<PAGE>

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                             ----------------------

                                    FORM 10-Q

[X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934

                For the quarterly period ended September 30, 2004

                                       or

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

                        Commission file number: 33-29035

                             K & F Industries, Inc.
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

           Delaware                                     34-1614845
-------------------------------            ------------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

 600 Third Avenue, New York, New York                      10016
----------------------------------------                  ----------
(Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code (212) 297-0900

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 reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of November 1, 2004, there were 740,398 shares of common stock outstanding.

<PAGE>

                     K & F INDUSTRIES, INC. AND SUBSIDIARIES

                                    FORM 10-Q

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

                                      INDEX

<TABLE>
<CAPTION>
                                                                                      Page
                                                                                      ----
<S>                                                                                   <C>
Part  I. Consolidated Financial Information

      Item  1. Consolidated Financial Statements (Unaudited)

                  1)    Consolidated Balance Sheets as of September 30, 2004 and
                        December 31, 2003                                               3

                  b)    Consolidated Statements of Operations for the nine
                        months ended September 30, 2004 and 2003                        4

                  3)    Consolidated Statements of Operations for the three
                        months ended September 30, 2004 and 2003                        5

                  d)    Consolidated Statements of Cash Flows for the nine
                        months ended September 30, 2004 and 2003                        6

                  e)    Notes to Consolidated Financial Statements                      7

      Item  2. Management's Discussion and Analysis of Financial Condition and
               Results of Operations                                                   13

      Item  3. Quantitative and Qualitative Disclosures About Market Risk              18

      Item  4. Controls and Procedures                                                 18

Part  II. Other Information

      Item  6. Exhibits                                                                19

Signatures                                                                             20
</TABLE>

<PAGE>

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS

                     K & F INDUSTRIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                        September 30,     December 31,
                                                            2004             2003
                                                        -------------    -------------
<S>                                                     <C>              <C>
ASSETS:
Current Assets:
  Cash and cash equivalents                             $  69,961,000    $  24,464,000
  Accounts receivable, net                                 42,170,000       41,595,000
  Inventory                                                51,457,000       50,087,000
  Other current assets                                        869,000        1,527,000
  Income taxes receivable                                          --          851,000
                                                        -------------    -------------
Total current assets                                      164,457,000      118,524,000
                                                        -------------    -------------

Property, plant and equipment                             176,375,000      175,107,000
  Less, accumulated depreciation and amortization         116,046,000      111,527,000
                                                        -------------    -------------
                                                           60,329,000       63,580,000
                                                        -------------    -------------

Deferred charges, net of amortization                      56,506,000       54,232,000
Intangible assets, net of amortization                     15,317,000       16,238,000
Goodwill                                                  167,011,000      167,011,000
                                                        -------------    -------------
                                                        $ 463,620,000    $ 419,585,000
                                                        =============    =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current Liabilities:
  Accounts payable, trade                               $  14,695,000    $  15,029,000
  Interest payable                                         13,166,000        3,797,000
  Other current liabilities                                45,048,000       49,621,000
                                                        -------------    -------------
Total current liabilities                                  72,909,000       68,447,000
                                                        -------------    -------------

Pension liabilities                                        26,885,000       26,885,000
Deferred income taxes and other long-term liabilities      39,223,000       31,756,000
Postretirement benefit obligation other than pensions      83,871,000       84,468,000
9 1/4% senior subordinated notes due 2007                 145,000,000      145,000,000
9 5/8% senior subordinated notes due 2010                 250,000,000      250,000,000

Stockholders' Deficiency:
  Common stock, $.01 par value - authorized,
    1,000,000 shares; issued and
    outstanding, 740,398 shares                                 7,000            7,000
  Additional paid-in capital                             (263,259,000)    (263,259,000)
  Retained earnings                                       136,689,000      104,039,000
  Accumulated other comprehensive loss                    (27,705,000)     (27,758,000)
                                                        -------------    -------------
Total stockholders' deficiency                           (154,268,000)    (186,971,000)
                                                        -------------    -------------
                                                        $ 463,620,000    $ 419,585,000
                                                        =============    =============
</TABLE>

                 See notes to consolidated financial statements.

                                       3
<PAGE>

                     K & F INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                      Nine Months Ended
                                               ------------------------------
                                               September 30,    September 30,
                                                   2004             2003
                                               -------------    -------------
<S>                                            <C>              <C>
Sales                                          $ 257,497,000    $ 247,842,000
Cost of sales                                    147,863,000      145,149,000
                                               -------------    -------------
Gross margin                                     109,634,000      102,693,000
Independent research and development              10,226,000       11,321,000
Selling, general and administrative expenses      23,364,000       23,813,000
Amortization                                       3,552,000        3,174,000
                                               -------------    -------------
Operating income                                  72,492,000       64,385,000
Interest and investment income                       393,000          373,000
Interest expense                                 (29,588,000)     (32,864,000)
                                               -------------    -------------
Income before income taxes                        43,297,000       31,894,000
Income tax provision                             (10,647,000)      (8,356,000)
                                               -------------    -------------
Net income                                     $  32,650,000    $  23,538,000
                                               =============    =============
</TABLE>

                 See notes to consolidated financial statements.

                                       4
<PAGE>

                     K & F INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                   Three Months Ended
                                               -----------------------------
                                               September 30,   September 30,
                                                   2004            2003
                                               -------------   -------------
<S>                                            <C>             <C>
Sales                                          $ 90,757,000    $ 87,821,000
Cost of sales                                    50,101,000      49,139,000
                                               ------------    ------------
Gross margin                                     40,656,000      38,682,000
Independent research and development              3,441,000       3,963,000
Selling, general and administrative expenses      8,866,000       6,931,000
Amortization                                      1,212,000       1,075,000
                                               ------------    ------------
Operating income                                 27,137,000      26,713,000
Interest and investment income                      173,000         146,000
Interest expense                                 (9,864,000)    (10,930,000)
                                               ------------    ------------
Income before income taxes                       17,446,000      15,929,000
Income tax provision                             (2,371,000)     (3,740,000)
                                               ------------    ------------
Net income                                     $ 15,075,000    $ 12,189,000
                                               ============    ============
</TABLE>

                 See notes to consolidated financial statements.

                                       5
<PAGE>

                     K & F INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                        Nine Months Ended
                                                   -----------------------------
                                                   September 30,   September 30,
                                                       2004            2003
                                                   -------------   -------------
<S>                                                <C>             <C>
Cash flows from operating activities:
 Net income                                        $ 32,650,000    $ 23,538,000
 Adjustments to reconcile net income to net cash
   provided by operating activities:
   Depreciation and amortization                      8,874,000       9,090,000
   Non-cash interest expense - amortization
    of deferred financing charges                     1,377,000       1,604,000
   Non-cash interest income - change in fair
   market value of interest rate swap                        --      (2,590,000)
   Deferred income taxes                              1,323,000       4,448,000
   Changes in assets and liabilities:
    Accounts receivable, net                           (544,000)     (4,731,000)
    Inventory                                        (1,348,000)     (7,093,000)
    Other current assets                              1,509,000         629,000
    Accounts payable, interest payable and
    other current liabilities                         4,462,000        (265,000)
    Postretirement benefit obligation other
     than pensions                                     (597,000)      2,324,000
    Other long-term liabilities                       6,144,000       6,230,000
                                                   ------------    ------------
 Net cash provided by operating
  activities                                         53,850,000      33,184,000
                                                   ------------    ------------
Cash flows from investing activities:
 Capital expenditures                                (2,071,000)     (2,384,000)
 Deferred charges                                    (6,282,000)     (3,049,000)
                                                   ------------    ------------
 Net cash used in investing activities               (8,353,000)     (5,433,000)
                                                   ------------    ------------
 Net increase in cash and cash equivalents           45,497,000      27,751,000
Cash and cash equivalents, beginning of
 period                                              24,464,000      22,735,000
                                                   ------------    ------------
Cash and cash equivalents, end of period           $ 69,961,000    $ 50,486,000
                                                   ============    ============
Supplemental cash flow information:
 Interest paid during period                       $ 18,842,000    $ 23,323,000
                                                   ============    ============
 Income taxes paid during the period               $  6,419,000    $  3,117,000
                                                   ============    ============
</TABLE>

                 See notes to consolidated financial statements.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.    The accompanying unaudited consolidated financial statements have been
      prepared by K & F Industries, Inc. and Subsidiaries (the "Company")
      pursuant to the rules of the Securities and Exchange Commission ("SEC")
      and, in the opinion of the Company, include all adjustments (consisting of
      normal recurring accruals) necessary for a fair presentation of financial
      position, results of operations and cash flows. Certain information and
      footnote disclosures normally included in financial statements prepared in
      accordance with generally accepted accounting principles have been
      condensed or omitted pursuant to such SEC rules. The Company believes that
      the disclosures made are adequate to make the information presented not
      misleading. The consolidated statements of operations for the three and
      nine months ended September 30, 2004 are not necessarily indicative of the
      results to be expected for the full year. It is suggested that these
      financial statements be read in conjunction with the audited financial
      statements and notes thereto included in the Company's December 31, 2003
      Annual Report on Form 10-K.

2.    Accounting Pronouncements

      In December 2003, the Medicare Prescription Drug, Improvement and
      Modernization Act of 2003 (the "Act") was enacted. The Act introduced a
      plan sponsor subsidy based on a percentage of a beneficiary's annual
      prescription drug benefits, within defined limits, and the opportunity for
      a retiree to obtain prescription drug benefits under Medicare.

      In May 2004, the Financial Accounting Standards Board issued Staff
      Position No. 106-2, "Accounting and Disclosure Requirements Related to the
      Medicare Prescription Drug, Improvement and Modernization Act of 2003"
      which supersedes Staff Position No. 106-1 of the same title. The Staff
      Position clarifies the accounting for the benefits attributable to new
      government subsidies for companies that provide prescription drug benefits
      to retirees.

      The Company had elected to defer any accounting for the effects of the Act
      pursuant to Staff Position No. 106-1. The Company adopted Staff Position
      No. 106-2 as of July 1, 2004, the beginning of its third quarter,
      retroactive to January 1, 2004. The Company and its actuarial advisors
      determined that benefits provided by the plan were at least actuarially
      equivalent to Medicare Part D. The Company remeasured the effects of the
      Act on the recorded Accumulated Plan Benefit Obligation ("APBO") as of
      January 1, 2004. The effect of the federal subsidy to which the Company is
      entitled has been estimated to decrease the APBO by $11.5 million.

      The decrease in the APBO was treated as a gain, which is being amortized
      prospectively from January 1, 2004. The table below details the reduction
      in net periodic postretirement cost by component, which is included in the
      three and nine months ended September 30, 2004, as a result of the Act and
      the adoption of Staff Position No. 106-2.

                                       7
<PAGE>

2.

                     K & F INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                       Three Months Ended   Nine Months Ended
                                       ------------------   ------------------
                                       September 30, 2004   September 30, 2004
                                       ------------------   ------------------
<S>                                    <C>                  <C>
Service cost                                $ 60,000            $  180,000
Interest cost                                185,000               555,000
Recognized actuarial gain                    230,000               690,000
                                            --------            ----------
Net periodic postretirement benefit cost    $475,000            $1,425,000
                                            ========            ==========
</TABLE>

3.    Receivables are summarized as follows:

<TABLE>
<CAPTION>
                                    September 30,        December 31,
                                       2004                  2003
                                    -------------        ------------
<S>                                 <C>                  <C>
Accounts receivable, principally
 from commercial customers          $ 39,818,000         $ 35,306,000
Accounts receivable, on U. S.
 Government and other long-term
 contracts                             3,593,000            7,505,000
Allowances                            (1,241,000)          (1,216,000)
                                    ------------         ------------
                                    $ 42,170,000         $ 41,595,000
                                    ============         ============
</TABLE>

4.    Inventory consists of the following:

<TABLE>
<CAPTION>
                                    September 30,        December 31,
                                        2004                2003
                                    -------------        ------------
<S>                                 <C>                  <C>
Raw materials and work-in-process    $26,393,000          $22,324,000
Finished goods                        11,759,000           15,839,000
Inventoried costs related to U.S.
 Government and other long-term
 contracts                            13,305,000           11,924,000
                                     -----------          -----------
                                     $51,457,000          $50,087,000
                                     ===========          ===========
</TABLE>

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

                                       8
<PAGE>

                     K & F INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

      Inventory is stated at average cost, not in excess of net realizable
      value. In accordance with industry practice, inventoried costs may contain
      amounts relating to contracts with long production cycles, a portion of
      which will not be realized within one year. Reserves for slow moving and
      obsolete inventories are provided based on current assessments about
      future product demand and production requirements for the next twelve
      months. The Company evaluates the adequacy of these reserves quarterly.

5.    Other current liabilities consist of the following:

<TABLE>
<CAPTION>
                                          September 30,  December 31,
                                              2004           2003
                                          ------------   ------------
<S>                                        <C>            <C>
Accrued payroll costs                      $12,482,000    $14,451,000
Accrued property taxes and other taxes       2,002,000      2,711,000
Accrued costs on long-term contracts         2,448,000      5,061,000
Accrued warranty costs                      14,053,000     13,261,000
Customer credits                             4,251,000      5,918,000
Postretirement benefit obligation other
  than pensions                              3,000,000      3,000,000
Accrued income taxes                         1,475,000             --
Other                                        5,337,000      5,219,000
                                           -----------    -----------

                                           $45,048,000    $49,621,000
                                           ===========    ===========
</TABLE>

6.    Income Taxes

      The Company's effective tax rate of 13.6% and 23.5% for the three months
      ended September 30, 2004 and 2003, respectively, differs from the
      statutory rate of 35% due to tax benefits derived from export sales and
      reversals of prior years tax reserves no longer needed. The decrease in
      the effective tax rate for the three months ended September 30, 2004, as
      compared with the same period in the prior year, is primarily due to a
      higher amount of tax reserves no longer needed and greater tax benefits
      derived from export sales.

      The Company's effective tax rate of 24.6% and 26.2% for the nine months
      ended September 30, 2004 and 2003, respectively, differs from the
      statutory rate of 35% due to tax benefits derived from export sales and
      reversals of prior years tax reserves no longer needed.

7.    Contingencies

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

                                       9
<PAGE>

                    K & F INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

8.    Comprehensive Income

<TABLE>
<CAPTION>
                                                   Three Months Ended
                                              -----------------------------
                                              September 30,   September 30,
                                                  2004            2003
                                              -------------   -------------
<S>                                           <C>             <C>
Net income                                     $ 15,075,000    $12,189,000
Other comprehensive income:
  Cumulative translation adjustments                 (9,000)        55,000
  Amortization of transition adjustment
    included in interest expense                         --         46,000
                                               ------------    -----------
  Comprehensive income                         $ 15,066,000    $12,290,000
                                               ============    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                    Nine Months Ended
                                              -----------------------------
                                              September 30,   September 30,
                                                  2004            2003
                                              -------------   -------------
<S>                                           <C>             <C>
Net income                                     $32,650,000     $23,538,000
Other comprehensive income:
  Cumulative translation adjustments                53,000          94,000
  Amortization of transition adjustment
   included in interest expense                         --         138,000
                                               -----------     -----------
  Comprehensive income                         $32,703,000     $23,770,000
                                               ===========     ===========
</TABLE>

9.    Segments

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

<TABLE>
<CAPTION>
                                                   Three Months Ended
                                              -----------------------------
                                              September 30,   September 30,
                                                  2004            2003
                                              -------------   -------------
<S>                                           <C>             <C>
Sales:
  Aircraft Braking Systems                     $75,166,000     $73,292,000
  Engineered Fabrics                            15,591,000      14,529,000
                                               -----------     -----------
                                               $90,757,000     $87,821,000
                                               ===========     ===========
Operating Profit:
  Aircraft Braking Systems                     $24,738,000     $24,709,000
  Engineered Fabrics                             2,399,000       2,004,000
                                               -----------     -----------
  Operating income                              27,137,000      26,713,000
  Interest expense, net                         (9,691,000)    (10,784,000)
                                                ----------     -----------
      Income before income taxes               $17,446,000     $15,929,000
                                               ===========     ===========
</TABLE>


                                10
<PAGE>


                     K & F INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                     Nine Months Ended
                                               ------------------------------
                                               September 30,    September 30,
                                                   2004             2003
                                               -------------    -------------
<S>                                            <C>              <C>
Sales:
    Aircraft Braking Systems                   $ 213,205,000      208,010,000
    Engineered Fabrics                            44,292,000       39,832,000
                                               -------------    -------------
                                               $ 257,497,000    $ 247,842,000
                                               =============    =============
Operating Profit:
    Aircraft Braking Systems                   $  65,360,000    $  59,946,000
    Engineered Fabrics                             7,132,000        4,439,000
                                               -------------    -------------
      Operating income                            72,492,000       64,385,000
    Interest expense, net                        (29,195,000)     (32,491,000)
                                               -------------    -------------
      Income before income taxes               $  43,297,000    $  31,894,000
                                               =============    =============
</TABLE>

<TABLE>
<CAPTION>
                                               September 30,    December 31,
                                                   2004             2003
                                               ------------     ------------
<S>                                            <C>              <C>
Total Assets:
    Aircraft Braking Systems                   $384,302,000     $348,609,000
    Engineered Fabrics                           71,142,000       60,593,000
    Deferred financing costs not
      allocated to segments                       6,791,000        8,168,000
    Corporate assets                              1,385,000        1,364,000
    Income taxes receivable
      not allocated to segments                          --          851,000
                                               ------------     ------------
                                               $463,620,000     $419,585,000
                                               ============     ============
</TABLE>

10.   Subsequent Event

      On October 15, 2004, K & F Industries, Inc. entered into a stock purchase
      agreement in which it agreed to be acquired by an affiliate of Aurora
      Capital Group, for a purchase price of $1.06 billion in cash.

      The transaction is expected to close in November 2004 and to be financed
      with a new credit facility, including a funded term loan facility of $480
      million and an unfunded (at closing) $50 million revolving credit
      facility, $315 million of new senior subordinated notes and $315 million
      of equity capital.

      The cash consideration will be used to repay the Company's existing
      indebtedness, with the balance paid to the Company's existing stockholders
      and optionholders. In connection with the transaction, on October 20,
      2004, the Company commenced cash tender offers for all of the existing
      senior subordinated notes.

      The acquisition will be accounted for using the purchase method of

                                       11
<PAGE>

      accounting in accordance with SFAS No. 141, Business Combinations,
      pursuant to which the total purchase price of the acquisition, including
      related fees and expenses, will be allocated to the Company's net assets
      based upon its estimates of fair value. The preliminary results of the
      allocation of the excess of the purchase price over the fair value of net
      tangible assets acquired, would result in the recording of goodwill of
      approximately $951 million and intangible assets of $254 million.

                                       12
<PAGE>

ITEM  2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                  OF OPERATIONS

General

We are a manufacturer of aircraft wheels, brakes, brake control systems and
flexible bladder fuel tanks for commercial, general aviation and military
aircraft. We service a diversified portfolio of customers across the commercial
transport, general aviation and military sectors, such that declines in any one
market have often been offset by increased revenues in another. For example, the
commercial transport and general aviation markets that we serve were adversely
affected by the events of September 11, 2001, but the downturn in those markets
was partially offset by an increase in military aircraft spending.

We believe that conditions in the commercial transport and general aviation
markets have improved and the regional jet market, in particular, will provide
new opportunities for replacement part sales. Since the beginning of 2004, our
sales and bookings in both commercial transport and general aviation sectors
have shown recovery from this downturn. During the same period, our military
business has leveled off, but we expect military aircraft spending to continue
at current levels.

The Acquisition

On October 15, 2004, we entered into a stock purchase agreement in which we
agreed to be acquired by an affiliate of Aurora Capital Group, for a purchase
price of $1.06 billion in cash.

The transaction is expected to close in November 2004 and to be financed with a
new credit facility, including a funded term loan facility of $480 million and
an unfunded (at closing) $50 million revolving credit facility, $315 million of
new senior subordinated notes and $315 million  of equity capital.

The cash consideration will be used to repay our existing indebtedness, with the
balance paid to our existing stockholders and optionholders. In connection with
the transaction, on October 20, 2004, we commenced cash tender offers for all
of our existing senior subordinated notes.

The acquisition will be accounted for using the purchase method of accounting in
accordance with SFAS No. 141, Business Combinations, pursuant to which the total
purchase price of the acquisition, including related fees and expenses, will be
allocated to our net assets based upon our estimates of fair value. The
preliminary results of the allocation of the excess of the purchase price over
the fair value of net tangible assets acquired, would result in the recording of
goodwill of approximately $951 million and intangible assets of $254 million.

Critical Accounting Policies and Estimates

This section is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
our management to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to bad debts, inventories, intangible assets,
income taxes, warranty obligations, workers compensation liabilities, pension
and other postretirement benefits, and contingencies and litigation. We base our
estimates on historical experience and on various

                                       13
<PAGE>

other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates. We believe the following
critical accounting policies involve our more significant judgments and
estimates used in the preparation of the consolidated financial statements.

Inventory. Inventory is stated at average cost, not in excess of net realizable
value. In accordance with industry practice, inventoried costs may contain
amounts related to contracts with long production cycles, a portion of which
will not be realized within one year. Reserves for slow moving and obsolete
inventories are provided based on current assessments about future product
demand and production requirements for the next twelve months. These factors are
impacted by market conditions, technology changes, and changes in strategic
direction, and require estimates and management judgment that may include
elements that are uncertain. We evaluate the adequacy of these reserves
quarterly.

Although we strive to achieve a balance between market demands and risk of
inventory excess or obsolescence, it is possible that, should conditions change,
additional reserves may be needed. Any changes in reserves will impact operating
income during a given period. This policy is consistently applied to each of our
operating segments and we do not anticipate any changes to our policy in the
near term.

Evaluation of Long-Lived Assets. Long-lived assets are assessed for
recoverability on an ongoing basis in accordance with SFAS No. 144. In
evaluating the value and future benefits of long-lived assets, their carrying
value is compared to management's estimate of the anticipated undiscounted
future net cash flows of the related long-lived asset. Any necessary impairment
charges would be recorded when we do not believe the carrying value of the
long-lived asset will be recoverable.

Warranty. Estimated costs of warranty are accrued when individual claims arise
with respect to a product or performance. When we become aware of those types of
defects, the estimated costs of all potential warranty claims arising from those
types of defects are estimated and accrued.

Pension and Other Postretirement Benefits. We have significant pension and
postretirement benefit costs and liabilities. The determination of our
obligation and expense for pension and other postretirement benefits is
dependent on our selection of certain assumptions used by actuaries in
calculating those amounts. Assumptions are made about interest rates, expected
investment return on plan assets, rate of increase in health care costs, total
and involuntary turnover rates, and rates of future compensation increases. In
addition, our actuarial consultants use subjective factors such as withdrawal
rates and mortality rates to develop our valuations. We generally review and
update these assumptions at the beginning of each fiscal year. We are required
to consider current market conditions, including changes in interest rates, in
making these assumptions. The actuarial assumptions that we may use may differ
materially from actual results due to changing market and economic conditions,
higher or lower withdrawal rates or longer or shorter life spans of
participants. These differences may result in a significant impact on the amount
of pension and postretirement benefits

                                       14
<PAGE>

expense we have recorded or may record.

The discount rate enables us to state expected future cash flows at a present
value on the measurement date. The rate represents the market rate of
high-quality fixed income investments. A lower discount rate increases the
present value of benefit obligations and increases pension expense. We used a 6
3/4% discount rate in 2003 and are using a 6 1/4% discount rate for 2004 to
reflect market interest rate conditions.

To determine the expected long-term rate of return on pension plan assets, we
consider the current and expected asset allocations, as well as historical and
expected returns on various categories of plan assets. We assumed that the
long-term return on our pension plan assets was 9.0% in 2003 and will remain at
9.0% for 2004 to reflect market conditions.

The annual postretirement expense was calculated using a number of actuarial
assumptions, including a health care cost trend rate and a discount rate. Our
discount rate assumption for postretirement benefits is consistent with that
used in the calculation of pension benefits. The healthcare cost trend rate
being used to calculate the calendar year 2004 postretirement expense is 10.0%
in 2004 trending down to 4.5% for 2010.

Comparison of Results of Operations for the Nine Months Ended September 30, 2004
and September 30, 2003

Our sales for the nine months ended September 30, 2004 totaled $257,497,000,
reflecting an increase of $9,655,000, compared with $247,842,000 for the same
period in the prior year. This increase was due to higher sales at Aircraft
Braking Systems of $5,195,000 and higher sales at Engineered Fabrics of
$4,460,000.

Commercial sales at Aircraft Braking Systems increased $11,064,000, primarily on
the Bombardier CRJ-700 and CRJ-100/200, the Embraer 170 and Boeing MD-90
programs, partially offset by lower sales on the Boeing MD-80 and B-707
programs. General aviation sales increased $7,019,000, primarily on Gulfstream,
Lear, Israeli Aircraft Industries and Canadair aircraft. Military sales
decreased $12,888,000, primarily on the Boeing B-1B, the Lockheed Martin C-130
and F-16, and the Northrop Grumman F-14 programs.

Sales at Engineered Fabrics increased primarily due to higher military sales of
fuel tanks for the Boeing F-15, the Northrop Grumman F-18 and T-38 and the
Sikorsky Blackhawk programs, higher sales of iceguards on the Bell/Boeing V-22
program, partially offset by lower sales of oil containment booms.

Our gross margin for the nine months ended September 30, 2004 was 42.6%,
compared with 41.4% for the same period in the prior year. Aircraft Braking
Systems' gross margin was $100,002,000, or 46.9% of sales for the nine months
ended September 30, 2004, compared with $94,431,000 or 45.4% of sales for the
same period in the prior year. Engineered Fabrics' gross margin was
$9,632,000,or 21.7% of sales for the nine months ended September 30, 2004,
compared with $8,262,0000, or 20.7% of sales for the same period in the prior
year.

Aircraft Braking Systems' gross margin increased primarily due to a favorable
mix of products sold, lower operating costs and the favorable overhead
absorption effect relating to the higher sales, partially offset by higher
program investments. Engineered Fabrics' gross margin increased primarily due to
the favorable overhead absorption effect relating to the higher sales and
operating efficiencies.

Independent research and development costs were $10,226,000 for the nine months
ended September 30, 2004, compared with $11,321,000 for the same period in the
prior year. This decrease was primarily due to lower costs associated with the
Embraer 170 and various other

                                       15
<PAGE>

programs, partially offset by higher costs on the China ARJ 21 and Dassault
Falcon 7X programs.

Selling, general and administrative expenses for the nine months ended September
30, 2004 were level with the same period in the prior year.

Our net interest expense was $29,195,000 for the nine months ended September 30,
2004, compared with $32,491,000 for the same period in the prior year. This
decrease was primarily due to a lower average debt balance.

Our effective tax rate of 24.6% and 26.2% for the nine months ended September
30, 2004 and 2003, respectively, differs from the statutory rate of 35% due to
tax benefits derived from export sales and reversals of prior years tax reserves
no longer needed.

Comparison of Results of Operations for the Three Months Ended September 30,
2004 and September 30, 2003

Our sales for the three months ended September 30, 2004 totaled $90,757,000,
reflecting an increase of $2,936,000, compared with $87,821,000 for the same
period in the prior year. This increase was due to higher sales at Aircraft
Braking Systems of $1,874,000 and Engineered Fabrics of $1,062,000.

Commercial sales at Aircraft Braking Systems increased $6,176,000, primarily on
the Bombardier CRJ-700 and Boeing DC-10 programs. General aviation sales
increased $1,863,000, primarily on Israeli Aircraft Industries, Gulfstream and
Lear aircraft. Military sales decreased $6,165,000, primarily on the Boeing
B-1B, the Lockheed Martin F-16 and C-130, and the Northrop Grumman F-14
programs.

Sales at Engineered Fabrics increased primarily due to higher military sales of
fuel tanks on the Boeing F-15, Bell Helicopter UH-1H Huey and Northrop Grumman
T-38 programs, partially offset by lower sales of oil containment booms.

Our gross margin for the three months ended September 30, 2004 was 44.8%,
compared with 44.0% for the same period in the prior year. Aircraft Braking
Systems' gross margin was $37,355,000, or 49.7% of sales for the three months
ended September 30, 2004, compared with $35,532,000, or 48.5% of sales for the
same period in the prior year. Engineered Fabrics' gross margin was $3,301,000,
or 21.2% of sales for the three months ended September 30, 2004, compared with
$3,150,000, or 21.7% of sales for the same period in the prior year.

Aircraft Braking Systems' gross margin increased primarily due to a favorable
mix of products sold, lower operating costs and the favorable overhead
absorption effect relating to the higher sales, partially offset by higher
program investments. Engineered Fabrics' gross margin decreased primarily due to
unfavorable mix of products sold, partially offset by the favorable overhead
absorption effect relating to the higher sales and operating efficiencies.

Independent research and development costs were $3,441,000 for the three months
ended September 30, 2004, compared with $3,963,000 for the same period in the
prior year. This decrease was primarily due to lower costs associated with the
Embraer 170 and various other programs, partially offset by higher costs on the
China ARJ 21.

Selling, general and administrative expenses were $8,866,00 for the three months
ended September 30, 2004, compared with $6,931,000 for the same period in the
prior year. This increase was primarily due to higher costs associated with
performance-related incentive compensation.

                                       16
<PAGE>

Our net interest expense was $9,691,000 for the three months ended September 30,
2004, compared with $10,784,000 for the same period in the prior year. This
decrease was primarily due to a lower average debt balance.

Our effective tax rate of 13.6% and 23.5% for the three months ended September
30, 2004 and 2003, respectively, differs from the statutory rate of 35% due to
tax benefits derived from export sales and reversals of prior years tax reserves
no longer needed. The decrease in the effective tax rate for the three months
ended September 30, 2004, as compared with the same period in the prior year, is
primarily due to a higher amount of tax reserves no longer needed and greater
tax benefits derived from export sales.

Liquidity and Capital Resources

Our cash and cash equivalents totaled $70.0 million at September 30, 2004,
compared with $24.5 million at December 31, 2003. Our total debt was $395.0
million at September 30, 2004 and December 31, 2003, and we had $28.0 million
(which is net of letters of credit of $2.0 million) available to borrow under
our $30.0 million revolving credit facility. In the past, the cash generated
from operations has been sufficient to pay our indebtedness. We do not have to
pay principal on our notes until 2007, when $145.0 million of our 9 1/4% notes
mature.

We expect that our principal use of funds for the next several years will be to
pay interest and principal on indebtedness, fund capital expenditures and make
program investments. Our primary source of funds for conducting our business
activities and servicing our indebtedness has been cash generated from
operations.

The credit facility contains certain covenants and events of default, including
limitations on additional indebtedness, liens, asset sales, making certain
restricted payments, capital expenditures, creating guarantee obligations and
material lease obligations. The credit facility also contains certain financial
ratio requirements, including a cash interest coverage ratio and a leverage
ratio. We were in compliance with all debt covenants at September 30, 2004.

Our contractual obligations are detailed in our Annual Report on Form 10-K for
the year ended December 31, 2003. As of September 30, 2004, our contractual
obligations have not materially changed from December 31, 2003.

Cash Flows

During the nine months ended September 30, 2004, net cash provided by operating
activities amounted to $53,850,000, compared with $33,184,000 for the same
period in the prior year, an increase of $20,666,000. Our cash flow from
operating activities increased from the prior year primarily due to payments
made in 2003 to the holders of our stock options in connection with the 2002
recapitalization, lower increases in inventory and accounts receivable in 2004
versus 2003, and lower interest payments, partially offset by higher income tax
payments.

During the nine months ended September 30, 2004, net cash used in investing
activities amounted to $8,353,000 versus $5,433,000 for the same period in the
prior year, an increase of $2,920,000. This increase was primarily due to
$6,282,000 of program participation payments made during the nine months ended
September 30, 2004, compared with $3,049,000 made during the same period in the
prior year.

Accounting Pronouncements

In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003, or the Act, was enacted. The Act introduced a

                                       17
<PAGE>

plan sponsor subsidy based on a percentage of a beneficiary's annual
prescription drug benefits, within defined limits, and the opportunity for a
retiree to obtain prescription drug benefits under Medicare.

In May 2004, the Financial Accounting Standards Board issued Staff Position No.
106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act, which supersedes Staff
Position No. 106-1 of the same title. The Staff Position clarifies the
accounting for the benefits attributable to new government subsidies for
companies that provide prescription drug benefits to retirees.

We had elected to defer any accounting for the effects of the Act pursuant to
Staff Position No. 106-1. We adopted Staff Position No. 106-2 as of July 1,
2004, the beginning of our third quarter, retroactive to January 1, 2004. We and
our actuarial advisors determined that benefits provided by the plan were at
least actuarially equivalent to Medicare Part D. We remeasured the effects of
the Act on the recorded Accumulated Plan Benefit Obligation ("APBO") as of
January 1, 2004. The effect of the federal subsidy to which we are entitled has
been estimated to decrease the APBO by $11.5 million.

The decrease in the APBO was treated as a gain, which is being amortized
prospectively from January 1, 2004. The table below details the reduction in net
periodic postretirement cost by component, which is included in the three and
nine months ended September 30, 2004, as a result of the Act and the adoption of
Staff Position No. 106-2.

<TABLE>
<CAPTION>
                                        Three Months Ended     Nine Months Ended
                                        ------------------     ------------------
                                        September 30, 2004     September 30, 2004
                                        ------------------     ------------------
<S>                                     <C>                    <C>
Service cost                                 $ 60,000             $  180,000
Interest cost                                 185,000                555,000
Recognized actuarial gain                     230,000                690,000
                                             --------             ----------
Net periodic postretirement benefit cost     $475,000             $1,425,000
                                             ========             ==========
</TABLE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have $395.0 million of total fixed rate debt outstanding at September 30,
2004. Borrowings under the credit facility bear interest that varies with LIBOR,
for which no borrowings were outstanding at September 30, 2004.

Given that all of our outstanding debt is at a fixed rate, a 10% change in
interest rates would not have a significant impact on fair values, cash flows or
earnings. We have no derivative financial instruments.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities and
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate, to allow timely decisions regarding required

                                       18
<PAGE>

disclosures. Any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the designed
control objectives. Our management, with the participation of our Chief
Executive Officer and our Chief Financial Officer, have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of September 30, 2004. Based upon that evaluation and subject to
the foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of our disclosure controls and procedures provided
reasonable assurance that the disclosure controls and procedures are effective
to accomplish their objectives.

In addition, there was no change to our internal control over financial
reporting that occurred during the quarter ended September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

                                       19
<PAGE>

                           PART II. OTHER INFORMATION

Item 6. Exhibits

      Exhibits

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

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

      32.1 - Certification of Chief Executive Office pursuant to 18 U.S.C.
             Section 1350, as adopted pursuant to Section 906 of the
             Sarbanes-Oxley Act of 2002.

      32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C.
             Section 1350, as adopted pursuant to Section 906 of the
             Sarbanes-Oxley Act of 2002.


Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.

                                       20
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

                                        K & F INDUSTRIES, INC.
                                        -----------------------------
                                                Registrant

                                        /s/ DIRKSON R. CHARLES
                                        -----------------------------
                                        Dirkson R. Charles
                                        Chief Financial Officer and
                                        Registrant's Authorized Officer

Dated: November 4, 2004

                                       21