TABLE OF CONTENTS




|                                                                |                                                                                               |  |  |  |  |  |  | 
|--------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part I                                                         
|                                                                | ITEM 1. BUSINESS                                                                             
|                                                                | 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 AND RELATED STOCKHOLDER MATTERS                
|                                                                | ITEM 6. SELECTED FINANCIAL DATA                                                              
|                                                                | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                                | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                                | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                                | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|Part III                                                       
|                                                                | ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT                                            
|                                                                | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                                                | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                                | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|                                                                | ITEM 14. CONTROLS AND PROCEDURES                                                             
|Part IV                                                        
|                                                                | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES                                                     
|CERTIFICATION Chairman of the Board and Chief Executive Officer
|CERTIFICATION                                                  
|EX-4.8 Indenture Among Company and HSBC Bank USA               
|EX-21.1 Subsidiaries of the Registrant                         
|EX-23.1 Consent of Ernst & Young LLP                           
|EX-99.1 Certification of CEO                                   
|EX-99.2 Certification of CFO                                   



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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, 2002 | Commission File No. 001-13797

HAWK CORPORATION

(Exact name of registrant as specified in its
charter)


|                                                      |  |                                     
|----------------------------------------------------- |  | ------------------------------------
|DELAWARE                                              |  | 34-1608156                          
|                                                      |  |                                     
|(State of Incorporation)                              |  | (I.R.S. Employer Identification No.)
|                                                     
|200 Public Square, Suite 30-5000,
    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
|                                     |  |                                     
|12% Senior Notes due 2006            |  | New York Stock Exchange             
|Class A Common Stock, par value $.01 |  | New York Stock Exchange             

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

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

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

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

The aggregate market value of the voting common
equity held by non-affiliates as of June 28, 2002 was
$39,945,687 (based on the closing price as quoted on the New
York Stock Exchange on that date).

As of February 14, 2003, the Registrant had
8,557,990 shares of Class A Common Stock, net of
treasury shares, and 0 shares of Class B non-voting
Common Stock outstanding. As of that date, non-affiliates held
5,386,609 shares of Class A Common Stock and 0 shares
of Class B non-voting Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2003 Proxy Statement of Hawk
Corporation are incorporated by reference into Part III of this
Form 10-K.

As used in this Form 10-K, the terms
Company, Hawk, Registrant,
we, us and our mean Hawk
Corporation and its consolidated subsidiaries, taken as a whole,
unless the context indicates otherwise. Except as otherwise
stated, the information contained in this Form 10-K is as
of December 31, 2002.



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##### Table of Contents






Part I




ITEM 1. BUSINESS

Our Company

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

We benefit from a deep and diversified customer
base, with approximately 2,500 total customers, none of which
accounted for more than 5% of our net sales in 2002. We are a
preferred supplier to many of the worlds largest and well
known brand name original equipment manufacturers, deriving more
than 80% of our sales from products for which we are the sole
source provider for specific customer applications. We offer our
customers full service capabilities, from design through
production, and work closely with original equipment
manufacturers to improve performance and develop product
innovations to generate increased sales. We also benefit from a
diversified product list, with over 5,000 total products, none
of which accounted for more than 5% of our net sales in 2002. We
do not target the cyclical consumer automotive sector.
Consequently, less than 7% of our net sales in any of the last
five years was to the consumer automotive or light truck market.
For the year ended December 31, 2002, we generated net sales of
$197.3 million and income from operations of
$9.8 million. For the year ended December 31, 2001, we
had net sales of $184.4 million and income from operations
of $3.6 million. Our common stock has been publicly traded
since 1998.

Hawk is a holding company, the principal assets
of which consist of the capital stock of its manufacturing
subsidiaries, Friction Products Co., S.K. Wellman Corp., S.K.
Wellman SpA, S.K. Wellman of Canada Limited, Hawk Composites
(Suzhou) Company Limited, Helsel, Inc., Sinterloy Corporation,
Allegheny Clearfield, Inc., Hawk MIM, Inc., Hawk Motors, Inc.,
Hawk Motors de Mexico, Quarter Master Industries, Inc., Tex
Racing Enterprises, Inc. and Logan Metal Stampings, Inc. Through
our subsidiaries, we operate primarily in four reportable
segments: friction products, precision powder metal components,
performance automotive and motor components:



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



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



| |   |                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a leading domestic supplier of friction products
    for construction equipment, agricultural equipment and trucks,                                                                                                                                                                                     
|
| |  | the only independent supplier of friction
    materials for braking systems for new and existing series of
    many commercial aircraft models, including the Boeing 737 and
    757 and the MD-80, and several regional jets used by commuter
    airlines, including the Canadair regional jet series,
|
| |  | 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                                                                                                          

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| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a leading domestic supplier of friction products
    into specialty markets such as motorcycles, all terrain vehicles
    (ATVs) and snowmobiles.



| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the years ended December 31, 2002 and
    2001, our friction products segment generated net sales of
    $106.2 million and $104.1 million, representing 54% and 56%
    of our total net sales, respectively and income from operations
    of $7.5 million and $6.4 million, representing 77% and
    178%, of our total income from operations, respectively.



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are a leading supplier of powder metal
    components for industrial equipment, lawn and garden equipment,
    appliances, hand tools and trucks. We use composite metal alloys
    in powder form to manufacture high quality custom-engineered
    metal components. According to the Metal Powder Industries
    Foundation, the powder metal market is growing at approximately
    10% per year as original equipment manufacturers substitute
    precision components made from metal powders for forged, cast or
    stamped parts. 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 and telecommunications.



| |                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the years ended December 31, 2002 and
    2001, our precision components segment generated net sales of
    $65.8 million and $58.3 million, representing 34% and 32%
    of our total net sales, respectively and income from operations
    of $4.1 million and $0.3 million, representing 42% and
    8% of our total income from operations, respectively.



| |   |                       
| | - | ----------------------
| |  | Performance Automotive



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We engineer, manufacture and market premium
    branded clutch, transmissions and driveline systems for the
    performance automotive racing market. Through this segment, we
    supply parts for the National Association for Stock Car Auto
    Racing (NASCAR), the Championship Auto Racing Teams (CART) and
    the Indy Racing League (IRL) racing series and for the
    weekend enthusiasts in the Sports Car Club of America
    (SCCA) and the American Speed Association (ASA) racing
    clubs and other road racing and competition cars. For the years
    ended December 31, 2002 and 2001, our performance
    automotive segment generated net sales of $12.6 million and
    $13.0 million, representing 6% and 7% of our total net sales,
    respectively and income from operations of $1.0 million and
    $0.3 million, representing 10% and 8% of our total income
    from operations, respectively.



| |   |      
| | - | -----
| |  | Motor



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We design and manufacture die-cast aluminum
    rotors for fractional and subfractional horsepower electric
    motors. These parts are used in a wide variety of motor
    applications, including appliances, business equipment, pumps
    and fans. We believe our motor segment is the largest
    independent U.S. manufacturer of die-cast aluminum rotors for
    use in fractional and subfractional horsepower electric motors.
    We also believe our motor segment has significant growth
    opportunities arising from the trend by original equipment motor
    manufacturers, which we estimate still produce more than half of
    all rotors in the U.S. fractional and subfractional horsepower
    motor market, to outsource their production of rotors to
    independent suppliers. For the years ended December 31,
    2002 and 2001, our motor segment generated net sales of
    $12.7 million and $9.0 million, representing 6% and 5%
    of our total net sales, respectively and operating losses of
    $2.8 million and $3.4 million, respectively. Our
    facility in Mexico accounted for $1.5 million of the
    operating loss in 2002 and $2.3 million of the operating
    loss in 2001, as it experienced higher than expected operating
    costs.

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Business Strategy

Our business strategy includes the following
principal elements:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Focus on High-Margin, Specialty
    Applications.We focus on markets that
    require sophisticated engineering and production techniques and
    in which we have achieved a significant market share. In
    developing new applications, we seek to compete in markets
    requiring a high level of engineering expertise and technical
    capability, rather than in markets in which the primary
    competitive factor is product pricing. We believe margins for
    our products in these markets are higher than in other
    manufacturing markets that use standardized products. Our gross
    margins were 22.2% and 21.7% for the years ended
    December 31, 2002 and 2001, respectively.                                                                                                                                                                                                              
|
| |  | Introduce New
    Products.A key part of our strategy
    is the introduction of products for new applications, which
    incorporate improved performance characteristics or reduced
    costs in response to customer needs. Our engineers proactively
    focus on developing new product solutions that enhance
    performance and reduce manufacturing costs, including instances
    where we are the incumbent supplier. We also grow by applying
    our existing products and technologies to new specialized
    applications where our products have a performance or
    technological advantage.                                                                                                                                                                                                                                                                                                           
|
| |  | Expand Customer
    Relationships.We seek to provide
    advanced solutions to customers, enhancing our long-term
    relationships. Our engineers work closely with customers to
    develop and design new products and improve the performance of
    existing products. We believe that more than 80% of our net
    sales are from products and materials for which we are the sole
    source provider for specific customer applications. Our
    predecessors formed, and we have continued to build,
    relationships with a number of customers dating back over
    50 years. Our commitment to quality, service and
    just-in-time delivery enables us to build and maintain strong
    and stable customer relationships. We believe that strong
    relationships with our customers provide us with significant
    competitive advantages in obtaining and maintaining new business
    opportunities.
|
| |  | Capitalize on Aftermarket
    Opportunities.Our stable aftermarket
    sales enable us to minimize our exposure to adverse economic
    cycles. Because friction products are the consumable, or wear,
    component of brake, clutch and transmission systems, the use of
    our friction products in conjunction with a new or existing
    system provides us with the opportunity to supply the
    aftermarket for the life of the system, typically through sales
    to the original equipment manufacturer. For example, the ability
    to service the aftermarket for a particular aircraft braking
    system will likely provide us with a stable market for our
    friction products for the life of the product, which can be
    30 years or more. Aftermarket sales of friction products
    have comprised approximately 50% of our friction product sales
    in recent years.                       
|
| |  | Selectively Expand
    Internationally.Through our friction
    and motor segments, which have foreign manufacturing facilities
    in Italy, Canada, China and Mexico, and our friction
    segments worldwide distribution network, we continue to
    selectively expand our international operations in established
    markets throughout Europe, Asia, North America and Australia. In
    our friction products segment, we have recently established a
    market presence in Latin America. Our international net sales
    represented $31.1 million, or 15.8%, of our consolidated
    net sales for the year ended December 31, 2002, and
    $23.6 million, or 12.8%, of our consolidated net sales in
    2001.                                                                                                                                                                                           

Our Principal Markets and Products

We focus on supplying the industrial,
agricultural, aerospace, performance automotive and motor
markets with components that require sophisticated engineering
and production techniques for applications where we have
achieved a significant market share. We have diversified our end
markets through acquisitions and product line expansions. We
believe that diversification has reduced our economic exposure
to the cyclical effects of any particular industry.

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

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

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

The principal markets served by our friction
segment include manufacturers of truck clutches, heavy-duty
construction and agricultural vehicle brakes, aircraft brakes,
motorcycle and snowmobile brakes and transmissions. Based on net
sales, we believe that we are among the top worldwide
manufacturers of friction products used in industrial and
aerospace applications. We estimate that aftermarket sales of
friction products have comprised approximately 50% of our net
friction product sales in recent years. We believe that our
stable aftermarket sales component enables us to minimize our
exposure to adverse economic cycles.

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Construction
    Equipment.We supply friction products
    such as transmission discs, clutch facings and brake components
    to manufacturers of construction equipment, including
    Caterpillar. We believe we are the second largest domestic
    supplier of these types of friction products. Replacement
    components for construction equipment are sold through original
    equipment manufacturers as well as various aftermarket
    distributors.                        
|
| |  | Agriculture
    Equipment.We supply friction products
    such as clutch facings, transmission discs and brake components
    to manufacturers of agriculture equipment, including John Deere
    and CNH (formerly Case New Holland). We believe we are the
    second largest domestic supplier of these friction products.
    Replacement components for agricultural equipment are sold
    through original equipment manufacturers as well as various
    aftermarket distributors.
|
| |  | Medium and Heavy
    Trucks.We supply friction products
    for clutch facings used in medium and heavy trucks to original
    equipment manufacturers, such as Eaton. We believe we are the
    leading domestic supplier of replacement friction products used
    in these applications. Replacement components are sold through
    original equipment manufacturers and various aftermarket
    distributors.                                                                        
|
| |  | Specialty Friction.We supply friction products for use in specialty applications,
    such as brake pads for Harley-Davidson motorcycles, General
    Motors Hummer and Bombardier, Polaris and Arctic Cat
    snowmobiles. We believe that these markets are experiencing
    significant growth, and that we have                                                                                                                                                                      

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| |  |                                                                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increased our market share with our combination
    of superior quality and product performance. Replacement
    components are sold through original equipment manufacturers and
    various aftermarket distributors.

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

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

Our friction products for commercial aerospace
applications are primarily used on single-aisle
aircraft that are flown on shorter routes, resulting in more
takeoffs and landings than those experienced by wide
body aircraft. We believe our friction products provide an
attractive combination of performance and cost effectiveness in
these applications. According to Boeings 2002 Current
Market Outlook, approximately 65% of the 15,271 airplanes in the
world fleet are single-aisle commercial aircraft. The report
also forecasts single-aisle aircraft to more than double by
approximately 12,350 to 23,850 by the end of 2021. The Boeing
report also states that world airline passenger traffic is
projected to increase 4.9% per year through 2021. We expect that
long-term growth in world airline traffic, combined with the
increasing number of single-aisle aircraft, will cause long-term
demand for our aerospace friction products to be stable,
although this market remained soft in 2002 and we expect this
softness to continue in 2003.

As a result of the terrorist attacks on
September 11, 2001, the aerospace markets we serve suffered
an immediate downturn. Air travel schedule curtailments by the
airlines were significant as a result of the steep declines in
customer traffic. Many older airplanes were among the first to
be put out of service by the airlines, including DC-9 and 727
models that were among our markets highest margin
products. The weakness in customer traffic continues as
evidenced by the bankruptcy filings of some major U.S. airlines
and the weak financial condition of others. We are expecting a
further decline in our aerospace market for the full year of
2003 of approximately 15 percent compared to 2002.



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

Our precision components segment is a leading
supplier of powder metal components consisting primarily of
pump, motor and transmission elements, gears, pistons and other
component parts for applications ranging from lawn and garden
tractors to industrial equipment. Since we were founded, we have
participated in the growing powder metal products industry with
a focus on the North American industrial market. The Metal
Powder Industries Federation, an industry trade group, estimates
that the powder metal market for automotive and non-automotive
applications in North America had sales of over
$5.0 billion in 2001.

Applications.We
manufacture a variety of components made from powder metals for
use in (1) fluid power applications, such as pumps and
other hydraulic mechanisms, (2) transmissions, other drive
mechanisms and anti-lock braking systems used in trucks and
off-road and lawn and garden equipment, (3) gears and other
components for use in home appliances, small hand tools and
office equipment and (4) components used in automotive
applications. Powder metal components can often be produced at a
lower cost per unit than products manufactured with forging,
casting or stamping technologies due to the elimination of, or
substantial reduction in, secondary machining, lower material
costs and the virtual elimination of raw material waste. In
addition, we expect advances in our core powder metal technology
to permit production of powder metal components with

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improved strength, hardness and durability for
demanding applications and with greater design flexibility. As a
result, we believe that the current trend of substituting powder
metal components for forged, cast or stamped components in
industrial applications will continue for the foreseeable
future, providing us with increased product and market
opportunities.


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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | High Precision.Our
    pressing and finishing capabilities enable us to specialize in
    tight tolerance fluid power components such as pump elements and
    gears. In addition, we believe that our machining capabilities
    provide us with a competitive advantage by giving us the ability
    to supply a completed part to our customers, typically without
    any subcontracted precision machining. We expect that our growth
    in this niche will be driven by existing customers new
    design requirements and new product applications primarily for
    pumps, motors and transmissions.                                                            
|
| |  | Large Size
    Capability.We have the capability to
    make powder metal components that are among the largest used in
    North America. For example, we make reactor plates having
    diameters up to 19 inches for use in transmissions in
    construction equipment. We expect our sales of large powder
    metal components to continue to grow as we create new designs
    for existing customers and benefit from market growth, primarily
    in current construction, agricultural and truck applications.                                                                                                                                                  
|
| |  | High Volume.We also
    target smaller, high volume parts where we can use efficient
    pressing and sintering capabilities to our best advantage. In
    this niche, our primary markets have been powder metal
    components for the lawn and garden, home appliance, power hand
    tool, truck, automotive and business equipment markets. We
    believe that our high volume capabilities will provide us with
    opportunities to cross-sell numerous of our other precision
    components. 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 and telecommunications. We
    believe that many of our traditional powder metal customers may
    also be attractive prospects for metal injected molded parts.
    For instance, we were able to provide one of our powder metal
    customers with a hydraulic valve component with a precisely
    controlled flow path because of the fine details achievable in
    metal injected molded parts as compared to standard powder metal
    components.                                                      



| |                       
| | ----------------------
| | Performance Automotive

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



| |      
| | -----
| | Motor

We believe our motor segment is the largest
independent U.S. manufacturer of die-cast aluminum rotors for
use in fractional and subfractional horsepower electric motors.
These motors are used in a wide variety of applications such as
small household appliances, business equipment, pumps and fans.
We believe our motor segment has significant growth
opportunities arising from the trend by original equipment motor
manufacturers, which we estimate still produce more than half of
all rotors in the U.S. fractional and subfractional horsepower
motor market, to outsource their production of rotors to
independent suppliers. In 2000, we commenced production at our
rotor manufacturing factory in Monterrey, Mexico, a city where a
large portion of fractional and subfractional motors are
manufactured. We also design and market integral horsepower
custom motors and generators through a manufacturing and sales
relationship with Potencia Industrial, located in Mexico City,
Mexico.

7



---



##### Table of Contents



Information About Our Business
Segments

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

|                                 |                           |                         |   |       |       |      |  |       |       |   |   |       |       |  |  |       |       |   |   |       |       |  |  |      |       |  
|-------------------------------- | ------------------------- | ----------------------- | - | ----- | ----- | ---- |  | ----- | ----- | - | - | ----- | ----- |  |  | ----- | ----- | - | - | ----- | ----- |  |  | ---- | ----- | -
|                                 |                           |                        
|                                 |                           | Year ended December 31,
|                                 |                           |                        
|                                 |                           |                         |   |       |       |     
|                                 |                           | 2002                    |   | 2001  |       | 2000
|                                 |                           |                         |   |       |       |     
|                                 |                           |                         |   |       |       |      |  |       |       |  
|Net sales to external customers: |                           |                         |   |       |       |      |  |       |       |   |   |       |       |  |  |       |       |   |   |       |       |  |  |     
|                                 | Friction products(2)      |                         | $ | 106.2 |       |      |  | 53.8  | %     |   | $ | 104.1 |       |  |  | 56.5  | %     |   | $ | 116.3 |       |  |  | 57.5 | %    
|                                 | Precision components      |                         |   | 65.8  |       |      |  | 33.4  | %     |   |   | 58.3  |       |  |  | 31.6  | %     |   |   | 72.0  |       |  |  | 35.6 | %    
|                                 | Performance automotive(2) |                         |   | 12.6  |       |      |  | 6.4   | %     |   |   | 13.0  |       |  |  | 7.0   | %     |   |   | 5.6   |       |  |  | 2.8  | %    
|                                 | Motor                     |                         |   | 12.7  |       |      |  | 6.4   | %     |   |   | 9.0   |       |  |  | 4.9   | %     |   |   | 8.4   |       |  |  | 4.1  | %    
|                                 |                           |                         |   |       |       |      |  |       |       |   |   |       |       |  |  |       |       |   |   |       |       |  |  |     
|                                 |                           | Consolidated            |   | $     | 197.3 |      |  |       | 100.0 | % |   | $     | 184.4 |  |  |       | 100.0 | % |   | $     | 202.3 |  |  |      | 100.0 | %
|                                 |                           |                         |   |       |       |      |  |       |       |   |   |       |       |  |  |       |       |   |   |       |       |  |  |     
|Gross profit (loss):             |                           |                         |   |       |       |      |  |       |       |   |   |       |       |  |  |       |       |   |   |       |       |  |  |     
|                                 | Friction products(2)      |                         | $ | 25.4  |       |      |  | 58.1  | %     |   | $ | 24.9  |       |  |  | 62.3  | %     |   | $ | 30.9  |       |  |  | 56.3 | %    
|                                 | Precision components      |                         |   | 14.6  |       |      |  | 33.4  | %     |   |   | 11.5  |       |  |  | 28.8  | %     |   |   | 19.4  |       |  |  | 35.3 | %    
|                                 | Performance automotive(2) |                         |   | 3.7   |       |      |  | 8.5   | %     |   |   | 3.9   |       |  |  | 9.7   | %     |   |   | 2.8   |       |  |  | 5.1  | %    
|                                 | Motor                     |                         |   |       |       |      |  |       |       |   |   | (0.3  | )     |  |  | (0.8  | )%    |   |   | 1.8   |       |  |  | 3.3  | %    
|                                 |                           |                         |   |       |       |      |  |       |       |   |   |       |       |  |  |       |       |   |   |       |       |  |  |     
|                                 |                           | Consolidated            |   | $     | 43.7  |      |  |       | 100.0 | % |   | $     | 40.0  |  |  |       | 100.0 | % |   | $     | 54.9  |  |  |      | 100.0 | %
|                                 |                           |                         |   |       |       |      |  |       |       |   |   |       |       |  |  |       |       |   |   |       |       |  |  |     
|Income (loss) from operations(1) |                           |                         |   |       |       |      |  |       |       |   |   |       |       |  |  |       |       |   |   |       |       |  |  |     
|                                 | Friction products(2)      |                         | $ | 7.5   |       |      |  | 76.5  | %     |   | $ | 6.4   |       |  |  | 177.8 | %     |   | $ | 11.5  |       |  |  | 59.0 | %    
|                                 | Precision components      |                         |   | 4.1   |       |      |  | 41.8  | %     |   |   | 0.3   |       |  |  | 8.3   | %     |   |   | 8.4   |       |  |  | 43.1 | %    
|                                 | Performance automotive(2) |                         |   | 1.0   |       |      |  | 10.2  | %     |   |   | 0.3   |       |  |  | 8.3   | %     |   |   | 0.9   |       |  |  | 4.6  | %    
|                                 | Motor                     |                         |   | (2.8  | )     |      |  | (28.5 | )%    |   |   | (3.4  | )     |  |  | (94.4 | )%    |   |   | (1.3  | )     |  |  | (6.7 | )%   
|                                 |                           |                         |   |       |       |      |  |       |       |   |   |       |       |  |  |       |       |   |   |       |       |  |  |     
|                                 |                           | Consolidated            |   | $     | 9.8   |      |  |       | 100.0 | % |   | $     | 3.6   |  |  |       | 100.0 | % |   | $     | 19.5  |  |  |      | 100.0 | %
|                                 |                           |                         |   |       |       |      |  |       |       |   |   |       |       |  |  |       |       |   |   |       |       |  |  |     

|              |                           |              |   |      |       |  |   |       |       | 
|------------- | ------------------------- | ------------ | - | ---- | ----- |  | - | ----- | ----- | 
|              |                           |             
|              |                           | December 31,
|              |                           |             
|              |                           | 2002         |   | 2001
|              |                           |              |   |     
|Total assets: |                           |              |   |      |       |  |   |      
|              | Friction products(2)      |              | $ | 96.0 |       |  | $ | 103.5 |      
|              | Precision components      |              |   | 74.6 |       |  |   | 69.0  |      
|              | Performance automotive(2) |              |   | 10.9 |       |  |   | 14.6  |      
|              | Motor                     |              |   | 12.4 |       |  |   | 16.0  |      
|              |                           |              |   |      |       |  |   |      
|              |                           | Consolidated |   | $    | 193.9 |  |   | $     | 203.1 | 
|              |                           |              |   |      |       |  |   |      



---



|    |                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In accordance with the non-amortization
    provisions of SFAS 142 (see Note B-Significant Accounting
    Policies to the accompanying consolidated financial
    statements beginning on page 27 of this Form 10-K),
    the Company eliminated the amortization of goodwill in 2002.



| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table illustrates the pro forma
    effect on income (loss) from operations had we applied the
    non-amortization provisions of SFAS 142 for the years ended
    December 31, 2001 and 2000 by segment:

|                                                   |                        |                         |   |      |     |  |  |       |       |   |   |      |      |  |  |      |       |  
|-------------------------------------------------- | ---------------------- | ----------------------- | - | ---- | --- |  |  | ----- | ----- | - | - | ---- | ---- |  |  | ---- | ----- | -
|                                                   |                        |                        
|                                                   |                        | Year Ended December 31,
|                                                   |                        |                        
|                                                   |                        |                         |   |     
|                                                   |                        | 2001                    |   | 2000
|                                                   |                        |                         |   |     
|                                                   |                        |                         |   |      |     |  |  |      
|Pro forma operating income (loss) from operations: |                        |                         |   |      |     |  |  |       |       |   |   |      |      |  |  |     
|                                                   | Friction products      |                         | $ | 7.5  |     |  |  | 110.3 | %     |   | $ | 12.6 |      |  |  | 56.5 | %    
|                                                   | Precision components   |                         |   | 1.5  |     |  |  | 22.1  | %     |   |   | 9.6  |      |  |  | 43.0 | %    
|                                                   | Performance automotive |                         |   | 0.9  |     |  |  | 13.2  | %     |   |   | 1.1  |      |  |  | 4.9  | %    
|                                                   | Motor                  |                         |   | (3.1 | )   |  |  | (45.6 | )%    |   |   | (1.0 | )    |  |  | (4.4 | )%   
|                                                   |                        |                         |   |      |     |  |  |       |       |   |   |      |      |  |  |     
|                                                   |                        | Consolidated            |   | $    | 6.8 |  |  |       | 100.0 | % |   | $    | 22.3 |  |  |      | 100.0 | %
|                                                   |                        |                         |   |      |     |  |  |       |       |   |   |      |      |  |  |     



|    |                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | As of January 1, 2002, we reclassified an
    operating unit formerly associated with our performance
    automotive segment to our friction products segment as a result
    of changes in the internal operating responsibility of that
    unit. We have reclassified all prior periods discussed in this
    Form 10-K to reflect this change.

8



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##### Table of Contents



Our Manufacturing Processes

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



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

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

Our die-cast aluminum rotors are produced in a
three-step process. Steel stamped disks forming the laminations
of the rotors are first skewed (stacked) and then loaded into
dies into which molten aluminum is injected to create the
rotors. The rotor castings created in the dies are then machined
to produce finished rotors. We manufacture these rotors in a
variety of sizes and shapes to customers design
specifications.

Our Quality Control Procedures

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

In 2001, we launched a Six Sigma initiative
focused on creating a culture of continuous improvement. Six
Sigma is a discipline that aims to eliminate costly process
variation in a companys operations and bring more value to
its customers. To achieve this, Six Sigma managers use
statistical analysis to locate process and product errors. As of
December 31, 2002, we have trained approximately 250
employees and have over 80 Six Sigma projects in process
throughout our business segments. We completed 40 projects in
2002, many of which involved direct customer participation.

9



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##### Table of Contents



Our Foreign Operations

Our foreign operations are subject to the usual
risks of operating in foreign jurisdictions. They include, but
are not limited to, exchange controls, currency restrictions and
fluctuations, changes in local economic and political
conditions, changes in laws, regulations, tariffs or taxes, the
establishment of trade barriers and difficulties in management
and staffing. For financial information regarding our
international operations, see Note M  Business
Segments and Note N  Supplemental
Guarantor Information to the accompanying consolidated
financial statements beginning on page 27 of this
Form 10-K.

Our Technology

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

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

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

Our motor business is able to produce a wide
range of rotors for the fractional and subfractional motor
industries. We have developed customized manufacturing processes
for rotors and created specialty rotor die construction
techniques. We have also designed highly automated machines
necessary for the production of our rotors.

Our Customers

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

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

10



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##### Table of Contents



Our top five customers accounted for 21.6% of our
consolidated net sales in 2002, and 24.4% of our consolidated
net sales in 2001.

How We Market and Sell Our Products

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

Our Competition

The principal segments in which we operate are
competitive and fragmented, with many small manufacturers and
only a few manufacturers that generate annual sales in excess of
$50.0 million. We compete for new business principally at
the beginning of the development of new applications and at the
redesign of existing applications by our customers. For example,
new model development for our aircraft braking system customers
generally begins two to five years before full-scale production
of new braking systems. Initiatives by customers to upgrade
existing products typically involve long lead times as well. We
also compete with manufacturers using different technologies,
such as carbon composite (carbon-carbon) friction
materials for aircraft braking systems. Carbon-carbon braking
systems are significantly lighter than the metallic aircraft
braking systems that we supply friction materials for, but are
generally more expensive. The carbon-carbon brakes are typically
used on wide-body aircraft, such as the Boeing 747, and on
military aircraft, where the advantages in reduced weight may
justify the additional expense.

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

The Suppliers and Prices of the Raw Materials
We Use

The principal raw materials that we use are
copper, steel and iron powders, aluminum ingot and
custom-fabricated cellulose sheet. We have generally been able
to obtain sufficient supplies of raw materials for our
operations, and changes in prices of our supplies over the past
few years have not had a significant effect on our operations.

Government Regulation of Our
Businesses

Our sales to manufacturers of aircraft braking
systems represented 11.1% of our consolidated net sales in 2002
and 14.1% of our consolidated net sales in 2001. Each aircraft
braking system, including the friction products supplied by us,
must meet stringent Federal Aviation Administration criteria and
testing requirements. We have been able to meet these
requirements in the past and we continuously review Federal
Aviation Administration compliance procedures to help ensure our
continued and future compliance.

Environmental, Health and Safety
Matters

We are subject to stringent environmental
standards imposed by federal, state, local and foreign
environmental laws and regulations, including those related to
air emissions, wastewater discharges, chemical and hazardous
waste management and disposal. Some of these environmental laws
hold owners or operators of land or

11



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##### Table of Contents



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


Our Intellectual Property

Our federally registered trademarks include
Hawk®, Wellman Friction Products®, Velvetouch®,
Fibertuff®, Feramic®, Velvetouch Feramic®,
Velvetouch Organik®, Hawk Brake®, Hawk Precision
Components®, Hawk Motors®, Quarter Master®, and
Hawk Performance®. Velvetouch® and Sheepbridge®
are our principal trademarks for use in the friction products
aftermarket segment and are registered in 26 countries. We have
applied for the registration of the Hawk Precision Components
Group, Hawk Racing International, Pro V, Tex Racing and Wellman
Products Group trademarks. Although we maintain patents related
to our business, we do not believe that our competitive position
is dependent on patent protection or that our operations are
dependent on any individual patent. To protect our intellectual
property, we rely on a combination of internal procedures,
confidentiality agreements, patents, trademarks, trade secrets
law and common law, including the law of unfair competition.

Personnel

At December 31, 2002, we had approximately
1,260 domestic employees and 420 international employees.
Approximately 190 employees at our Brook Park, Ohio plant are
covered under a collective bargaining agreement with the Paper,
Allied Industrial, Chemical and Energy Workers International
Union expiring in October 2004; approximately 60 employees
at our Akron, Ohio facility are covered under a collective
bargaining agreement with the United Automobile Workers expiring
in July 2003; approximately 70 hourly employees at our
Alton, Illinois facility are covered under a collective
bargaining agreement with the International Association of
Machinists and Aerospace Workers expiring in June 2004;
approximately 100 employees at our Monterrey, Mexico plant are
represented by the Federacion Nacional de Sindicatos
Independientes union under a national union agreement which
expires in August 2003; and approximately 200 employees at
our Orzinuovi, Italy plant are represented by a national
mechanics union agreement that expired in December 2002.
Negotiations are ongoing between the parties at the national
level. The Italian employees are also covered by an local union
agreement that expires in December 2004. We have
experienced no strikes and believe we have good relations with
our employees and their unions.






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

Hawks world headquarters is located in
Cleveland, Ohio. We maintain manufacturing and research and
development facilities at 16 locations in 5 countries. We are a
lessee under operating leases for some of our properties and
equipment. Hawks principal research facility is located in
Solon, Ohio. In addition, research is also performed in a number
of the operating divisions facilities. We believe that
substantially all of our property and equipment is maintained in
good condition, adequately insured and suitable for its present
and intended use.






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

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






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

No matters were submitted to a vote of security
holders during the fourth quarter of 2002.

12



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##### Table of Contents






Part II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND
    RELATED STOCKHOLDER MATTERS

Our Class A Common Stock has been traded on
the New York Stock Exchange since our initial public offering on
May 12, 1998 under the symbol HWK. The
following table sets forth, for the fiscal periods indicated,
the high and low closing prices of our Common Stock as reported
on the New York Stock Exchange.

Quarterly Stock
Prices

|     |  |                    |  |      |      |     |  |   |      | 
|---- |  | ------------------ |  | ---- | ---- | --- |  | - | ---- | 
|     |  | Quarter Ended      |  | High |      | Low
|     |  |                    |  |      |      |    
|2002 |  |                    |  |      |      |     |  |   |      | 
|     |  | March 31, 2002     |  | $    | 5.20 |     |  | $ | 3.41 | 
|     |  | June 30, 2002      |  | $    | 5.35 |     |  | $ | 3.55 | 
|     |  | September 30, 2002 |  | $    | 3.80 |     |  | $ | 2.26 | 
|     |  | December 31, 2002  |  | $    | 2.66 |     |  | $ | 1.70 | 
|2001 |  |                    |  |      |      |     |  |   |      | 
|     |  | March 31, 2001     |  | $    | 7.25 |     |  | $ | 5.31 | 
|     |  | June 30, 2001      |  | $    | 7.20 |     |  | $ | 5.37 | 
|     |  | September 30, 2001 |  | $    | 6.29 |     |  | $ | 3.95 | 
|     |  | December 31, 2001  |  | $    | 4.20 |     |  | $ | 2.65 | 

The closing sale price for our common stock on
December 31, 2002 was $2.32.

Shareholders of record as of February 14,
2003 numbered 84. We estimate that an additional 1,000
shareholders own stock in their accounts at brokerage firms and
other financial institutions.

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

Effective October 25, 2002, we issued 750
shares of our Class A Common Stock, having a market value
at the time of issuance of $1,875, to Andrew T. Berlin as part
of his annual compensation for services as a director of Hawk.
The shares were issued without registration in an offering not
involving any public offering as permitted by Section 4(2)
of the Securities Act of 1933.

13



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

|                                                                                                      |                                                                                                                 |                                      |       |       |   |      |       |      |   |      |       |     |  |   |       |     |  |   |       |      |  
|----------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ----- | ----- | - | ---- | ----- | ---- | - | ---- | ----- | --- |  | - | ----- | --- |  | - | ----- | ---- | -
|Years ended December 31,                                                                              |                                                                                                                 | 2002                                 |       | 2001  |   | 2000 |       | 1999 |   | 1998
|                                                                                                      |                                                                                                                 |                                      |       |       |   |      |       |      |   |     
|                                                                                                      |                                                                                                                 |                                     
|                                                                                                      |                                                                                                                 | (In millions, except per share data)
|Income Statement Data:                                                                                |                                                                                                                 |                                      |       |       |   |      |       |      |   |      |       |     |  |   |       |     |  |   |       |     
|Net sales                                                                                             |                                                                                                                 | $                                    | 197.3 |       |   | $    | 184.4 |      |   | $    | 202.3 |     |  | $ | 187.6 |     |  | $ | 182.3 |     
|Gross profit                                                                                          |                                                                                                                 |                                      | 43.7  |       |   |      | 40.0  |      |   |      | 54.9  |     |  |   | 48.8  |     |  |   | 57.7  |     
|Restructuring costs(1)                                                                                |                                                                                                                 |                                      |       |       |   |      | 1.1   |      |   |      |       |     |  |   |       |     |  |   |       |     
|Income from operations(2)                                                                             |                                                                                                                 |                                      | 9.8   |       |   |      | 3.6   |      |   |      | 19.5  |     |  |   | 18.6  |     |  |   | 32.8  |     
|(Loss) income before cumulative effect of change
    in accounting principle and extraordinary charge |                                                                                                                 |                                      | (1.0  | )     |   |      | (4.3  | )    |   |      | 5.8   |     |  |   | 6.3   |     |  |   | 12.2  |     
|Extraordinary charge, net of tax of
    $2.3(3)                                                       |                                                                                                                 |                                      |       |       |   |      |       |      |   |      |       |     |  |   |       |     |  |   | 3.1   |     
|Cumulative effect of change in accounting
    principle, net of tax of $4.3                           |                                                                                                                 |                                      | 17.2  |       |   |      |       |      |   |      |       |     |  |   |       |     |  |   |       |     
|Net (loss) income                                                                                     |                                                                                                                 | $                                    | (18.2 | )     |   | $    | (4.3  | )    |   | $    | 5.8   |     |  | $ | 6.3   |     |  | $ | 9.1   |     
|(Loss) Earnings Per Share:                                                                            |                                                                                                                 |                                      |       |       |   |      |       |      |   |      |       |     |  |   |       |     |  |   |       |     
|                                                                                                      | Basic (loss) earnings before extraordinary
    charges and cumulative effect of change in accounting principle  |                                      | $     | (.14  | ) |      | $     | (.52 | ) |      | $     | .66 |  |   | $     | .71 |  |   | $     | 1.59 |  
|                                                                                                      | Extraordinary charge(2)                                                                                         |                                      |       |       |   |      |       |      |   |      |       |     |  |   |       |     |  |   |       | (.41 | )
|                                                                                                      | Cumulative effect of change in accounting
    principle                                                         |                                      |       | (2.01 | ) |      |       |      |   |      |       |     |  |   |       |     |  |   |       |      |  
|                                                                                                      |                                                                                                                 |                                      |       |       |   |      |       |      |   |      |       |     |  |   |       |     |  |   |       |     
|                                                                                                      | Basic (loss) earnings per share                                                                                 |                                      | $     | (2.15 | ) |      | $     | (.52 | ) |      | $     | .66 |  |   | $     | .71 |  |   | $     | 1.18 |  
|                                                                                                      |                                                                                                                 |                                      |       |       |   |      |       |      |   |      |       |     |  |   |       |     |  |   |       |     
|                                                                                                      | Diluted (loss) earnings before extraordinary
    charge and cumulative effect of change in accounting principle |                                      | $     | (.14  | ) |      | $     | (.52 | ) |      | $     | .66 |  |   | $     | .71 |  |   | $     | 1.51 |  
|                                                                                                      | Extraordinary charge(2)                                                                                         |                                      |       |       |   |      |       |      |   |      |       |     |  |   |       |     |  |   |       | (.39 | )
|                                                                                                      | Cumulative effect of change in accounting
    principle                                                         |                                      |       | (2.01 | ) |      |       |      |   |      |       |     |  |   |       |     |  |   |       |      |  
|                                                                                                      |                                                                                                                 |                                      |       |       |   |      |       |      |   |      |       |     |  |   |       |     |  |   |       |     
|                                                                                                      | Diluted (loss) earnings per share                                                                               |                                      | $     | (2.15 | ) |      | $     | (.52 | ) |      | $     | .66 |  |   | $     | .71 |  |   | $     | 1.12 |  
|                                                                                                      |                                                                                                                 |                                      |       |       |   |      |       |      |   |      |       |     |  |   |       |     |  |   |       |     
|Other Data:                                                                                           |                                                                                                                 |                                      |       |       |   |      |       |      |   |      |       |     |  |   |       |     |  |   |       |     
|Depreciation                                                                                          |                                                                                                                 | $                                    | 11.0  |       |   | $    | 11.4  |      |   | $    | 10.8  |     |  | $ | 9.9   |     |  | $ | 8.0   |     
|Amortization(2)                                                                                       |                                                                                                                 | $                                    | 1.4   |       |   | $    | 4.5   |      |   | $    | 4.2   |     |  | $ | 3.8   |     |  | $ | 3.5   |     
|Capital expenditures (including capital leases)                                                       |                                                                                                                 | $                                    | 11.5  |       |   | $    | 9.1   |      |   | $    | 10.5  |     |  | $ | 10.2  |     |  | $ | 15.2  |     

|                                       |  |               |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|-------------------------------------- |  | ------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- | 
|December 31,                           |  | 2002          |       | 2001 |  | 2000 |       | 1999 |  | 1998
|                                       |  |               |       |      |  |      |       |      |  |     
|                                       |  |              
|                                       |  | (In millions)
|Balance Sheet Data:                    |  |               |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|Cash and cash equivalents              |  | $             | 1.7   |      |  | $    | 3.1   |      |  | $    | 4.0   |  |  | $ | 4.0   |  |  | $ | 14.3  | 
|Working capital                        |  |               | 10.0  |      |  |      | 31.5  |      |  |      | 36.5  |  |  |   | 33.5  |  |  |   | 39.9  | 
|Property plant and equipment, net      |  |               | 68.0  |      |  |      | 67.4  |      |  |      | 70.4  |  |  |   | 70.2  |  |  |   | 64.3  | 
|Total assets                           |  |               | 193.8 |      |  |      | 203.1 |      |  |      | 215.4 |  |  |   | 209.6 |  |  |   | 203.4 | 
|Total long-term debt and Bank Facility |  |               | 109.0 |      |  |      | 97.8  |      |  |      | 103.9 |  |  |   | 105.4 |  |  |   | 102.5 | 
|Shareholders equity                   |  |               | 44.8  |      |  |      | 66.4  |      |  |      | 71.7  |  |  |   | 66.5  |  |  |   | 64.4  | 



---



|    |                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reflects primarily a work force reduction at our
    domestic facilities for approximately 160 salaried and
    production personnel.                                                                                                                                                         
|   
|(2) | In accordance with the non-amortization
    provisions of SFAS 142 (see Note B 
    Significant Accounting Policies to the accompanying
    consolidated financial statements beginning on page 27 of
    this Form 10-K), the Company eliminated the amortization of
    goodwill in 2002.
|   
|(3) | Reflects premium paid on partial redemption of
    Senior Notes and write-off of deferred financing costs in
    conjunction with the Companys initial public offering, net
    of $2.3 million in income taxes.                                                                             

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

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

Results of Operations

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

In 2002, our income from operations increased to
$9.8 million, or 172 percent, over the prior year. This
increase was attributable primarily to sales volume increases in
most of the end-markets we serve in our friction and precision
component segments with the notable exception of aircraft,
improved absorption of fixed costs as a result of the volume
increases, cost reduction initiatives and decreased goodwill
amortization expense. Partially offsetting these improvements
were higher than expected operating costs incurred at our
Mexican facility.

Despite the sales increases we achieved during
2002, we expect that early 2003 will continue to be challenging
in most of the markets we serve. Based on discussions with our
customer base, we expect our revenue growth during the year will
be weighted toward the second half of 2003. We believe that the
aerospace market will decline approximately 15% for the
full year 2003 compared to 2002, as a result of the continuing
softness in that market. Other than aerospace, we expect that
our overall sales growth will continue primarily from new
product introductions across our segments and sales made from
our international facilities. For the full year of 2003, with a
gradually improving economy, we are anticipating our segments to
provide revenue growth of approximately 10 percent.
Although we anticipate improvement in our motor segment as we
continue to take steps to improve manufacturing efficiency, we
expect that the margins in this segment will continue to lag
significantly behind our other segments.

Critical Accounting Policies

Hawks critical accounting policies,
including the assumptions and judgments underlying them are more
fully described in Note B  Significant
Accounting Policies of the notes to the accompanying
consolidated financial statements beginning on page 27 of
this Form 10-K. Some of our accounting policies require the
application of significant judgment by us in the preparation of
our financial statements. In applying these policies, we use our
best judgment to determine the underlying assumptions that are
used in calculating the estimates that affect the reported
values on our financial statements. We base our estimates and
assumptions on historical experience and other factors that we
consider relevant. If these estimates differ materially from
actual results, the impact on our consolidated financial
statements may be material. Hawks critical accounting
policies include the following:



| |   |                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue Recognition.Revenues are recognized when products are shipped and title has
    transferred to the customer.                                                                                                                                                                                                                      
|
| |  | Allowance for Doubtful
    Accounts.Our policy regarding the
    collectibility of accounts receivables 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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | to the amount that we reasonably expect to
    collect. If circumstances change, estimates of the
    recoverability of the amounts due us could change.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Inventory Reserves.Reserves for slow moving and obsolete inventories are developed
    based on historical experience and product demand. We
    continuously evaluate the adequacy of our inventory reserves and
    make adjustments to the reserves as required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Goodwill.Goodwill
    represents the excess of the cost of companies we acquired over
    the fair value of their net assets as of the date of
    acquisition. In accordance with Statement of Financial
    Accounting Standard (SFAS) No. 142, Goodwill and
    Other Intangible Assets (SFAS 142), our policy is to
    periodically, and in no case less than annually, review our
    goodwill and other intangible assets based upon the evaluation
    of such factors as the occurrence of a significant adverse event
    or change in the environment in which one of our business unit
    operates would become less than the amount of the asset as
    reflected in our financial statements. An impairment loss would
    be recorded in the period such determination is made based on
    the fair value of the related assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Pension and Postretirement
    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 have assumed that the expected weighted average long-term
    rate of return on plan assets will be 8.6 percent. 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. 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).
|
| |   | 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, 2002, we determined
this rate to be 6.75 percent. 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, have been deferred as allowed by
SFAS 87.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

We expect pension expense to be approximately
$1.5 million in 2003, compared to $0.4 million in 2002.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Insurance.We use a
    combination of insurance and self-insurance for a number of
    risks including property, general liability, directors and
    officers liability, workers compensation, vehicle
    liability and employee-related health care benefits. Liabilities
    associated with the risks that are retained are estimated by
    considering various historical trends and forward-looking
    assumptions. The estimated accruals for these liabilities could
    be significantly affected if future occurrences and claims
    differ from these assumptions and historical trends.

Over the past year, the cost and availability of
commercial insurance as a result of significant changes in the
insurance market have impacted our insurance coverages. We have
renewed all of our insurance policies for 2003, although at
additional premium cost, and with increased exposures to losses.



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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | 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. 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 balance
    sheet date. The effect of the transactions gain or loss is
    included in other income (expense) in our statement of
    operations.

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

Net Sales.Our
consolidated net sales for 2002 were $197.3 million, an
increase of $12.9 million or 7 percent from the same
period in 2001. The increase in net sales, primarily a result of
a gradual economic recovery during the year in the industrial
markets we serve, resulted in all of our segments, with the
exception of performance automotive. Additionally, net sales in
our motor segment were positively impacted by increased sales
originating from our Mexican facility.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Friction Segment.Net sales in the friction segment, our largest, were
    $106.2 million in 2002, an increase of 2 percent
    compared to 2001. As a result of improved operating environments
    in the United States and Europe, we experienced increases in
    most of our major markets, including construction, agriculture
    and automotive. The notable exception was our aerospace market.
    As a result of the continuing softness in the commercial
    aerospace market during 2002, our sales to this market were down
    16 percent from the comparable period in 2001. This segment
    also experienced strong sales growth out of our international
    operations in 2002. Net sales, exclusive of any translation
    gains, at our Italian facility increased 14 percent
    compared to 2001, as a result of new product introductions and
    market share gains. Net sales at our Chinese facility were up
    251 percent compared to 2001.
|
| |  | Precision Component
    Segment.Net sales in the precision
    components segment were $65.8 million, an increase of
    13 percent compared to 2001. The increase in net sales was
    primarily attributable to gradually improving conditions in the
    general industrial segments of the domestic economy. We
    experienced sales increases in nearly all of the major markets
    served by this segment, including pump and motor, lawn and
    garden, truck and appliance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Performance
    Automotive.Net sales in our
    performance automotive segment were $12.6 million, a
    decrease of 3 percent compared to net sales of
    $13.0 million in 2001. The decrease in revenues was
    primarily attributable to the softness in the end markets we
    serve from our clutch manufacturing operation. Net sales at our
    transmission and driveline systems manufacturing facility
    benefited from the continued popularity of racing, particularly
    in the NASCAR racing series.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Motor Segment.Net
    sales in our motor segment were $12.7 million, an increase
    of 41 percent from the same period in 2001. While a
    majority of the sales growth came as a result of the production
    ramp up at our Monterrey, Mexico facility, the segment benefited
    from the establishment of a number of new customer relationships
    serviced from our U.S. and Mexican facilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Gross Profit.Gross
profit increased $3.7 million to $43.7 million during
2002, a 9 percent increase compared to gross profit of
$40.0 million in 2001. The gross profit margin increased to
22.2 percent of net sales in 2002 from 21.7 percent of
net sales in the comparable period of 2001.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Friction Segment.Our friction segment reported gross profit of $25.4 million or
    24 percent of net sales in 2002 compared to
    $24.9 million or 24 percent of net sales in 2001. The
    flat gross profit margin was primarily the result of product
    mix, especially in our aerospace market, as older aircraft,
    which have higher margins for us, were retired or put out of
    service by the commercial airlines. We also continued to support
    our new facility in China during 2002. Although the facility
    operated at negative margins for the

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | full year, it achieved break even results for the
    last half of 2002. The decline in gross margin was partially
    offset by reductions in incentive compensation costs.                                                                                                                                                                                                                                                                               
|
| |  | Precision Components
    Segment.Gross profit in our precision
    components segment was $14.6 million or 22 percent of
    net sales in 2002 compared to $11.5 million or
    20 percent of net sales in 2001. The increase in this
    segments margins was primarily the result of the volume
    increases and our ability to leverage and absorb the fixed
    charges generated by the segment and reductions in incentive
    compensations costs.
|
| |  | Performance Automotive
    Segment.Our performance automotive
    segment reported gross profit of $3.7 million or
    29 percent of net sales in 2002 compared to
    $3.9 million or 30 percent of net sales in 2001. The
    decline in gross profit was primarily the result of volume
    declines at our performance clutch manufacturing facility.                                                                                                  
|
| |  | Motor Segment.Our
    motor segment reported break even gross profit in 2002. This
    compared to a gross margin loss of $0.3 million in 2001.
    Despite ongoing manufacturing inefficiencies at our facilities,
    the improvement in our gross margin was primarily the result of
    the sales volume increases and the resulting absorption of fixed
    costs at our Mexican facility in 2002.                                                    

Selling, Technical and Administrative
Expenses.Selling, technical and
administrative (ST&A) expenses increased $1.8 million,
or 6 percent, to $32.6 million in 2002 from
$30.8 million during 2001. As a percentage of net sales,
ST&A remained stable at 17 percent in 2002 and 2001.
The increase in ST&A expenses resulted primarily from
continuing start-up expenditures incurred at our Mexican rotor
manufacturing and Chinese friction material facilities,
increased insurance and personnel costs associated with our
long-term sales and growth initiatives. Additionally, we
incurred legal expenses in our performance automotive segment
related to litigation that was resolved in the second quarter of
2002. These cost increases were partially offset by reductions
in incentive compensation costs. We spent $3.5 million, or
2 percent of our net sales on product research and
development compared to $3.9 million in 2001.

Amortization of
Intangibles.Results for the year
ended December 31, 2002 were favorably impacted by the
adoption of SFAS 142 on January 1, 2002, which eliminated
the amortization of goodwill on indefinite-life intangible
assets. This accounting change reduced our amortization expense
for the year by $3.2 million compared to 2001.

Income from
Operations.Income from operations
increased $6.2 million or 172 percent to
$9.8 million in 2002 from $3.6 million in 2001. Income
from operations as a percentage of net sales increased to
5 percent in 2002 from 2 percent in 2001. The increase was
primarily the result of the increased sales volume, improved
absorption of fixed costs as a result of the volume increases,
cost reduction initiatives and a reduction of amortization
expense of $3.2 million as a result of the adoption of
SFAS 142. This improvement to income from operations was
partially offset by continuing support of our operations in
China, higher than anticipated operating costs incurred at our
Mexican rotor manufacturing facility and continued support of
our metal injection molding facility during the year. During the
year ended December 31, 2001, we recognized an expense of
$1.1 million in restructuring charges to adjust our
business plan to reflect the economic slowdown. No such charge
was taken in 2002.

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



| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our friction segments income from
    operations increased $1.1 million or 17 percent to
    $7.5 million in 2002 from $6.4 million in 2001.                                
|
| |  | Income from operations at our precision
    components segment was $4.1 million in 2002, an increase of
    $3.8 million, or 8 percent, compared to
    $0.3 million in 2001.
|
| |  | Income from operations at our performance
    automotive segment was $1.0 million in 2002, an increase of
    $0.7 million, compared to $0.3 million in 2001.                
|
| |  | The loss from operations in our motor segment
    decreased to $2.8 million in 2002 from $3.4 million in
    2001.                                                           

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

Interest Expense.Interest expense increased $0.3 million, or 3 percent, to
$9.8 million in 2002 from $9.5 million in 2001. The
increase is primarily attributable to increased borrowings
during the year and an increase in the interest rate on our
Senior Notes. Following our exchange offer in October 2002, the
interest rate on our Senior Notes increased from 10.25% to 12%.
This increase was partially offset by lower interest rates paid
under our new Bank Facility, which was also entered into in
October 2002. Additionally, we recorded $0.1 million in
interest expense in December 2002, to reflect the issuance of
payment in kind (PIK) interest under the terms of the
Senior Notes leverage ratio test for the period ended
December 31, 2002.

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

Income Taxes.We
recorded a tax benefit of $1.5 million, or 59 percent
of pre-tax loss, in 2002 compared to a benefit of
$1.9 million, or 30 percent of pre-tax loss in 2001.
The increase in the effective benefit is primarily the result of
the reversal of tax accruals due to the expiration of various
statutes of limitations covering periods in which we provided
for potential tax liabilities. An analysis of changes in our
income taxes and our effective tax rate is contained in
Note J  Income Taxes in the accompanying
consolidated financial statements beginning on page 27 of
this Form 10-K.

Cumulative Effect of Change in Accounting
Principle.In accordance with the
requirements of SFAS 142, we recorded a charge for the
cumulative effect of change in accounting principle of
$17.2 million for the year ended December 31, 2002.
See Note B  Significant Accounting
Policies in the accompanying consolidated financial
statements beginning on page 27 of this Form 10-K.
This charge represents the write-off of $21.5 million of
goodwill ($17.2 million, net of income taxes of
$4.3 million).

Net (Loss) Income.As a result of the factors noted above, we reported a net loss
of $18.2 million in 2002, compared to a net loss of
$4.3 million in 2001.

Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000

Net Sales.Our
consolidated net sales for 2001 were $184.4 million, a
decrease of $17.9 million or 9% from the same period in
2000. The decline in net sales, primarily a result of the
prolonged weakness in the markets we serve, resulted in a
difficult operating environment in most of our reporting
segments. The terrorist attacks on September 11, 2001, in
particular, had a significant negative impact on our aircraft
friction business.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Friction Segment.Net sales in the friction segment were $104.1 million in 2001, a
    decrease of 10% compared to 2000. The major markets served by
    this segment all experienced weak operating conditions in 2001.
    We experienced declines in heavy truck, agriculture,
    construction and specialty friction for the full year 2001 as a
    result of the soft operating conditions in the United States and
    Europe. Net sales in the aerospace market showed a decline for
    the year, most notably in the fourth quarter of 2001, as a
    result of the events of September 11.                                                                                                                                 
|
| |  | Precision Components
    Segment.Net sales in the precision
    components segment were $58.3 million, a decrease of 19%
    compared to 2000. The decrease was primarily attributable to
    continuing softness in the general industrial segments of the
    domestic economy. We experienced sales weakness in nearly all of
    the markets served by this segment, including heavy truck, lawn
    and garden, pump and motor, appliance and office equipment.
    While net sales in the segment were down as a result of the
    general softness of economic operating environment, we feel the
    sales declines were further exacerbated by negative inventory
    realignments by our customers in the last half of 2001.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Performance Automotive
    Segment.Net sales in our performance
    automotive segment were $13.0 million, an increase of 132%
    compared to net sales of $5.6 million in 2000. The increase
    in revenues was primarily attributable to the acquisition of our
    Tex Racing subsidiary in November 2000. Additionally, net sales
    in this segment benefited from the continued popularity of
    racing, particularly in the NASCAR and CART racing series, both
    served by us.                                   
|
| |  | Motor Segment.Net
    sales in our motor segment were $9.0 million, an increase
    of 7% from the same period in 2000. The sales growth in the
    motor segment came from our new rotor manufacturing facility in
    Monterrey, Mexico, which began shipments in 2001. This facility
    is expected to service the growing motor manufacturing base in
    that region. Net sales from our Alton, Illinois facility were
    flat in 2001 as a result of the soft economic conditions
    experienced in the United States.

Gross Profit.Gross
profit decreased $14.9 million to $40.0 million during
2001, a 27% decrease compared to gross profit of
$54.9 million in 2000. The gross profit margin decreased to
22% of net sales in 2001 from 27% of net sales in the comparable
period in 2000. Each of our segments experienced decreased
margins primarily as a result of the deteriorating economic
conditions experienced in 2001.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Friction Segment.Our friction segment reported gross profit of $24.9 million
    or 24% of net sales in 2001 compared to $30.9 million or 27% of
    net sales in 2000. The decline in our gross profit margin was
    the result of lower sales volumes, product mix and our inability
    to absorb all of the fixed costs of our manufacturing facilities
    as a result of the deteriorated economic conditions experienced
    in 2001; especially the impact of the reduction in sales to the
    aircraft market in the fourth quarter as a result of the events
    of September 11. We also continued to support our start-up
    facility in China during 2001. Although the facility began
    shipments in 2001, it operated at negative margins for the
    entire year.
|
| |  | Precision Components
    Segment.Gross profit in the precision
    components segment was $11.5 million or 20% of net sales in
    2001 compared to $19.4 million or 27% of net sales in 2000.
    The sharp decline in this segments margins was primarily
    the result of the severe economic downturn and the resulting
    volume declines and our inability to cover all of the unabsorbed
    fixed charges generated by the segment. We also provided
    operating support to our start-up metal injection molding
    company, Net Shape, which was acquired in December 2000.                                                                                                                                                                                            
|
| |  | Performance Automotive
    Segment.Our performance automotive
    segment reported gross profit of $3.9 million or 30% of net
    sales in 2001 compared to $2.8 million or 50% of net sales
    in 2000. The decline in gross profit was primarily the result of
    manufacturing inefficiencies and inventory realignments at our
    performance clutch manufacturing facility.                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Motor Segment.We
    reported a gross margin loss in the motor segment for 2001. The
    loss was $0.3 million compared to a gross profit of
    $1.8 million in 2000. The negative gross margin was
    primarily the result of our continued support of our start-up
    rotor manufacturing facility in Mexico during 2001.
    Additionally, as a result of softness in the domestic motor
    business in 2001, our domestic margin declined in 2001, since we
    were unable to absorb all of the fixed costs.                                                                                                                                                                                                                                                                 

Selling, Technical and Administrative
Expenses.ST&A expenses decreased
$0.5 million, or 2%, to $30.8 million in 2001 from
$31.3 million during 2000. As a percentage of net sales,
ST&A increased to 17% in 2001 from 15% in 2000. The increase
in ST&A expenses as a percentage of net sales resulted
primarily from sales volume reductions, continuing start-up
expenditures incurred at our Mexican rotor manufacturing and
Chinese friction material facilities, personnel costs associated
with our long-term sales and growth initiatives and charges to
settle litigation in our friction segment. We spent
$3.9 million, or 2% of our net sales on product research
and development compared to $3.5 million in 2000.

Restructuring Costs.In June 2001, we announced a restructuring program to adjust our
near-term business plan to reflect the current economic
slowdown. This restructuring initiative included a workforce
reduction at our domestic facilities and other charges. As a
result of the restructuring initiative, we recorded an expense
of $1.1 million in 2001. The restructuring program included
a reduction of approximately 160 employees, including salary and
production personnel, primarily at our domestic locations.
Restructuring activities were substantially completed in the
first quarter of 2002.

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Income from
Operations.Income from operations
decreased $15.9 million or 82% to $3.6 million in 2001
from $19.5 million in 2000. Income from operations as a
percentage of net sales decreased to 2% in 2001 from 10% in
2000. The decline was primarily the result of the sales volume
declines due to the economic slowdown affecting our markets,
continuing support of our start-up operations, charges to settle
litigation in our performance automotive segment, increased
depreciation expense and the restructuring charge we took in the
second quarter of 2001.

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



| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our friction segments income from
    operations decreased $5.1 million or 44% to
    $6.4 million in 2001 from $11.5 million in 2000,                         
|
| |  | Income from operations at the precision
    components segment was $0.3 million in 2001, a decrease of
    $8.1 million or 96% compared to $8.4 million in 2000,
|
| |  | The performance automotive segment reported
    income from operations of $0.3 million, a decrease of
    $0.6 million in 2001 compared to 2000, and            
|
| |  | The loss from operations in the motor segment
    increased to $3.4 million in 2001 from $1.3 million in
    2000.                                              

Other Expense.Other
expense was $0.5 million in 2001, the same as reported in
2000. The expense in 2001 primarily reflected the fair value of
our interest rate swap agreement and foreign currency
transaction losses we incurred primarily through our Italian
facility.

Interest Expense.Interest expense increased $0.5 million, or 6%, to
$9.5 million in 2001 from $9.0 million in 2000. The
increase is primarily attributable to increased borrowings by us
during the year partially offset by lower interest rates.

Income Taxes.The
provision for income taxes decreased $6.2 million to a
benefit of $1.9 million in 2001 from a tax expense of
$4.4 million in 2000 primarily because of the losses
incurred in 2001. Our effective tax benefit for the year ended
is 30% compared to a tax provision of 43% in 2000. The primary
factors affecting our effective tax rate in 2001 are
nondeductible goodwill amortization and required state and local
tax provisions. An analysis of changes in our income taxes and
our effective tax rate is contained in Note J 
Income Taxes in the accompanying consolidated financial
statements beginning on page 27 of this Form 10-K.

Net (Loss) Income.As a result of the factors noted above, we reported a net loss
of $4.3 million in 2001, compared to net income of
$5.8 million in 2000.

Liquidity and Capital Resources

Our primary financing requirements are
(1) for capital expenditures for maintenance, replacement
and acquisitions of equipment, expansion of capacity,
productivity improvements and product development, (2) for
funding our day-to-day working capital requirements and
(3) to pay interest on, and to repay principal of, our
indebtedness. Hawks primary source of funds for conducting
its business activities and servicing its indebtedness has been
cash generated from operations and borrowings under our bank
credit facility.

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

The Bank Facility is collateralized by a security
interest in the accounts receivable, inventory, equipment and
real estate and other assets of Hawk and our domestic
subsidiaries, and we have pledged the stock of all of our
domestic subsidiaries and up to 65% of the stock of certain of
our foreign subsidiaries as collateral. Restrictive

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terms of the Bank Facility require that we
maintain specified financial ratios including leverage and fixed
charge ratios, and comply with other loan covenants. The
interest rates on the Bank Facility range from 225 to 375 basis
points over the London Interbank Offered Rates, or
alternatively, 0 to 100 basis points over the prime rate. The
Bank Facility matures 120 days prior to the maturity of the
Senior Notes in 2006. The Bank Facility replaced the Term Loan
and Revolving Credit Facility. As of December 31, 2002,
$36.3 million was outstanding under the Bank Facility and
we had approximately $5.5 million available for future
borrowings.


Emerging Issues Task Force (EITF) Issue
No. 95-22 Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements That Include both
a Subjective Acceleration Clause and a Lock-Box
Arrangement, we are required to classify all of our
outstanding debt under the Bank Facility as a current liability.
However, it is our intention to manage the bank credit facility
as long-term debt with a final maturity date in 2006, as
provided for in the agreement that we signed. We expect the
long-term availability under the revolving credit portion of the
Bank Facility to be $50.0 million for the next twelve month
period, subject to the borrowing base.

In October 2002, we exchanged $64.4 million
of our $65.0 million, 10 1/4% Senior Notes due
December 1, 2003 (Old Senior Notes), for 12% Senior Notes
due December 1, 2006 (Senior Notes). The Senior Notes were
issued on October 23, 2002. The remaining principal of the
Old Senior Notes in the amount of $0.6 million remain
outstanding and will mature on December 1, 2003. In
addition, the holders of the Old Senior Notes that participated
in the exchange for Senior Notes received a consent payment of
$25.63 for each $1,000 of Old Senior Notes held as of
October 23, 2002. The consent payment which totaled
$1.6 million, was issued in the form of additional Senior
Notes and is payable to the holders at maturity of the Senior
Notes. We incurred $1.9 million of third party costs in
connection with the exchange. The Senior Notes are general
unsecured senior obligations of Hawk and are fully and
unconditionally guaranteed, on a joint and several basis, by all
of our domestic wholly-owned subsidiaries. The Senior Notes
accrue interest at a rate of 12% per annum on the principal
amount commencing October 23, 2002. Interest payments are due
December 31 and June 30. In addition, in the event
that our leverage ratio exceeds 4.0 to 1.0 for the most recently
ended four quarters beginning with the semi-annual period ended
December 31, 2002, we will be required to pay additional
PIK interest at a rate ranging from .25% to 2.00% until the next
semi-annual test period. Any interest payment under this test
will be made by issuing additional Senior Notes. As of
December 31, 2002, the leverage ratio test will require us
to issue $0.1 million of PIK interest, calculated at a rate of
1.00%, in the form of additional Senior Notes.

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

The Senior Notes permit Hawk and its subsidiaries
to incur additional indebtedness without limitation, provided
that we continue to meet a cash flow coverage ratio. As of
December 31, 2002, we did not meet the prescribed ratio.
The failure to meet the ratio does not constitute a default
under the Senior Note indenture. Rather, the Senior Note
indenture continues to permit indebtedness subject to
limitations. Our Bank Facility, which is secured by liens on all
of our assets and the assets of our subsidiaries, is permitted.
We do not believe that our operations will be materially
impacted by the limitation on indebtedness arising under the
Senior Note indenture.

The Senior Notes prohibit the payment of cash
dividends on the Companys Class A Common Stock. The
Senior Notes also contain other covenants limiting our ability
to make certain restricted payments, make certain investments,
permit liens, incur dividend and other payment restrictions
affecting subsidiaries, enter into consolidation, merger,
conveyance, lease or transfer transactions, make asset sales,
enter into transactions with affiliates or engage in unrelated
lines of business. These covenants are subject to certain
exceptions and qualifications. The Senior Notes considers
non-compliance with the limitations events of default. In
addition to

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non-payment of interest and principal amounts,
the Senior Notes also considers default with respect to other
indebtedness in excess of $5.0 million an event of default.
In the event of a default, the principal and interest could be
accelerated upon written notice by 25% or more of the holders of
the notes.


Net cash used in operating activities was
$2.7 million in 2002 compared to cash provided by operating
activities of $14.5 million in 2001. Cash used in our
operations in 2002 was primarily attributable to the loss we
incurred in 2002, an increase in our receivables, inventories,
other working capital assets and the continued operating support
of our foreign facilities, partially offset by non-cash charges
of depreciation and amortization. Cash provided by operations in
2001 was primarily attributable to non-cash charges of
depreciation and amortization partially offset by the loss we
experienced in 2001. Our net working capital, exclusive of the
outstanding debt under the Bank Facility, which is classified as
a current liability for accounting purposes, was
$46.3 million at year-end 2002 compared to
$31.5 million at year-end 2001.

We used cash in investing activities of
$11.5 million in 2002 and $9.1 million in 2001 for the
purchase of property, plant and equipment.

Cash provided by financing activities was
$12.8 million in 2002. The increase in 2002 was the
primarily the result of our additional borrowings to support the
increase in working capital assets, the support of our
facilities in Mexico and China and our purchases of property,
plant and equipment during the year. Our net cash used in
financing activities was $6.2 million in 2001 primarily for
the payment of long-term debt.

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

Net Operating Loss Carrybacks

As of December 31, 2002, we have available
to us U.S. net operating loss tax carrybacks which will result
in approximately $3.5 million in federal income tax
refunds, which we expect to receive in the first half of 2003.

Forward-Looking Statements

Statements that are not historical facts,
including statements about our confidence in our prospects and
strategies and our expectations about growth of existing markets
and our ability to expand into new markets, to identify and
acquire complementary businesses and to attract new sources of
financing, are forward-looking statements that involve risks and
uncertainties. In addition to statements which are
forward-looking by reason of context, the words
believe, expect, anticipate,
intend, designed, goal,
objective, optimistic, will
and other similar expressions identify forward-looking
statements. In light of the risks and uncertainties inherent in
all future projections, the inclusion of the forward-looking
statements should not be regarded as a representation by us or
any other person that our objectives or plans will be achieved.
Many factors could cause our actual results to differ materially
and adversely from those in the forward-looking statements,
including the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to continue to meet the terms of our
    debt and bank credit facilities 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 continuing impact of the reduction in air
    travel, the bankruptcy filings by a number of major airline
    companies and the weak financial condition of other airlines on
    our aircraft brake business, including the decline in gross
    profit margins in this market as a result of the retirement of
    many older airplanes that used our product;
|
| |  | our ability to effectively utilize all of our
    manufacturing capacity as the industrial and commercial
    end-markets we serve gradually improve;                                                                                                                                                                                                               

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to generate profits at our facility
    in Mexico, including our ability to resolve the manufacturing
    inefficiencies being incurred at that facility;                                                                                                                                                                                                                                                       
|
| |  | the effect of competition by manufacturers using
    new or different technologies;                                                                                                                                                                                                                                                                                                                                         
|
| |  | the effect on our international operations of
    unexpected changes in regulatory requirements, export
    restrictions, currency controls, tariffs and other trade
    barriers, difficulties in staffing and managing foreign
    operations, political and economic instability, fluctuations in
    currency exchange rates, difficulty in accounts receivable
    collection and potentially adverse tax consequences;
|
| |  | our ability to negotiate new agreements, as they
    expire, with our unions representing certain of our employees,
    on terms favorable to us or without experiencing work stoppages;                                                                                                                                                                                                                                    
|
| |  | the effect of any interruption in our supply of
    raw materials or a substantial increase in the price of any of
    the raw materials;                                                                                                                                                                                                                                                                                   
|
| |  | the continuity of business relationships with
    major customers; and                                                                                                                                                                                                                                                                                                                                                      
|
| |  | the ability of our products to meet stringent
    Federal Aviation Administration criteria and testing
    requirements.                                                                                                                                                                                                                                                                                                    

You must consider these risks and others that are
detailed in this Form 10-K in deciding whether to invest.

Effects of Recently Issued Accounting
Pronouncements

In October 2001, the FASB issued SFAS
No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144). SFAS 144 supersedes SFAS
No. 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of,
however it retains the fundamental provisions of that statement
related to the recognition and measurement of the impairment of
long-lived assets to be held and used. In addition,
SFAS 144 provides more guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived
asset (group) to be disposed of other than by sale (e.g.
abandoned) be classified as held and used until it
is disposed of, and establishes more restrictive criteria to
classify an asset (group) as held for sale.
SFAS 144 was effective for us in 2002. The adoption of SFAS 144
did not have a material impact on our financial results.

In June 2002, the FASB issued SFAS No. 146,
Accounting for Exit or Disposal Activities (SFAS
146). SFAS 146 addresses significant issues regarding the
recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including
restructuring activities that are currently accounted for
pursuant to the guidance of EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS 146 will be
effective in 2003. The adoption of SFAS 146 is not expected to
have a material impact on our financial results.

In December 2002, we adopted the disclosure
provisions of SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure (SFAS 148). SFAS 148 requires prominent
disclosure regarding the method used by us to account for stock
based employee compensation and the effect of the method used on
reported results.






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

Market Risk
Disclosures.The following discussion
about our market risk disclosures involves forward-looking
statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to
market risk related to changes in interest rates and foreign
currency exchange rates. We do not use derivative financial
instruments for speculative or trading purposes.

Interest Rate
Sensitivity.At December 31,
2002, approximately 33 percent, or $36.3 million, of our
debt obligations bear interest at a variable rate. Our primary
interest rate risk exposure results from floating rate debt. If
interest rates were to increase 100 basis points (1.0%) from
December 31, 2002 rates, and assuming no changes in debt
from December 31, 2002 levels, our additional annual
interest expense would be approximately

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$0.4 million. In October 2002, we terminated
a $10.0 million notional amount interest rate swap. The
cancellation did not have a material impact on earnings.


The interest rates on our long-term debt reflect
market rates and therefore, the carrying value of long-term debt
approximates fair value.

The following table presents our total
contractual obligations and other commercial commitments as of
December 31, 2002 (in millions):

|                                   |                                     |       |       |      |  |             |     |            |  |   |       |      |  |   |     |     | 
|---------------------------------- | ----------------------------------- | ----- | ----- | ---- |  | ----------- | --- | ---------- |  | - | ----- | ---- |  | - | --- | --- | 
|                                   |                                     | Total |       | 2003 |  |             |     | Thereafter
|                                   |                                     |       |       |      |  | 2004 - 2007 |     |           
|Contractual cash obligations       |                                     |       |       |      |  |             |     |            |  |   |       |      |  |   |     |    
|                                   | Bank Facility                       |       | $     | 36.3 |  |             |     |            |  |   | $     | 36.3 |  |   |     |     | 
|                                   | Senior notes                        |       |       | 66.7 |  |             | $   | 0.6        |  |   |       | 66.1 |  |   |     |     | 
|                                   | Capital lease and other obligations |       |       | 6.0  |  |             |     | 2.6        |  |   |       | 3.0  |  |   | $   | 0.4 | 
|                                   | Operating leases                    |       |       | 8.8  |  |             |     | 2.1        |  |   |       | 5.1  |  |   |     | 1.6 | 
|                                   |                                     |       |       |      |  |             |     |            |  |   |       |      |  |   |     |    
|Total contractual cash obligations |                                     | $     | 117.8 |      |  | $           | 5.3 |            |  | $ | 110.5 |      |  | $ | 2.0 |    
|                                   |                                     |       |       |      |  |             |     |            |  |   |       |      |  |   |     |    
|Other commercial commitments       |                                     |       |       |      |  |             |     |            |  |   |       |      |  |   |     |    
|                                   | Stand-by letters of credit          |       | $     | 1.3  |  |             | $   | 1.3        |  |   |       |      |  |   |     |     | 

Foreign Currency Exchange
Risk.The majority of our receipts and
expenditures are contracted in U.S. dollars, and we do not
consider the market risk exposure relating to currency exchange
to be material at this time. We currently do not hedge our
foreign currency exposure and, therefore, have not entered into
any forward foreign exchange contracts to hedge foreign currency
transactions. We have operations outside the United States with
foreign currency denominated assets and liabilities, primarily
denominated in Euro, Canadian dollars, Mexican pesos and Chinese
renminbi. Because we have foreign currency denominated assets
and liabilities, financial exposure may result, primarily from
the timing of transactions and the movement of exchange rates.
We do not expect that our unhedged foreign currency balance
sheet exposure as of December 31, 2002 will result in a
significant impact on our earnings or cash flows.

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ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

AUDITED CONSOLIDATED FINANCIAL
STATEMENTS

Hawk Corporation and subsidiaries

December 31, 2002, 2001 and 2000


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HAWK CORPORATION

AUDITED CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2002, 2001 and 2000

Contents

Audited Consolidated Financial
Statements

|                                                    |  |  |    | 
|--------------------------------------------------- |  |  | -- | 
|Report of Independent Auditors                      |  |  | 28 | 
|Consolidated Balance Sheets                         |  |  | 29 | 
|Consolidated Statements of Operations               |  |  | 31 | 
|Consolidated Statements of Shareholders
    Equity |  |  | 32 | 
|Consolidated Statements of Cash Flows               |  |  | 33 | 
|Notes to Consolidated Financial Statements          |  |  | 34 | 

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REPORT OF INDEPENDENT AUDITORS

Shareholders and Board of Directors 
 Hawk Corporation

We have audited the accompanying consolidated
balance sheets of Hawk Corporation and subsidiaries as of
December 31, 2002 and 2001, and the related consolidated
statements of operations, shareholders equity, and cash
flows for each of the three years in the period ended
December 31, 2002. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Hawk
Corporation and subsidiaries at December 31, 2002 and 2001
and the consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles
generally accepted in the United States.

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



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

Cleveland, Ohio

February 7, 2003


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HAWK CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands, except share data)

|                                    |                                                                          |                                   |         |         |        |   |         |        |        | 
|----------------------------------- | ------------------------------------------------------------------------ | --------------------------------- | ------- | ------- | ------ | - | ------- | ------ | ------ | 
|                                    |                                                                          |                                  
|                                    |                                                                          | December 31                      
|                                    |                                                                          |                                  
|                                    |                                                                          | 2002                              |         | 2001   
|                                    |                                                                          |                                   |         |        
|Assets                              |                                                                          |                                   |         |         |        |   |         |       
|Current assets:                     |                                                                          |                                   |         |         |        |   |         |       
|                                    | Cash and cash equivalents                                                |                                   | $       | 1,702   |        |   | $       | 3,084  |       
|                                    | Accounts receivable, less allowance of $482 in
    2002 and $455 in 2001 |                                   |         | 32,761  |        |   |         | 25,773 |       
|                                    | Inventories:                                                             |                                   |         |         |        |   |         |        |       
|                                    |                                                                          | Raw materials and work-in-process |         |         | 20,597 |   |         |        | 19,224 | 
|                                    |                                                                          | Finished products                 |         |         | 12,664 |   |         |        | 9,928  | 
|                                    |                                                                          |                                   |         |         |        |   |         |       
|                                    |                                                                          |                                   | 33,261  |         |        |   | 29,152  |       
|                                    | Deferred income taxes                                                    |                                   |         | 745     |        |   |         | 1,200  |       
|                                    | Taxes receivable                                                         |                                   |         | 4,321   |        |   |         | 2,030  |       
|                                    | Other current assets                                                     |                                   |         | 4,008   |        |   |         | 2,608  |       
|                                    |                                                                          |                                   |         |         |        |   |         |       
|Total current assets                |                                                                          |                                   | 76,798  |         |        |   | 63,847  |       
|Property, plant and equipment:      |                                                                          |                                   |         |         |        |   |         |       
|                                    | Land and improvements                                                    |                                   |         | 1,676   |        |   |         | 1,608  |       
|                                    | Buildings and improvements                                               |                                   |         | 19,604  |        |   |         | 18,657 |       
|                                    | Machinery and equipment                                                  |                                   |         | 100,840 |        |   |         | 96,688 |       
|                                    | Furniture and fixtures                                                   |                                   |         | 7,920   |        |   |         | 7,168  |       
|                                    | Construction in progress                                                 |                                   |         | 6,385   |        |   |         | 1,450  |       
|                                    |                                                                          |                                   |         |         |        |   |         |       
|                                    |                                                                          |                                   | 136,425 |         |        |   | 125,571 |       
|                                    | Less accumulated depreciation and amortization                           |                                   |         | 68,533  |        |   |         | 58,208 |       
|                                    |                                                                          |                                   |         |         |        |   |         |       
|Total property, plant and equipment |                                                                          |                                   | 67,892  |         |        |   | 67,363  |       
|Other assets:                       |                                                                          |                                   |         |         |        |   |         |       
|                                    | Goodwill                                                                 |                                   |         | 32,495  |        |   |         | 53,877 |       
|                                    | Other intangible assets                                                  |                                   |         | 10,701  |        |   |         | 11,728 |       
|                                    | Shareholder notes                                                        |                                   |         | 1,010   |        |   |         | 1,010  |       
|                                    | Other                                                                    |                                   |         | 4,972   |        |   |         | 5,243  |       
|                                    |                                                                          |                                   |         |         |        |   |         |       
|Total other assets                  |                                                                          |                                   | 49,178  |         |        |   | 71,858  |       
|                                    |                                                                          |                                   |         |         |        |   |         |       
|Total assets                        |                                                                          | $                                 | 193,868 |         |        | $ | 203,068 |       
|                                    |                                                                          |                                   |         |         |        |   |         |       



See notes to consolidated financial
statements.


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HAWK CORPORATION


CONSOLIDATED BALANCE SHEETS 
(continued)

|                                           |                                                                                                                                                                                                           |             |         |        |   |   |         |        |  
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------- | ------ | - | - | ------- | ------ | -
|                                           |                                                                                                                                                                                                           |            
|                                           |                                                                                                                                                                                                           | December 31
|                                           |                                                                                                                                                                                                           |            
|                                           |                                                                                                                                                                                                           | 2002        |         | 2001  
|                                           |                                                                                                                                                                                                           |             |         |       
|Liabilities and shareholders
    equity   |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|Current liabilities:                       |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|                                           | Accounts payable                                                                                                                                                                                          |             | $       | 17,851 |   |   | $       | 13,432 |  
|                                           | Accrued compensation                                                                                                                                                                                      |             |         | 4,302  |   |   |         | 5,233  |  
|                                           | Other accrued expenses                                                                                                                                                                                    |             |         | 5,172  |   |   |         | 6,832  |  
|                                           | Bank Facility                                                                                                                                                                                             |             |         | 36,327 |   |   |         |        |  
|                                           | Current portion of long-term debt                                                                                                                                                                         |             |         | 3,103  |   |   |         | 6,862  |  
|                                           |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|Total current liabilities                  |                                                                                                                                                                                                           |             | 66,755  |        |   |   | 32,359  |       
|Long-term liabilities:                     |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|                                           | Long-term debt                                                                                                                                                                                            |             |         | 69,523 |   |   |         | 90,957 |  
|                                           | Deferred income taxes                                                                                                                                                                                     |             |         | 6,233  |   |   |         | 10,978 |  
|                                           | Other                                                                                                                                                                                                     |             |         | 6,523  |   |   |         | 2,337  |  
|                                           |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|Total long-term liabilities                |                                                                                                                                                                                                           |             | 82,279  |        |   |   | 104,272 |       
|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 8,556,764
    and 8,552,920 outstanding in 2002 and 2001, respectively                                      |             |         | 92     |   |   |         | 92     |  
|                                           | Class B common stock, $.01 par value;
    10,000,000 shares authorized; none issued or outstanding                                                                                                        |             |         |        |   |   |         |        |  
|                                           | Additional paid-in capital                                                                                                                                                                                |             |         | 54,616 |   |   |         | 54,626 |  
|                                           | Retained earnings                                                                                                                                                                                         |             |         | 1,228  |   |   |         | 19,623 |  
|                                           | Accumulated other comprehensive loss                                                                                                                                                                      |             |         | (6,436 | ) |   |         | (3,201 | )
|                                           | Treasury stock, at cost, 630,986 and 634,830
    shares in 2002 and 2001, respectively                                                                                                                    |             |         | (4,667 | ) |   |         | (4,704 | )
|                                           |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|Total shareholders equity                 |                                                                                                                                                                                                           |             | 44,834  |        |   |   | 66,437  |       
|                                           |                                                                                                                                                                                                           |             |         |        |   |   |         |       
|Total liabilities and shareholders equity |                                                                                                                                                                                                           | $           | 193,868 |        |   | $ | 203,068 |       
|                                           |                                                                                                                                                                                                           |             |         |        |   |   |         |       



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                                                        
|                                                                                 |                                                |                                                                               
|                                                                                 |                                                | 2002                                                                           |         | 2001   |       | 2000
|                                                                                 |                                                |                                                                                |         |        |       |     
|Net sales                                                                        |                                                | $                                                                              | 197,286 |        |       | $    | 184,388 |        |      | $ | 202,329 |       
|Cost of sales                                                                    |                                                |                                                                                | 153,582 |        |       |      | 144,409 |        |      |   | 147,387 |       
|                                                                                 |                                                |                                                                                |         |        |       |      |         |        |      |   |         |       
|Gross profit                                                                     |                                                |                                                                                | 43,704  |        |       |      | 39,979  |        |      |   | 54,942  |       
|Operating expenses:                                                              |                                                |                                                                                |         |        |       |      |         |        |      |   |         |       
|                                                                                 | Selling, technical and administrative expenses |                                                                                |         | 32,568 |       |      |         | 30,804 |      |   |         | 31,318 |    
|                                                                                 | Restructuring costs                            |                                                                                |         |        |       |      |         | 1,055  |      |   |         |        |    
|                                                                                 | Amortization of intangibles                    |                                                                                |         | 1,379  |       |      |         | 4,548  |      |   |         | 4,161  |    
|                                                                                 |                                                |                                                                                |         |        |       |      |         |        |      |   |         |       
|Total operating expenses                                                         |                                                |                                                                                | 33,947  |        |       |      | 36,407  |        |      |   | 35,479  |       
|                                                                                 |                                                |                                                                                |         |        |       |      |         |        |      |   |         |       
|Income from operations                                                           |                                                |                                                                                | 9,757   |        |       |      | 3,572   |        |      |   | 19,463  |       
|Interest expense                                                                 |                                                |                                                                                | (9,754  | )      |       |      | (9,469  | )      |      |   | (9,016  | )     
|Interest income                                                                  |                                                |                                                                                | 118     |        |       |      | 233     |        |      |   | 218     |       
|Exchange offer costs                                                             |                                                |                                                                                | (1,928  | )      |       |      |         |        |      |   |         |       
|Other expense, net                                                               |                                                |                                                                                | (734    | )      |       |      | (530    | )      |      |   | (535    | )     
|                                                                                 |                                                |                                                                                |         |        |       |      |         |        |      |   |         |       
|(Loss) income before income taxes                                                |                                                |                                                                                | (2,541  | )      |       |      | (6,194  | )      |      |   | 10,130  |       
|Income tax (benefit) provision                                                   |                                                |                                                                                | (1,496  | )      |       |      | (1,858  | )      |      |   | 4,360   |       
|                                                                                 |                                                |                                                                                |         |        |       |      |         |        |      |   |         |       
|Net (loss) income before cumulative effect
    of change in accounting principle |                                                |                                                                                | (1,045  | )      |       |      | (4,336  | )      |      |   | 5,770   |       
|Cumulative effect of change in
    accounting principle, net of tax of $4,252    |                                                |                                                                                | (17,200 | )      |       |      |         |        |      |   |         |       
|                                                                                 |                                                |                                                                                |         |        |       |      |         |        |      |   |         |       
|Net (loss) income                                                                |                                                | $                                                                              | (18,245 | )      |       | $    | (4,336  | )      |      | $ | 5,770   |       
|                                                                                 |                                                |                                                                                |         |        |       |      |         |        |      |   |         |       
|(Loss) earnings per share:                                                       |                                                |                                                                                |         |        |       |      |         |        |      |   |         |       
|                                                                                 | Basic (loss) earnings per share:               |                                                                                |         |        |       |      |         |        |      |   |         |        |    
|                                                                                 |                                                | (Loss) earnings before cumulative effect of
    change in accounting principle |         | $      | (.14  | )    |         | $      | (.52 | ) |         | $      | .66 | 
|                                                                                 |                                                | Cumulative effect of change in
    accounting principle                        |         |        | (2.01 | )    |         |        |      |   |         |        |     | 
|                                                                                 |                                                |                                                                                |         |        |       |      |         |        |      |   |         |       
|                                                                                 | Net (loss) earnings per basic share            |                                                                                | $       | (2.15  | )     |      | $       | (.52   | )    |   | $       | .66    |    
|                                                                                 |                                                |                                                                                |         |        |       |      |         |        |      |   |         |       
|                                                                                 | Diluted (loss) earnings per share:             |                                                                                |         |        |       |      |         |        |      |   |         |        |    
|                                                                                 |                                                | (Loss) earnings before cumulative effect of
    change in accounting principle |         | $      | (.14  | )    |         | $      | (.52 | ) |         | $      | .66 | 
|                                                                                 |                                                | Cumulative effect of change in
    accounting principle                        |         |        | (2.01 | )    |         |        |      |   |         |        |     | 
|                                                                                 |                                                |                                                                                |         |        |       |      |         |        |      |   |         |       
|                                                                                 | Net (loss) earnings per diluted share          |                                                                                | $       | (2.15  | )     |      | $       | (.52   | )    |   | $       | .66    |    
|                                                                                 |                                                |                                                                                |         |        |       |      |         |        |      |   |         |       



See notes to consolidated financial
statements.


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HAWK CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

(In Thousands)

|                             |                                                            |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   |        |   |        |    |  |   |        |         |        |  
|---------------------------- | ---------------------------------------------------------- | -------------------------------------- | - | ------ |  | ---------- | -- | -------- |  | ------------------ | ------ | --------- | - | -------- | ------ | ------- | - | - | ------ | - | ---- | - | ------ | - | ------ | - | ------ | -- |  | - | ------ | ------- | ------ | -
|                             |                                                            |                                        |   |        |  |            |    |          |  |                    |        |           |   |         
|                             |                                                            |                                        |   |        |  |            |    |          |  | Accumulated Other  |        |           |   |         
|                             |                                                            |                                        |   |        |  |            |    |          |  | Comprehensive Loss |        |           |   |         
|                             |                                                            |                                        |   |        |  |            |    |          |  |                    |        |           |   |         
|                             |                                                            |                                        |   |        |  | Additional |    |          |  | Foreign            |        | Minimum   |   |          |        |        
|                             |                                                            | Preferred                              |   | Common |  | Paid-in    |    | Retained |  | Currency           |        | Pension   |   | Treasury |        |        
|                             |                                                            | Stock                                  |   | Stock  |  | Capital    |    | Earnings |  | Translation        |        | Liability |   | Stock    |        | Total  
|                             |                                                            |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        |        
|Balance at January 1, 2000   |                                                            | $                                      | 1 |        |  | $          | 92 |          |  | $                  | 54,645 |           |   | $        | 18,491 |         |   | $ | (1,949 | ) |      |   |        |   |        | $ | (4,791 | )  |  | $ | 66,489 |        
|                             | Net income                                                 |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        | 5,770   |   |   |        |   |      |   |        |   |        |   |        |    |  |   |        | 5,770   |       
|                             | Other comprehensive income (loss):                         |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   |        |   |        |    |  |   |        |         |       
|                             |                                                            | Minimum pension liability (net of tax) |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   | (83    | ) |        |    |  |   |        |         | (83    | )
|                             |                                                            | Foreign currency translation           |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   | (377 | ) |        |   |        |   |        |    |  |   |        |         | (377   | )
|                             |                                                            |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   |        |   |        |    |  |   |        |        
|                             | Total comprehensive income                                 |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   |        |   |        |    |  |   |        | 5,310   |       
|                             | Preferred stock dividends                                  |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        | (152    | ) |   |        |   |      |   |        |   |        |   |        |    |  |   |        | (152    | )     
|                             | Issuance of common stock from treasury as
    compensation |                                        |   |        |  |            |    |          |  |                    |        | (14       | ) |          |        |         |   |   |        |   |      |   |        |   |        |   |        | 56 |  |   |        | 42      |       
|                             |                                                            |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   |        |   |        |    |  |   |        |        
|Balance at December 31, 2000 |                                                            |                                        | 1 |        |  |            | 92 |          |  |                    | 54,631 |           |   |          | 24,109 |         |   |   | (2,326 | ) |      |   | (83    | ) |        |   | (4,735 | )  |  |   | 71,689 |        
|                             | Net loss                                                   |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        | (4,336  | ) |   |        |   |      |   |        |   |        |   |        |    |  |   |        | (4,336  | )     
|                             | Other comprehensive loss:                                  |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   |        |   |        |    |  |   |        |         |       
|                             |                                                            | Minimum pension liability (net of tax) |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   | (495   | ) |        |    |  |   |        |         | (495   | )
|                             |                                                            | Foreign currency translation           |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   | (297 | ) |        |   |        |   |        |    |  |   |        |         | (297   | )
|                             |                                                            |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   |        |   |        |    |  |   |        |        
|                             | Total comprehensive loss                                   |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   |        |   |        |    |  |   |        | (5,128  | )     
|                             | Preferred stock dividends                                  |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        | (150    | ) |   |        |   |      |   |        |   |        |   |        |    |  |   |        | (150    | )     
|                             | Issuance of common stock from treasury as
    compensation |                                        |   |        |  |            |    |          |  |                    |        | (5        | ) |          |        |         |   |   |        |   |      |   |        |   |        |   |        | 31 |  |   |        | 26      |       
|                             |                                                            |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   |        |   |        |    |  |   |        |        
|Balance at December 31, 2001 |                                                            |                                        | 1 |        |  |            | 92 |          |  |                    | 54,626 |           |   |          | 19,623 |         |   |   | (2,623 | ) |      |   | (578   | ) |        |   | (4,704 | )  |  |   | 66,437 |        
|                             | Net loss                                                   |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        | (18,245 | ) |   |        |   |      |   |        |   |        |   |        |    |  |   |        | (18,245 | )     
|                             | Other comprehensive income (loss):                         |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   |        |   |        |    |  |   |        |         |       
|                             |                                                            | Minimum pension liability (net of tax) |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   | (3,901 | ) |        |    |  |   |        |         | (3,901 | )
|                             |                                                            | Foreign currency translation           |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   | 666  |   |        |   |        |   |        |    |  |   |        |         | 666    |  
|                             |                                                            |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   |        |   |        |    |  |   |        |        
|                             | 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 |        
|                             |                                                            |                                        |   |        |  |            |    |          |  |                    |        |           |   |          |        |         |   |   |        |   |      |   |        |   |        |   |        |    |  |   |        |        



See notes to consolidated financial
statements.


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##### Table of Contents



HAWK CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In Thousands)

|                                                                                             |                                                                          |                             |         |        |        |      |         |        |        |   |         |        |        |  
|-------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                                                             |                                                                          |                            
|                                                                                             |                                                                          | Year ended December 31     
|                                                                                             |                                                                          |                            
|                                                                                             |                                                                          | 2002                        |         | 2001   |        | 2000
|                                                                                             |                                                                          |                             |         |        |        |     
|Cash flows from operating activities                                                         |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|Net (loss) income                                                                            |                                                                          | $                           | (18,245 | )      |        | $    | (4,336  | )      |        | $ | 5,770   |       
|Adjustments to reconcile net (loss) income to net
    cash provided by operating activities: |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|                                                                                             | Cumulative effect of change in accounting
    principle, net of tax      |                             |         | 17,200 |        |      |         |        |        |   |         |        |       
|                                                                                             | Depreciation and amortization                                            |                             |         | 12,373 |        |      |         | 15,929 |        |   |         | 14,976 |       
|                                                                                             | Deferred income taxes                                                    |                             |         | 2,394  |        |      |         | (637   | )      |   |         | 1,650  |       
|                                                                                             | Loss on fixed assets                                                     |                             |         | 47     |        |      |         | 399    |        |   |         | 216    |       
|                                                                                             | Changes in operating assets and liabilities, net
    of acquired assets: |                             |         |        |        |      |         |        |        |   |         |        |       
|                                                                                             |                                                                          | Accounts receivable         |         |        | (6,027 | )    |         |        | 3,495  |   |         |        | 590    |  
|                                                                                             |                                                                          | Inventories                 |         |        | (3,292 | )    |         |        | 2,453  |   |         |        | (3,622 | )
|                                                                                             |                                                                          | Other assets                |         |        | (5,105 | )    |         |        | (3,156 | ) |         |        | 57     |  
|                                                                                             |                                                                          | Accounts payable            |         |        | 3,941  |      |         |        | 2,006  |   |         |        | (205   | )
|                                                                                             |                                                                          | Other liabilities and other |         |        | (6,025 | )    |         |        | (1,683 | ) |         |        | 2,132  |  
|                                                                                             |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|Net cash (used in) provided by operating
    activities                                      |                                                                          |                             | (2,739  | )      |        |      | 14,470  |        |        |   | 21,564  |       
|Cash flows from investing activities                                                         |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|Purchases of property, plant and equipment                                                   |                                                                          |                             | (11,457 | )      |        |      | (9,096  | )      |        |   | (10,489 | )     
|Business acquisitions                                                                        |                                                                          |                             |         |        |        |      |         |        |        |   | (6,510  | )     
|Proceeds from sale of assets                                                                 |                                                                          |                             |         |        |        |      |         |        |        |   | 69      |       
|                                                                                             |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|Net cash used in investing activities                                                        |                                                                          |                             | (11,457 | )      |        |      | (9,096  | )      |        |   | (16,930 | )     
|Cash flows from financing activities                                                         |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|Proceeds from long-term debt                                                                 |                                                                          |                             | 54,023  |        |        |      | 40,457  |        |        |   | 30,217  |       
|Payments on long-term debt                                                                   |                                                                          |                             | (47,615 | )      |        |      | (46,520 | )      |        |   | (33,886 | )     
|Payments on short-term debt                                                                  |                                                                          |                             |         |        |        |      |         |        |        |   | (808    | )     
|Pay off of Term Loan and Revolving Credit Facility                                           |                                                                          |                             | (29,784 | )      |        |      |         |        |        |   |         |       
|Proceeds from Bank Facility                                                                  |                                                                          |                             | 52,165  |        |        |      |         |        |        |   |         |       
|Payments on Bank Facility                                                                    |                                                                          |                             | (15,838 | )      |        |      |         |        |        |   |         |       
|Payments of preferred stock dividends                                                        |                                                                          |                             | (150    | )      |        |      | (150    | )      |        |   | (152    | )     
|                                                                                             |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|Net cash provided by (used in) financing
    activities                                      |                                                                          |                             | 12,801  |        |        |      | (6,213  | )      |        |   | (4,629  | )     
|Effect of exchange rate changes on cash                                                      |                                                                          |                             | 13      |        |        |      | (87     | )      |        |   | 12      |       
|                                                                                             |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|Net (decrease) increase in cash and cash
    equivalents                                     |                                                                          |                             | (1,382  | )      |        |      | (926    | )      |        |   | 17      |       
|Cash and cash equivalents at beginning of year                                               |                                                                          |                             | 3,084   |        |        |      | 4,010   |        |        |   | 3,993   |       
|                                                                                             |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|Cash and cash equivalents at end of year                                                     |                                                                          | $                           | 1,702   |        |        | $    | 3,084   |        |        | $ | 4,010   |       
|                                                                                             |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|Supplemental cash flow information                                                           |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|Cash payments for interest                                                                   |                                                                          | $                           | 9,975   |        |        | $    | 8,940   |        |        | $ | 9,045   |       
|                                                                                             |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|Cash (refunds) payments for income taxes, net                                                |                                                                          | $                           | (2,371  | )      |        | $    | 871     |        |        | $ | 3,685   |       
|                                                                                             |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|Noncash investing and financing activities:                                                  |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|                                                                                             | Equipment purchased with capital leases and notes
    payable            |                             | $       | 653    |        |      | $       | 422    |        |   | $       | 24     |       
|                                                                                             |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|                                                                                             | Issuance of common stock from treasury                                   |                             | $       | 27     |        |      | $       | 26     |        |   | $       | 42     |       
|                                                                                             |                                                                          |                             |         |        |        |      |         |        |        |   |         |       
|                                                                                             | Issuance of consent payments in the form of
    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, 2002, 2001 and
2000

(In Thousands, Except Share Data)


A. Basis of Presentation

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

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

Certain amounts have been reclassified in prior
periods to conform to the 2002 presentation.

B. Significant Accounting
Policies



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

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



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

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



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

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



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

Property, plant and equipment are stated at cost
and include expenditures for additions and major improvements.
Expenditures for repairs and maintenance are charged to
operations as incurred. The Company uses the straight-line and
double declining methods of depreciation for financial reporting
purposes. Buildings and improvements are depreciated over
periods ranging from 15 to 33 years. Machinery and
equipment are depreciated over periods ranging from 4 to
12 years. Furniture and fixtures are depreciated over
periods ranging from 3 to 10 years. Accelerated methods of
depreciation are used for federal income tax purposes. When
assets are sold or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any
gain or loss is reflected in the Statement of Operations. The
Companys depreciation expense was $10,994 in 2002, $11,381
in 2001 and $10,815 in 2000.



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

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) 142 Goodwill and Other Intangible
Assets (SFAS 142). This statement eliminated the
requirement to amortize goodwill and indefinite-lived
intangibles for 2002 and future years. The Company adopted SFAS
142 as of January 1, 2002. The pro forma effect of applying
the non-amortization provisions of SFAS 142 for the year ended
December 31, 2001 and 2000 would have been to decrease
amortization expense by approximately $3,180 and $2,810,
respectively, and would have resulted in basic and diluted
(loss) earnings per share of $(.23) and $.92, in each
respective year.

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

Upon adoption of SFAS 142 the Company
changed the accounting for goodwill and other indefinite-lived
intangible assets from an amortization methodology to an
impairment-only methodology. SFAS 142 provided for a six
month transitional period, from the effective date of adoption,
for the Company to perform an initial assessment of whether
goodwill was impaired. The Company performed the assessment
during the second quarter of 2002, by comparing the fair value
of each of its reporting units, to their respective carrying
values. The Company, with the assistance of independent
valuation experts, concluded that certain of its goodwill was
impaired at January 1, 2002 by $21,452 ($17,200 after tax)
or $2.01 per basic and diluted share and was reflected as a
cumulative effect of change in accounting principle. The fair
value of goodwill was estimated using a combination of a
discounted cash flow valuation model, incorporating a discount
rate commensurate with the risks involved for each reporting
unit and a market approach of guideline companies and similar
transactions. The impairment resulted from the carrying value
exceeding the fair value of certain reporting units. This was
due primarily to a shortfall in sales from levels anticipated at
the time of the respective acquisitions and other costs
associated with the Companys global expansion initiatives.

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



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

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



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

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



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

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



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

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

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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)



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

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



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

Product research and development costs are
expensed as incurred. The Companys expenditures for
product research and development and engineering were
approximately $3,470 in 2002, $3,893 in 2001 and $3,533 in 2000.



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

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



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

In accordance with the provisions of
SFAS 123, Accounting for Stock-Based
Compensation, the Company has elected to continue applying
the provisions of Accounting Principles Board Opinion 25
and related interpretations in accounting for its stock-based
compensation plans. Accordingly, the Company does not recognize
compensation expense for stock options when the stock option
price at the grant date is equal to or greater than the fair
market value of the stock at that date. The following
illustrates the pro forma effect on net income and earnings per
share if the Company had applied the fair value recognition
provisions of SFAS 123:

|                                               |                                                                                                     |                        |         |         |   |      |        |        |   |   |       |       | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------------- | ---------------------- | ------- | ------- | - | ---- | ------ | ------ | - | - | ----- | ----- | 
|                                               |                                                                                                     |                       
|                                               |                                                                                                     | Year ended December 31
|                                               |                                                                                                     |                       
|                                               |                                                                                                     | 2002                   |         | 2001    |   | 2000
|                                               |                                                                                                     |                        |         |         |   |     
|Net (loss) income as reported                  |                                                                                                     | $                      | (18,245 | )       |   | $    | (4,336 | )      |   | $ | 5,770 |      
|                                               | Employee stock-based compensation expense
    determined under fair value based methods, net of tax |                        |         | 1,020   |   |      |        | 822    |   |   |       | 795   | 
|                                               |                                                                                                     |                        |         |         |   |      |        |        |   |   |       |      
|                                               | Pro forma net (loss) income                                                                         |                        | $       | (19,265 | ) |      | $      | (5,158 | ) |   | $     | 4,975 | 
|                                               |                                                                                                     |                        |         |         |   |      |        |        |   |   |       |      
|(Loss) earnings per share (basic and diluted): |                                                                                                     |                        |         |         |   |      |        |        |   |   |       |      
|                                               | As reported                                                                                         |                        | $       | (2.15   | ) |      | $      | (.52   | ) |   | $     | .66   | 
|                                               | Pro forma                                                                                           |                        | $       | (2.27   | ) |      | $      | (.62   | ) |   | $     | .58   | 

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

|                                |  |                        |           |      |  |      |         |  |  |  |         | 
|------------------------------- |  | ---------------------- | --------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                                |  |                       
|                                |  | Year ended December 31
|                                |  |                       
|                                |  | 2002                   |           | 2001 |  | 2000
|                                |  |                        |           |      |  |     
|Dividend yield                  |  |                        | 0%        |      |  |      | 0%      |  |  |  | 0%      | 
|Expected volatility             |  |                        | 66.5%     |      |  |      | 58.4%   |  |  |  | 57.8%   | 
|Risk free interest rate         |  |                        | 4.00%     |      |  |      | 5.00%   |  |  |  | 5.25%   | 
|Expected average holding period |  |                        | 7.5 years |      |  |      | 7 years |  |  |  | 7 years | 

In December 2002, the Company adopted the
disclosure provisions of SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and
Disclosure (SFAS 148). SFAS 148 requires
prominent disclosure

36



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

regarding the method used by the Company to
account for stock-based employee compensation and the effect of
the method used on reported results.



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

The Companys financial instruments include
cash and cash equivalents, short-term trade receivables,
long-term notes receivable, notes payable and debentures. For
short-term instruments, the historical carrying value is a
reasonable estimate of fair value. Fair values for long-term
financial instruments that are not readily marketable are
estimated based upon the discounted future cash flows at
prevailing market interest rates. Based on these assumptions,
management believes that the fair market values of the
Companys financial instruments are not materially
different from their respective carrying values as of
December 31, 2002.



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

In October 2001, the FASB issued
SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144).
SFAS 144 supersedes SFAS No. 121 Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (SFAS 121), however it
retains the fundamental provisions of that statement related to
the recognition and measurement of the impairment of long-lived
assets to be held and used. In addition,
SFAS 144 provides more guidance on estimating cash flows
when performing a recoverability test, requires that a
long-lived asset (group) to be disposed of other than by
sale (e.g. abandoned) be classified as held and used
until it is disposed of, and establishes more restrictive
criteria to classify an asset (group) as held for
sale. SFAS 144 was effective for the Company in 2002.
The adoption of SFAS 144 did not have a material impact on
the Companys financial results.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Exit or Disposal
Activities (SFAS 146). SFAS 146 addresses
significant issues regarding the recognition, measurement and
reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are
currently accounted for pursuant to the guidance of Emerging
Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS 146 will be
effective for the Company in 2003. The adoption of SFAS 146
is not expected to have a material impact on the Companys
financial results.

C. Business Acquisitions and
Restructuring

In November 2000, the Company acquired all of the
outstanding stock of Tex Racing Enterprises, Inc. (Tex Racing)
for $6,030 in cash and a $1,500 note payable to the selling
shareholder. The purchase price also includes future contingent
payments based on earnings. The Company does not anticipate
these contingent payments to be material. The acquisition was
accounted for as a purchase. The excess of the purchase price
over the estimated fair value of the net assets acquired of
$4,700 was being amortized over 15 years, prior to the
adoption of SFAS 142. The results of operations of Tex
Racing are included in the Companys consolidated
statements of operations since the date of acquisition.

In December 2000, the Company acquired a majority
of Net Shape Technologies LLC (Net Shape) membership interests
for $480 in cash. The acquisition was accounted for as a
purchase. The excess of the purchase price over the estimated
fair value of net assets acquired in the amount of $742 was
being amortized over 10 years, prior to the adoption of
SFAS 142. In February 2002, the Company acquired the
remaining interest in Net Shape. The results of operations of
Net Shape are included in the Companys consolidated
statements of operations since the dates of acquisition.

In June 2001, the Company announced a
restructuring program to adjust their near-term business plan to
reflect the current economic slowdown. This restructuring
initiative included a workforce reduction at the domestic
facilities and other charges. As a result of the restructuring
initiative, an expense of $1,055 was recorded

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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

in 2001. The restructuring program included a
reduction of approximately 160 employees, including salary
and production personnel. All activities under the
Companys restructuring program were substantially
completed during the first quarter of 2002.

D. Intangible Assets

The components of net goodwill and other
intangible assets are as follows:

|                                      |              |              |        |        |  |   |        |       | 
|------------------------------------- | ------------ | ------------ | ------ | ------ |  | - | ------ | ----- | 
|                                      |              |             
|                                      |              | December 31,
|                                      |              |             
|                                      |              | 2002         |        | 2001  
|                                      |              |              |        |       
|Net goodwill, beginning of the period |              | $            | 53,877 |        |  | $ | 56,629 |      
|                                      | Additions    |              |        | 70     |  |   |        | 428   | 
|                                      | Amortization |              |        |        |  |   |        | 3,180 | 
|                                      | Impairment   |              |        | 21,452 |  |   |        |       | 
|                                      |              |              |        |        |  |   |        |      
|Net goodwill, end of the period       |              | $            | 32,495 |        |  | $ | 53,877 |      
|                                      |              |              |        |        |  |   |        |      

|                                           |                         |                   |        |                   |  |     |        |        |  |              |        |        |  |   |        |        |  |   |        |       |  |   |        |        | 
|------------------------------------------ | ----------------------- | ----------------- | ------ | ----------------- |  | --- | ------ | ------ |  | ------------ | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ----- |  | - | ------ | ------ | 
|                                           |                         |                   |        |                  
|                                           |                         | December 31, 2002 |        | December 31, 2001
|                                           |                         |                   |        |                  
|                                           |                         |                   |        | Accumulated       |  |     |        |        |  | Accumulated  |        |       
|                                           |                         | Gross             |        | Amortization      |  | Net |        | Gross  |  | Amortization |        | Net   
|                                           |                         |                   |        |                   |  |     |        |        |  |              |        |       
|Intangible assets subject to amortization: |                         |                   |        |                   |  |     |        |        |  |              |        |        |  |   |        |        |  |   |        |       |  |   |        |       
|                                           | Product certifications  |                   | $      | 20,820            |  |     | $      | 10,264 |  |              | $      | 10,556 |  |   | $      | 20,820 |  |   |        | 9,544 |  |   | $      | 11,276 | 
|                                           | Other intangible assets |                   |        | 2,719             |  |     |        | 2,574  |  |              |        | 145    |  |   |        | 3,013  |  |   |        | 2,561 |  |   |        | 452    | 
|                                           |                         |                   |        |                   |  |     |        |        |  |              |        |        |  |   |        |        |  |   |        |       |  |   |        |       
|Intangible assets subject to amortization  |                         | $                 | 23,539 |                   |  | $   | 12,838 |        |  | $            | 10,701 |        |  | $ | 23,833 |        |  | $ | 12,105 |       |  | $ | 11,728 |       
|                                           |                         |                   |        |                   |  |     |        |        |  |              |        |        |  |   |        |        |  |   |        |       |  |   |        |       

The Company estimates its amortization expense
for its finite-lived intangible assets for each of the next five
years to be $732.

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

A summary of the Companys net goodwill at
December 31, 2002 and 2001 by reportable operating segment
is as follows:

|                       |  |             |        |      |  |   |        | 
|---------------------- |  | ----------- | ------ | ---- |  | - | ------ | 
|                       |  |            
|                       |  | December 31
|                       |  |            
|                       |  | 2002        |        | 2001
|                       |  |             |        |     
|Precision components   |  | $           | 28,109 |      |  | $ | 28,039 | 
|Friction products      |  |             |        |      |  |   | 11,100 | 
|Performance automotive |  |             | 4,386  |      |  |   | 8,392  | 
|Motor                  |  |             |        |      |  |   | 6,346  | 
|                       |  |             |        |      |  |   |        | 
|Total                  |  | $           | 32,495 |      |  | $ | 53,877 | 
|                       |  |             |        |      |  |   |        | 

38



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

E. Financing Arrangements

|                          |  |             |         |      |  |   |        | 
|------------------------- |  | ----------- | ------- | ---- |  | - | ------ | 
|                          |  |            
|                          |  | December 31
|                          |  |            
|                          |  | 2002        |         | 2001
|                          |  |             |         |     
|Old Senior Notes          |  | $           | 583     |      |  | $ | 65,000 | 
|Senior Notes              |  |             | 66,059  |      |  |   |        | 
|Term Loan                 |  |             |         |      |  |   | 17,500 | 
|Revolving Credit Facility |  |             |         |      |  |   | 8,337  | 
|Bank Facility             |  |             | 36,327  |      |  |   |        | 
|Other                     |  |             | 5,984   |      |  |   | 6,982  | 
|                          |  |             |         |      |  |   |        | 
|                          |  |             | 108,953 |      |  |   | 97,819 | 
|Less current portion      |  |             | 39,430  |      |  |   | 6,862  | 
|                          |  |             |         |      |  |   |        | 
|                          |  | $           | 69,523  |      |  | $ | 90,957 | 
|                          |  |             |         |      |  |   |        | 

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

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

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



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

Borrowings under the capital expenditure loan
component of the Bank Facility are available to the Company in
the following increments: a) up to $2,000 through
December 31, 2003, beginning January 1, 2003 and,
b) up to

39



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

$1,000 thereafter. At the end of each borrowing
period, the principal amount of all borrowings under the capital
expenditure loan component borrowed during the applicable
borrowing period will begin to amortize monthly over a seven
year, straight-line basis. Any remaining unamortized principal
balance under the capital expenditure loan component is due and
payable on the final maturity date of the Bank Facility.

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

In October 2002, the Company exchanged $64,417 of
its $65,000, 10 1/4% Senior Notes due December 1, 2003
(Old Senior Notes), for 12% Senior Notes due December 1,
2006 (Senior Notes). The Senior Notes were issued on
October 23, 2002. The remaining outstanding principal of
the Old Senior Notes in the amount of $583 will mature on
December 1, 2003. In addition, the holders of the Old
Senior Notes that participated in the exchange for Senior Notes
received a consent payment of $25.63 for each $1,000 of Old
Senior Notes held as of October 23, 2002. The consent
payment, which totaled $1,642, was issued in the form of
additional Senior Notes and is payable to the holders at
maturity. The Company incurred $1,928 of third party costs in
connection with the exchange. The Senior Notes are general
unsecured senior obligations of the Company and are fully and
unconditionally guaranteed, on a joint and several basis, by all
domestic wholly owned subsidiaries of the Company. The Senior
Notes accrue interest at a rate of 12% per annum on the
principal amount commencing October 23, 2002. Interest
payments are due December 31 and June 30. In addition,
in the event that the Companys leverage ratio exceeds 4.0
to 1.0 for the most recently ended four quarters beginning with
the semi-annual period ended December 31, 2002, the Company
will be required to pay additional payment in kind
(PIK) interest at a rate ranging from .25% to 2.00% until
the next semi-annual test period. Any interest payment under
this test will be made by issuing additional Senior Notes. As of
December 31, 2002, the leverage ratio test will require the
Company to issue $124 of PIK interest, calculated at a rate of
1.00%, in the form of additional Senior Notes.

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

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

The Senior Notes prohibit the payment of cash
dividends on the Companys Class A Common Stock. The
Senior Notes also contain other covenants limiting the
Companys ability and its subsidiaries to, among other
things, make certain other restricted payments, make certain
investments, permit liens, incur dividend and other payment
restrictions affecting subsidiaries, enter into consolidation,
merger, conveyance, lease or transfer transactions, make asset
sales, enter into transactions with affiliates or engage in
unrelated lines of business. These covenants are subject to
certain exceptions and qualifications. The Senior Notes
considers non-compliance

40



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

with the limitations events of default. In
addition to non-payment of interest and principal amounts, the
Senior Notes also considers default with respect to other
indebtedness in excess of $5,000 an event of default. In the
event of a default, the principal and interest could be
accelerated upon written notice by 25% or more of the holders of
the notes.

The Company has issued stand-by Letters of Credit
totaling $1,284. There are no balances outstanding at
December 31, 2002.

Aggregate principal payments due on long-term
debt exclusive of the Bank Facility, which matures in 2006, as
of December 31, 2002 are as follows: 2003 
$3,103; 2004  $1,708; 2005  $1,160;
2006  $66,184; 2007  $54; and
thereafter  $417.

F. Shareholders Equity

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

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

G. Employee Stock Option Plan

The Company grants stock options to certain
employees under various plans, to purchase shares of
Class A common stock. During 2002, 2001 and 2000, the
Company granted stock options to purchase an aggregate of
53,418, 701,594 and 328,878 shares, respectively, at exercise
prices representing the closing market price of the
Companys common stock at the date of grant. The options
vest ratably over specific defined periods. Canceled options are
available for future issuance under the provisions of the stock
option plans.

The following table summarizes the stock option
activity for the years ended December 31, 2002, 2001 and
2000:

|                                         |  |         |           |          |  |         |      |          |  |         |           |          |  |   |       |  |  |  |         |   |  |   |       | 
|---------------------------------------- |  | ------- | --------- | -------- |  | ------- | ---- | -------- |  | ------- | --------- | -------- |  | - | ----- |  |  |  | ------- | - |  | - | ----- | 
|                                         |  |         |           |          |  |        
|                                         |  | 2002    |           | 2001     |  | 2000   
|                                         |  |         |           |          |  |        
|                                         |  |         |           | Weighted |  |         |      | Weighted |  |         |           | Weighted
|                                         |  |         |           | Average  |  |         |      | Average  |  |         |           | Average 
|                                         |  |         |           | Exercise |  |         |      | Exercise |  |         |           | Exercise
|                                         |  | Options |           | Price    |  | Options |      | Price    |  | Options |           | Price   
|                                         |  |         |           |          |  |         |      |          |  |         |           |         
|Options outstanding at beginning of year |  |         | 1,324,646 |          |  | $       | 6.73 |          |  |         | 766,267   |          |  | $ | 10.51 |  |  |  | 472,600 |   |  | $ | 13.78 | 
|Granted                                  |  |         | 53,418    |          |  |         | 4.89 |          |  |         | 701,594   |          |  |   | 3.64  |  |  |  | 328,878 |   |  |   | 6.11  | 
|Exercised                                |  |         |           |          |  |         |      |          |  |         |           |          |  |   |       |  |  |  |         |   |  |   |       | 
|Canceled                                 |  |         | (160,335  | )        |  |         | 6.81 |          |  |         | (143,215  | )        |  |   | 10.45 |  |  |  | (35,211 | ) |  |   | 13.16 | 
|                                         |  |         |           |          |  |         |      |          |  |         |           |          |  |   |       |  |  |  |         |   |  |   |       | 
|Options outstanding at end of year       |  |         | 1,217,729 |          |  | $       | 6.62 |          |  |         | 1,324,646 |          |  | $ | 6.73  |  |  |  | 766,267 |   |  | $ | 10.51 | 

41



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                                                   |  |         |         |          |  |         |      |          |  |         |         |          |  |   |       |  |  |  |         |  |  |   |       | 
|------------------------------------------------------------------ |  | ------- | ------- | -------- |  | ------- | ---- | -------- |  | ------- | ------- | -------- |  | - | ----- |  |  |  | ------- |  |  | - | ----- | 
|                                                                   |  |         |         |          |  |        
|                                                                   |  | 2002    |         | 2001     |  | 2000   
|                                                                   |  |         |         |          |  |        
|                                                                   |  |         |         | Weighted |  |         |      | Weighted |  |         |         | Weighted
|                                                                   |  |         |         | Average  |  |         |      | Average  |  |         |         | Average 
|                                                                   |  |         |         | Exercise |  |         |      | Exercise |  |         |         | Exercise
|                                                                   |  | Options |         | Price    |  | Options |      | Price    |  | Options |         | Price   
|                                                                   |  |         |         |          |  |         |      |          |  |         |         |         
|Exercisable at the end of the year                                 |  |         | 636,632 |          |  | $       | 7.69 |          |  |         | 242,169 |          |  | $ | 12.36 |  |  |  | 159,300 |  |  | $ | 14.91 | 
|Weighted average fair value of options granted
    during the year |  |         |         |          |  | $       | 4.34 |          |  |         |         |          |  | $ | 2.56  |  |  |  |         |  |  | $ | 4.00  | 
|Shares available for future grant                                  |  |         | 182,271 |          |  |         |      |          |  |         | 75,354  |          |  |   |       |  |  |  | 633,733 |  |  |   |       | 

Exercise prices for options outstanding as of
December 31, 2002 ranged from $3.40 to $18.70. A summary of
the options by range of exercise prices is as follows:

|                |  |             |         |             |  |              |       |         |  |          |     |  |  |  |         |  |  |   |       | 
|--------------- |  | ----------- | ------- | ----------- |  | ------------ | ----- | ------- |  | -------- | --- |  |  |  | ------- |  |  | - | ----- | 
|                |  |             |         |            
|                |  | Outstanding |         | Exercisable
|                |  |             |         |            
|                |  |             |         | Weighted    |  |             
|                |  |             |         | Weighted    |  | Average      |       |         |  | Weighted
|                |  |             |         | Average     |  | Remaining    |       |         |  | Average 
|Range of        |  |             |         | Exercise    |  | Contractual  |       |         |  | Exercise
|Exercise Price  |  | Options     |         | Price       |  | Life (years) |       | Options |  | Price   
|                |  |             |         |             |  |              |       |         |  |         
|$3.40 to $3.50  |  |             | 366,622 |             |  | $            | 3.40  |         |  |          | 8.6 |  |  |  | 187,273 |  |  | $ | 3.40  | 
|$3.51 to $5.00  |  |             | 285,177 |             |  | $            | 3.85  |         |  |          | 8.7 |  |  |  | 133,982 |  |  | $ | 3.82  | 
|$5.01 to $8.00  |  |             | 328,270 |             |  | $            | 6.13  |         |  |          | 7.5 |  |  |  | 131,557 |  |  | $ | 6.30  | 
|$8.01 to $18.70 |  |             | 237,660 |             |  | $            | 15.58 |         |  |          | 4.9 |  |  |  | 183,820 |  |  | $ | 15.90 | 

H. Employee Benefits

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

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

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

|                                                                      |                                   |                                                |                                     |        |        |        |        |        |        |       |  
|--------------------------------------------------------------------- | --------------------------------- | ---------------------------------------------- | ----------------------------------- | ------ | ------ | ------ | ------ | ------ | ------ | ----- | -
|                                                                      |                                   |                                               
|                                                                      |                                   | December 31                                   
|                                                                      |                                   |                                               
|                                                                      |                                   | 2002                                           |                                     | 2001  
|                                                                      |                                   |                                                |                                     |       
|Change in benefit obligation:                                         |                                   |                                                |                                     |        |        |        |        |       
|                                                                      |                                   | Benefit obligation at beginning of year        |                                     | $      | 17,528 |        |        | $      | 15,003 |      
|                                                                      |                                   | Service cost                                   |                                     |        | 732    |        |        |        | 550    |      
|                                                                      |                                   | Interest cost                                  |                                     |        | 1,292  |        |        |        | 1,148  |      
|                                                                      |                                   | Actuarial losses                               |                                     |        | 406    |        |        |        | 1,609  |      
|                                                                      |                                   | Plan amendments                                |                                     |        | 152    |        |        |        |       |      
|                                                                      |                                   | Foreign currency exchange rate charges         |                                     |        | 11     |        |        |        | (41    | )    
|                                                                      |                                   | Benefits paid                                  |                                     |        | (853   | )      |        |        | (741   | )    
|                                                                      |                                   |                                                |                                     |        |        |        |        |       
|                                                                      | Benefit obligation at end of year |                                                | $                                   | 19,268 |        |        | $      | 17,528 |       
|                                                                      |                                   |                                                |                                     |        |        |        |        |       
|Change in plan assets:                                                |                                   |                                                |                                     |        |        |        |        |       
|                                                                      |                                   | Fair value of plan assets at beginning of year |                                     | $      | 19,399 |        |        | $      | 19,449 |      
|                                                                      |                                   | Actual return on plan assets                   |                                     |        | (5,371 | )      |        |        | (190   | )    
|                                                                      |                                   | Foreign currency exchange rate charges         |                                     |        | 17     |        |        |        | (67    | )    
|                                                                      |                                   | Company contributions                          |                                     |        | 978    |        |        |        | 948    |      
|                                                                      |                                   | Benefits paid                                  |                                     |        | (853   | )      |        |        | (741   | )    
|                                                                      |                                   |                                                |                                     |        |        |        |        |       
|Fair value of plan assets at end of year                              |                                   | $                                              | 14,170                              |        |        | $      | 19,399 |       
|                                                                      |                                   |                                                |                                     |        |        |        |        |       
|Funded status of the plans                                            |                                   | $                                              | (5,098                              | )      |        | $      | 1,871  |       
|Unrecognized net actuarial losses                                     |                                   |                                                | 9,002                               |        |        |        | 1,484  |       
|Unrecognized prior service cost                                       |                                   |                                                | 572                                 |        |        |        | 500    |       
|                                                                      |                                   |                                                |                                     |        |        |        |        |       
|Net prepaid benefit cost                                              |                                   | $                                              | 4,476                               |        |        | $      | 3,855  |       
|                                                                      |                                   |                                                |                                     |        |        |        |        |       
|Amounts recognized in the balance sheet consist
    of the following: |                                   |                                                |                                     |        |        |        |        |       
|                                                                      |                                   |                                                | Prepaid benefit cost                |        | $      | 604    |        |        | $      | 2,818 |  
|                                                                      |                                   |                                                | Accrued benefit liability           |        |        | (4,069 | )      |        |        | (363  | )
|                                                                      |                                   |                                                | Intangible asset                    |        |        | 659    |        |        |        | 454   |  
|                                                                      |                                   |                                                | Cumulative other comprehensive loss |        |        | 7,282  |        |        |        | 946   |  
|                                                                      |                                   |                                                |                                     |        |        |        |        |       
|Net amount recognized                                                 |                                   | $                                              | 4,476                               |        |        | $      | 3,855  |       
|                                                                      |                                   |                                                |                                     |        |        |        |        |       

Amounts applicable to the Companys
underfunded pension plans at December 31, 2002 and 2001 are
as follows:

|                                                  |  |             |        |      |  |   |       | 
|------------------------------------------------- |  | ----------- | ------ | ---- |  | - | ----- | 
|                                                  |  |            
|                                                  |  | December 31
|                                                  |  |            
|                                                  |  | 2002        |        | 2001
|                                                  |  |             |        |     
|Projected benefit obligation                      |  | $           | 18,522 |      |  | $ | 4,877 | 
|Accumulated benefit obligation                    |  |             | 17,333 |      |  |   | 4,877 | 
|Fair value of plan assets                         |  |             | 13,264 |      |  |   | 4,120 | 
|Amounts recognized as accrued benefit liabilities |  |             | 4,069  |      |  |   | 363   | 
|Amounts recognized as intangible asset            |  |             | 659    |      |  |   | 454   | 

43



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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                         |                                      |                        |     |        |   |      |     |        |   |   |     |        |  
|---------------------------------------- | ------------------------------------ | ---------------------- | --- | ------ | - | ---- | --- | ------ | - | - | --- | ------ | -
|                                         |                                      |                       
|                                         |                                      | Year ended December 31
|                                         |                                      |                       
|                                         |                                      | 2002                   |     | 2001   |   | 2000
|                                         |                                      |                        |     |        |   |     
|Components of net periodic pension cost: |                                      |                        |     |        |   |      |     |        |   |   |     |       
|                                         | Service cost                         |                        | $   | 732    |   |      | $   | 550    |   |   | $   | 508    |  
|                                         | Interest cost                        |                        |     | 1,292  |   |      |     | 1,148  |   |   |     | 1,019  |  
|                                         | Expected return on plan assets       |                        |     | (1,798 | ) |      |     | (1,585 | ) |   |     | (1,455 | )
|                                         | Amortization of prior service cost   |                        |     | 80     |   |      |     | 76     |   |   |     | 67     |  
|                                         | Recognized net actuarial loss (gain) |                        |     | 60     |   |      |     | 10     |   |   |     | (26    | )
|                                         |                                      |                        |     |        |   |      |     |        |   |   |     |       
|                                         |                                      | $                      | 366 |        |   | $    | 199 |        |   | $ | 113 |       
|                                         |                                      |                        |     |        |   |      |     |        |   |   |     |       

The plans assets are primarily invested in
fixed income and equity securities. In addition, one of the
Companys defined benefit plans also contains investments
in the Companys stock. As of December 31, 2002 60,000
shares of the Companys stock were held by a defined
benefit plan at a cost of $717. The market value of such
investment as of December 31, 2002, was $139.

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

|                                                                        |                                                                                                      |      |  |      |   |      |  |      |   |  |  |      |  
|----------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ---- |  | ---- | - | ---- |  | ---- | - |  |  | ---- | -
|                                                                        |                                                                                                      | 2002 |  | 2001 |   | 2000
|                                                                        |                                                                                                      |      |  |      |   |     
|Used to compute the projected benefit obligation
    as of December 31: |                                                                                                      |      |  |      |   |      |  |      |   |  |  |     
|                                                                        | Weighted average discount rate                                                                       |      |  | 6.75 | % |      |  | 7.25 | % |  |  | 7.50 | %
|                                                                        | Annual salary increase                                                                               |      |  | 3.00 | % |      |  | 3.00 | % |  |  | 3.00 | %
|                                                                        | Weighted average expected long-term rate of
    return on plan assets for the year ended December 31 |      |  | 8.60 | % |      |  | 9.00 | % |  |  | 9.50 | %

The Company also sponsors several defined
contribution plans which provide voluntary employee
contributions and, in certain plans, matching and discretionary
employer contributions. Expenses associated with these plans
were approximately $241 in 2002, $581 in 2001 and $1,444 in
2000. In 2002 and 2001, the Company made no discretionary
employer contributions.

I. Lease Obligations

The Company has capital lease commitments for
buildings and equipment. Future minimum annual rentals are:
2003  $246; 2004  $221; 2005 
$163; 2006  $37; 2007  $0; and
thereafter  $0. Amount representing interest is $78.
Total capital lease obligations are included in other long-term
debt. Amortization of assets recorded under capital leases is
included with depreciation expense.

The Company leases certain office and warehouse
facilities and equipment under operating leases. Rental expense
was approximately $2,223 in 2002, $2,131 in 2001 and $1,828 in
2000. Future noncancelable minimum lease commitments under these
agreements that have an original or existing term in excess of
one year as of December 31, 2002 are as follows:
2003  $2,133; 2004  $2,028;
2005  $1,550; 2006  $940; 2007 
$513; and thereafter  $1,624.

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

J. Income Taxes

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

|                                     |                 |                        |        |        |   |      |        |        |   |   |       |       | 
|------------------------------------ | --------------- | ---------------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ----- | ----- | 
|                                     |                 |                       
|                                     |                 | Year ended December 31
|                                     |                 |                       
|                                     |                 | 2002                   |        | 2001   |   | 2000
|                                     |                 |                        |        |        |   |     
|Current:                             |                 |                        |        |        |   |      |        |        |   |   |       |      
|                                     | Federal         |                        | $      | (4,333 | ) |      | $      | (2,792 | ) |   | $     | 2,020 | 
|                                     | State and local |                        |        | (134   | ) |      |        | (26    | ) |   |       | 171   | 
|                                     | Foreign         |                        |        | 574    |   |      |        | 297    |   |   |       | 527   | 
|                                     |                 |                        |        |        |   |      |        |        |   |   |       |      
|                                     |                 |                        | (3,893 | )      |   |      | (2,521 | )      |   |   | 2,718 |      
|Deferred:                            |                 |                        |        |        |   |      |        |        |   |   |       |      
|                                     | Federal         |                        |        | 2,333  |   |      |        | 1,118  |   |   |       | 1,468 | 
|                                     | State and local |                        |        | 18     |   |      |        | 62     |   |   |       | 119   | 
|                                     | Foreign         |                        |        | 46     |   |      |        | (517   | ) |   |       | 55    | 
|                                     |                 |                        |        |        |   |      |        |        |   |   |       |      
|                                     |                 |                        | 2,397  |        |   |      | 663    |        |   |   | 1,642 |      
|                                     |                 |                        |        |        |   |      |        |        |   |   |       |      
|Total income tax (benefit) provision |                 | $                      | (1,496 | )      |   | $    | (1,858 | )      |   | $ | 4,360 |      
|                                     |                 |                        |        |        |   |      |        |        |   |   |       |      

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

|                               |                                          |      |        |       |  |   |        |       | 
|------------------------------ | ---------------------------------------- | ---- | ------ | ----- |  | - | ------ | ----- | 
|                               |                                          | 2002 |        | 2001 
|                               |                                          |      |        |      
|Deferred tax assets:           |                                          |      |        |       |  |   |        |      
|                               | Accrued vacation                         |      | $      | 555   |  |   | $      | 529   | 
|                               | Other accruals                           |      |        | 3,350 |  |   |        | 836   | 
|                               | Foreign net operating loss carryforwards |      |        | 352   |  |   |        | 496   | 
|                               | Book over tax goodwill amortization      |      |        | 2,161 |  |   |        |       | 
|                               | Inventory                                |      |        | 527   |  |   |        | 472   | 
|                               |                                          |      |        |       |  |   |        |      
|Total deferred tax assets      |                                          |      | 6,945  |       |  |   | 2,333  |      
|Deferred tax liabilities:      |                                          |      |        |       |  |   |        |      
|                               | Tax over book depreciation               |      |        | 9,409 |  |   |        | 8,047 | 
|                               | Tax over book intangibles amortization   |      |        | 1,708 |  |   |        | 2,295 | 
|                               | Tax over book goodwill amortization      |      |        |       |  |   |        | 1,039 | 
|                               | Employee benefits                        |      |        |       |  |   |        | 373   | 
|                               | Foreign leased property                  |      |        | 340   |  |   |        | 349   | 
|                               | Debt financing costs                     |      |        | 746   |  |   |        |       | 
|                               | Other                                    |      |        | 230   |  |   |        | 8     | 
|                               |                                          |      |        |       |  |   |        |      
|Total deferred tax liabilities |                                          |      | 12,433 |       |  |   | 12,111 |      
|                               |                                          |      |        |       |  |   |        |      
|Net deferred tax liabilities   |                                          | $    | 5,488  |       |  | $ | 9,778  |      
|                               |                                          |      |        |       |  |   |        |      

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

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

|                                                                            |  |             |       |      |  |      |       |    |  |  |      |  
|--------------------------------------------------------------------------- |  | ----------- | ----- | ---- |  | ---- | ----- | -- |  |  | ---- | -
|                                                                            |  |            
|                                                                            |  | December 31
|                                                                            |  |            
|                                                                            |  | 2002        |       | 2001 |  | 2000
|                                                                            |  |             |       |      |  |     
|Income tax (benefit) expense at federal
    statutory rate                  |  |             | (35.0 | )%   |  |      | (35.0 | )% |  |  | 35.0 | %
|State and local tax, net of federal tax benefit                             |  |             | (3.0  | )    |  |      | 0.4   |    |  |  | 1.8  |  
|Nondeductible goodwill amortization                                         |  |             |       |      |  |      | 5.3   |    |  |  | 3.3  |  
|Nondeductible intangible amortization                                       |  |             | 2.0   |      |  |      | .9    |    |  |  | .6   |  
|Adjustment to worldwide tax accrual and other                               |  |             | (36.3 | )    |  |      | (4.4  | )  |  |  | (1.2 | )
|Taxes on foreign income which differs from United
    States statutory rate |  |             | 9.9   |      |  |      | 6.8   |    |  |  | 2.8  |  
|Other                                                                       |  |             | 3.5   |      |  |      | (4.0  | )  |  |  | 0.7  |  
|                                                                            |  |             |       |      |  |      |       |    |  |  |      |  
|Provision for income taxes                                                  |  |             | (58.9 | )%   |  |      | (30.0 | )% |  |  | 43.0 | %
|                                                                            |  |             |       |      |  |      |       |    |  |  |      |  

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

The Company is expecting to receive federal tax
refunds in the amount of approximately $3,500 in the first half
of 2003 as a result of the utilization of tax loss carrybacks.

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

K. (Loss) Earnings Per Share

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

|                                                                                                                      |                                     |                                                                                        |         |       |       |      |        |      |       |   |       |     |       | 
|--------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | -------------------------------------------------------------------------------------- | ------- | ----- | ----- | ---- | ------ | ---- | ----- | - | ----- | --- | ----- | 
|                                                                                                                      |                                     |                                                                                       
|                                                                                                                      |                                     | Year ended December 31                                                                
|                                                                                                                      |                                     |                                                                                       
|                                                                                                                      |                                     | 2002                                                                                   |         | 2001  |       | 2000
|                                                                                                                      |                                     |                                                                                        |         |       |       |     
|Net (loss) income before cumulative effect
    of change in accounting principle                                      |                                     | $                                                                                      | (1,045  | )     |       | $    | (4,336 | )    |       | $ | 5,770 |    
|Less: Preferred stock dividends                                                                                       |                                     |                                                                                        | 150     |       |       |      | 150    |      |       |   | 152   |    
|                                                                                                                      |                                     |                                                                                        |         |       |       |      |        |      |       |   |       |    
|Net (loss) income before cumulative effect
    of change in accounting principle available to common
    shareholders |                                     | $                                                                                      | (1,195  | )     |       | $    | (4,486 | )    |       | $ | 5,618 |    
|                                                                                                                     
|Net (loss) income                                                                                                     |                                     | $                                                                                      | (18,245 | )     |       | $    | (4,336 | )    |       | $ | 5,770 |    
|Less: Preferred stock dividends                                                                                       |                                     |                                                                                        | 150     |       |       |      | 150    |      |       |   | 152   |    
|                                                                                                                      |                                     |                                                                                        |         |       |       |      |        |      |       |   |       |    
|Net (loss) income available to common
    shareholders                                                                |                                     | $                                                                                      | (18,395 | )     |       | $    | (4,486 | )    |       | $ | 5,618 |    
|                                                                                                                      |                                     |                                                                                        |         |       |       |      |        |      |       |   |       |    
|Weighted average shares (in thousands):                                                                               |                                     |                                                                                        |         |       |       |      |        |      |       |   |       |    
|                                                                                                                      |                                     | Basic weighted average shares                                                          |         |       | 8,557 |      |        |      | 8,552 |   |       |     | 8,548 | 
|                                                                                                                      |                                     |                                                                                        |         |       |       |      |        |      |       |   |       |    
|                                                                                                                      |                                     | Diluted:                                                                               |         |       |       |      |        |      |       |   |       |     |       | 
|                                                                                                                      |                                     | Basic from above                                                                       |         |       | 8,557 |      |        |      | 8,552 |   |       |     | 8,548 | 
|                                                                                                                      |                                     | Effect of stock options                                                                |         |       |      |      |        |      |      |   |       |     | 21    | 
|                                                                                                                      |                                     |                                                                                        |         |       |       |      |        |      |       |   |       |    
|Diluted weighted average shares                                                                                       |                                     |                                                                                        | 8,557   |       |       |      | 8,552  |      |       |   | 8,569 |    
|                                                                                                                      |                                     |                                                                                        |         |       |       |      |        |      |       |   |       |    
|Loss (earnings) per share:                                                                                            |                                     |                                                                                        |         |       |       |      |        |      |       |   |       |    
|                                                                                                                      |                                     | Basic (loss) earnings before cumulative
    effect of change in accounting principle   |         | $     | (.14  | )    |        | $    | (.52  | ) |       | $   | .66   | 
|                                                                                                                      |                                     | Cumulative effect of change in accounting
    principle                                |         | $     | (2.01 | )    |        |      |       |   |       |     |       | 
|                                                                                                                      |                                     |                                                                                        |         |       |       |      |        |      |       |   |       |    
|                                                                                                                      | Net (loss) income per basic share   |                                                                                        | $       | (2.15 | )     |      | $      | (.52 | )     |   | $     | .66 |      
|                                                                                                                      |                                     |                                                                                        |         |       |       |      |        |      |       |   |       |    
|                                                                                                                      |                                     | Diluted (loss) earnings before cumulative
    effect of change in accounting principle |         | $     | (.14  | )    |        | $    | (.52  | ) |       | $   | .66   | 
|                                                                                                                      |                                     | Cumulative effect of change in accounting
    principle                                |         | $     | (2.01 | )    |        |      |       |   |       |     |       | 
|                                                                                                                      |                                     |                                                                                        |         |       |       |      |        |      |       |   |       |    
|                                                                                                                      | Net (loss) income per diluted share |                                                                                        | $       | (2.15 | )     |      | $      | (.52 | )     |   | $     | .66 |      
|                                                                                                                      |                                     |                                                                                        |         |       |       |      |        |      |       |   |       |    

Stock options outstanding were not included in
the computation of diluted earnings per share for 2002 and 2001,
since it would have resulted in an anti-dilutive effect.

L. Related Parties

In July 1995, certain shareholders of the Company
issued interest-bearing notes to the Company in the amount of
$2,000, enabling them to repay certain indebtedness incurred by
them with respect to an acquisition. The notes are due and
payable on December 31, 2005 and bear interest at the prime
rate. The balance outstanding at December 31, 2002 and 2001 is
$1,010.

M. Business Segments

The Company operates in four primary business
segments: friction products, precision components, performance
automotive and motors. The Companys reportable segments
are strategic business units that offer

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

different products and services. They are managed
separately based on fundamental differences in their operations.

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

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

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

The motor segment engineers, manufactures and
markets die-cast aluminum rotors for use in subfractional
electric motors. The Company, through this segment, targets a
wide variety of application such as appliances, business
equipment, pumps and fans.

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

The information by segment is as follows:

|                                                  |                        |                           |         |         |   |      |         |         |   |   |         |         |  
|------------------------------------------------- | ---------------------- | ------------------------- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                  |                        |                          
|                                                  |                        | Year ended December 31(1)
|                                                  |                        |                          
|                                                  |                        | 2002                      |         | 2001    |   | 2000
|                                                  |                        |                           |         |         |   |     
|Net sales to external customers:                  |                        |                           |         |         |   |      |         |         |   |   |         |        
|                                                  | Friction products      |                           | $       | 106,134 |   |      | $       | 104,127 |   |   | $       | 116,267 |  
|                                                  | Precision components   |                           |         | 65,810  |   |      |         | 58,272  |   |   |         | 72,019  |  
|                                                  | Performance automotive |                           |         | 12,627  |   |      |         | 12,967  |   |   |         | 5,612   |  
|                                                  | Motor                  |                           |         | 12,715  |   |      |         | 9,022   |   |   |         | 8,431   |  
|                                                  |                        |                           |         |         |   |      |         |         |   |   |         |        
|Consolidated                                      |                        | $                         | 197,286 |         |   | $    | 184,388 |         |   | $ | 202,329 |        
|                                                  |                        |                           |         |         |   |      |         |         |   |   |         |        
|Depreciation and amortization:(2)                 |                        |                           |         |         |   |      |         |         |   |   |         |        
|                                                  | Friction products      |                           | $       | 7,781   |   |      | $       | 9,276   |   |   | $       | 9,297   |  
|                                                  | Precision components   |                           |         | 3,545   |   |      |         | 4,886   |   |   |         | 4,525   |  
|                                                  | Performance automotive |                           |         | 200     |   |      |         | 742     |   |   |         | 386     |  
|                                                  | Motor                  |                           |         | 847     |   |      |         | 1,025   |   |   |         | 768     |  
|                                                  |                        |                           |         |         |   |      |         |         |   |   |         |        
|Consolidated                                      |                        | $                         | 12,373  |         |   | $    | 15,929  |         |   | $ | 14,976  |        
|                                                  |                        |                           |         |         |   |      |         |         |   |   |         |        
|Gross profit (loss):                              |                        |                           |         |         |   |      |         |         |   |   |         |        
|                                                  | Friction products      |                           | $       | 25,403  |   |      | $       | 24,899  |   |   | $       | 30,901  |  
|                                                  | Precision components   |                           |         | 14,589  |   |      |         | 11,495  |   |   |         | 19,360  |  
|                                                  | Performance automotive |                           |         | 3,711   |   |      |         | 3,854   |   |   |         | 2,856   |  
|                                                  | Motor                  |                           |         | 1       |   |      |         | (269    | ) |   |         | 1,825   |  
|                                                  |                        |                           |         |         |   |      |         |         |   |   |         |        
|Consolidated                                      |                        | $                         | 43,704  |         |   | $    | 39,979  |         |   | $ | 54,942  |        
|                                                  |                        |                           |         |         |   |      |         |         |   |   |         |        
|Income (loss) from operations:(2)                 |                        |                           |         |         |   |      |         |         |   |   |         |        
|                                                  | Friction products      |                           | $       | 7,509   |   |      | $       | 6,386   |   |   | $       | 11,403  |  
|                                                  | Precision components   |                           |         | 4,092   |   |      |         | 312     |   |   |         | 8,419   |  
|                                                  | Performance automotive |                           |         | 907     |   |      |         | 285     |   |   |         | 907     |  
|                                                  | Motor                  |                           |         | (2,751  | ) |      |         | (3,411  | ) |   |         | (1,266  | )
|                                                  |                        |                           |         |         |   |      |         |         |   |   |         |        
|Consolidated                                      |                        | $                         | 9,757   |         |   | $    | 3,572   |         |   | $ | 19,463  |        
|                                                  |                        |                           |         |         |   |      |         |         |   |   |         |        
|Capital expenditures: (including capital leases): |                        |                           |         |         |   |      |         |         |   |   |         |        
|                                                  | Friction products      |                           | $       | 5,742   |   |      | $       | 5,000   |   |   | $       | 3,888   |  
|                                                  | Precision components   |                           |         | 3,486   |   |      |         | 2,882   |   |   |         | 4,416   |  
|                                                  | Performance automotive |                           |         | 521     |   |      |         | 171     |   |   |         | 230     |  
|                                                  | Motor                  |                           |         | 1,708   |   |      |         | 1,043   |   |   |         | 1,955   |  
|                                                  |                        |                           |         |         |   |      |         |         |   |   |         |        
|Consolidated                                      |                        | $                         | 11,457  |         |   | $    | 9,096   |         |   | $ | 10,489  |        
|                                                  |                        |                           |         |         |   |      |         |         |   |   |         |        

|              |                        |             |         |        |  |   |         |         | 
|------------- | ---------------------- | ----------- | ------- | ------ |  | - | ------- | ------- | 
|              |                        |            
|              |                        | December 31
|              |                        |            
|              |                        | 2002        |         | 2001  
|              |                        |             |         |       
|Total assets: |                        |             |         |        |  |   |         |        
|              | Friction products      |             | $       | 95,984 |  |   | $       | 103,451 | 
|              | Precision components   |             |         | 74,558 |  |   |         | 69,002  | 
|              | Performance automotive |             |         | 10,862 |  |   |         | 14,633  | 
|              | Motor                  |             |         | 12,464 |  |   |         | 15,982  | 
|              |                        |             |         |        |  |   |         |        
|Consolidated  |                        | $           | 193,868 |        |  | $ | 203,068 |        
|              |                        |             |         |        |  |   |         |        






|    |                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | An operating unit formerly associated with the
    Companys performance automotive 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 B), the Company eliminated the
    amortization of goodwill in 2002.                                                                                                                                                                                           

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)



| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table illustrates the pro forma
    effect by operating segment, on depreciation and amortization,
    and income (loss) from operations had the Company applied the
    non-amortization provisions of SFAS 142 for the years ended
    December 31, 2001 and 2000:

|                                         |                        |             |        |        |   |   |        |        |  
|---------------------------------------- | ---------------------- | ----------- | ------ | ------ | - | - | ------ | ------ | -
|                                         |                        |            
|                                         |                        | December 31
|                                         |                        |            
|                                         |                        | 2001        |        | 2001  
|                                         |                        |             |        |       
|Pro forma depreciation and amortization: |                        |             |        |        |   |   |        |       
|                                         | Friction products      |             | $      | 8,124  |   |   | $      | 8,145  |  
|                                         | Precision components   |             |        | 3,698  |   |   |        | 3,346  |  
|                                         | Performance automotive |             |        | 154    |   |   |        | 159    |  
|                                         | Motor                  |             |        | 773    |   |   |        | 516    |  
|                                         |                        |             |        |        |   |   |        |       
|Consolidated                             |                        | $           | 12,749 |        |   | $ | 12,166 |       
|                                         |                        |             |        |        |   |   |        |       
|Pro forma income (loss) from operations: |                        |             |        |        |   |   |        |       
|                                         | Friction products      |             | $      | 7,538  |   |   | $      | 12,555 |  
|                                         | Precision components   |             |        | 1,500  |   |   |        | 9,598  |  
|                                         | Performance automotive |             |        | 873    |   |   |        | 1,134  |  
|                                         | Motor                  |             |        | (3,159 | ) |   |        | (1,014 | )
|                                         |                        |             |        |        |   |   |        |       
|Consolidated                             |                        | $           | 6,752  |        |   | $ | 22,273 |       
|                                         |                        |             |        |        |   |   |        |       

Geographic information for the years ended
December 31, 2002, 2001 and 2000 is as follows:

|                                                                    |  |                |         |            |  |       |        |            |  |            |         |       |  |            |         |            |  |       |        |   |  |   |         |   |  |   |         |  |  |   |        |   |  |   |         | 
|------------------------------------------------------------------- |  | -------------- | ------- | ---------- |  | ----- | ------ | ---------- |  | ---------- | ------- | ----- |  | ---------- | ------- | ---------- |  | ----- | ------ | - |  | - | ------- | - |  | - | ------- |  |  | - | ------ | - |  | - | ------- | 
|                                                                    |  |                |         |            |  |      
|                                                                    |  | 2002           |         | 2001       |  | 2000 
|                                                                    |  |                |         |            |  |      
|                                                                    |  | Domestic       |         | Foreign    |  |       |        | Domestic   |  | Foreign    |         |       |  | Domestic   |         | Foreign    |  |      
|                                                                    |  | Operations     |         | Operations |  | Total |        | Operations |  | Operations |         | Total |  | Operations |         | Operations |  | Total
|                                                                    |  |                |         |            |  |       |        |            |  |            |         |       |  |            |         |            |  |      
|                                                                    |  |               
|                                                                    |  | (In thousands)
|Net sales                                                           |  | $              | 166,235 |            |  | $     | 31,051 |            |  | $          | 197,286 |       |  | $          | 160,810 |            |  | $     | 23,578 |   |  | $ | 184,388 |   |  | $ | 180,632 |  |  | $ | 21,697 |   |  | $ | 202,329 | 
|Income (loss) from operations                                       |  |                | 10,467  |            |  |       | (710   | )          |  |            | 9,757   |       |  |            | 6,980   |            |  |       | (3,408 | ) |  |   | 3,572   |   |  |   | 19,499  |  |  |   | (36    | ) |  |   | 19,463  | 
|Cumulative effect of change in accounting
    principle, net of tax |  |                | (17,200 | )          |  |       |        |            |  |            | (17,200 | )     |  |            |         |            |  |       |        |   |  |   |         |   |  |   |         |  |  |   |        |   |  |   |         | 
|Net (loss) income                                                   |  |                | (16,089 | )          |  |       | (2,156 | )          |  |            | (18,245 | )     |  |            | (211    | )          |  |       | (4,125 | ) |  |   | (4,336  | ) |  |   | 7,274   |  |  |   | (1,504 | ) |  |   | 5,770   | 
|Total assets                                                        |  |                | 182,747 |            |  |       | 11,121 |            |  |            | 193,868 |       |  |            | 185,495 |            |  |       | 17,573 |   |  |   | 203,068 |   |  |   | 194,659 |  |  |   | 20,726 |   |  |   | 215,385 | 

The Company has foreign operations in Canada,
Italy, Mexico and China.

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

N. Supplemental Guarantor
Information

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

The following supplemental consolidating
condensed financial statements present:



| |                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidating condensed balance sheets as of
    December 31, 2002 and December 31, 2001, consolidating
    condensed statements of operations for the years ended
    December 31, 2002, 2001 and 2000 and consolidating
    condensed statements of cash flows for the years ended
    December 31, 2002, 2001 and 2000.
|
| | Hawk Corporation (Parent), combined Guarantor
    Subsidiaries and combined Non-Guarantor Subsidiaries consisting
    of the Companys subsidiaries in Canada, Italy, Mexico and
    China with their investments in subsidiaries accounted for using
    the equity method.                                              
|
| | Elimination entries necessary to consolidate the
    Parent and all of its subsidiaries.                                                                                                                                                                                                                                  

Management does not believe that separate
financial statements of the Guarantor Subsidiaries are material
to investors. Therefore, separate financial statements and other
disclosures concerning the Guarantor Subsidiaries are not
presented.

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                           |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |        | 
|------------------------------------------ | --------------------------------- | ----------------- | ------- | ------------ |  | ------------- | ------- | ------------ |  | ------------ | ------- | ------ |  | - | -------- | -------- | - | - | ------- | ------ | 
|                                           |                                   |                  
|                                           |                                   | December 31, 2002
|                                           |                                   |                  
|                                           |                                   |                   |         | Combined     |  | Combined      |         |             
|                                           |                                   |                   |         | Guarantor    |  | Non-Guarantor |         |             
|                                           |                                   | Parent            |         | Subsidiaries |  | Subsidiaries  |         | Eliminations |  | Consolidated
|                                           |                                   |                   |         |              |  |               |         |              |  |             
|Assets                                     |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |       
|Current assets:                            |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |       
|                                           | Cash and cash equivalents         |                   | $       | 116          |  |               | $       | 351          |  |              | $       | 1,235  |  |   |          |          |   |   | $       | 1,702  | 
|                                           | Accounts receivable, net          |                   |         |              |  |               |         | 22,416       |  |              |         | 10,345 |  |   |          |          |   |   |         | 32,761 | 
|                                           | Inventories                       |                   |         |              |  |               |         | 24,692       |  |              |         | 8,569  |  |   |          |          |   |   |         | 33,261 | 
|                                           | Deferred income taxes             |                   |         | 577          |  |               |         |              |  |              |         | 168    |  |   |          |          |   |   |         | 745    | 
|                                           | Taxes receivable                  |                   |         | 4,321        |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         | 4,321  | 
|                                           | Other current assets              |                   |         | 1,439        |  |               |         | 1,721        |  |              |         | 848    |  |   |          |          |   |   |         | 4,008  | 
|                                           |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |       
|Total current assets                       |                                   |                   | 6,453   |              |  |               | 49,180  |              |  |              | 21,165  |        |  |   |          |          |   |   | 76,798  |       
|Investment in subsidiaries                 |                                   |                   | 794     |              |  |               | (3,154  | )            |  |              |         |        |  | $ | 2,360    |          |   |   |         |       
|Inter-company advances, net                |                                   |                   | 164,732 |              |  |               | 25,515  |              |  |              | (21,452 | )      |  |   | (164,922 | )        |   |   |         |       
|Property, plant and equipment              |                                   |                   | 9       |              |  |               | 57,415  |              |  |              | 10,468  |        |  |   |          |          |   |   | 67,892  |       
|Intangible assets                          |                                   |                   | 72      |              |  |               | 43,124  |              |  |              |         |        |  |   |          |          |   |   | 43,196  |       
|Other                                      |                                   |                   | 1,043   |              |  |               | 1,136   |              |  |              | 940     |        |  |   | (1,010   | )        |   |   | 5,982   |       
|                                           |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |       
|Total assets                               |                                   | $                 | 173,103 |              |  | $             | 173,216 |              |  | $            | 11,121  |        |  | $ | (163,572 | )        |   | $ | 193,868 |       
|                                           |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |       
|Liabilities and shareholders
    equity   |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |       
|Current liabilities:                       |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |       
|                                           | Accounts payable                  |                   |         |              |  |               | $       | 13,342       |  |              | $       | 4,509  |  |   |          |          |   |   | $       | 17,851 | 
|                                           | Accrued compensation              |                   |         |              |  |               |         | 3,231        |  |              |         | 1,071  |  |   |          |          |   |   |         | 4,302  | 
|                                           | Other accrued expenses            |                   |         | 1,358        |  |               |         | 2,899        |  |              |         | 915    |  |   |          |          |   |   |         | 5,172  | 
|                                           | Bank Facility                     |                   |         | 36,327       |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         | 36,327 | 
|                                           | Current portion of long-term debt |                   |         | 583          |  |               |         | 2,250        |  |              |         | 270    |  |   |          |          |   |   |         | 3,103  | 
|                                           |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |       
|Total current liabilities                  |                                   |                   | 38,268  |              |  |               | 21,722  |              |  |              | 6,765   |        |  |   |          |          |   |   | 66,755  |       
|Long-term liabilities:                     |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |       
|                                           | Long-term debt                    |                   |         | 66,059       |  |               |         | 2,885        |  |              |         | 579    |  |   |          |          |   |   |         | 69,523 | 
|                                           | Deferred income taxes             |                   |         | 6,024        |  |               |         |              |  |              |         | 209    |  |   |          |          |   |   |         | 6,233  | 
|                                           | Other                             |                   |         |              |  |               |         | 4,902        |  |              |         | 1,621  |  |   |          |          |   |   |         | 6,523  | 
|                                           | Inter-company advances, net       |                   |         | 1,128        |  |               |         | 158,808      |  |              |         | 5,101  |  |   | $        | (165,037 | ) |   |         |        | 
|                                           |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |       
|Total long-term liabilities                |                                   |                   | 73,211  |              |  |               | 166,595 |              |  |              | 7,510   |        |  |   | (165,037 | )        |   |   | 82,279  |       
|                                           |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |       
|Total liabilities                          |                                   |                   | 111,479 |              |  |               | 188,317 |              |  |              | 14,275  |        |  |   | (165,037 | )        |   |   | 149,034 |       
|Shareholders equity                       |                                   |                   | 61,624  |              |  |               | (15,101 | )            |  |              | (3,154  | )      |  |   | 1,465    |          |   |   | 44,834  |       
|                                           |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |       
|Total liabilities and shareholders equity |                                   | $                 | 173,103 |              |  | $             | 173,216 |              |  | $            | 11,121  |        |  | $ | (163,572 | )        |   | $ | 193,868 |       
|                                           |                                   |                   |         |              |  |               |         |              |  |              |         |        |  |   |          |          |   |   |         |       

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HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                           |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |        | 
|------------------------------------------ | --------------------------------- | ----------------- | ------- | ------------ | - | ------------- | ------- | ------------ |  | ------------ | ------ | ----- |  | - | -------- | -------- | - | - | ------- | ------ | 
|                                           |                                   |                  
|                                           |                                   | December 31, 2001
|                                           |                                   |                  
|                                           |                                   |                   |         | Combined     |   | Combined      |         |             
|                                           |                                   |                   |         | Guarantor    |   | Non-Guarantor |         |             
|                                           |                                   | Parent            |         | Subsidiaries |   | Subsidiaries  |         | Eliminations |  | Consolidated
|                                           |                                   |                   |         |              |   |               |         |              |  |             
|Assets                                     |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |       
|Current assets:                            |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |       
|                                           | Cash and cash equivalents         |                   | $       | 1,073        |   |               | $       | 247          |  |              | $      | 1,764 |  |   |          |          |   |   | $       | 3,084  | 
|                                           | Accounts receivable, net          |                   |         | 160          |   |               |         | 18,828       |  |              |        | 6,785 |  |   |          |          |   |   |         | 25,773 | 
|                                           | Inventories                       |                   |         | 42           |   |               |         | 22,566       |  |              |        | 6,544 |  |   |          |          |   |   |         | 29,152 | 
|                                           | Deferred income taxes             |                   |         | 1,111        |   |               |         |              |  |              |        | 89    |  |   |          |          |   |   |         | 1,200  | 
|                                           | Taxes receivable                  |                   |         | 2,030        |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         | 2,030  | 
|                                           | Other current assets              |                   |         | 946          |   |               |         | 1,143        |  |              |        | 519   |  |   |          |          |   |   |         | 2,608  | 
|                                           |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |       
|Total current assets                       |                                   |                   | 5,362   |              |   |               | 42,784  |              |  |              | 15,701 |       |  |   |          |          |   |   | 63,847  |       
|Investment in subsidiaries                 |                                   |                   | 794     |              |   |               | (1,080  | )            |  |              |        |       |  | $ | 286      |          |   |   |         |       
|Inter-company advances, net                |                                   |                   | 153,455 |              |   |               | 9,447   |              |  |              | (8,555 | )     |  |   | (154,347 | )        |   |   |         |       
|Property, plant and equipment              |                                   |                   | 18      |              |   |               | 58,026  |              |  |              | 9,319  |       |  |   |          |          |   |   | 67,363  |       
|Intangible assets                          |                                   |                   | 199     |              |   |               | 65,406  |              |  |              |        |       |  |   |          |          |   |   | 65,605  |       
|Other                                      |                                   |                   | 1,010   |              |   |               | 5,145   |              |  |              | 1,108  |       |  |   | (1,010   | )        |   |   | 6,253   |       
|                                           |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |       
|Total assets                               |                                   | $                 | 160,838 |              |   | $             | 179,728 |              |  | $            | 17,573 |       |  | $ | (155,071 | )        |   | $ | 203,068 |       
|                                           |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |       
|Liabilities and shareholders
    equity   |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |       
|Current liabilities:                       |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |       
|                                           | Accounts payable                  |                   |         |              |   |               | $       | 10,292       |  |              | $      | 3,140 |  |   |          |          |   |   | $       | 13,432 | 
|                                           | Accrued compensation              |                   | $       | (18          | ) |               |         | 4,440        |  |              |        | 811   |  |   |          |          |   |   |         | 5,233  | 
|                                           | Other accrued expenses            |                   |         | 1,449        |   |               |         | 4,345        |  |              |        | 1,038 |  |   |          |          |   |   |         | 6,832  | 
|                                           | Current portion of long-term debt |                   |         | 5,000        |   |               |         | 1,669        |  |              |        | 193   |  |   |          |          |   |   |         | 6,862  | 
|                                           |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |       
|Total current liabilities                  |                                   |                   | 6,431   |              |   |               | 20,746  |              |  |              | 5,182  |       |  |   |          |          |   |   | 32,359  |       
|Long-term liabilities:                     |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |       
|                                           | Long-term debt                    |                   |         | 82,450       |   |               |         | 4,765        |  |              |        | 3,742 |  |   |          |          |   |   |         | 90,957 | 
|                                           | Deferred income taxes             |                   |         | 10,894       |   |               |         |              |  |              |        | 84    |  |   |          |          |   |   |         | 10,978 | 
|                                           | Other                             |                   |         |              |   |               |         | 1,117        |  |              |        | 1,220 |  |   |          |          |   |   |         | 2,337  | 
|                                           | Inter-company advances, net       |                   |         | 1,350        |   |               |         | 144,786      |  |              |        | 8,425 |  |   | $        | (154,561 | ) |   |         |        | 
|                                           |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |       
|Total long-term liabilities                |                                   |                   | 94,694  |              |   |               | 150,668 |              |  |              | 13,471 |       |  |   | (154,561 | )        |   |   | 104,272 |       
|                                           |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |       
|Total liabilities                          |                                   |                   | 101,125 |              |   |               | 171,414 |              |  |              | 18,653 |       |  |   | (154,561 | )        |   |   | 136,631 |       
|Shareholders equity                       |                                   |                   | 59,713  |              |   |               | 8,314   |              |  |              | (1,080 | )     |  |   | (510     | )        |   |   | 66,437  |       
|                                           |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |       
|Total liabilities and shareholders equity |                                   | $                 | 160,838 |              |   | $             | 179,728 |              |  | $            | 17,573 |       |  | $ | (155,071 | )        |   | $ | 203,068 |       
|                                           |                                   |                   |         |              |   |               |         |              |  |              |        |       |  |   |          |          |   |   |         |       

53



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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                                                           |                                                    |                              |         |              |   | $             | 166,235 |              |  | $            | 31,051 |       |  |   |        |  |  | $ | 197,286 |       
|Cost of sales                                                       |                                                    |                              |         |              |   |               | 126,586 |              |  |              | 26,996 |       |  |   |        |  |  |   | 153,582 |       
|                                                                    |                                                    |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       
|Gross profit                                                        |                                                    |                              |         |              |   |               | 39,649  |              |  |              | 4,055  |       |  |   |        |  |  |   | 43,704  |       
|Expenses:                                                           |                                                    |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       
|                                                                    | Selling, technical and
    administrative expenses |                              | $       | (121         | ) |               |         | 27,924       |  |              |        | 4,765 |  |   |        |  |  |   |         | 32,568 | 
|                                                                    | Amortization of intangible assets                  |                              |         |              |   |               |         | 1,379        |  |              |        |       |  |   |        |  |  |   |         | 1,379  | 
|                                                                    |                                                    |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       
|Total expenses                                                      |                                                    |                              | (121    | )            |   |               | 29,303  |              |  |              | 4,765  |       |  |   |        |  |  |   | 33,947  |       
|                                                                    |                                                    |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       
|Income (loss) from operations                                       |                                                    |                              | 121     |              |   |               | 10,346  |              |  |              | (710   | )     |  |   |        |  |  |   | 9,757   |       
|Interest (income) expense, net                                      |                                                    |                              | (3,495  | )            |   |               | 12,272  |              |  |              | 859    |       |  |   |        |  |  |   | 9,636   |       
|Loss from equity investees                                          |                                                    |                              | (20,656 | )            |   |               | (2,156  | )            |  |              |        |       |  | $ | 22,812 |  |  |   |         |       
|Other expense                                                       |                                                    |                              | 2,239   |              |   |               | 328     |              |  |              | 95     |       |  |   |        |  |  |   | 2,662   |       
|                                                                    |                                                    |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       
|Loss before income taxes                                            |                                                    |                              | (19,279 | )            |   |               | (4,410  | )            |  |              | (1,664 | )     |  |   | 22,812 |  |  |   | (2,541  | )     
|Income tax (benefit) provision                                      |                                                    |                              | (1,113  | )            |   |               | (875    | )            |  |              | 492    |       |  |   |        |  |  |   | (1,496  | )     
|                                                                    |                                                    |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       
|Loss before cumulative effect of change in
    accounting principle |                                                    |                              | (18,166 | )            |   |               | (3,535  | )            |  |              | (2,156 | )     |  |   | 22,812 |  |  |   | (1,045  | )     
|Cumulative effect of change in
    accounting principle             |                                                    |                              | 79      |              |   |               | 17,121  |              |  |              |        |       |  |   |        |  |  |   | 17,200  |       
|                                                                    |                                                    |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       
|Net loss                                                            |                                                    | $                            | (18,245 | )            |   | $             | (20,656 | )            |  | $            | (2,156 | )     |  | $ | 22,812 |  |  | $ | (18,245 | )     
|                                                                    |                                                    |                              |         |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       

|                               |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |        | 
|------------------------------ | -------------------------------------------------- | ---------------------------- | ------ | ------------ | - | ------------- | ------- | ------------ |  | ------------ | ------ | ----- |  | - | ------ |  |  | - | ------- | ------ | 
|                               |                                                    |                             
|                               |                                                    | Year ended December 31, 2001
|                               |                                                    |                             
|                               |                                                    |                              |        | Combined     |   | Combined      |         |             
|                               |                                                    |                              |        | Guarantor    |   | Non-Guarantor |         |             
|                               |                                                    | Parent                       |        | Subsidiaries |   | Subsidiaries  |         | Eliminations |  | Consolidated
|                               |                                                    |                              |        |              |   |               |         |              |  |             
|Net sales                      |                                                    |                              |        |              |   | $             | 160,810 |              |  | $            | 23,578 |       |  |   |        |  |  | $ | 184,388 |       
|Cost of sales                  |                                                    |                              |        |              |   |               | 122,070 |              |  |              | 22,339 |       |  |   |        |  |  |   | 144,409 |       
|                               |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       
|Gross profit                   |                                                    |                              |        |              |   |               | 38,740  |              |  |              | 1,239  |       |  |   |        |  |  |   | 39,979  |       
|Expenses:                      |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       
|                               | Selling, technical and
    administrative expenses |                              | $      | (545         | ) |               |         | 27,757       |  |              |        | 4,647 |  |   |        |  |  |   |         | 31,859 | 
|                               | Amortization of intangible assets                  |                              |        | 9            |   |               |         | 4,539        |  |              |        |       |  |   |        |  |  |   |         | 4,548  | 
|                               |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       
|Total expenses                 |                                                    |                              | (536   | )            |   |               | 32,296  |              |  |              | 4,647  |       |  |   |        |  |  |   | 36,407  |       
|                               |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       
|Income (loss) from operations  |                                                    |                              | 536    |              |   |               | 6,444   |              |  |              | (3,408 | )     |  |   |        |  |  |   | 3,572   |       
|Interest (income) expense, net |                                                    |                              | (3,686 | )            |   |               | 12,050  |              |  |              | 872    |       |  |   |        |  |  |   | 9,236   |       
|Loss from equity investees     |                                                    |                              | (7,520 | )            |   |               | (4,125  | )            |  |              |        |       |  | $ | 11,645 |  |  |   |         |       
|Other expense (income)         |                                                    |                              | 579    |              |   |               | (114    | )            |  |              | 65     |       |  |   |        |  |  |   | 530     |       
|                               |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       
|Loss before income taxes       |                                                    |                              | (3,877 | )            |   |               | (9,617  | )            |  |              | (4,345 | )     |  |   | 11,645 |  |  |   | (6,194  | )     
|Income tax provision (benefit) |                                                    |                              | 459    |              |   |               | (2,097  | )            |  |              | (220   | )     |  |   |        |  |  |   | (1,858  | )     
|                               |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       
|Net loss                       |                                                    | $                            | (4,336 | )            |   | $             | (7,520  | )            |  | $            | (4,125 | )     |  | $ | 11,645 |  |  | $ | (4,336  | )     
|                               |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |  |  |   |         |       

54



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                    |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |        | 
|----------------------------------- | -------------------------------------------------- | ---------------------------- | ------ | ------------ | - | ------------- | ------- | ------------ |  | ------------ | ------ | ----- |  | - | ------ | - |  | - | ------- | ------ | 
|                                    |                                                    |                             
|                                    |                                                    | Year ended December 31, 2000
|                                    |                                                    |                             
|                                    |                                                    |                              |        | Combined     |   | Combined      |         |             
|                                    |                                                    |                              |        | Guarantor    |   | Non-Guarantor |         |             
|                                    |                                                    | Parent                       |        | Subsidiaries |   | Subsidiaries  |         | Eliminations |  | Consolidated
|                                    |                                                    |                              |        |              |   |               |         |              |  |             
|Net sales                           |                                                    |                              |        |              |   | $             | 180,632 |              |  | $            | 21,697 |       |  |   |        |   |  | $ | 202,329 |       
|Cost of sales                       |                                                    | $                            | 285    |              |   |               | 129,265 |              |  |              | 17,837 |       |  |   |        |   |  |   | 147,387 |       
|                                    |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Gross profit                        |                                                    |                              | (285   | )            |   |               | 51,367  |              |  |              | 3,860  |       |  |   |        |   |  |   | 54,942  |       
|Expenses:                           |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|                                    | Selling, technical and
    administrative expenses |                              |        | (274         | ) |               |         | 27,696       |  |              |        | 3,896 |  |   |        |   |  |   |         | 31,318 | 
|                                    | Amortization of intangible assets                  |                              |        | 9            |   |               |         | 4,152        |  |              |        |       |  |   |        |   |  |   |         | 4,161  | 
|                                    |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Total expenses                      |                                                    |                              | (265   | )            |   |               | 31,848  |              |  |              | 3,896  |       |  |   |        |   |  |   | 35,479  |       
|                                    |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Income from operations              |                                                    |                              | (20    | )            |   |               | 19,519  |              |  |              | (36    | )     |  |   |        |   |  |   | 19,463  |       
|Interest (income) expense, net      |                                                    |                              | (3,803 | )            |   |               | 11,947  |              |  |              | 654    |       |  |   |        |   |  |   | 8,798   |       
|Income (loss) from equity investees |                                                    |                              | 2,898  |              |   |               | (1,504  | )            |  |              |        |       |  | $ | (1,394 | ) |  |   |         |       
|Other expense                       |                                                    |                              |        |              |   |               | 394     |              |  |              | 141    |       |  |   |        |   |  |   | 535     |       
|                                    |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Income (loss) before income taxes   |                                                    |                              | 6,681  |              |   |               | 5,674   |              |  |              | (831   | )     |  |   | (1,394 | ) |  |   | 10,130  |       
|Income taxes                        |                                                    |                              | 911    |              |   |               | 2,776   |              |  |              | 673    |       |  |   |        |   |  |   | 4,360   |       
|                                    |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       
|Net income (loss)                   |                                                    | $                            | 5,770  |              |   | $             | 2,898   |              |  | $            | (1,504 | )     |  | $ | (1,394 | ) |  | $ | 5,770   |       
|                                    |                                                    |                              |        |              |   |               |         |              |  |              |        |       |  |   |        |   |  |   |         |       

|                                                         |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |         |  
|-------------------------------------------------------- | ------------------------------------------------------ | ---------------------------- | ------- | ------------ | - | ------------- | ------ | ------------ | - | ------------ | ------ | ------ | - |  |  |  |  | - | ------- | ------- | -
|                                                         |                                                        |                             
|                                                         |                                                        | Year ended December 31, 2002
|                                                         |                                                        |                             
|                                                         |                                                        |                              |         | Combined     |   | Combined      |        |             
|                                                         |                                                        |                              |         | Guarantor    |   | Non-Guarantor |        |             
|                                                         |                                                        | Parent                       |         | Subsidiaries |   | Subsidiaries  |        | Eliminations |   | Consolidated
|                                                         |                                                        |                              |         |              |   |               |        |              |   |             
|Net cash (used in) provided by operating
    activities  |                                                        | $                            | (14,685 | )            |   | $             | 10,284 |              |   | $            | 1,662  |        |   |  |  |  |  | $ | (2,739  | )      
|Cash flows from investing activities:                    |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|                                                         | Purchases of property, plant and equipment             |                              |         |              |   |               |        | (9,020       | ) |              |        | (2,437 | ) |  |  |  |  |   |         | (11,457 | )
|                                                         |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|Net cash used in investing activities                    |                                                        |                              |         |              |   |               | (9,020 | )            |   |              | (2,437 | )      |   |  |  |  |  |   | (11,457 | )      
|Cash flows from financing activities:                    |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|                                                         | Proceeds from long-term debt                           |                              |         | 53,160       |   |               |        | 428          |   |              |        | 435    |   |  |  |  |  |   |         | 54,023  |  
|                                                         | Payments on long-term debt                             |                              |         | (45,825      | ) |               |        | (1,588       | ) |              |        | (202   | ) |  |  |  |  |   |         | (47,615 | )
|                                                         | Pay off of Term Loan and Revolving
    Credit Facility |                              |         | (29,784      | ) |               |        |              |   |              |        |        |   |  |  |  |  |   |         | (29,784 | )
|                                                         | Proceeds from Bank Facility                            |                              |         | 52,165       |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         | 52,165  |  
|                                                         | Payments on Bank Facility                              |                              |         | (15,838      | ) |               |        |              |   |              |        |        |   |  |  |  |  |   |         | (15,838 | )
|                                                         | Payments of preferred stock dividends                  |                              |         | (150         | ) |               |        |              |   |              |        |        |   |  |  |  |  |   |         | (150    | )
|                                                         |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|Net cash provided by (used in)
    financing activities  |                                                        |                              | 13,728  |              |   |               | (1,160 | )            |   |              | 233    |        |   |  |  |  |  |   | 12,801  |        
|                                                         | Effect of exchange rate changes on cash                |                              |         |              |   |               |        |              |   |              |        | 13     |   |  |  |  |  |   |         | 13      |  
|                                                         |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|Net (decrease) increase in cash and
    cash equivalents |                                                        |                              | (957    | )            |   |               | 104    |              |   |              | (529   | )      |   |  |  |  |  |   | (1,382  | )      
|Cash and cash equivalents, at beginning
    of period    |                                                        |                              | 1,073   |              |   |               | 247    |              |   |              | 1,764  |        |   |  |  |  |  |   | 3,084   |        
|                                                         |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|Cash and cash equivalents, at end of period              |                                                        | $                            | 116     |              |   | $             | 351    |              |   | $            | 1,235  |        |   |  |  |  |  | $ | 1,702   |        
|                                                         |                                                        |                              |         |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        

55



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

|                                                         |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |         |  
|-------------------------------------------------------- | ------------------------------------------ | ---------------------------- | ------ | ------------ | - | ------------- | ------ | ------------ | - | ------------ | ------ | ------ | - |  |  |  |  | - | ------ | ------- | -
|                                                         |                                            |                             
|                                                         |                                            | Year ended December 31, 2001
|                                                         |                                            |                             
|                                                         |                                            |                              |        | Combined     |   | Combined      |        |             
|                                                         |                                            |                              |        | Guarantor    |   | Non-Guarantor |        |             
|                                                         |                                            | Parent                       |        | Subsidiaries |   | Subsidiaries  |        | Eliminations |   | Consolidated
|                                                         |                                            |                              |        |              |   |               |        |              |   |             
|Net cash provided by (used in)
    operating activities  |                                            | $                            | 8,865  |              |   | $             | 7,445  |              |   | $            | (1,840 | )      |   |  |  |  |  | $ | 14,470 |        
|Cash flows from investing activities:                    |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|                                                         | Purchases of property, plant and equipment |                              |        |              |   |               |        | (7,183       | ) |              |        | (1,913 | ) |  |  |  |  |   |        | (9,096  | )
|                                                         |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Net cash used in investing activities                    |                                            |                              |        |              |   |               | (7,183 | )            |   |              | (1,913 | )      |   |  |  |  |  |   | (9,096 | )      
|Cash flows from financing activities:                    |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|                                                         | Proceeds from long-term debt               |                              |        | 35,820       |   |               |        | 1,126        |   |              |        | 3,511  |   |  |  |  |  |   |        | 40,457  |  
|                                                         | Payments on long-term debt                 |                              |        | (44,015      | ) |               |        | (2,168       | ) |              |        | (337   | ) |  |  |  |  |   |        | (46,520 | )
|                                                         | Payment of preferred stock dividends       |                              |        | (150         | ) |               |        |              |   |              |        |        |   |  |  |  |  |   |        | (150    | )
|                                                         |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Net cash (used in) provided by
    financing activities  |                                            |                              | (8,345 | )            |   |               | (1,042 | )            |   |              | 3,174  |        |   |  |  |  |  |   | (6,213 | )      
|                                                         | Effect of exchange rate changes on cash    |                              |        |              |   |               |        |              |   |              |        | (87    | ) |  |  |  |  |   |        | (87     | )
|                                                         |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Net increase (decrease) in cash and
    cash equivalents |                                            |                              | 520    |              |   |               | (780   | )            |   |              | (666   | )      |   |  |  |  |  |   | (926   | )      
|Cash and cash equivalents, at beginning
    of period    |                                            |                              | 553    |              |   |               | 1,027  |              |   |              | 2,430  |        |   |  |  |  |  |   | 4,010  |        
|                                                         |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        
|Cash and cash equivalents, at end of period              |                                            | $                            | 1,073  |              |   | $             | 247    |              |   | $            | 1,764  |        |   |  |  |  |  | $ | 3,084  |        
|                                                         |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |        |        

|                                                         |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |         |  
|-------------------------------------------------------- | ------------------------------------------ | ---------------------------- | ------ | ------------ | - | ------------- | ------ | ------------ | - | ------------ | ------ | ------ | - |  |  |  |  | - | ------- | ------- | -
|                                                         |                                            |                             
|                                                         |                                            | Year ended December 31, 2000
|                                                         |                                            |                             
|                                                         |                                            |                              |        | Combined     |   | Combined      |        |             
|                                                         |                                            |                              |        | Guarantor    |   | Non-Guarantor |        |             
|                                                         |                                            | Parent                       |        | Subsidiaries |   | Subsidiaries  |        | Eliminations |   | Consolidated
|                                                         |                                            |                              |        |              |   |               |        |              |   |             
|Net cash provided by operating activities                |                                            | $                            | 7,330  |              |   | $             | 9,976  |              |   | $            | 4,258  |        |   |  |  |  |  | $ | 21,564  |        
|Cash flows from investing activities:                    |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|                                                         | Business acquisitions                      |                              |        | (6,510       | ) |               |        |              |   |              |        |        |   |  |  |  |  |   |         | (6,510  | )
|                                                         | Purchases of property, plant and equipment |                              |        |              |   |               |        | (7,747       | ) |              |        | (2,742 | ) |  |  |  |  |   |         | (10,489 | )
|                                                         | Proceeds from sale of assets               |                              |        |              |   |               |        | 69           |   |              |        |        |   |  |  |  |  |   |         | 69      |  
|                                                         |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|Net cash used in investing activities                    |                                            |                              | (6,510 | )            |   |               | (7,678 | )            |   |              | (2,742 | )      |   |  |  |  |  |   | (16,930 | )      
|Cash flows from financing activities:                    |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|                                                         | Payments on short-term debt                |                              |        |              |   |               |        |              |   |              |        | (808   | ) |  |  |  |  |   |         | (808    | )
|                                                         | Proceeds from long-term debt               |                              |        | 29,443       |   |               |        | 774          |   |              |        |        |   |  |  |  |  |   |         | 30,217  |  
|                                                         | Payments on long-term debt                 |                              |        | (31,249      | ) |               |        | (2,238       | ) |              |        | (399   | ) |  |  |  |  |   |         | (33,886 | )
|                                                         | Payment of preferred stock dividends       |                              |        | (152         | ) |               |        |              |   |              |        |        |   |  |  |  |  |   |         | (152    | )
|                                                         |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|Net cash used in financing activities                    |                                            |                              | (1,958 | )            |   |               | (1,464 | )            |   |              | (1,207 | )      |   |  |  |  |  |   | (4,629  | )      
|                                                         | Effect of exchange rate changes on cash    |                              |        |              |   |               |        |              |   |              |        | 12     |   |  |  |  |  |   |         | 12      |  
|                                                         |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|Net (decrease) increase in cash and
    cash equivalents |                                            |                              | (1,138 | )            |   |               | 834    |              |   |              | 321    |        |   |  |  |  |  |   | 17      |        
|Cash and cash equivalents, at beginning
    of period    |                                            |                              | 1,691  |              |   |               | 193    |              |   |              | 2,109  |        |   |  |  |  |  |   | 3,993   |        
|                                                         |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        
|Cash and cash equivalents, at end of period              |                                            | $                            | 553    |              |   | $             | 1,027  |              |   | $            | 2,430  |        |   |  |  |  |  | $ | 4,010   |        
|                                                         |                                            |                              |        |              |   |               |        |              |   |              |        |        |   |  |  |  |  |   |         |        

56



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##### Table of Contents



HAWK CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

O. Summary of Quarterly Results of Operations
(Unaudited)

|                                                                                 |                                                                                          |           |         |          |   |               |        |              |  |           |        |          |   |               |        |              |   |   |        |     |  |   |        |      |   |   |        |      |   |   |        |      |  
|-------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | --------- | ------- | -------- | - | ------------- | ------ | ------------ |  | --------- | ------ | -------- | - | ------------- | ------ | ------------ | - | - | ------ | --- |  | - | ------ | ---- | - | - | ------ | ---- | - | - | ------ | ---- | -
|                                                                                 |                                                                                          | March 31, |         | June 30, |   | September 30, |        | December 31, |  | March 31, |        | June 30, |   | September 30, |        | December 31,
|                                                                                 |                                                                                          | 2002      |         | 2002     |   | 2002          |        | 2002         |  | 2001      |        | 2001     |   | 2001          |        | 2001        
|                                                                                 |                                                                                          |           |         |          |   |               |        |              |  |           |        |          |   |               |        |             
|Net sales                                                                        |                                                                                          | $         | 49,804  |          |   | $             | 50,349 |              |  | $         | 49,447 |          |   | $             | 47,686 |              |   | $ | 53,781 |     |  | $ | 47,419 |      |   | $ | 42,208 |      |   | $ | 40,980 |     
|Gross profit                                                                     |                                                                                          |           | 10,779  |          |   |               | 11,626 |              |  |           | 10,247 |          |   |               | 11,052 |              |   |   | 13,820 |     |  |   | 10,334 |      |   |   | 8,704  |      |   |   | 7,121  |     
|Net (loss) income before cumulative effect of
    change in accounting principle |                                                                                          |           | (600    | )        |   |               | 239    |              |  |           | (277   | )        |   |               | (407   | )            |   |   | 857    |     |  |   | (1,419 | )    |   |   | (953   | )    |   |   | (2,821 | )   
|Cumulative effect of change in accounting
    principle, net of tax              |                                                                                          |           | (17,200 | )        |   |               |        |              |  |           |        |          |   |               |        |              |   |   |        |     |  |   |        |      |   |   |        |      |   |   |        |     
|                                                                                 |                                                                                          |           |         |          |   |               |        |              |  |           |        |          |   |               |        |              |   |   |        |     |  |   |        |      |   |   |        |      |   |   |        |     
|Net income (loss)(1)                                                             |                                                                                          | $         | (17,800 | )        |   | $             | 239    |              |  | $         | (277   | )        |   | $             | (407   | )            |   | $ | 857    |     |  | $ | (1,419 | )    |   | $ | (953   | )    |   | $ | (2,821 | )   
|                                                                                 |                                                                                          |           |         |          |   |               |        |              |  |           |        |          |   |               |        |              |   |   |        |     |  |   |        |      |   |   |        |      |   |   |        |     
|Basic and Diluted (loss) earnings per
    share:(1)                              |                                                                                          |           |         |          |   |               |        |              |  |           |        |          |   |               |        |              |   |   |        |     |  |   |        |      |   |   |        |      |   |   |        |     
|                                                                                 | (Loss) earnings per share before cumulative
    effect of change in accounting principle |           | $       | (.07     | ) |               | $      | .02          |  |           | $      | (.04     | ) |               | $      | (.05         | ) |   | $      | .10 |  |   | $      | (.17 | ) |   | $      | (.12 | ) |   | $      | (.33 | )
|                                                                                 | Cumulative effect of change in accounting
    principle, net of tax                      |           |         | (2.01    | ) |               |        |              |  |           |        |          |   |               |        |              |   |   |        |     |  |   |        |      |   |   |        |      |   |   |        |      |  
|                                                                                 |                                                                                          |           |         |          |   |               |        |              |  |           |        |          |   |               |        |              |   |   |        |     |  |   |        |      |   |   |        |      |   |   |        |     
|                                                                                 | Net (loss) earnings per basic and diluted
    share                                      |           | $       | (2.08    | ) |               | $      | .02          |  |           | $      | (.04     | ) |               | $      | (.05         | ) |   | $      | .10 |  |   | $      | (.17 | ) |   | $      | (.12 | ) |   | $      | (.33 | )
|                                                                                 |                                                                                          |           |         |          |   |               |        |              |  |           |        |          |   |               |        |              |   |   |        |     |  |   |        |      |   |   |        |      |   |   |        |     



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In accordance with the non-amortization
    provisions of SFAS 142 (see Note B), the Company eliminated the
    amortization of goodwill in 2002. The pro forma effect of
    applying the non-amortization of provisions of SFAS 142 for the
    each of the quarters ended 2001 would have been to decrease
    amortization expense by approximately $770 for the quarter ended
    March 31, 2001; $770 for the quarter ended June 30,
    2001; $820 for the quarter ended September 30, 2001; and
    $820 for the quarter ended December 31, 2001, and would
    have resulted in basic and diluted earnings (loss) per
    share of $.17; $(.10); $(.04) and $(.26), for each respective
    quarter.

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

None.




Part III






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

The information required by Item 10 is
incorporated herein by reference to the Registrants
definitive Proxy Statement relating to its 2003 Annual Meeting
of Stockholders (the Proxy Statement), under the
captions Board of Directors, Executive
Officers and Section 16(a) Beneficial Ownership
Reporting Compliance. This Proxy Statement will be filed
with the SEC prior to April 30, 2003.






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

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






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

Equity Compensation Plan Information

|                                                               |  |                        |           |                        |  |                       |      |  |  |  |         | 
|-------------------------------------------------------------- |  | ---------------------- | --------- | ---------------------- |  | --------------------- | ---- |  |  |  | ------- | 
|                                                               |  |                        |           |                        |  | Number of securities 
|                                                               |  |                        |           |                        |  | remaining available  
|                                                               |  |                        |           |                        |  | for future issuance  
|                                                               |  | Number of securities   |           |                        |  | under equity         
|                                                               |  | to be issued upon      |           | Weighted-average       |  | compensation plans   
|                                                               |  | exercise of            |           | exercise price of      |  | (excluding securities
|                                                               |  | outstanding options,   |           | outstanding options,   |  | reflected in         
|Plan category                                                  |  | warrants and rights(a) |           | warrants and rights(b) |  | column(a))(c)        
|                                                               |  |                        |           |                        |  |                      
|Equity compensation plans approved by security
    holders     |  |                        | 1,217,729 |                        |  | $                     | 6.62 |  |  |  | 182,271 | 
|Equity compensation plans not approved by
    security holders |  |                        | 0         |                        |  |                       | 0    |  |  |  | 0       | 
|Total                                                          |  |                        | 1,217,729 |                        |  | $                     | 6.62 |  |  |  | 182,271 | 

For additional information regarding our equity
compensation plans, see Note G  Employee
Stock Option Plan in the accompanying consolidated
financial statements beginning on page 27 of this
Form 10-K.

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






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

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






|         |                        
|-------- | -----------------------
|ITEM 14. | CONTROLS AND PROCEDURES

Within the 90 days prior to the filing date
of this report, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures. The
evaluation was carried out under the supervision of and with the
participation of our management, including our Chief Executive
Officer, Vice President  Finance and Vice
President  Controller. Based on this evaluation, the
Chief Executive Officer, Vice President  Finance and
Vice President  Controller concluded that our
disclosure controls and procedures are effective in timely
alerting them to material information relating to Hawk,
including our consolidated subsidiaries, required to be included
in reports we file with or submit to the Securities and Exchange
Commission under the Securities

58



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Exchange Act of 1934. There have been no
significant changes in our internal controls or in other factors
that could significantly affect our internal controls subsequent
to the date of the evaluation.





Part IV






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

(a) (1) Financial Statements

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



| |       |                                                                                                         
| | ----- | --------------------------------------------------------------------------------------------------------
| | (i)   | Consolidated Balance Sheets at December 31,
    2002 and 2001                                           
|
| | (ii)  | Consolidated Statements of Operations for the
    years ended December 31, 2002, 2001 and 2000          
|
| | (iii) | Consolidated Statements of Shareholders
    Equity for the years ended December 31, 2002, 2001 and 2000
|
| | (iv)  | Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, 2001 and 2000          
|
| | (v)   | Notes to Consolidated Financial Statements for
    the years ended December 31, 2002, 2001 and 2000     

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

(b) Reports on Form 8-K:

We have filed five reports on Form 8-K since
September 30, 2002:

A report dated October 2, 2002 reporting the
extension of the consent payment deadline in connection with our
offer to exchange new 12% Senior Notes due 2006 for our
outstanding 10 1/4% Senior Notes due 2003 and our related
solicitation of consents to amend the indenture for the
10 1/4% Senior Notes due 2003.

A report dated October 14, 2002 reporting
that on October 14, 2002, we filed a press release
announcing, in connection with our offer to exchange new 12%
Senior Notes due 2006 for our outstanding 10 1/4% Senior
Notes due 2003 and our related solicitation of consents to amend
the indenture for the 10 1/4% Senior Notes due 2003, that
we have received valid and unrevoked consents representing a
majority in aggregate principal amount of the 10 1/4%
Senior Notes due 2003. In addition, we announced the extension
of the exchange offer and related consent payment deadline. We
also issued press releases on October 16, 17 and 18, 2002,
further extending the exchange offer and consent payment
deadline. Later in the day on October 18, 2002, we issued
another press release announcing the completion of the exchange
offer and our acceptance of $64,417,000 or approximately 99% in
principal amount of its 10 1/4% Senior Notes due 2003. We
further announced that, concurrently with our acceptance of the
10 1/4% Senior Notes due 2003, we completed its new
$53.0 million credit facility.

A report dated December 3, 2002, reporting
information relating to our financial presentation to investors
and financial analysts.

A report dated January 3, 2003, reporting
information relating to our announcement that the New York Stock
Exchange accepted our proposed plan for complying with all of
the NYSEs continued listing standards.

A report dated February 11, 2003, reporting
our financial results for the 4th quarter of 2002 and for the
full year of 2002.

(c) Exhibits:

| |     |  |  |                                                                                                                                                                                                                                                        
| | --- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1 |  |  | Form of the Companys Second Amended and
    Restated Certificate of Incorporation (Incorporated by reference
    to the Companys Registration Statement on Form S-1 as
    filed with the Securities and Exchange Commission (Reg.
    No.333-40535))

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| |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ---- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.2  |  |  | The Companys Amended and Restated By-laws
    (Incorporated by reference to the Companys Current Report
    on Form 8-K as filed with the Securities and Exchange
    Commission (Reg. No. 001-13797))                                                                                                                                                                                                                                                                                                                                                    
| | 4.1  |  |  | Form of Rights Agreement between the Company and
    Continental Stock Transfer & Trust Company, as Rights Agent
    (Incorporated by reference to the Companys Registration
    Statement on Form S-1 as filed with the Securities and
    Exchange Commission (Reg. No. 333-40535))                                                                                                                                                                                                                                                                      
| | 4.2  |  |  | Indenture, dated as of November 27, 1996, by
    and among the Company, Friction Products Co., Hawk Brake, Inc.,
    Logan Metal Stampings, Inc., Helsel, Inc., S.K. Wellman
    Holdings, Inc., S.K. Wellman Corp., Wellman Friction Products
    U.K. Corp., Hutchinson Products Corporation, and Bank One Trust
    Company, NA, as Trustee (Incorporated by reference to the
    Companys Registration Statement on Form S-4 as filed
    with the Securities and Exchange Commission (Reg.
    No. 333-18433))                                        
| | 4.3  |  |  | Form of 10 1/4% Senior Note due 2003
    (Incorporated by reference to the Companys Registration
    Statement on Form S-4 as filed with the Securities and
    Exchange Commission(Reg. No. 333-18433))                                                                                                                                                                                                                                                                                                                                                   
| | 4.4  |  |  | Form of Series B 10 1/4% Senior Note
    due 2003 (Incorporated by reference to the Companys
    Registration Statement on Form S-4 as filed with the
    Securities and Exchange Commission(Reg. No. 333-18433))                                                                                                                                                                                                                                                                                                                                          
| | 4.5  |  |  | 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))                                                                                          
| | 4.6  |  |  | 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))                              
| | 4.7  |  |  | Supplemental Indenture among the Company, certain
    of its domestic subsidiaries from time to time a party thereto,
    as Guarantors, and HSBC Bank USA, as successor trustee to Bank
    One Trust Company, N.A., relating to the Companys
    Series A 10.25% Senior Notes due December 1, 2003, and
    Series B 10.25% Senior Notes due December 1, 2002
    (incorporated herein by reference to Amendment No. 1 to the
    Registration Statement on Form S-4 (Registration Number
    333-90556), as filed with the Commission on August 1, 2002)
| | 4.8* |  |  | Indenture among the Company, certain of its
    domestic subsidiaries from time to time a party thereto, as
    Guarantors, and HSBC Bank USA, as trustee, relating to the
    Companys 12% Senior Notes due 2006                                                                                                                                                                                                                                                                                                                                          
| | 10.1 |  |  | Employment Agreement, dated as of
    November 1, 1996, between the Company and Norman C. Harbert
    (Incorporated by reference to the Companys Registration
    Statement on Form S-4 as filed with the Securities and
    Exchange Commission (Reg. No. 333-18433))                                                                                                                                                                                                                                                                                     
| | 10.2 |  |  | Form of Amended and Restated Wage Continuation
    Agreement between the Company and Norman C. Harbert
    (Incorporated by reference to the Companys Registration
    Statement on Form S-1 as filed with the Securities and
    Exchange Commission (Reg. No. 333-40535))                                                                                                                                                                                                                                                                                
| | 10.3 |  |  | Employment Agreement, dated as of
    November 1, 1996, between the Company and Ronald E.
    Weinberg (Incorporated by reference to the Companys
    Registration Statement on Form S-4 as filed with the
    Securities and Exchange Commission (Reg. No. 333-18433))                                                                                                                                                                                                                                                                                    
| | 10.4 |  |  | Amendment No. 1 to the Employment Agreement,
    dated as of October 24, 2000, between the Company and
    Norman C. Harbert (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    March 31, 2001 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                                          
| | 10.5 |  |  | Amendment No. 1 to the Employment Agreement,
    dated as of October 24, 2000, between the Company and
    Ronald E. Weinberg (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    March 31, 2001 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                                         
| | 10.6 |  |  | Amended and Restated Employment Agreement, dated
    as of December 31, 2001, by and among the Company, Friction
    Products Co. and Ronald E. Weinberg                                                                                                                                                                                                                                                                                                                                                                                                    

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| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.7  |  |  | Amended and Restated Employment Agreement, dated
    as of December 31, 2001, by and among the Company, Friction
    Products Co. and Norman C. Harbert                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 10.8  |  |  | Amended and Restated Wage Continuation Agreement,
    dated as of December 31, 2001, by and among the Company,
    Friction Products Co. and Norman C. Harbert                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 10.9  |  |  | Consultant Agreement, dated as of
    December 31, 2001, by and among the Company, Friction
    Products Co. and Norman C. Harbert                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 10.10 |  |  | Letter agreement, dated as of March 26,
    1998, amending the Employment Agreement and the Consulting
    Agreement, each dated July 1, 1994, between Helsel, Inc.
    and Jess F. Helsel (Incorporated by reference to the
    Companys Form 10-K for the year ended December 31,
    1998 as filed with the Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 10.11 |  |  | 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))                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 10.12 |  |  | 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))                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.13 |  |  | Credit Agreement, dated as of May 1, 1998,
    among the Company and KeyBank National Association, as Swing
    Line Lender, Administrative Agent and as Syndication Agent
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended June 30, 1998 as filed with
    the Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 10.14 |  |  | Subsidiary Guaranty, dated as of May 1,
    1998, among the subsidiaries of the Company, as guarantors, and
    KeyBank National Association, as Administrative Agent
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended June 30, 1998 as filed with
    the Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 10.15 |  |  | Amendment No. 1, dated as of
    November 22, 2000 to Credit Agreement among the Company and
    KeyBank National Association, as Lender, the Swing Line Lender,
    a Letter of Credit Issuer and as the Syndication Agent and the
    Administrative Agent                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 10.16 |  |  | 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))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 10.17 |  |  | Hawk Corporation 2000 Long Term Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 10.18 |  |  | Hawk Corporation Annual Incentive Compensation
    Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 10.19 |  |  | Amendment No. 2 to Credit Agreement, dated
    as of July 31, 2001, by and among the Company, the Lenders
    identified therein and KeyBank National Association, a national
    banking association, as the Administrative Agent under the
    Credit Agreement (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    June 30, 2001 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                                                                                                                                 
| | 10.20 |  |  | Form of Security Agreement, dated as of
    August 10, 2001, by and between KeyBank National
    Association, the Company and each of the following subsidiaries
    of the Company: Allegheny Powder Metallurgy, Inc., Clearfield
    Powdered Metals, Inc., Friction Products Co., Hawk Brake, Inc.,
    Hawk MIM, Inc., Helsel, Inc., Hawk Motors, Inc., Logan Metal
    Stampings, Inc., Net Shape Technologies LLC, Quarter Master
    Industries, Inc., S.K. Wellman Corp., S.K. Wellman Holdings,
    Inc., Sinterloy Corporation, Tex Racing Enterprises, Inc. and
    Wellman Friction Products U.K. Corp (Incorporated by reference
    to the Companys Form 10-Q for the quarterly period
    ended June 30, 2001 as filed with the Securities and
    Exchange Commission)

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| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ----- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.21 |  |  | Form of Pledge Agreement, dated as of
    August 10, 2001, by and between KeyBank National
    Association, the Company and each of the following subsidiaries
    of the Company: Allegheny Powder Metallurgy, Inc., Clearfield
    Powdered Metals, Inc., Friction Products Co., Hawk Brake, Inc.,
    Hawk MIM, Inc., Helsel, Inc., Hawk Motors, Inc., Logan Metal
    Stampings, Inc., Net Shape Technologies LLC, Quarter Master
    Industries, Inc., S.K. Wellman Corp., S.K. Wellman Holdings,
    Inc., Sinterloy Corporation, Tex Racing Enterprises, Inc. and
    Wellman Friction Products U.K. Corp (Incorporated by reference
    to the Companys Form 10-Q for the quarterly period
    ended June 30, 2001 as filed with the Securities and
    Exchange Commission)                
| | 10.22 |  |  | 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)                         
| | 10.23 |  |  | Form of Guaranty Agreement of Payment of
    Obligations, dated as of August 10, 2001, by and between
    KeyBank National Association and each of the following
    subsidiaries of the Company: Allegheny Powder Metallurgy, Inc.,
    Clearfield Powdered Metals, Inc., Friction Products Co., Hawk
    Brake, Inc., Hawk MIM, Inc., Helsel, Inc., Hawk Motors, Inc.,
    Logan Metal Stampings, Inc., Net Shape Technologies LLC, Quarter
    Master Industries, Inc., S.K. Wellman Corp., S.K. Wellman
    Holdings, Inc., Sinterloy Corporation, Tex Racing Enterprises,
    Inc. and Wellman Friction Products U.K. Corp. (Incorporated by
    reference to the Companys Form 10-Q for the quarterly
    period ended June 30, 2001 as filed with the Securities and
    Exchange Commission)
| | 10.24 |  |  | Form of Open Ended Ohio Mortgage, executed as of
    August 10, 2001, in favor of KeyBank National Association
    by each of the following subsidiaries of the Company: Friction
    Products Co., Logan Metal Stampings, Inc. and S.K. Wellman Corp.
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended June 30, 2001 as filed with
    the Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                          
| | 10.25 |  |  | Form of Open Ended Pennsylvania Mortgage,
    executed as of August 10, 2001, in favor of KeyBank
    National Association by each of the following subsidiaries of
    the Company: Allegheny Powder Metallurgy, Inc. and Clearfield
    Powdered Metals, Inc. (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    June 30, 2001 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                                                                                                                                                 
| | 10.26 |  |  | Form of Mortgage, Assignment of Leases and Rents
    and Fixture Filing, executed as of August 10, 2001, in
    favor of KeyBank National Association by each of the following
    subsidiaries of the Company: Hawk Motors, Inc. and Helsel, Inc.
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended June 30, 2001 as filed with
    the Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                              
| | 10.27 |  |  | Common Stock Selling Plan of Thomas A. Gilbride
    pursuant Rule 10b5-1 of the Securities Exchange Act of
    1934, as amended, effective as of June 6, 2001
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended June 30, 2001 as filed with
    the Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.28 |  |  | Amendment No. 3 to Credit Agreement, dated
    as of November 9, 2001, by and among the Company, the
    Lenders identified therein and KeyBank National Association, a
    national banking association, as the Administrative Agent under
    the Credit Agreement (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    September 30, 2001 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                                                                                                                                                                                                       

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| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.29 |  |  | Form of Pledge Agreement, dated as of
    November 9, 2001, by and between KeyBank National
    Association, the Company and each of the following subsidiaries
    of the Company: Allegheny Powder Metallurgy, Inc., Clearfield
    Powdered Metals, Inc., Friction Products Co., Hawk Brake, Inc.,
    Hawk MIM, Inc., Helsel, Inc., Hawk Motors, Inc., Logan Metal
    Stampings, Inc., Net Shape Technologies LLC, Quarter Master
    Industries, Inc., S.K. Wellman Corp., S.K. Wellman Holdings,
    Inc., Sinterloy Corporation, Tex Racing Enterprises, Inc. and
    Wellman Friction Products U.K. Corp (Incorporated by reference
    to the Companys Form 10-Q for the quarterly period
    ended September 30, 2001 as filed with the Securities and
    Exchange Commission)
| | 10.30 |  |  | Amendment No. 4 to Credit Agreement, dated
    as of March 25, 2002, by and among the Company, the Lenders
    identified therein and KeyBank National Association, a national
    banking association, as the Administrative Agent under the
    Credit Agreement (Incorporated by reference to the
    Companys Form 10-K for the period ended
    December 31, 2001 as filed with the Securities and Exchange
    Commission)                                                                                                                                                                                                                                                                                                                                                          
| | 10.31 |  |  | Credit Agreement, dated as of October 18,
    2002, among the Company, and certain of its domestic
    subsidiaries from time to time party thereto, as Borrowers and
    Guarantors, the Lending Institutions party thereto, as Lenders,
    J.P. Morgan Business Credit Corp., as Advisor, JPMorgan Chase
    Bank, as Administrative Agent and Collateral Agent, Issuing Bank
    and Arranger, PNC Bank, National Association as a Documentation
    Agent and Fleet Capital Corp. as a Documentation Agent
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended September 30, 2002 as filed
    with the Securities and Exchange Commission)                                                                                                  
| | 10.32 |  |  | Security and Pledge Agreement, dated as of
    October 18, 2002, among the Company, and its certain
    Subsidiaries as Grantors, the other Grantors from time to time
    party thereto, and JPMorgan Chase Bank, as Administrative and
    Collateral Agent (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    September 30, 2002 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                                                                                                                                                                                                    
| | 10.33 |  |  | Form of Ohio Open Ended Mortgage, Assignment of
    Leases and Rents and Fixture Filing, each dated as of
    October 18, 2002, issued by each of Friction Products Co.,
    Logan Metal Stampings, Inc. and S.K. Wellman Corp. and in Favor
    of JPMorgan Chase Bank (Incorporated by reference to the
    Companys Form 10-Q for the quarterly period ended
    September 30, 2002 as filed with the Securities and
    Exchange Commission)                                                                                                                                                                                                                                                                                                                                          
| | 10.34 |  |  | Form of Pennsylvania Open Ended Mortgage Securing
    Future and/or Revolving Advances up to a Maximum Principal
    Amount of Fifty Three Million Dollars ($53,000,000) plus accrued
    interest and other Indebtedness as described in 42 PA.
    C.S.A.ss.8143, dated as of October 18, 2002, issued by
    Allegheny Clearfield, Inc. in favor of JPMorgan Chase Bank
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended September 30, 2002 as filed
    with the Securities and Exchange Commission)                                                                                                                                                                                                                                       
| | 10.35 |  |  | Form of Illinois Mortgage, Assignment of Leases
    and Rents and Fixture Filing, dated as of October 18, 2002,
    issued by Hawk Motors, Inc. in favor of JPMorgan Chase Bank
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended September 30, 2002 as filed
    with the Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 10.36 |  |  | Form of Indiana Mortgage, Assignment of Leases
    and Rents and Fixture Filing, dated as of October 18, 2002,
    issued by Helsel, Inc. in favor of JPMorgan Chase Bank
    (Incorporated by reference to the Companys Form 10-Q
    for the quarterly period ended September 30, 2002 as filed
    with the Securities and Exchange Commission)                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 21.1* |  |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 23.1* |  |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 99.1* |  |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 99.2* |  |  | Certification 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

63



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##### Table of Contents






SIGNATURES

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



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



| |     |                       
| | --- | ----------------------
| | BY: | /s/ THOMAS A. GILBRIDE

| |                                       
| | --------------------------------------
| |                                       
| | Thomas A. Gilbride                    
| | Vice President  Finance and Treasurer

Date: February 24, 2003

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

|                                         |  |                                                                                                   |  |                  
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | -----------------
|SIGNATURE                                |  | TITLE                                                                                             |  | DATE             
|                                         |  |                                                                                                   |  |                  
|                                        
|/s/ RONALD E. WEINBERGRonald E. Weinberg |  | Chairman of the Board, Chief Executive Officer
    and Director
    (principal executive officer) |  | February 24, 2003
|                                        
|/s/ NORMAN C. HARBERTNorman C. Harbert   |  | Senior Chairman of the Board, Founder and Director                                                |  | February 24, 2003
|                                        
|/s/ JEFFERY H. BERLINJeffery H. Berlin   |  | President, Chief Operating Officer and Director                                                   |  | February 24, 2003
|                                        
|/s/ THOMAS A. GILBRIDEThomas A. Gilbride |  | Vice President  Finance and
    Treasurer
    (principal financial accounting officer)           |  | February 24, 2003
|                                        
|/s/ BYRON S. KRANTZByron S. Krantz       |  | Secretary and Director                                                                            |  | February 24, 2003
|                                        
|/s/ PAUL R. BISHOPPaul R. Bishop         |  | Director                                                                                          |  | February 24, 2003
|                                        
|/s/ JACK KEMPJack Kemp                   |  | Director                                                                                          |  | February 24, 2003
|                                        
|/s/ DAN T. MOORE, IIIDan T. Moore, III   |  | Director                                                                                          |  | February 24, 2003
|                                        
|/s/ ANDREW T. BERLINAndrew T. Berlin     |  | Director                                                                                          |  | February 24, 2003

64



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##### Table of Contents






CERTIFICATION

I, Ronald E Weinberg, certify that:

1. I have reviewed this annual report on
Form 10-K of Hawk Corporation;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of
Hawk Corporation as of, and for, the periods presented in this
annual report;

4. Hawk Corporations other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for Hawk Corporation and we have:



| |                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to Hawk
    Corporation, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of Hawk
    Corporations disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                  

5. Hawk Corporations other certifying
officer and I have disclosed, based on our most recent
evaluation, to Hawk Corporations auditors and the audit
committee of Hawk Corporations board of directors:



| |                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect Hawk Corporations ability to record, process,
    summarize and report financial data and have identified for Hawk
    Corporations auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in Hawk Corporations internal controls; and                                                                                                                                                      

6. Hawk Corporations other certifying
officer and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: February 24, 2003

/s/  RONALD E. WEINBERG




Ronald E. Weinberg


Chairman of the Board and Chief Executive
Officer


(Principal Executive Officer)


65



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##### Table of Contents






CERTIFICATION

I, Thomas A. Gilbride, certify that:

1. I have reviewed this annual report on
Form 10-K of Hawk Corporation;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of
Hawk Corporation as of, and for, the periods presented in this
annual report;

4. Hawk Corporations other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for Hawk Corporation and we have:



| |                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to Hawk
    Corporation, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of Hawk
    Corporations disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                  

5. Hawk Corporations other certifying
officer and I have disclosed, based on our most recent
evaluation, to Hawk Corporations auditors and the audit
committee of Hawk Corporations board of directors:



| |                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect Hawk Corporations ability to record, process,
    summarize and report financial data and have identified for Hawk
    Corporations auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in Hawk Corporations internal controls; and                                                                                                                                                      

6. Hawk Corporations other certifying
officer and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: February 24, 2003

/s/  THOMAS A. GILBRIDE




Thomas A. Gilbride


Vice President  Finance and
Treasurer


(Principal Accounting Officer)


66