##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
   Form 10-Q
   þ

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    September 30, 2006oro

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
    incorporation or organization)

(I.R.S. Employer
    Identification No.)50 Main Street, White
    Plains,
    New York(Address of principal
    executive offices)

10606(Zip
    Code)   Registrants telephone number, including area code
 (914) 448-2700
  þ o
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ




---



##### 



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
  Form 10-Q
  For the quarterly period ended September 30, 2006
  INDEX
  
  PagePART I.
    CONDENSED CONSOLIDATED FINANCIAL INFORMATIONItem 1.


Condensed
    Consolidated Financial Statements:a) Condensed
    Consolidated Balance Sheets as of September 30, 2006
    (Unaudited) and
    December 31, 2005*


1b) Condensed
    Consolidated Statements of Income for the nine months ended
    September 30, 2006 and 2005 (Unaudited)


2c) Condensed
    Consolidated Statements of Income for the three months ended
    September 30, 2006 and 2005 (Unaudited)


3d) Condensed
    Consolidated Statements of Cash Flows for the nine months ended
    September 30, 2006 and 2005 (Unaudited)


4e) Notes to
    Condensed Consolidated Financial Statements
    (Unaudited)


5Item 2.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


17Item 3.


Quantitative and
    Qualitative Disclosures About Market Risk


28Item 4.


Controls and
    Procedures


28PART II.
    OTHER INFORMATIONItem 6.


Exhibits


29Signatures


30   *
    Information for the December 31, 2005 balance sheet has
    been derived from audited consolidated financial statements
    included in our Annual Report on
    Form 10-K
    for the year ended December 31, 2005.EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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##### Table of Contents



PART I.
    FINANCIAL INFORMATION  Item 1.
    Condensed
    Consolidated Financial Statements  K&F INDUSTRIES, INC. AND SUBSIDIARIES
 Condensed Consolidated Balance Sheets  September 30,


December 31,2006


2005(Unaudited)ASSETS:Current Assets:Cash and cash equivalents

$
13,609,000


$
34,731,000Accounts receivable, net


52,131,000



47,586,000Inventory


73,364,000



53,979,000Other current assets


4,409,000



5,979,000Deferred income taxes


17,339,000



15,133,000Total current assets


160,852,000



157,408,000Property, plant and equipment


130,263,000



113,248,000Less, accumulated depreciation and
    amortization


20,412,000



11,363,000109,851,000



101,885,000Other long-term assets


1,918,000



1,490,000Debt issuance costs, net of
    accumulated amortization


18,858,000



22,517,000Program participation costs, net
    of accumulated amortization


217,742,000



201,023,000Intangible assets, net of
    accumulated amortization


55,434,000



58,546,000Goodwill


851,628,000



841,049,000Total assets

$
1,416,283,000


$
1,383,918,000LIABILITIES AND STOCKHOLDERS
    EQUITY:Current Liabilities:Accounts payable

$
18,824,000


$
18,223,000Current portion of long-term debt






11,018,000Interest payable


9,527,000



5,171,000Income taxes payable


8,449,000



7,230,000Other current liabilities


46,446,000



49,141,000Total current liabilities


83,246,000



90,783,000Pension liabilities


57,426,000



54,348,000Deferred income tax liabilities


55,108,000



43,234,000Postretirement benefit obligations
    other than pensions


94,409,000



92,625,000Other long-term liabilities


10,176,000



5,491,000Senior term loan


422,000,000



439,982,00073/4% senior
    subordinated notes due 2014


315,000,000



315,000,00095/8% senior
    subordinated notes due 2010


577,000



577,000Contingencies (Note 9)Stockholders Equity:Common stock, $.01 par
    value  authorized, 1,000 shares; issued and
    outstanding, 1,000 shares






Additional paid-in capital


309,810,000



309,810,000Retained earnings


70,325,000



34,001,000Accumulated other comprehensive
    loss


(1,794,000
)


(1,933,000
)Total stockholders equity


378,341,000



341,878,000Total liabilities and
    stockholders equity

$
1,416,283,000


$
1,383,918,000    1




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##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
 Condensed Consolidated Statements of Income  Nine Months EndedSeptember 30,


September 30,2006


2005(Unaudited)Net sales

$
300,127,000


$
278,982,000Cost of sales (includes inventory
    purchase accounting charges of $1,174,000 and $12,084,000 for
    the nine months ended September 30, 2006 and 2005,
    respectively)


163,002,000



160,114,000Gross profit


137,125,000



118,868,000Independent research and
    development costs


11,762,000



11,490,000Selling, general and
    administrative expenses


25,784,000



26,937,000Amortization of intangible assets


4,165,000



9,043,000Operating income


95,414,000



71,398,000Interest income


2,491,000



256,000Interest expense


(44,653,000
)


(43,738,000
)Income before income taxes


53,252,000



27,916,000Income tax provision


(16,928,000
)


(9,285,000
)Net income

$
36,324,000


$
18,631,000    2




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##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
 Condensed Consolidated Statements of Income  Three Months EndedSeptember 30,


September 30,2006


2005(Unaudited)Net sales

$
106,412,000


$
99,990,000Cost of sales (includes inventory
    purchase accounting charges of $587,000 for the three months
    ended September 30, 2006)


56,322,000



51,450,000Gross profit


50,090,000



48,540,000Independent research and
    development costs


3,885,000



3,904,000Selling, general and
    administrative expenses


8,475,000



12,996,000Amortization of intangible assets


1,450,000



3,015,000Operating income


36,280,000



28,625,000Interest income


782,000



105,000Interest expense


(17,052,000
)


(14,097,000
)Income before income taxes


20,010,000



14,633,000Income tax provision


(5,289,000
)


(4,795,000
)Net income

$
14,721,000


$
9,838,000    3




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##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
 Condensed Consolidated Statements of Cash Flows  Nine Months EndedSeptember 30,


September 30,2006


2005(Unaudited)Cash flows from operating
    activities:Net income

$
36,324,000


$
18,631,000Adjustments to reconcile net income
    to net cash provided by operating activities:Depreciation and amortization


9,150,000



7,545,000Amortization of program
    participation costs


6,661,000



1,886,000Amortization of intangible assets


5,497,000



9,043,000Stock-based compensation


855,000



65,000Non-cash interest
    expense  amortization/write-off of debt issuance costs


3,659,000



5,650,000(Gain) loss on change in fair
    market value of interest rate swaps and caps


(428,000
)


272,000Inventory purchase accounting
    charges


1,174,000



12,084,000Deferred income taxes


9,320,000



8,618,000Changes in assets and liabilities,
    net of the effect of an acquisition:Accounts receivable


(3,478,000
)


(8,720,000
)Inventory


(16,677,000
)


(10,306,000
)Other current assets


830,000



(1,499,000
)Program participation
    costs  equipment


(21,880,000
)


(18,718,000
)Program participation
    costs  cash


(1,500,000
)


(1,000,000
)Accounts payable, interest payable
    and other current liabilities


5,449,000



23,726,000Pension liabilities


3,078,000



2,800,000Postretirement benefit obligations
    other than pensions


1,784,000



1,667,000Other long-term liabilities


1,185,000



186,000Net cash provided by operating
    activities


41,003,000



51,930,000Cash flows from investing
    activities:Payment for acquisition, net of
    cash acquired


(16,016,000
)


Capital expenditures


(17,109,000
)


(6,314,000
)Payment of deferred purchase price






(14,682,000
)Net cash used in investing
    activities


(33,125,000
)


(20,996,000
)Cash flows from financing
    activities:Payments of long-term debt


(29,000,000
)


(19,000,000
)Equity contributions






20,000Net cash used in financing
    activities


(29,000,000
)


(18,980,000
)Net (decrease) increase in cash and
    cash equivalents


(21,122,000
)


11,954,000Cash and cash equivalents,
    beginning of period


34,731,000



9,636,000Cash and cash equivalents, end of
    period

$
13,609,000


$
21,590,000Supplemental cash flow information:Interest paid during period

$
37,710,000


$
30,286,000Income taxes paid during the period

$
5,411,000


$
767,000Income tax refund received during
    the period

$



$
15,425,000Business acquisition:Fair value of assets acquired,
    including goodwill

$
21,618,000Cash paid, net of cash acquired


(16,016,000
)Issuance of note payable


(3,000,000
)Liabilities assumed

$
2,602,000    4




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##### Table of Contents



K&F
    INDUSTRIES, INC. AND SUBSIDIARIES
  Notes to Condensed Consolidated Financial
    Statements
 (Unaudited)
  1.
    Description
    of the Business and Acquisitions  Description
    of Business
      Acquisition
    of K&F Industries
    3 4
  Acquisition
    of Nasco Aircraft Brake, Inc.
    Other
    Developments
   5




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##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
  Notes to Condensed Consolidated Financial
    Statements  (Continued)
  2.
    Unaudited
    Interim Condensed Consolidated Financial Statements  Form 10-K.
    3.
    Recent
    Accounting Pronouncements and Accounting Changes  Accounting
    Pronouncements
       6




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##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
  Notes to Condensed Consolidated Financial
    Statements  (Continued)
      Accounting
    Changes
      4.
    Accounts
    Receivable consists of the following:  September 30,


December 31,2006


2005Accounts receivable, principally
    from commercial and general aviation customers

$
48,599,000


$
43,626,000Accounts receivable on
    U.S. Government and other long-term contracts


5,157,000



5,587,000Allowances


(1,625,000
)


(1,627,000
)$
52,131,000


$
47,586,000  7




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##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
  Notes to Condensed Consolidated Financial
    Statements  (Continued)
  5.
    Inventory
    consists of the following:  September 30,


December 31,2006


2005Raw materials and
    work-in-process

$
41,191,000


$
29,689,000Finished goods


13,985,000



11,920,000Inventoried costs related to
    U.S. Government and other long-term contracts


18,188,000



12,370,000$
73,364,000


$
53,979,000   6.
    Other
    current liabilities consist of the following:  September 30,


December 31,2006


2005Accrued payroll and payroll
    related costs

$
13,136,000


$
14,128,000Accrued property and other taxes


2,017,000



2,507,000Accrued costs on long-term
    contracts


2,927,000



3,963,000Accrued warranty costs


11,698,000



12,327,000Customer credits


6,651,000



7,264,000Postretirement benefit obligations
    other than pensions


6,000,000



6,000,000Other


4,017,000



2,952,000$
46,446,000


$
49,141,000   7.
    Stock
    Options         8




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##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
  Notes to Condensed Consolidated Financial
    Statements  (Continued)
    Three Months EndedSeptember 30, 2005Reported net income

$
9,838,000Deduct: Total stock-based employee
    and director compensation expense determined under fair value
    method for all awards, net of related tax effects


(148,000
)Pro forma net income

$
9,690,000   Nine Months EndedSeptember 30, 2005Reported net income

$
18,631,000Add: Stock-based compensation
    included in net income, net of related tax effects


40,000Deduct: Total stock-based employee
    and director compensation expense determined under fair value
    method for all awards, net of related tax effects


(458,000
)Pro forma net income

$
18,213,000     Volatility


32.88%Risk free interest rate


3.97%Dividend yield


0.0%Expected life


7.0 years     Three Months Ended


Nine Months EndedSeptember 30, 2006


September 30, 2006Volatility


37.12%



27.56%Risk free interest rate


4.83%



4.97%Dividend yield


0.0%



0.0%Expected life


7.0 years



7.0 years     Weighted AverageNumber of Options


Exercise PriceOutstanding at December 31,
    2005


1,404,821


$
5.50Granted


326,150



17.70Exercised


(53,565
)


5.22Forfeited or expired


(1,989
)


5.22Outstanding at September 30,
    2006


1,675,417


$
7.88  9




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##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
  Notes to Condensed Consolidated Financial
    Statements  (Continued)
      Options Outstanding


Options ExercisableNumber


Weighted Average


Weighted Average


Number


Weighted Average


Weighted AverageExercise Price

Outstanding


Life (Years)


Exercise Price


Exercisable


Life (Years)


Exercise Price$ 5.22


1,315,186



8.3


$
5.22



243,570



8.3


$
5.2215.16


5,000



9.2



15.16











16.00


30,900



9.8



16.00











17.00


29,081



9.1



17.00











17.80


235,250



9.6



17.80











18.17


60,000



9.9



18.17











1,675,417



8.5


$
7.88



243,570



8.3


$
5.22       8.
    Income
    Taxes      Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005Current domestic provision

$
(1,105,000
)

$
(793,000
)

$
(7,143,000
)

$
(458,000
)Foreign provision


(251,000
)


(197,000
)


(465,000
)


(209,000
)Deferred tax provision


(3,933,000
)


(3,805,000
)


(9,320,000
)


(8,618,000
)Income tax provision

$
(5,289,000
)

$
(4,795,000
)

$
(16,928,000
)

$
(9,285,000
)  10




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##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
  Notes to Condensed Consolidated Financial
    Statements  (Continued)
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005Statutory federal income tax rate


35.0
%


35.0
%


35.0
%


35.0
%State tax


1.3



1.4



1.3



1.9Change in state tax rate






(5.9
)






(3.1
)Tax reserves


(3.3
)


11.1



(0.2
)


5.8Extraterritorial income exclusion
    benefit


(5.5
)


(3.3
)


(3.2
)


(5.3
)Foreign taxes and other


(1.1
)


(5.5
)


(1.1
)


(1.0
)Effective income tax rate


26.4
%


32.8
%


31.8
%


33.3
%     September 30,


December 31,2006


2005Deferred tax assets:Federal and state net operating
    loss carryforwards

$
572,000


$
918,000Tax credit carryforwards


2,494,000



5,518,000Postretirement and other employee
    benefits


61,390,000



59,890,000Warranty costs


4,522,000



4,525,000Other


5,782,000



4,936,00074,760,000



75,787,000Deferred tax liabilities:Intangible assets


15,931,000



14,062,000Program participation costs


78,609,000



71,775,000Depreciation


16,937,000



17,287,000Other


1,052,000



764,000112,529,000



103,888,000Net deferred tax liability

$
37,769,000


$
28,101,000   9.
    Contingencies   11




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##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
  Notes to Condensed Consolidated Financial
    Statements  (Continued)
  10.
    Comprehensive
    Income  Three Months EndedSeptember 30,


September 30,2006


2005Net income

$
14,721,000


$
9,838,000Other comprehensive income (loss):Cumulative translation adjustments


43,000



(36,000
)Comprehensive income

$
14,764,000


$
9,802,000   Nine Months EndedSeptember 30,


September 30,2006


2005Net income

$
36,324,000


$
18,631,000Other comprehensive income (loss):Cumulative translation adjustments


139,000



(186,000
)Comprehensive income

$
36,463,000


$
18,445,000   11.
    Goodwill,
    Intangible Assets, Debt Issuance Costs and Program Participation
    Costs    Aircraft BrakingSystems


Engineered Fabrics


TotalBalance at December 31, 2005

$
765,380,000


$
75,669,000


$
841,049,000Increase


11,721,000







11,721,000Decrease


(1,142,000
)






(1,142,000
)Balance at September 30, 2006

$
775,959,000


$
75,669,000


$
851,628,000    12




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##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
  Notes to Condensed Consolidated Financial
    Statements  (Continued)
    EstimatedSeptember 30, 2006


WeightedGross Carrying


Accumulated





AverageAmount


Amortization


Net


Useful LifeDebt issuance costs

$
25,572,000


$
(6,714,000
)

$
18,858,000



9 yearsProgram participation costs

$
228,605,000


$
(10,863,000
)

$
217,742,000



25 yearsAmortized intangible assets:Customer relationships

$
13,858,000


$
(5,428,000
)

$
8,430,000



22 yearsEngineering drawings


20,881,000



(2,169,000
)


18,712,000



18 yearsContract backlog


12,401,000



(7,156,000
)


5,245,000



3 yearsIn-house libraries


8,297,000



(862,000
)


7,435,000



18 yearsTechnology licenses


7,464,000



(1,355,000
)


6,109,000



10 yearsPatents


4,017,000



(719,000
)


3,298,000



11 yearsTotal amortizable intangible assets


66,918,000



(17,689,000
)


49,229,000Indefinite-lived trademarks


6,205,000







6,205,000Total intangible assets

$
73,123,000


$
(17,689,000
)

$
55,434,000    EstimatedDecember 31, 2005


WeightedGross Carrying


Accumulated





AverageAmount


Amortization


Net


Useful LifeDebt issuance costs

$
26,599,000


$
(4,082,000
)

$
22,517,000



9 yearsProgram participation costs

$
205,225,000


$
(4,202,000
)

$
201,023,000



25 yearsAmortized intangible assets:Customer relationships

$
12,749,000


$
(4,938,000
)

$
7,811,000



24 yearsEngineering drawings


20,881,000



(1,299,000
)


19,582,000



18 yearsContract backlog


12,203,000



(4,225,000
)


7,978,000



3 yearsIn-house libraries


8,297,000



(516,000
)


7,781,000



18 yearsTechnology licenses


7,003,000



(784,000
)


6,219,000



10 yearsPatents


4,017,000



(430,000
)


3,587,000



11 yearsTotal amortizable intangible assets


65,150,000



(12,192,000
)


52,958,000Indefinite-lived trademarks


5,588,000







5,588,000Total intangible assets

$
70,738,000


$
(12,192,000
)

$
58,546,000    13




---



##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
  Notes to Condensed Consolidated Financial
    Statements  (Continued)
          Program


DebtIntangible


Participation


IssuanceAsset -


Costs -


Costs -Year Ending December 31,

Amortization


Amortization


AmortizationRemainder of 2006

$
1,900,000


$
2,300,000


$
800,0002007


7,000,000



9,100,000



3,200,0002008


4,100,000



9,100,000



3,100,0002009


3,300,000



9,100,000



2,900,0002010


3,300,000



9,100,000



2,800,0002011


3,100,000



9,100,000



2,500,000   12.
    Segments    Three Months EndedSeptember 30,


September 30,2006


2005Net Sales:Aircraft Braking Systems

$
88,361,000


$
84,022,000Engineered Fabrics


18,051,000



15,968,000$
106,412,000


$
99,990,000Operating Profit:Aircraft Braking Systems

$
33,401,000


$
27,091,000Engineered Fabrics


2,879,000



1,534,000Operating income


36,280,000



28,625,000Interest expense, net of interest
    income


(16,270,000
)


(13,992,000
)Income before income taxes

$
20,010,000


$
14,633,000  14




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##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
  Notes to Condensed Consolidated Financial
    Statements  (Continued)
  Nine Months EndedSeptember 30,


September 30,2006


2005Net Sales:Aircraft Braking Systems

$
248,537,000
(a)

$
231,683,000Engineered Fabrics


51,590,000



47,299,000$
300,127,000



278,982,000Operating Profit:Aircraft Braking Systems

$
88,521,000
(b)

$
67,821,000Engineered Fabrics


6,893,000



3,577,000Operating income


95,414,000



71,398,000Interest expense, net of interest
    income


(42,162,000
)


(43,482,000
)Income before income taxes

$
53,252,000


$
27,916,000     (a)
    
    Includes $2.4 million of sales relating to past due amounts
    owed under a licensing agreement.(b)
    
    Includes a $2.5 million charge related to a retroactive
    price increase for certain materials purchased over the 12
    months ended June 30, 2006.  September 30,


December 31,2006


2005Total Assets:Aircraft Braking Systems

$
1,258,203,000


$
1,221,962,000Engineered Fabrics


135,493,000



133,731,000Debt issuance costs, net, not
    allocated to segments


18,858,000



22,517,000Corporate assets


3,729,000



5,708,000$
1,416,283,000


$
1,383,918,000     13.
    Product
    Warranty    Balance at December 31, 2005

$
12,674,000Current provisions


5,413,000Expenditures


(5,260,000
)Balance at September 30, 2006

$
12,827,000     September 30,


December 31,2006


2005Current liabilities

$
11,698,000


$
12,327,000Long-term liabilities


1,129,000



347,000Total

$
12,827,000


$
12,674,000  15




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##### Table of Contents



K&F INDUSTRIES, INC. AND SUBSIDIARIES
  Notes to Condensed Consolidated Financial
    Statements  (Continued)
  14.
    Employee
    Benefit Plans    Pension BenefitsThree Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Service cost

$
1,190,000


$
836,000


$
3,356,000


$
2,897,000Interest cost


2,331,000



2,192,000



6,901,000



6,577,000Expected return on plan assets


(2,288,000
)


(2,228,000
)


(6,848,000
)


(6,674,000
)Net periodic benefit cost

$
1,233,000


$
800,000


$
3,409,000


$
2,800,000   Postretirement BenefitsThree Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Service cost

$
448,000


$
478,000


$
1,344,000


$
1,434,000Interest cost


1,400,000



1,396,000



4,200,000



4,188,000Net periodic benefit cost

$
1,848,000


$
1,874,000


$
5,544,000


$
5,622,000     15.
    Financial
    Instruments    3 4
    
    a 3 month LIBOR interest rate cap at 6% from December 2005
    to December 2007 for an increasing notional amount starting at
    $144.6 million, increasing to $161.2 million;
    a swap arrangement for a portion of our term loans from a
    variable 3 month LIBOR interest rate to a fixed rate of
    4.0375%, beginning January 24, 2006. The notional amount of
    the swap is initially $95.4 million and declines to
    $78.8 million on January 24, 2008 at the termination
    of the swap agreement; and
    a swap arrangement for a portion of our term loans from a
    variable 3 month LIBOR interest rate to a fixed rate of
    4.506%, beginning January 24, 2006. The notional amount of
    the swap is initially $47.7 million and declines to
    $39.4 million on January 24, 2008 at the termination
    of the swap agreement.     16




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Special
    Note Regarding Forward-Looking Statements
  Form 10-Q Form 10-K
    General
    Performance
    Evaluation
   17




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##### Table of Contents



Certain
    Market Trends, Challenges and Opportunities
      point-to-point
        Acquisition
    of K&F Industries
   18




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##### Table of Contents



3 4
  Acquisition
    of Nasco Aircraft Brake, Inc.
    Non-GAAP Financial
    Information
      Three Months EndedSeptember 30, 2006


September 30, 2005Net income, as reported

$
14,721,000


$
9,838,000Adjustments:Depreciation and amortization
    expense


7,419,000



6,105,000Interest expense, net of interest
    income


16,270,000



13,992,000Income tax provision


5,289,000



4,795,000EBITDA

$
43,699,000
(a)(b)

$
34,730,000
(c)    (a)
    
    Includes pre-tax non-cash stock-based compensation expense of
    $0.3 million during the three months ended
    September 30, 2006.(b)
    
    Includes pre-tax inventory purchase accounting charges of
    $0.6 million during the three months ended
    September 30, 2006.(c)
    
    Includes a pre-tax charge of $5.0 million during the three
    months ended September 30, 2005, related to the amendment
    of a management services agreement.  19




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##### Table of Contents



Nine Months EndedSeptember 30, 2006


September 30, 2005Net income, as reported

$
36,324,000


$
18,631,000Adjustments:Depreciation and amortization
    expense


21,308,000



18,474,000Interest expense, net of interest
    income


42,162,000



43,482,000Income tax provision


16,928,000



9,285,000EBITDA

$
116,722,000
(a)(b)

$
89,872,000
(a)(b)(c)     (a)
    
    Includes pre-tax non-cash stock-based compensation of
    $0.9 million and $0.1 million during the nine months
    ended September 30, 2006 and 2005, respectively.(b)
    
    Includes pre-tax inventory purchase accounting charges of
    $1.2 million and $12.1 million during the nine months
    ended September 30, 2006 and 2005, respectively.(c)
    
    Includes a pre-tax charge of $5.0 million during the nine
    months ended September 30, 2005, related to the amendment
    of a management services agreement.  Critical
    Accounting Policies and Estimates
    Revenue Recognition.
  Inventory.
    Evaluation of Long-Lived Assets.
 20




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##### Table of Contents



Goodwill and Other Intangible Assets.
        Program Participation Costs.
      Warranty.
  Pension and Other Postretirement Benefits.
 21




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##### Table of Contents



Business
    Segment Financial Information
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2006


2005


2006


2005Sales:Aircraft Braking Systems

$
88,361,000


$
84,022,000


$
248,537,000


$
231,683,000Engineered Fabrics


18,051,000



15,968,000



51,590,000



47,299,000Total

$
106,412,000


$
99,990,000


$
300,127,000



278,982,000Gross Profit:Aircraft Braking Systems

$
45,432,000


$
45,321,000


$
125,824,000


$
110,017,000Engineered Fabrics


4,658,000



3,219,000



11,301,000



8,851,000Total

$
50,090,000


$
48,540,000


$
137,125,000


$
118,868,000Gross Profit Margin:Aircraft Braking Systems


51.4%



53.9%



50.6%



47.5%Engineered Fabrics


25.8%



20.2%



21.9%



18.7%Consolidated


47.1%



48.5%



45.7%



42.6%  22




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##### Table of Contents



Comparison
    of Results of Operations for the Nine Months Ended
    September 30, 2006 and September 30,
    2005
    F-16 B-1B MD-80 ERJ-170 MD-90 Boeing MD-11 AH-64, UH-60
      Nine Months EndedSeptember 30,


September 30,2006


2005Gross Program Participation Costs

$
30,276,000


$
30,217,000Amount capitalized during period


(23,380,000
)


(19,718,000
)Amortization of Program
    Participation Costs


6,661,000



1,886,000Program Participation Costs
    expensed in period

$
13,557,000


$
12,385,000      23




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##### Table of Contents



Comparison
    of Results of Operations for the Three Months Ended
    September 30, 2006 and September 30,
    2005
    DC-9, DC-10 MD-80 Boeing MD-11 ERJ-190 Bombardier CRJ-700 AH-64 CH-47,
   24




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##### Table of Contents



Three Months EndedSeptember 30,


September 30,2006


2005Gross Program Participation Costs

$
9,399,000


$
10,286,000Amount capitalized during period


(7,613,000
)


(6,156,000
)Amortization of Program
    Participation Costs


2,299,000



696,000Program Participation Costs
    expensed in period

$
4,085,000


$
4,826,000           write-off
   25




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##### Table of Contents



Liquidity
    and Capital Resources
  3 4 5 8
        Form 10-K
  Cash
    Flows
       26




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##### Table of Contents



Current
    Accounting Pronouncements and Accounting Changes
  Accounting
    Pronouncements
            Accounting
    Changes
   27




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##### Table of Contents



Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk      
    a 3 month LIBOR interest rate cap at 6% from December 2005
    to December 2007 for an increasing notional amount starting at
    $144.6 million, increasing to $161.2 million;
    a swap arrangement for a portion of our term loans from a
    variable 3 month LIBOR interest rate to a fixed rate of
    4.0375%, beginning January 24, 2006. The notional amount of
    the swap is initially $95.4 million and declines to
    $78.8 million on January 24, 2008 at the termination
    of the swap agreement; and
    a swap arrangement for a portion of our term loans from a
    variable 3 month LIBOR interest rate to a fixed rate of
    4.506%, beginning January 24, 2006. The notional amount of
    the swap is initially $47.7 million and declines to
    $39.4 million on January 24, 2008 at the termination
    of the swap agreement.           Item 4.
    Controls
    and Procedures   28




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##### Table of Contents



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,
    1A, 2, 3, 4 and 5 are not applicable and have been
    omitted.
 29




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##### Table of Contents



SIGNATURES    K&F INDUSTRIES, INC.
    DIRKSON
    R. CHARLES
         30