4,973     | ) |  |       | (77     | ) |  |   | (1,773 | ) |  |   | (1,850  | )
|Cumulative effect of change in accounting principle, net of tax |  |                |         |   |            |   |        |       |  |          |            |   |         |            |         |   |       |          |        |            |         |   |            |   |  |       | (17,200 | ) |  |   |        |   |  |   | (17,200 | )
|Net (loss) income                                               |  |                | (2,019  | ) |            |   | 3,160  |       |  |          | 1,141      |   |         |            | (1,866  | ) |       |          | (3,556 | )          |         |   | (5,422     | ) |  |       | (16,075 | ) |  |   | (2,170 | ) |  |   | (18,245 | )
|Total assets of continuing operations                           |  | $              | 176,269 |   |            | $ | 36,249 |       |  | $        | 212,518    |   |         | $          | 159,406 |   |       | $        | 29,841 |            |         | $ | 189,247    |   |  | $     | 165,702 |   |  | $ | 16,805 |   |  | $ | 182,507 |  





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







| |   |                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Consolidating condensed balance sheets as of December 31,
    2004 and December 31, 2003, consolidating condensed
    statements of operations for the years ended December 31,
    2004, 2003 and 2002 and consolidating condensed statements of
    cash flows for the years ended December 31, 2004, 2003 and
    2002.

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




| |   |                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 financial
    statements of the Parent and all of its subsidiaries.                                                                                                                                                 



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)


|                                           |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |          |          |   |   |         |         | 
|------------------------------------------ | ---------------------------------------------- | ----------------- | ------- | --------- | ------------ | - | ------------- | ------------ |  | - | ------------ | ------ | - | ------------ | -------- | -------- | - | - | ------- | ------- | 
|                                           |                                                | December 31, 2004 |        
|                                           |                                                |                   |        
|                                           |                                                |                   |         | Combined  |              |   | Combined      |              |  |  
|                                           |                                                |                   |         | Guarantor |              |   | Non-Guarantor |              |  |  
|                                           |                                                | Parent            |         |           | Subsidiaries |   |               | Subsidiaries |  |   | Eliminations |        |   | Consolidated |         
|                                           |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |         
|Assets                                     |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |          |          |   |   |         |        
|Current assets:                            |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |          |          |   |   |         |        
|                                           | Cash and cash equivalents                      |                   | $       | 1,967     |              |   | $             | 49           |  |   | $            | 4,769  |   |              |          |          |   |   | $       | 6,785   | 
|                                           | Accounts receivable, net                       |                   |         |           |              |   |               | 26,491       |  |   |              | 12,553 |   |              |          |          |   |   |         | 39,044  | 
|                                           | Inventories                                    |                   |         | (974      | )            |   |               | 31,316       |  |   |              | 12,081 |   |              | $        | (873     | ) |   |         | 41,550  | 
|                                           | Deferred income taxes                          |                   |         | 3,698     |              |   |               |              |  |   |              | 885    |   |              |          |          |   |   |         | 4,583   | 
|                                           | Taxes receivable                               |                   |         | 373       |              |   |               |              |  |   |              |        |   |              |          |          |   |   |         | 373     | 
|                                           | Other current assets                           |                   |         | 1,809     |              |   |               | 1,771        |  |   |              | 480    |   |              |          |          |   |   |         | 4,060   | 
|                                           | Current assets of discontinued operations      |                   |         |           |              |   |               | 84           |  |   |              | 4,415  |   |              |          |          |   |   |         | 4,499   | 
|                                           |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |         
|Total current assets                       |                                                |                   | 6,873   |           |              |   | 59,711        |              |  |   | 35,183       |        |   |              | (873     | )        |   |   | 100,894 |        
|Investment in subsidiaries                 |                                                |                   | 793     |           |              |   |               |              |  |   |              |        |   |              | (793     | )        |   |   |         |        
|Inter-company advances, net                |                                                |                   | 177,871 |           |              |   | 2,531         |              |  |   | (4,970       | )      |   |              | (175,432 | )        |   |   |         |        
|Property, plant and equipment, net         |                                                |                   |         |           |              |   | 60,299        |              |  |   | 9,729        |        |   |              |          |          |   |   | 70,028  |        
|Other assets:                              |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |          |          |   |   |         |        
|                                           | Goodwill and other intangible assets           |                   |         | 72        |              |   |               | 41,593       |  |   |              |        |   |              |          |          |   |   |         | 41,665  | 
|                                           | Other                                          |                   |         | 228       |              |   |               | 4,492        |  |   |              | 720    |   |              |          | (1,010   | ) |   |         | 4,430   | 
|                                           |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |         
|Total other assets                         |                                                |                   | 300     |           |              |   | 46,085        |              |  |   | 720          |        |   |              | (1,010   | )        |   |   | 46,095  |        
|                                           |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |         
|Total assets                               |                                                | $                 | 185,837 |           |              | $ | 168,626       |              |  | $ | 40,662       |        |   | $            | (178,108 | )        |   | $ | 217,017 |        
|                                           |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |         
|Liabilities and shareholders equity       |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |          |          |   |   |         |        
|Current liabilities:                       |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |          |          |   |   |         |        
|                                           | Accounts payable                               |                   |         |           |              |   | $             | 15,749       |  |   | $            | 9,805  |   |              |          |          |   |   | $       | 25,554  | 
|                                           | Accrued compensation                           |                   | $       | 1,395     |              |   |               | 5,052        |  |   |              | 1,726  |   |              |          |          |   |   |         | 8,173   | 
|                                           | Accrued interest                               |                   |         | 1,623     |              |   |               |              |  |   |              | 7      |   |              |          |          |   |   |         | 1,630   | 
|                                           | Accrued taxes                                  |                   |         | 553       |              |   |               | 22           |  |   |              | 2,077  |   |              |          |          |   |   |         | 2,652   | 
|                                           | Other accrued expenses                         |                   |         | 1,840     |              |   |               | 4,379        |  |   |              | (236   | ) |              | $        | (386     | ) |   |         | 5,597   | 
|                                           | Short-term debt                                |                   |         |           |              |   |               |              |  |   |              | 980    |   |              |          |          |   |   |         | 980     | 
|                                           | Current portion of long-term debt              |                   |         |           |              |   |               | 362          |  |   |              | 277    |   |              |          |          |   |   |         | 639     | 
|                                           | Current liabilities of discontinued operations |                   |         |           |              |   |               | 257          |  |   |              | 4,040  |   |              |          |          |   |   |         | 4,297   | 
|                                           |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |         
|Total current liabilities                  |                                                |                   | 5,411   |           |              |   | 25,821        |              |  |   | 18,676       |        |   |              | (386     | )        |   |   | 49,522  |        
|Long-term liabilities:                     |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |          |          |   |   |         |        
|                                           | Long-term debt                                 |                   |         | 110,000   |              |   |               | 887          |  |   |              | 515    |   |              |          |          |   |   |         | 111,402 | 
|                                           | Deferred income taxes                          |                   |         | 2,821     |              |   |               |              |  |   |              | 810    |   |              |          |          |   |   |         | 3,631   | 
|                                           | Other                                          |                   |         | 898       |              |   |               | 4,071        |  |   |              | 2,826  |   |              |          |          |   |   |         | 7,795   | 
|                                           | Inter-company advances, net                    |                   |         | 818       |              |   |               | 166,815      |  |   |              | 8,388  |   |              |          | (176,021 | ) |   |         |         | 
|                                           |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |         
|Total long-term liabilities                |                                                |                   | 114,537 |           |              |   | 171,773       |              |  |   | 12,539       |        |   |              | (176,021 | )        |   |   | 122,828 |        
|Shareholders equity                       |                                                |                   | 65,889  |           |              |   | (28,968       | )            |  |   | 9,447        |        |   |              | (1,701   | )        |   |   | 44,667  |        
|                                           |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |         
|Total liabilities and shareholders equity |                                                | $                 | 185,837 |           |              | $ | 168,626       |              |  | $ | 40,662       |        |   | $            | (178,108 | )        |   | $ | 217,017 |        
|                                           |                                                |                   |         |           |              |   |               |              |  |   |              |        |   |              |         

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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 |       
|                                           |                                                  |                   |         |           |              |   |               |              |  |   |              |        |  |              |         

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)


|                                                             |                                                |                              |        |           |              |   |               |              |  |   |              |       |  |              |         |   |  |   |         |        | 
|------------------------------------------------------------ | ---------------------------------------------- | ---------------------------- | ------ | --------- | ------------ | - | ------------- | ------------ |  | - | ------------ | ----- |  | ------------ | ------- | - |  | - | ------- | ------ | 
|                                                             |                                                | Year ended December 31, 2004 |       
|                                                             |                                                |                              |       
|                                                             |                                                |                              |        | Combined  |              |   | Combined      |              |  |  
|                                                             |                                                |                              |        | Guarantor |              |   | Non-Guarantor |              |  |  
|                                                             |                                                | Parent                       |        |           | Subsidiaries |   |               | Subsidiaries |  |   | Eliminations |       |  | Consolidated |        
|                                                             |                                                |                              |        |           |              |   |               |              |  |   |              |       |  |              |        
|Net sales                                                    |                                                |                              |        |           |              | $ | 195,942       |              |  | $ | 56,361       |       |  | $            | (11,115 | ) |  | $ | 241,188 |       
|Cost of sales                                                |                                                | $                            | 42     |           |              |   | 151,744       |              |  |   | 43,991       |       |  |              | (11,115 | ) |  |   | 184,662 |       
|                                                             |                                                |                              |        |           |              |   |               |              |  |   |              |       |  |              |        
|Gross profit                                                 |                                                |                              | (42    | )         |              |   | 44,198        |              |  |   | 12,370       |       |  |              |         |   |  |   | 56,526  |       
|Expenses:                                                    |                                                |                              |        |           |              |   |               |              |  |   |              |       |  |              |         |   |  |   |         |       
|                                                             | Selling, technical and administrative expenses |                              |        | 406       |              |   |               | 31,589       |  |   |              | 5,410 |  |              |         |   |  |   |         | 37,405 | 
|                                                             | Restructuring costs                            |                              |        |           |              |   |               | 1,117        |  |   |              |       |  |              |         |   |  |   |         | 1,117  | 
|                                                             | Amortization of finite-lived intangible assets |                              |        |           |              |   |               | 734          |  |   |              |       |  |              |         |   |  |   |         | 734    | 
|                                                             |                                                |                              |        |           |              |   |               |              |  |   |              |       |  |              |        
|Total operating expenses                                     |                                                |                              | 406    |           |              |   | 33,440        |              |  |   | 5,410        |       |  |              |         |   |  |   | 39,256  |       
|                                                             |                                                |                              |        |           |              |   |               |              |  |   |              |       |  |              |        
|(Loss) income from operations                                |                                                |                              | (448   | )         |              |   | 10,758        |              |  |   | 6,960        |       |  |              |         |   |  |   | 17,270  |       
|Interest income (expense), net                               |                                                |                              | 3,666  |           |              |   | (13,777       | )            |  |   | (100         | )     |  |              |         |   |  |   | (10,211 | )     
|Exchange offer costs                                         |                                                |                              | (1,464 | )         |              |   | (967          | )            |  |   |              |       |  |              |         |   |  |   | (2,431  | )     
|Income from equity investee                                  |                                                |                              | 748    |           |              |   | 3,160         |              |  |   |              |       |  |              | (3,908  | ) |  |   |         |       
|Other income (expense), net                                  |                                                |                              | (172   | )         |              |   | 702           |              |  |   | (774         | )     |  |              |         |   |  |   | (244    | )     
|                                                             |                                                |                              |        |           |              |   |               |              |  |   |              |       |  |              |        
|Income (loss) from continuing operations before income taxes |                                                |                              | 2,330  |           |              |   | (124          | )            |  |   | 6,086        |       |  |              | (3,908  | ) |  |   | 4,384   |       
|Income tax provision (benefit)                               |                                                |                              | 1,189  |           |              |   | (1,534        | )            |  |   | 3,244        |       |  |              |         |   |  |   | 2,899   |       
|                                                             |                                                |                              |        |           |              |   |               |              |  |   |              |       |  |              |        
|Income before discontinued operations                        |                                                |                              | 1,141  |           |              |   | 1,410         |              |  |   | 2,842        |       |  |              | (3,908  | ) |  |   | 1,485   |       
|Discontinued operations, net of tax                          |                                                |                              |        |           |              |   | (662          | )            |  |   | 318          |       |  |              |         |   |  |   | (344    | )     
|                                                             |                                                |                              |        |           |              |   |               |              |  |   |              |       |  |              |        
|Net income                                                   |                                                | $                            | 1,141  |           |              | $ | 748           |              |  | $ | 3,160        |       |  | $            | (3,908  | ) |  | $ | 1,141   |       
|                                                             |                                                |                              |        |           |              |   |               |              |  |   |              |       |  |              |        

65



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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 from equity investee                                    |                                                               |                              | (9,001 | )         |              |   | (3,556        | )            |  |   |              |       |  |              | 12,557 |   |  |   |         |       
|Other (expense) income, net                                  |                                                               |                              | (278   | )         |              |   | 497           |              |  |   | (36          | )     |  |              |        |   |  |   | 183     |       
|                                                             |                                                               |                              |        |           |              |   |               |              |  |   |              |       |  |              |       
|(Loss) income from continuing operations before income taxes |                                                               |                              | (5,503 | )         |              |   | (9,037        | )            |  |   | 2,591        |       |  |              | 12,355 |   |  |   | 406     |       
|Income tax (benefit) provision                               |                                                               |                              | (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  | )     
|                                                             |                                                               |                              |        |           |              |   |               |              |  |   |              |       |  |              |       

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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 (expense) income, 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 (benefit) provision                                                                                         |                                                |                              | (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 | )     
|                                                                                                                       |                                                |                              |         |           |              |   |               |              |  |   |              |       |  |              |       

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)


|                                                                                   |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              |  |  |  |   |         |          |  
|---------------------------------------------------------------------------------- | ------------------------------------------ | ---------------------------- | ------- | --------- | ------------ | - | ------------- | ------------ | - | - | ------------ | ------ | - | ------------ |  |  |  | - | ------- | -------- | -
|                                                                                   |                                            | Year ended December 31, 2004 |        
|                                                                                   |                                            |                              |        
|                                                                                   |                                            |                              |         | Combined  |              |   | Combined      |              |   |  
|                                                                                   |                                            |                              |         | Guarantor |              |   | Non-Guarantor |              |   |  
|                                                                                   |                                            | Parent                       |         |           | Subsidiaries |   |               | Subsidiaries |   |   | Eliminations |        |   | Consolidated | 
|                                                                                   |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              | 
|Net cash (used in) provided by operating activities of
    continuing operations   |                                            | $                            | (15,678 | )         |              | $ | 18,172        |              |   | $ | 3,522        |        |   |              |  |  |  | $ | 6,016   |         
|Net cash (used in) provided by operating activities of
    discontinued operations |                                            |                              |         |           |              |   | (1,084        | )            |   |   | 1,452        |        |   |              |  |  |  |   | 368     |         
|Cash flows from investing activities:                                              |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              |  |  |  |   |         |         
|                                                                                   | Proceeds from sale of assets               |                              |         |           |              |   |               | 881          |   |   |              |        |   |              |  |  |  |   |         | 881      |  
|                                                                                   | Purchases of property, plant and equipment |                              |         |           |              |   |               | (16,691      | ) |   |              | (1,606 | ) |              |  |  |  |   |         | (18,297  | )
|                                                                                   |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              | 
|Net cash used in investing activities of continuing operations                     |                                            |                              |         |           |              |   | (15,810       | )            |   |   | (1,606       | )      |   |              |  |  |  |   | (17,416 | )       
|Net cash used in investing activities of discontinued operations                   |                                            |                              |         |           |              |   |               |              |   |   | (173         | )      |   |              |  |  |  |   | (173    | )       
|Cash flows from financing activities:                                              |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              |  |  |  |   |         |         
|                                                                                   | Deferred financing                         |                              |         | (4,096    | )            |   |               |              |   |   |              |        |   |              |  |  |  |   |         | (4,096   | )
|                                                                                   | Payments on short-term debt                |                              |         |           |              |   |               |              |   |   |              | (342   | ) |              |  |  |  |   |         | (342     | )
|                                                                                   | Payments on long-term debt                 |                              |         |           |              |   |               | (1,358       | ) |   |              | (271   | ) |              |  |  |  |   |         | (1,629   | )
|                                                                                   | Payment on Bank Facility                   |                              |         | (13,355   | )            |   |               |              |   |   |              |        |   |              |  |  |  |   |         | (13,355  | )
|                                                                                   | Proceeds from Bank Facility                |                              |         | 13,575    |              |   |               |              |   |   |              |        |   |              |  |  |  |   |         | 13,575   |  
|                                                                                   | Proceeds from Senior Notes                 |                              |         | 110,000   |              |   |               |              |   |   |              |        |   |              |  |  |  |   |         | 110,000  |  
|                                                                                   | Payment on Old Senior Notes                |                              |         | (66,267   | )            |   |               |              |   |   |              |        |   |              |  |  |  |   |         | (66,267  | )
|                                                                                   | Proceeds from Old Bank Facility            |                              |         | 92,336    |              |   |               |              |   |   |              |        |   |              |  |  |  |   |         | 92,336   |  
|                                                                                   | Payments on Old Bank Facility              |                              |         | (116,395  | )            |   |               |              |   |   |              |        |   |              |  |  |  |   |         | (116,395 | )
|                                                                                   | Proceeds from exercise of stock options    |                              |         | 679       |              |   |               |              |   |   |              |        |   |              |  |  |  |   |         | 679      |  
|                                                                                   | Payments of preferred stock dividends      |                              |         | (150      | )            |   |               |              |   |   |              |        |   |              |  |  |  |   |         | (150     | )
|                                                                                   |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              | 
|Net cash provided by (used in) financing activities of
    continuing operations   |                                            |                              | 16,327  |           |              |   | (1,358        | )            |   |   | (613         | )      |   |              |  |  |  |   | 14,356  |         
|Effect of exchange rate changes on cash                                            |                                            |                              |         |           |              |   |               |              |   |   | 269          |        |   |              |  |  |  |   | 269     |         
|                                                                                   |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              | 
|Net cash provided by continuing operations                                         |                                            |                              | 649     |           |              |   | 1,004         |              |   |   | 1,572        |        |   |              |  |  |  |   | 3,225   |         
|Net cash (used in) provided by discontinued operations                             |                                            |                              |         |           |              |   | (1,084        | )            |   |   | 1,279        |        |   |              |  |  |  |   | 195     |         
|                                                                                   |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              | 
|Net increase (decrease) in cash and cash equivalents                               |                                            |                              | 649     |           |              |   | (80           | )            |   |   | 2,851        |        |   |              |  |  |  |   | 3,420   |         
|Cash and cash equivalents, at beginning of period                                  |                                            |                              | 1,318   |           |              |   | 129           |              |   |   | 1,918        |        |   |              |  |  |  |   | 3,365   |         
|                                                                                   |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              | 
|Cash and cash equivalents, at end of period                                        |                                            | $                            | 1,967   |           |              | $ | 49            |              |   | $ | 4,769        |        |   |              |  |  |  | $ | 6,785   |         
|                                                                                   |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              | 

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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         |              |   | $ | 913          |        |   |              |  |  |  | $ | 23,785  |        
|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           |   |   |              | 478    |   |              |  |  |  |   |         | 503     |  
|                                                                                 | Payments on long-term debt                 |                              |         |           |              |   |               | (2,775       | ) |   |              | (185   | ) |              |  |  |  |   |         | (2,960  | )
|                                                                                 | Payment on Old Senior Notes                |                              |         | (583      | )            |   |               |              |   |   |              |        |   |              |  |  |  |   |         | (583    | )
|                                                                                 | Proceeds from Old Bank Facility            |                              |         | 68,173    |              |   |               |              |   |   |              |        |   |              |  |  |  |   |         | 68,173  |  
|                                                                                 | Payments on Old Bank Facility              |                              |         | (80,441   | )            |   |               |              |   |   |              |        |   |              |  |  |  |   |         | (80,441 | )
|                                                                                 | Proceeds from exercise of stock options    |                              |         | 59        |              |   |               |              |   |   |              |        |   |              |  |  |  |   |         | 59      |  
|                                                                                 | Payments of preferred stock dividends      |                              |         | (150      | )            |   |               |              |   |   |              |        |   |              |  |  |  |   |         | (150    | )
|                                                                                 |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              | 
|Net cash provided by (used in) financing activities of
    continuing operations |                                            |                              | (12,942 | )         |              |   | (2,750        | )            |   |   | 1,619        |        |   |              |  |  |  |   | (14,073 | )      
|Effect of exchange rate changes on cash                                          |                                            |                              |         |           |              |   |               |              |   |   | 69           |        |   |              |  |  |  |   | 69      |        
|                                                                                 |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              | 
|Net cash (used in) provided by 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   |        
|                                                                                 |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              | 

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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 (used in) provided by operating activities of
    continuing operations |                                            | $                            | (14,567 | )         |              | $ | 4,105         |              |   | $ | 2,811        |        |   |              |  |  |  | $ | (7,651 | )      
|Net cash provided by (used in) operating activities of
    continuing 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                 |                              |         | 75,609    |              |   |               | (1,588       | ) |   |              | (202   | ) |              |  |  |  |   |        | (77,399 | )
|                                                                                 | 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  |        
|                                                                                 |                                            |                              |         |           |              |   |               |              |   |   |              |        |   |              | 

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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, |     
|                                                |                                                      | 2004                                                 |        |     | 2004     |   |        | 2004          |     |   | 2004         |      |      | 2003      |        |      | 2003     |   |        | 2003          |      |   | 2003         |     
|                                                |                                                      |                                                      |        |     |          |   |        |               |     |   |              |      |      |           |        |      |          |   |        |               |      |   |              |     
|Net
    sales(1)                                |                                                      | $                                                    | 60,295 |     |          | $ | 63,376 |               |     | $ | 59,367       |      |      | $         | 58,150 |      |          | $ | 54,661 |               |      | $ | 52,193       |      |      | $ | 48,161 |     |     | $ | 47,536 |     
|Gross
    profit(1)                             |                                                      |                                                      | 15,724 |     |          |   | 15,761 |               |     |   | 13,639       |      |      |           | 11,402 |      |          |   | 12,986 |               |      |   | 12,873       |      |      |   | 11,562 |     |     |   | 9,948  |     
|Income (loss) from continuing
    operations(1) |                                                      |                                                      | 1,755  |     |          |   | 1,467  |               |     |   | 1,051        |      |      |           | (2,788 | )    |          |   | 396    |               |      |   | 1,206        |      |      |   | 131    |     |     |   | (2,182 | )   
|Discontinued operations,
    net of tax         |                                                      |                                                      | 5      |     |          |   | 4      |               |     |   | (424         | )    |      |           | 71     |      |          |   | (277   | )             |      |   | (737         | )    |      |   | (48    | )   |     |   | (3,911 | )   
|Net income
    (loss)(1)                        |                                                      | $                                                    | 1,760  |     |          | $ | 1,471  |               |     | $ | 627          |      |      | $         | (2,717 | )    |          | $ | 119    |               |      | $ | 469          |      |      | $ | 83     |     |     | $ | (6,093 | )   
|                                                |                                                      |                                                      |        |     |          |   |        |               |     |   |              |      |      |           |        |      |          |   |        |               |      |   |              |     
|Basic earnings (loss) per
    share:(1)         |                                                      |                                                      |        |     |          |   |        |               |     |   |              |      |      |           |        |      |          |   |        |               |      |   |              |      |      |   |        |     |     |   |        |     
|                                                | Earnings (loss) per share from continuing operations |                                                      | $      | .20 |          |   | $      | .16           |     |   | $            | .12  |      |           | $      | (.32 | )        |   | $      | .04           |      |   | $            | .14  |      |   | $      | .01 |     |   | $      | (.26 | )   
|                                                | Discontinued operations                              |                                                      |        | .00 |          |   |        | .00           |     |   |              | (.05 | )    |           |        | .01  |          |   |        | (.03          | )    |   |              | (.09 | )    |   |        | .00 |     |   |        | (.45 | )   
|                                                |                                                      |                                                      |        |     |          |   |        |               |     |   |              |      |      |           |        |      |          |   |        |               |      |   |              |     
|                                                | Net earnings (loss) per basic share                  |                                                      | $      | .20 |          |   | $      | .16           |     |   | $            | .07  |      |           | $      | (.31 | )        |   | $      | .01           |      |   | $            | .05  |      |   | $      | .01 |     |   | $      | (.71 | )   
|                                                |                                                      |                                                      |        |     |          |   |        |               |     |   |              |      |      |           |        |      |          |   |        |               |      |   |              |     
|Diluted earnings (loss) per
    share:(1)       |                                                      |                                                      |        |     |          |   |        |               |     |   |              |      |      |           |        |      |          |   |        |               |      |   |              |      |      |   |        |     |     |   |        |     
|                                                |                                                      | Earnings (loss) per share from continuing operations |        | $   | .20      |   |        | $             | .16 |   |              | $    | .11  |           |        | $    | (.32     | ) |        | $             | .04  |   |              | $    | .14  |   |        | $   | .01 |   |        | $    | (.26 | )
|                                                |                                                      | Discontinued operations                              |        |     | .00      |   |        |               | .00 |   |              |      | (.05 | )         |        |      | .01      |   |        |               | (.03 | ) |              |      | (.09 | ) |        |     | .00 |   |        |      | (.45 | )
|                                                |                                                      |                                                      |        |     |          |   |        |               |     |   |              |      |      |           |        |      |          |   |        |               |      |   |              |     
|                                                |                                                      | Net earnings (loss) per diluted share                |        | $   | .20      |   |        | $             | .16 |   |              | $    | .06  |           |        | $    | (.31     | ) |        | $             | .01  |   |              | $    | .05  |   |        | $   | .01 |   |        | $    | (.71 | )
|                                                |                                                      |                                                      |        |     |          |   |        |               |     |   |              |      |      |           |        |      |          |   |        |               |      |   |              |     






|    |                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(continued)




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



ITEM 9A.                       CONTROLS
AND PROCEDURES










|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION



Part III




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



Code of Ethics






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



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

Equity Compensation Plan Information at December 31,
2004


|                                                           |  |                   |         |  |                        |           |                     |                       |  |  |        | 
|---------------------------------------------------------- |  | ----------------- | ------- |  | ---------------------- | --------- | ------------------- | --------------------- |  |  | ------ | 
|                                                           |  |                   |         |  |                        | 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     |  |                   | 793,910 |  |                        | $         | 4.72                |                       |  |  | 86,253 | 
|Equity compensation plans not approved by security holders |  |                   | 0       |  |                        |           |                     |                       |  |  | 0      | 
|Total                                                      |  |                   | 793,910 |  |                        | $         | 4.72                |                       |  |  | 86,253 | 







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





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



Part IV




|         |                                        
|-------- | ---------------------------------------
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES







| |       |                                                                                                         
| | ----- | --------------------------------------------------------------------------------------------------------
| | (i)   | Consolidated Balance Sheets at December 31, 2004 and 2003                                               
|
| | (ii)  | Consolidated Statements of Operations for the years ended
    December 31, 2004, 2003 and 2002          
|
| | (iii) | Consolidated Statements of Shareholders Equity for the
    years ended December 31, 2004, 2003 and 2002
|
| | (iv)  | Consolidated Statements of Cash Flows for the years ended
    December 31, 2004, 2003 and 2002          
|
| | (v)   | Notes to Consolidated Financial Statements for the years ended
    December 31, 2004, 2003 and 2002     

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| |    |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 National City
    Bank as successor, 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 |  | 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  | .3 |  | 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  | .4 |  | Indenture, dated as of November 1, 2004, among Hawk
    Corporation, the Guarantors named therein, and HSBC Bank USA,
    National Association, as Trustee (Incorporated by reference to
    the Companys Form 8-K, dated November 1, 2004,
    as filed with the Securities and Exchange Commission)                                                                                                                                                                                                                        
| | 4  | .5 |  | Registration Rights Agreement, dated as of November 1,
    2004, among Hawk Corporation, the Guarantors named therein, and
    Jefferies & Company, Inc. (Incorporated by reference to
    the Companys Form 8-K, dated November 1, 2004,
    as filed with the Securities and Exchange Commission)                                                                                                                                                                                                                          
| | 4  | .6 |  | Form of
    83/4% Senior
    Exchange Note due 2014 (Incorporated by reference to the
    Companys Registration Statement on Form S-4 as filed
    with the Securities and Exchange Commission (Reg.
    No. 333-120991)                                                                                                                                                                                                                                                                                                     
| | 10 | .1 |  | 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 | .2 |  | 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 | .3 |  | 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 | .4 |  | 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 | .5 |  | 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)                                                                                                                                                                                                                                                                                                             

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| |    |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .6  |  | 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 | .7  |  | Credit and Security Agreement, dated November 1, 2004,
    among Hawk Corporation, Allegheny Clearfield, Inc., Friction
    Products Co., Hawk MIM, Inc., Hawk Motors, Inc., Hawk Precision
    Components, Inc., Helsel, Inc., Logan Metal Stampings, Inc., Net
    Shape Technologies LLC, Quarter Master Industries, Inc.,
    Sinterloy Corporation, S.K. Wellman Corp.,
    S.K. Wellman Holdings, Inc., Tex Racing Enterprises, Inc.,
    Wellman Products Group, Inc., and Wellman Products, LLC, as
    Borrowers, and KeyBank National Association, as Administrative
    Agent and LC Issuer (Incorporated by reference to the
    Companys Form 8-K, dated November 1, 2004, as
    filed with the Securities and Exchange Commission)                              
| | 10 | .8  |  | Form of Pledge and Security Agreement  Borrower in
    favor of KeyBank National Association (Incorporated by reference
    to the Companys Form 10-Q for the quarterly period
    ended September 30, 2004 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 10 | .9  |  | Form of Collateral Assignment of Security Interest in Trademarks
    and Licenses, dated as of November 1, 2004, among Hawk
    Corporation and the other Grantors named therein and KeyBank
    National Association (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    September 30, 2004 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                 
| | 10 | .10 |  | Form of Collateral Assignment of Security Interest in Patents
    and Patent Applications, dated as of November 1, 2004,
    among Hawk Corporation and the other Grantors named therein and
    KeyBank National Association (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    September 30, 2004 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                         
| | 10 | .11 |  | Form of Collateral Assignment of Security Interest in
    Copyrights, dated as of November 1, 2004, among Hawk
    Corporation and the other Grantors named therein and KeyBank
    National Association (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    September 30, 2004 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                              
| | 10 | .12 |  | Form of Limited License Agreement (Borrower) in favor of KeyBank
    National Association (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    September 30, 2004 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 10 | .13 |  | Settlement Agreement, Release and Waiver, dated as of
    October 27, 2003, by and between the Company and Jeffrey H.
    Berlin (Incorporated by reference to the Companys
    Form 10-K for the period ended December 31, 2003 as
    filed with the Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 10 | .14 |  | Transition Agreement, Release and Waiver, dated as of
    January 7, 2004, by and between the Company and
    Michael J. Corkran (Incorporated by reference to the
    Companys Form 10-K for the period ended
    December 31, 2003 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 10 | .15 |  | 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 (Incorporated by
    reference to the Companys Form 10-K for the period
    ended December 31, 2003 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 10 | .16 |  | Amendment No. 1 to Sales Plan, dated as of August 10,
    2004, between the Harbert Foundation and Northern Trust
    Securities (Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended September 30,
    2004 as filed with the Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 10 | .17 |  | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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| |    |     |  |                                                                                                                                                                                                                                                                                                                                               
| | -- | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .18 |  | 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
    (Incorporated by reference to the Companys Form 10-K
    for the period ended December 31, 2003 as filed with the
    Securities and Exchange Commission)        
| | 10 | .19 |  | 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 | .20 |  | 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 | .21 |  | 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 | .22 |  | 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 (Incorporated
    by reference to the Companys Form 10-K for the period
    ended December 31, 2003 as filed with the Securities and
    Exchange Commission)     
| | 10 | .23 |  | Agreement of Employment, Confidentiality and Non-Competition,
    dated January 27, 2000, between Friction Products Co. and
    Steven J. Campbell Securities (Incorporated by reference to
    the Companys Form 10-Q for the quarterly period ended
    March 31, 2003 as filed with the Securities and Exchange
    Commission)           
| | 10 | .24 |  | First Amendment to Agreement of Employment, Confidentiality and
    Non-Competition, dated October 5, 2004, between Friction
    Products Co. and Steven J. Campbell (Incorporated by
    reference to the Companys Form 10-Q for the quarterly
    period ended September 30, 2004 as filed with the
    Securities and Exchange Commission)
| | 10 | .25 |  | Depositary Agreement appointing HSBC Bank USA, National
    Association, as exchange agent (Incorporated by reference to
    Amendment No. 1 to the Companys Registration
    Statement on Form S-4 as filed with the Securities and
    Exchange Commission (Reg. No. 333-120991)                                                           
| | 14 |     |  | Code of Business Conduct and Ethics (Incorporated by reference
    to the Companys Form 10-K for the period ended
    December 31, 2003 as filed with the Securities and Exchange
    Commission)                                                                                                                                            
| | 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                                                                                                                                                                                           
| | 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






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



| |     |                         
| | --- | ------------------------
| | By: | /s/ Joseph J. Levanduski

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





|                                                     |  |                                                                                                              |  |                |  | 
|---------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | -------------- |  | 
|SIGNATURE                                            |  | TITLE                                                                                                        |  | DATE          
|                                                     |  |                                                                                                              |  |               
|                                                    
|/s/ Ronald E. WeinbergRonald
    E. Weinberg         |  | Chairman of the Board, Chief Executive
    Officer, President and Director
    (principal executive officer) |  | March 30, 2005
|                                                    
|/s/ Norman C. HarbertNorman
    C. Harbert           |  | Senior Chairman of the Board,
    Founder and Director                                                       |  | March 30, 2005
|                                                    
|/s/ Joseph J.
    LevanduskiJoseph
    J. Levanduski |  | Chief Financial Officer
    (principal financial and accounting officer)                                     |  | March 30, 2005
|                                                    
|/s/ Byron S. KrantzByron
    S. Krantz               |  | Secretary and Director                                                                                       |  | March 30, 2005
|                                                    
|/s/ Paul R. BishopPaul
    R. Bishop                 |  | Director                                                                                                     |  | March 30, 2005
|                                                    
|/s/ Jack F. KempJack
    F. Kemp                     |  | Director                                                                                                     |  | March 30, 2005
|                                                    
|/s/ Dan T. Moore, IIIDan
    T. Moore, III           |  | Director                                                                                                     |  | March 30, 2005
|                                                    
|/s/ Andrew T. BerlinAndrew
    T. Berlin             |  | Director                                                                                                     |  | March 30, 2005

77