<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 June 30, 2005
                                       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)

 50 Main Street, White Plains, New York                   10606
----------------------------------------   -------------------------------------
(Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code (914) 448-2700

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 August 15, 2005, there were 1,000 shares of common stock outstanding.

<PAGE>

                      K&F INDUSTRIES, INC. AND SUBSIDIARIES

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005

                                      INDEX

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

  Item 1.   Consolidated Financial Statements (Unaudited)

            a)  Consolidated Balance Sheets as of June 30, 2005
                and December 31, 2004                                     3

            b)  Consolidated Statements of Operations for the six
                months ended June 30, 2005 and 2004 (Predecessor)         4

            c)  Consolidated Statements of Operations for the
                three months ended June 30, 2005 and 2004
                (Predecessor)                                             5

            d)  Consolidated Statements of Cash Flows for the
                six months ended June 30, 2005 and 2004
                (Predecessor)                                             6

            e)  Notes to Consolidated Financial Statements                7

  Item 2.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations                          15

  Item 3.   Quantitative and Qualitative Disclosures About
            Market Risk                                                  24

  Item 4.   Controls and Procedures                                      25

Part II. Other Information

  Item 6.   Exhibits                                                     26

Signatures                                                               27
</TABLE>

<PAGE>

                          PART I. FINANCIAL INFORMATION
                          ITEM 1. FINANCIAL STATEMENTS
                      K&F INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                       June 30,       December 31,
                                                         2005             2004
                                                    --------------   --------------
<S>                                                 <C>              <C>
ASSETS:
Current Assets:
  Cash and cash equivalents                         $    9,328,000   $    9,636,000
  Accounts receivable, net                              42,765,000       42,333,000
  Inventory                                             58,348,000       61,247,000
  Other current assets                                   5,008,000        4,336,000
                                                    --------------   --------------
Total current assets                                   115,449,000      117,552,000
                                                    --------------   --------------

Property, plant and equipment                          104,153,000      101,083,000
  Less, accumulated depreciation and amortization        6,583,000        1,491,000
                                                    --------------   --------------
                                                        97,570,000       99,592,000
                                                    --------------   --------------

Other long-term assets                                      93,000          351,000
Debt issuance costs, net of amortization                24,025,000       28,768,000
Program participation costs, net of amortization        64,150,000       51,778,000
Intangible assets, net of amortization                 189,168,000      195,196,000
Goodwill                                               856,668,000      856,668,000
                                                    --------------   --------------
                                                    $1,347,123,000   $1,349,905,000
                                                    ==============   --============

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
  Accounts payable, trade                           $   14,306,000   $   15,030,000
  Interest payable                                       4,902,000        3,505,000
  Note payable                                                  --       14,682,000
  Income taxes payable                                  18,680,000        3,714,000
  Other current liabilities                             44,913,000       46,420,000
                                                    --------------     ------------
Total current liabilities                               82,801,000       83,351,000
                                                    --------------     ------------

Pension liabilities                                     50,248,000       48,248,000
Deferred income taxes                                   24,354,000       19,541,000
Postretirement benefit obligation other
  than pensions                                         93,613,000       92,269,000
Other long-term liabilities                              5,128,000        5,180,000
Senior term loan                                       456,000,000      475,000,000
7 3/4% senior subordinated notes due 2014              315,000,000      315,000,000
9 5/8% senior subordinated notes due 2010                  577,000          577,000

Stockholders' Equity:
  Preferred stock, $.01 par value - authorized,
   0 shares and 9,250 shares; issued and                        --               --
    outstanding, 0 shares and 9,250 shares
  Common stock, $.01 par value - authorized,
     1,000 shares; issued and outstanding,
     1,000 shares                                               --               --
  Additional paid-in capital                           309,810,000      309,790,000
  Retained earnings                                      9,673,000          880,000
  Accumulated other comprehensive (loss) income            (81,000)          69,000
                                                    --------------   --------------
Total stockholders' equity                             319,402,000      310,739,000
                                                    --------------   --------------
                                                    $1,347,123,000   $1,349,905,000
                                                    ==============   ==============
</TABLE>

                See notes to consolidated financial statements.

                                       2
<PAGE>

                      K&F INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                               Six Months Ended
                                         ---------------------------
                                            June 30,      June 30,
                                              2005         2004
                                         ------------   ------------
                                                       (Predecessor)
<S>                                      <C>            <C>
Sales                                    $178,992,000   $166,740,000

Cost of sales (including inventory
   purchase accounting charges of
   $12,084,000 for the six months ended
   June 30, 2005)
                                          108,665,000     97,582,000
                                         ------------   ------------
Gross profit                               70,327,000     69,158,000

Independent research and development        7,586,000      6,965,000

Selling, general and administrative
   expenses
                                           13,940,000     14,498,000

Amortization of intangible assets           6,028,000      2,340,000
                                         ------------   ------------
Operating income                           42,773,000     45,355,000

Interest and investment income                151,000        220,000

Interest expense                          (29,641,000)   (19,724,000)
                                         ------------   ------------
Income before income taxes                 13,283,000     25,851,000

Income tax provision                       (4,490,000)    (8,592,000)
                                         ------------   ------------
Net income                               $  8,793,000   $ 17,259,000
                                         ============   ============
</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
                                              ---------------------------
                                                 June 30,      June 30,
                                                  2005           2004
                                              ------------   ------------
                                                             (Predecessor)
<S>                                           <C>            <C>
Sales                                         $ 90,302,000   $ 83,591,000

Cost of sales                                   48,199,000     49,530,000
                                              ------------   ------------
Gross profit                                    42,103,000     34,061,000

Independent research and development             3,753,000      3,338,000

Selling, general and administrative
    expenses                                     6,661,000      7,350,000

Amortization of intangible assets                3,014,000      1,194,000
                                              ------------   ------------
Operating income                                28,675,000     22,179,000

Interest and investment income                      88,000        119,000

Interest expense                               (14,840,000)    (9,861,000)
                                              ------------   ------------
Income before income taxes                      13,923,000     12,437,000

Income tax provision                            (4,706,000)    (4,082,000)
                                              ------------   ------------
Net income                                    $  9,217,000   $  8,355,000
                                              ============   ============
</TABLE>

                See notes to consolidated financial statements.

                                       5
<PAGE>

                      K&F INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                              Six Months Ended
                                                        ------------   ------------
                                                          June 30,       June 30,
                                                            2005           2004
                                                        ------------   -------------
                                                                       (Predecessor)
<S>                                                     <C>            <C>
Cash flows from operating activities:
 Net income                                             $  8,793,000   $ 17,259,000
 Adjustments to reconcile net income to net
   cash provided by operating activities:
     Depreciation                                          5,151,000      3,542,000
     Amortization of program participation costs           1,190,000             --
     Amortization of intangible assets                     6,028,000      2,340,000
     Non-cash interest expense - amortization of
       debt issuance cost                                  4,743,000        918,000
     Non-cash interest expense - change in fair
       market value of interest rate cap                     264,000             --
     Non-recurring inventory purchase accounting
       charge                                             12,084,000             --
     Deferred income taxes                                 4,813,000      2,199,000
     Changes in assets and liabilities:
      Accounts receivable, net                              (500,000)       925,000
      Inventory                                           (9,267,000)       (90,000)
      Other current assets                                  (678,000)       847,000
      Program participation costs                        (13,562,000)    (4,532,000)
      Notes payable                                      (14,682,000)            --
      Accounts payable, interest payable and
        other current liabilities                         14,132,000     (6,376,000)
      Postretirement benefit obligation other
        than pensions                                      1,344,000       (151,000)
      Long-term liabilities                                1,948,000      4,136,000
                                                        ------------   ------------
 Net cash provided by operating
  activities                                              21,801,000     21,017,000
                                                        ------------   ------------

Cash flows from investing activities:
 Capital expenditures                                     (3,129,000)    (1,240,000)
                                                        ------------   ------------
 Net cash used in investing activities                    (3,129,000)    (1,240,000)
                                                        ------------   ------------

Cash flows from financing activities:
 Equity contributions                                         20,000             --
 Payments of long-term debt                              (19,000,000)            --
                                                        ------------   ------------
 Net cash used in financing activities                   (18,980,000)            --
                                                        ------------   ------------

 Net (decrease) increase in cash and cash  equivalents      (308,000)    19,777,000
Cash and cash equivalents, beginning of
 period                                                    9,636,000     24,464,000
                                                        ------------   ------------

Cash and cash equivalents, end of period                $  9,328,000   $ 44,241,000
                                                        ============   ============

Supplemental cash flow information:
 Interest paid during period                            $ 23,237,000   $ 18,806,000
                                                        ============   ============

 Income taxes paid during the period                    $    167,000   $  4,379,000
                                                        ============   ============
</TABLE>

                 See notes to consolidated financial statements.

                                       6
<PAGE>

                      K&F INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.    Description of the Business and the Acquisition

Description of Business

K&F Industries, Inc. and subsidiaries ("K&F" or the "Company") is primarily
engaged in the design, development, manufacture and distribution of wheels,
brakes and brake control systems for commercial, military and general aviation
aircraft, and the manufacture of materials for fuel tanks, iceguards, inflatable
oil booms and various other products made from coated fabrics for military and
commercial uses. The Company serves the aerospace industry and sells its
products to airframe manufacturers and commercial airlines throughout the world
and to the United States government and certain foreign governments. The
Company's activities are conducted through its two wholly owned subsidiaries,
Aircraft Braking Systems Corporation ("Aircraft Braking Systems") and Engineered
Fabrics Corporation ("Engineered Fabrics").

The Acquisition

On November 18, 2004, K&F Industries Holdings, Inc. ("K&F Parent"), an affiliate
of Aurora Capital Group, acquired K&F in exchange for cash consideration of
approximately $1.06 billion (excluding capitalized transaction costs of $40.4
million). In addition, the former K&F equityholders retained $77.2 million of
cash on hand at the Acquisition date. The cash consideration was used to repay
substantially all of K&F's then existing indebtedness and the related fees and
expenses of K&F and certain of its stockholders, with the balance paid to former
equityholders of K&F (the "Acquisition").

The Acquisition was financed with an offering by K&F of $315.0 million of 7 3/4%
Senior Subordinated Notes due 2014, the borrowing by K&F of $480.0 million under
a new $530 million senior secured credit facility and $309.8 million in equity
investments from K&F Parent. K&F Parent contributed the $309.8 million of equity
to its wholly-owned subsidiary, K&F Intermediate Holdco, Inc., which then
contributed such proceeds as equity to its wholly-owned subsidiary, K&F
Acquisition, Inc., prior to the merger of K&F Acquisition, Inc. with and into
K&F.

The Acquisition was accounted for using the purchase method of accounting,
pursuant to which the total purchase price, including related fees and expenses,
was allocated to the acquired net assets based upon estimates of fair value.
These adjustments were made by obtaining third-party valuations of certain
tangible and intangible assets and liabilities.

The following table summarizes the fair values assigned to K&F's assets acquired
and liabilities assumed in connection with the Acquisition on November 18, 2004:

                                       7
<PAGE>

                      K&F INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

<TABLE>
<S>                                      <C>
Assets Acquired:

      Current assets                     $  183,467,000

      Property, plant and equipment          99,005,000

      Debt issuance costs                    29,280,000

      Program participation costs            49,238,000

      Other intangible assets               196,636,000

      Goodwill                              856,668,000
                                         --------------
           Total assets acquired          1,414,294,000
                                         --------------

Liabilities Assumed:

      Current liabilities                   142,242,000

      Pension liabilities                    47,629,000

      Postretirement benefit obligation      91,858,000

      Deferred income taxes                  20,169,000

      Other long-term liabilities             5,684,000

      Long-term debt                        796,922,000
                                         --------------
           Total liabilities assumed      1,104,504,000
                                         --------------
Net assets acquired                      $  309,790,000
                                         ==============
</TABLE>

2.    Unaudited Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared
by 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
statement of operations for the three and six months ended June 30, 2005 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, 2004 Annual Report on Form 10-K.

                                       8
<PAGE>

                      K&F INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

Since the date of the Acquisition (see Note 1), the accompanying financial
statements include fair value adjustments to assets and liabilities including
inventory, goodwill, other intangible assets, program participation costs,
property, plant and equipment and the subsequent impact on cost of sales,
amortization and depreciation expenses. Accordingly, all references in the
consolidated financial statements and the accompanying notes to events or
activities which occurred prior to the completion of the Acquisition relate to
K&F as the predecessor company and are labeled as "Predecessor".

3.    Program Participation Costs

"Program Participation Costs" consist of incentives given to Original Equipment
Aircraft Manufacturers ("OEMs") in connection with their sole source selection
of our products for installation on aircraft. Prior to the completion of the
Federal Aviation Administration ("FAA") certification process, these incentives
consist of cash payments. After the completion of the FAA-certification process,
these incentives consist of cash payments, products discounted below cost and
free products. The costs associated with a discounted product or free product
are equal to the amount by which the cost of production exceeds the sales price
of such product and are expensed prior to the completion of the
FAA-certification process. In most cases, the Company does not receive revenue
from the OEM, and does not generate profits until it sells replacement parts to
the OEMs' customers and end-user aircraft operators.

The Predecessor consolidated financial statements utilize a different accounting
treatment for Program Participation Costs than that used in the periods
subsequent to the Acquisition. The Predecessor consolidated financial
statements: (i) recognized the costs associated with discounted products and
free products given to an OEM after completion of the FAA-certification process
as an expense in cost of sales when the applicable original equipment was
shipped; and (ii) capitalized the cash payments component of Program
Participation Costs, which were then amortized on a straight-line basis over the
shorter of the estimated economic useful life of the aircraft or 20 years, as
amortization expense.

The consolidated financial statements for the three and six month ended June 30,
2005: (i) expense all three components of Program Participation Costs for
non-sole source programs in cost of sales when the applicable original equipment
is shipped or the cash payments component is paid; and (ii) capitalize Program
Participation Costs for sole source contracts. A "sole source contract" is a
contractual commitment from the OEM pursuant to which the OEM: (i) agrees to
purchase parts for newly-produced aircraft exclusively from us; and (ii) agrees
not to support an attempt by a different supplier to be certified as a supplier
of replacement parts for such aircraft platform. These sole source contracts
require the Company to supply the OEM with all of the OEM's parts requirements
for as long as the applicable aircraft is produced and is in service.
Accordingly, the Company amortizes all capitalized Program Participation Costs
as an expense in cost of sales on a straight-line basis over the shorter of the
estimated economic useful life of the aircraft or 25 years.

                                       9
<PAGE>

                      K&F INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

4.    Accounting Pronouncements

In December 2004 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123-R. SFAS No. 123-R is a revision
of SFAS No. 123 and supersedes Accounting Principles Board ("APB") Opinion No.
25. SFAS No. 123-R eliminates the alternative to use the intrinsic value method
of accounting that was provided in SFAS No. 123, which generally resulted in no
compensation expense recorded in the financial statements related to the
issuance of equity awards to employees. SFAS No. 123-R requires that the cost
resulting from all share-based payment transactions be recognized in the
financial statements. SFAS No. 123-R establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires all
companies to apply a fair-value-based measurement method in accounting for
generally all share-based payment transactions with employees. See Note 8.

The Company plans to adopt SFAS No. 123-R using a modified prospective
application. Under this application, companies are required to record
compensation expense for all awards granted after the required effective date
and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. The provisions of SFAS 123-R are effective
for the Company on January 1, 2006.

5. Accounts Receivable are summarized as follows:

<TABLE>
<CAPTION>
                                     June 30,     December 31,
                                       2005          2004
                                   ------------   ------------
<S>                                <C>            <C>
Accounts receivable, principally
   from commercial customers       $ 39,766,000   $ 35,885,000

Accounts receivable, on U.S.
   Government and other long-term
   contracts                          4,212,000      7,684,000

Allowances                           (1,213,000)    (1,236,000)
                                   ------------   ------------

                                   $ 42,765,000   $ 42,333,000
                                   ============   ============
</TABLE>

6.    Inventory consists of the following:

<TABLE>
<CAPTION>
                                      June 30,   December 31,
                                       2005          2004
                                   ------------  ------------
<S>                                <C>           <C>
Raw materials and work-in-process  $ 31,564,000  $ 35,356,000

Finished goods                       13,483,000    16,017,000

Inventoried costs related to U.S.
   Government and other long-term
   contracts                         13,301,000     9,874,000
                                   ------------  ------------

                                   $ 58,348,000  $ 61,247,000
                                   ============  ============
</TABLE>

                                       10
<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.

7.    Other current liabilities consist of the following:

<TABLE>
<CAPTION>
                                           June 30,    December 31,
                                             2005          2004
                                         ------------  ------------
<S>                                      <C>           <C>
Accrued payroll costs                    $ 12,674,000  $ 15,919,000
Accrued property and other taxes            3,156,000     2,197,000
Accrued costs on long-term contracts        4,907,000     2,639,000
Accrued warranty costs                     13,131,000    12,261,000
Customer credits                            4,241,000     5,402,000
Postretirement benefit obligation other
  than pensions                             4,000,000     4,000,000
Other                                       2,804,000     4,002,000
                                         ------------  ------------

                                         $ 44,913,000  $ 46,420,000
                                         ============  ============
</TABLE>

8.    Stock Options

      The following information has been adjusted for a 133 to one stock split
      which occurred on August 8, 2005.

      In 2005, K&F Parent established a stock option plan, covering an
      aggregate of 1,330,000 authorized but unissued shares of common stock, for
      the benefit of, and to incentivize, officers, directors, employees and
      certain other persons of K&F Parent and its subsidiaries. In 2005,
      K&F Parent issued stock options to certain of K&F's officers, directors
      and employees to purchase an aggregate of 927,965 shares of common stock,
      at an exercise price of $7.52 per share, the estimated fair value at the
      date of grant. The options vest at the rate of 20% per year.

      The Company applies the intrinsic value method under APB No. 25,
      "Accounting for Stock Issued to Employees", and related interpretations to
      account for its stock option plan (see Note 4). Accordingly, the Company
      only records compensation expense for any stock options granted with an
      exercise price that is less than the fair market value of the underlying
      stock at the date of grant.

      The following table details the effect on net income had compensation
      expense for the stock option plan been recorded based on the fair value
      method under SFAS No. 123, "Accounting for Stock-based Compensation", as
      amended:

                                       11
<PAGE>

                      K&F INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                               Three Months Ended
                                          ---------------------------
                                            June 30,       June 30,
                                              2005           2004
                                          ------------   ------------
                                                         (Predecessor)
<S>                                       <C>            <C>
Reported net income                       $  9,217,000   $  8,355,000
Deduct: Total stock-based employee and
  director compensation expense
  determined under fair value method for
  all awards, net of related tax effects      (128,000)            --
                                          ------------   ------------
Pro forma net income                      $  9,089,000   $  8,355,000
                                          ============   ============
</TABLE>

<TABLE>
<CAPTION>
                                              Six Months Ended
                                        ---------------------------
                                           June 30,      June 30,
                                            2005           2004
                                        ------------   ------------
                                                       (Predecessor)
<S>                                     <C>            <C>
Reported net income                     $  8,793,000   $ 17,259,000
Deduct: Total stock-based employee and
  director compensation expense
determined under fair value method for
all awards, net of related tax effects      (256,000)            --
                                        ------------   ------------
Pro forma net income                    $  8,537,000   $ 17,259,000
                                        ============   ============
</TABLE>

      There were no stock options granted during the three and six months ended
      June 30, 2004 (Predecessor). The effects of applying SFAS No. 123 in this
      pro forma disclosure are not indicative of future results.

      The weighted average fair value of K&F Parent stock options granted during
      the six months ended June 30, 2005 was $3.24 per stock option, estimated
      on the date of grant using the Black-Scholes options-pricing model with
      the following weighted average assumptions: expected volatility of 33%
      (represents an average of the three-year trailing volatility of publicly
      traded companies in our peer group); risk-free interest rate of 3.97%
      (represents the rate available on U.S. government bonds at the grant
      date); and expected lives of option grants of seven years.

9.    Income Taxes

      The Company's effective tax rate of 33.8% for the three and six months
      ended June 30, 2005 differs from the statutory rate of 35% due to tax
      benefits derived from export sales. The Company's effective tax rate of
      32.8% and 33.2% for the three and six months ended June 30, 2004
      (Predecessor), respectively, differs from the statutory rate of 35% due to
      tax benefits derived from export sales.

                                       12
<PAGE>

                      K&F INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

10.   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.

11.   Comprehensive Income

<TABLE>
<CAPTION>
                                            Three Months Ended
                                       ---------------------------
                                          June 30,      June 30,
                                           2005           2004
                                       ------------   ------------
                                                      (Predecessor)
<S>                                    <C>            <C>
Net income                             $  9,217,000   $  8,355,000

Other comprehensive (loss) income:

   Cumulative translation adjustments      (118,000)       (31,000)
                                       ------------   ------------

Comprehensive income                   $  9,099,000   $  8,324,000
                                       ============   ============
</TABLE>

<TABLE>
<CAPTION>
                                             Six Months Ended
                                       --------------------------
                                          June 30,      June 30,
                                           2005           2004
                                       ------------   ------------
                                                      (Predecessor)
<S>                                    <C>            <C>
Net income                             $  8,793,000   $ 17,259,000

Other comprehensive (loss) income:

   Cumulative translation adjustments      (150,000)        62,000
                                       ------------   ------------

Comprehensive income                   $  8,643,000   $ 17,321,000
                                       ============   ============
</TABLE>

                                       13
<PAGE>

                      K&F INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

12.   Segments

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

<TABLE>
<CAPTION>
                                     Three Months Ended
                                ---------------------------
                                   June 30,      June 30,
                                    2005           2004
                                ------------   ------------
                                               (Predecessor)
<S>                             <C>            <C>
Sales:
  Aircraft Braking Systems      $ 73,737,000   $ 69,162,000
  Engineered Fabrics              16,565,000     14,429,000
                                ------------   ------------
                                $ 90,302,000   $ 83,591,000
                                ============   ============

Operating Profit:
  Aircraft Braking Systems      $ 27,035,000   $ 19,937,000
  Engineered Fabrics               1,640,000      2,242,000
                                ------------   ------------
    Operating income              28,675,000     22,179,000
  Interest expense, net          (14,752,000)    (9,742,000)
                                ------------   ------------
    Income before income taxes  $ 13,923,000   $ 12,437,000
                                ============   ============
</TABLE>

<TABLE>
<CAPTION>
                                     Six Months Ended
                                ---------------------------
                                  June 30,       June 30,
                                    2005          2004
                                ------------   ------------
                                               (Predecessor)
<S>                             <C>            <C>
Sales:
  Aircraft Braking Systems      $147,661,000   $138,039,000
  Engineered Fabrics              31,331,000     28,701,000
                                ------------   ------------
                                $178,992,000   $166,740,000
                                ============   ============

Operating Profit:
  Aircraft Braking Systems      $ 40,730,000   $ 40,898,000
  Engineered Fabrics               2,043,000      4,457,000
                                ------------   ------------
    Operating income              42,773,000     45,355,000
  Interest expense, net          (29,490,000)   (19,504,000)
                                ------------   ------------
    Income before income taxes  $ 13,283,000   $ 25,851,000
                                ============   ============
</TABLE>

<TABLE>
<CAPTION>
                                         June 30,      December 31,
                                           2005            2004
                                      --------------  --------------
<S>                                   <C>             <C>
Total Assets:
  Aircraft Braking Systems            $1,183,336,000  $1,183,123,000
  Engineered Fabrics                     134,005,000     133,750,000
  Debt issuance costs not allocated
     to segments                          24,025,000      28,768,000
  Corporate assets                         5,757,000       4,264,000
                                      --------------  --------------
                                      $1,347,123,000  $1,349,905,000
                                      ==============  ==============
</TABLE>

13.   Subsequent Event

      K&F amended its Management Services Agreement with Aurora Management
      Partners LLC. The amendment eliminated the $1 million annual fee, payable
      over the term of the Management Services Agreement for a $5.0 million
      termination fee. K&F made this payment on August 12, 2005 and will record
      this as a charge to its third quarter 2005 earnings.

                                       14
<PAGE>

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

General

K&F Industries, Inc. and subsidiaries, or "K&F", is primarily engaged in the
design, development, manufacture and distribution of wheels, brakes and brake
control systems for commercial, military and general aviation aircraft, and the
manufacture of materials for fuel tanks, iceguards, inflatable oil booms and
various other products made from coated fabrics for military and commercial
uses. We serve the aerospace industry and sell our products to airframe
manufacturers and commercial airlines throughout the world and to the United
States government and certain foreign governments. Our activities are conducted
through our two wholly owned subsidiaries, Aircraft Braking Systems Corporation,
or "Aircraft Braking Systems" and Engineered Fabrics Corporation, or "Engineered
Fabrics".

Termination of Management Services Agreement

K&F amended its Management Services Agreement with Aurora Management Partners
LLC. The amendment eliminated the $1 million annual fee payable over the term
of the Management Services Agreement in exchange for a $5.0 million termination
fee. K&F made this payment on August 12, 2005 and will record this as a charge
to its third quarter 2005 earnings.

The Acquisition

On November 18, 2004, K&F Industries Holdings, Inc., or "K&F Parent", an
affiliate of Aurora Capital Group, acquired K&F in exchange for cash
consideration of approximately $1.06 billion (excluding capitalized transaction
costs of $40.4 million). In addition, the former K&F equityholders retained
$77.2 million of cash on hand at the acquisition date. The cash consideration
was used to repay substantially all of K&F's then existing indebtedness and the
related fees and expenses of K&F and certain of its stockholders, with the
balance paid to the former equityholders. We refer to this as the "Acquisition".

The Acquisition was financed with an offering by us of $315.0 million of 7 3/4%
Senior Subordinated Notes due 2014, the borrowing by us of $480.0 million under
a new $530 million senior secured credit facility and $309.8 million in equity
investments from K&F Parent. K&F Parent contributed the $309.8 million of equity
to its wholly-owned subsidiary, K&F Intermediate Holdco, Inc., which then
contributed such proceeds as equity to its wholly-owned subsidiary, K&F
Acquisition, Inc., prior to the merger of K&F Acquisition, Inc. with and into
K&F.

The Acquisition was accounted for using the purchase method of accounting,
pursuant to which the total purchase price, including related fees and expenses,
was allocated to the acquired net assets based upon estimates of fair value.
These adjustments were made by obtaining third-party valuations of certain
tangible and intangible assets and liabilities.

Since the date of the Acquisition, our financial statements include fair value
adjustments to assets and liabilities including inventory, goodwill, other
intangible assets, program participation costs, property, plant and equipment
and the subsequent impact on cost of sales, amortization and depreciation
expenses. Accordingly, all references to events or activities

                                       15
<PAGE>
which occurred prior to the completion of the Acquisition relate to K&F as the
predecessor company and are labeled as "Predecessor".

"EBITDA" represents net income before interest expense, income tax provision and
depreciation and amortization. EBITDA does not represent and should not be
considered as an alternative to net income or cash flow from operations, as
determined in accordance with GAAP, and our calculations thereof may not be
comparable to similarly entitled measures reported by other companies. We
present EBITDA because we believe it is a useful indicator of our operating
performance. Our management uses EBITDA principally as a measure of our
operating performance and believes that EBITDA is useful to investors because it
is frequently used by securities analysts, investors and other interested
parties in their evaluation of companies in industries similar to ours. We also
believe EBITDA is useful to our management and investors as a measure of
comparative operating performance between time periods and among companies as it
is reflective of changes in pricing decisions, cost controls and other factors
that affect operating performance. Our management also uses EBITDA for planning
purposes, including the preparation of our annual operating budget and financial
projections.

EBITDA does not represent and should not be considered as an alternative to
results of operations under GAAP and has significant limitations as an
analytical tool. Although we use EBITDA as a measure to assess the performance
of our business, the use of EBITDA is limited because it excludes certain
material costs. For example, it does not include interest expense, which is a
necessary element of our costs and ability to generate revenue, because we have
borrowed money in order to finance our operations. Because we use capital
assets, depreciation expense is a necessary element of our costs and ability to
generate revenue. In addition, the omission of the substantial amortization
expense associated with our intangible assets further limits the usefulness of
this measure. EBITDA also does not include the payment of taxes, which is also a
necessary element of our operations. Because EBITDA does not account for these
expenses, its utility as a measure of our operating performance has material
limitations. Because of these limitations management does not view EBITDA in
isolation or as a primary performance measure and also uses other measures, such
as net income, sales, bookings and operating profit, to measure operating
performance.

The following is a reconciliation of net income to EBITDA:

<TABLE>
<CAPTION>
                                             Three Months Ended
                                         --------------------------
                                           June 30,      June 30,
                                             2005          2004
                                         -----------   ------------
                                                       (Predecessor)
<S>                                      <C>           <C>
Net income                               $  9,217,000  $  8,355,000
Adjustments:
  Depreciation and amortization expense     6,236,000     3,006,000
  Interest expense, net                    14,752,000     9,742,000
  Income tax provision                      4,706,000     4,082,000
                                         ------------  ------------
EBITDA                                   $ 34,911,000  $ 25,185,000
                                         ============  ============
</TABLE>

<TABLE>
<CAPTION>
                                              Six Months Ended
                                         --------------------------
                                            June 30,      June 30,
                                             2005           2004
                                         ------------  ------------
                                                       (Predecessor)
<S>                                      <C>           <C>
Net income                               $  8,793,000  $ 17,259,000
Adjustments:
  Depreciation and amortization expense    12,369,000     5,882,000
  Interest expense, net                    29,490,000    19,504,000
  Income tax provision                      4,490,000     8,592,000
                                         ------------  ------------
EBITDA                                   $ 55,142,000  $ 51,237,000
                                         ============  ============
</TABLE>

The following tables show the non-recurring and certain other items which are
included in EBITDA: non-recurring inventory accounting adjustments,
non-recurring salary and benefit expense, non-recurring non-cash income and

                                       16
<PAGE>

capitalization of Program Participation Costs. We believe this information, when
reviewed in connection with our presentation of EBITDA, provides another useful
tool to our management and investors for measuring comparative operating
performance between time periods and among companies. In addition to EBITDA, our
management assesses the adjustments presented below when preparing our annual
operating budget and financial projections. Specifically, because these tables
exclude non-recurring salary and benefit expense and non-recurring non-cash
income, we believe this information allows our management and investors to
assess our operating performance during the periods these charges were incurred
on a consistent basis with the periods during which these unusual charges were
not incurred. Further, because of the significant changes in our capital
structure resulting from the Acquisition, including the post-Acquisition
capitalization of our Program Participation Costs, we believe that the
presentation of the adjustments relating to non-recurring inventory purchase
accounting adjustments and capitalization of Program Participation Costs both
enable our management and investors to assess the impact of the Acquisition on
our operating performance and provides a consistent measure of our operating
performance for periods subsequent to the Acquisition.

<TABLE>
<CAPTION>
                                             Three Months Ended
                                         --------------------------
                                            June 30,     June 30,
                                             2005         2004
                                         ------------  ------------
                                                       (Predecessor)
<S>                                      <C>           <C>
Non-recurring salary and benefit
 expense                                 $         --  $  1,707,000
Program Participation Costs previously
 expensed                                          --     6,098,000
                                         ------------  ------------
                                         $         --  $  7,805,000
                                         ============  ============
</TABLE>

<TABLE>
<CAPTION>
                                              Six Months Ended
                                        ------------  ------------
                                          June 30,      June 30,
                                            2005          2004
                                        ------------  ------------
                                                      (Predecessor)
<S>                                     <C>           <C>
Inventory purchase accounting
 charge                                 $ 12,084,000  $         --
Non-recurring salary and benefit
 expense                                          --     3,428,000
Non-recurring non-cash income                     --      (592,000)
Program Participation Costs previously
  expensed                                        --    10,817,000
                                        ------------  ------------
                                        $ 12,084,000  $ 13,653,000
                                        ============  ============
</TABLE>

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,

                                       17
<PAGE>

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 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 affect our more significant judgments and estimates
used in the preparation of the consolidated financial statements.

Revenue Recognition. Revenue from the sale of products is generally recognized
upon shipment to customers, provided that there are no uncertainties regarding
customer acceptance, there is persuasive evidence of an agreement, the sales
price is fixed and determinable and collection of the receivable is probable.

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.

Program Participation Costs. "Program Participation Costs" consist of incentives
given to Original Equipment Aircraft Manufacturers ("OEMs") in connection with
their sole source selection of our products for installation on aircraft. Prior
to the completion of the Federal Aviation Administration ("FAA") certification
process, these incentives consist of cash payments. After the completion of the
FAA-certification process, these incentives consist of cash payments, products
discounted below cost and free products. The costs associated with a discounted
product or free product are equal to the amount by which the cost of production
exceeds the sales price of such product and are expensed prior to the completion
of the FAA-certification process. In most cases, we do not receive revenue from
the OEM, and do not generate profits until we sell replacement parts to the
OEMs' customers and end-user aircraft operators.

The Predecessor consolidated financial statements utilize a different accounting
treatment for Program Participation Costs than that used in the periods
subsequent to the Acquisition. The Predecessor consolidated financial
statements: (i) recognized the costs associated with discounted products and
free products given to an OEM after completion of the FAA-certification process
as an expense in cost of sales when the applicable original equipment was
shipped; and (ii) capitalized the cash payments component of Program
Participation Costs, which were then amortized on a

                                       18
<PAGE>

straight-line basis over the shorter of the estimated economic useful life of
the aircraft or 20 years, as amortization expense.

The consolidated financial statements for the three and six months ended June
30, 2005: (i) expense all three components of Program Participation Costs for
non-sole source programs in cost of sales when the applicable original equipment
is shipped or the cash payments component is paid; and (ii) capitalize Program
Participation Costs for sole source contracts. A "sole source contract" is a
contractual commitment from the OEM pursuant to which the OEM: (i) agrees to
purchase parts for newly-produced aircraft exclusively from us; and (ii) agrees
not to support an attempt by a different supplier to be certified as a supplier
of replacement parts for such aircraft platform. These sole source contracts
require us to supply the OEM with all of the OEM's parts requirements for as
long as the applicable aircraft is produced and is in service. Accordingly, we
amortize all capitalized Program Participation Costs as an expense in cost of
sales on a straight-line basis over the shorter of the estimated economic useful
life of the aircraft or 25 years.

Evaluation of Long-Lived Assets. Long-lived assets are assessed for
recoverability on an ongoing basis in accordance with Statement of Financial
Accounting Standards or, "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.

Goodwill and Other Intangible Assets. In accordance with SFAS No. 142, "Goodwill
and Other Intangible Assets," we do not amortize goodwill and other intangible
assets that are deemed to have indefinite lives. We test these assets for
impairment at least annually or more frequently if any event occurs or
circumstances change that indicate possible impairment.

Goodwill represents the excess cost of the businesses acquired over the fair
market value of the identifiable net assets.

Upon completion of the Acquisition, we determined that Aircraft Braking Systems
and Engineered Fabrics qualified as reporting units because discrete financial
information exists for each operation and the management of each operation
directly reviewed the operation's performance. In the future, if we determine
that our current structure no longer meets the requirements of a reporting unit,
we will reevaluate the reporting units with respect to the changes in our
reporting structure.

The first step of the impairment test identifies potential impairments by
comparing the estimated fair value using a market multiple analysis and a
discounted cash flow analysis of each reporting unit with its corresponding net
book value, including goodwill. If the net book value of the reporting unit
exceeds its fair value, the second step of the impairment test determines the
potential impairment loss by applying the estimated fair value first to the
tangible assets, then to the identifiable intangible assets. Any remaining value
would then be applied to the goodwill. The excess carrying value of goodwill
over the remaining fair value would indicate the amount of the impairment
charge.

Warranty. Estimated costs of warranty are accrued when individual claims arise
with respect to a product or performance. When we become aware of

                                       19
<PAGE>

those types of defects, the estimated costs of all potential warranty claims
arising from those types of defects are fully 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 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 1/4% discount rate in 2004 and are using a 6.0% discount rate for 2005 to
reflect market 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 2004 and will remain at
9.0% for 2005 to reflect projected returns in the fixed income and equity
markets.

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 2005 postretirement expense is 10.1%
in 2005 trending down to 5.0% for 2010.

Comparison of Results of Operations for the Six Months Ended June 30, 2005 and
June 30, 2004

Our sales for the six months ended June 30, 2005 totaled $178,992,000,
reflecting an increase of $12,252,000, compared with $166,740,000 for the same
period in the prior year. This increase was due to higher sales at Aircraft
Braking Systems of $9,622,000 and Engineered Fabrics of $2,630,000.

Commercial sales at Aircraft Braking Systems increased $4,610,000, primarily due
to higher sales of wheels and brakes on the Boeing DC-10 and DC-9, Fokker FO-100
and Embraer ERJ-170 programs, partially offset by the Boeing MD-80 and
Bombardier CRJ-100/200 programs. General aviation sales increased $4,867,000,
primarily on Gulfstream and Dassault aircraft. Military sales were level with
the prior year with an increase in the Lockheed C-130, offset by a decrease in
the Boeing B-1B program. Sales at Engineered Fabrics increased primarily due to
higher military sales of fuel tanks, primarily for

                                       20
<PAGE>

the Boeing CH-47 and F-15 and Northrop Grumman T-38 programs, partially offset
by lower shipments on the F-18 program. In addition, sales increased due to
higher shipments of oil containment booms and iceguards for the Sikorsky UH-60
program.

Our gross profit increased by $1,169,000 to $70,327,000, or 39.3% of sales for
the six months ended June 30, 2005, compared with $69,158,000, or 41.5% of sales
for the same period in the prior year. This increase was primarily attributable
to lower expensed Program Participation Costs of $8,636,000 and the higher sales
volume, partially offset by a $12,084,000 non-recurring charge included in cost
of sales pertaining to an inventory purchase accounting adjustment (which
represents the remaining balance of the fair value adjustment to inventory
recorded in connection with the Acquisition) and higher depreciation of
$1,668,000 relating to purchase accounting allocations.

The following table provides additional information detailing Program
Participation Costs:

<TABLE>
<CAPTION>
                                              Six Months Ended
                                       ---------------------------
                                          June 30,      June 30,
                                           2005           2004
                                       ------------   ------------
                                                      (Predecessor)
<S>                                    <C>            <C>
Gross Program Participation Costs      $ 18,931,000   $ 16,195,000
Amount capitalized during period        (12,562,000)            --
Amortization of Program Participation
 Costs                                    1,190,000             --
                                       ------------   ------------
Program Participation Costs expensed
 in period                             $  7,559,000   $ 16,195,000
                                       ============   ============
</TABLE>

Aircraft Braking Systems' gross profit was $74,440,000, or 50.4% of sales
(excluding $11,293,000, relating to its portion of the non-recurring inventory
purchase accounting adjustment) for the six months ended June 30, 2005, compared
with $63,103,000, or 45.7% of sales for the same period in the prior year.
Aircraft Braking Systems' gross margin increased primarily due to lower expensed
investments, as discussed above and the overhead absorption effect relating to
the higher sales, partially offset by higher depreciation expense, as discussed
above. Engineered Fabrics' gross profit was $7,971,000, or 25.4% of sales
(excluding $791,000, relating to its portion of the non-recurring inventory
purchase accounting adjustment) for the six months ended June 30, 2005, compared
with $6,055,000, or 21.1% of sales for the same period in the prior year.
Engineered Fabrics' gross margin increased primarily due to the overhead
absorption effect relating to the higher sales and a favorable mix of products
sold.

Independent research and development costs increased by $621,000 for the six
months ended June 30, 2005, as compared with the same period in the prior year.
This increase was primarily due to higher costs on various development programs,
partially offset by lower costs on the Dassault Falcon 7X program.

Selling, general and administrative expenses decreased by $558,000 during the
six months ended June 30, 2005, as compared with the same period in the prior
year. This decrease was primarily due to lower compensation costs, partially
offset by costs associated with the implementation of our productivity
enhancement program.

                                       21
<PAGE>

Amortization expense increased by $3,688,000 during the six months ended June
30, 2005, as compared with the same period in the prior year. This increase was
due to the fair value accounting for intangible assets related to the
Acquisition.

Our net interest expense increased $9,986,000 for the six months ended June 30,
2005, as compared with the same period in the prior year. This increase was
primarily due to the increased debt and related debt issuance costs we incurred
in connection with the Acquisition. The increase related to the amortization of
debt issuance costs was $3,825,000 during the six months ended June 30, 2005, as
compared with the same period in the prior year.

Our effective tax rate of 33.8% for the six months ended June 30, 2005 differs
from the statutory rate of 35% due to tax benefits derived from export sales.
Our effective tax rate of 33.2% for the six months ended June 30, 2004 differs
from the statutory rate of 35% due to tax benefits derived from export sales.

Comparison of Results of Operations for the Three Months Ended June 30, 2005 and
June 30, 2004

Our sales for the three months ended June 30, 2005 totaled $90,302,000,
reflecting an increase of $6,711,000, compared with $83,591,000 for the same
period in the prior year. This increase was due to higher sales at Aircraft
Braking Systems of $4,575,000 and Engineered Fabrics of $2,136,000.

Commercial sales at Aircraft Braking Systems increased $1,720,000, primarily due
to higher sales of wheels and brakes on the Boeing DC-10 and Embraer ERJ-170
programs, partially offset by lower sales on the Bombardier CRJ-100/200 and the
Boeing MD-90 programs. General aviation sales increased $2,933,000, primarily on
Dassault and Gulfstream aircraft. Military sales were level with the prior year.
Sales at Engineered Fabrics increased primarily due to higher military sales of
fuel tanks, primarily for the Boeing CH-47 and F-15 and Northrop Grumman T-38
programs, partially offset by lower shipments on the F-18 program. In addition,
sales increased due to higher shipments of oil containment booms.

Our gross profit increased by $8,042,000 to $42,103,000, or 46.6% of sales for
the three months ended June 30, 2005, compared with $34,061,000, or 40.7% of
sales for the same period in the prior year. This increase was primarily
attributable to lower expensed Program Participation Costs of $4,876,000 and the
higher sales volume, partially offset by higher depreciation of $834,000
relating to purchase accounting allocations.

The following table provides additional information detailing Program
Participation Costs:

<TABLE>
<CAPTION>
                                            Three Months Ended
                                       ---------------------------
                                         June 30,        June 30,
                                           2005           2004
                                       ------------   ------------
                                                      (Predecessor)
<S>                                    <C>            <C>
Gross Program Participation Costs      $  9,861,000   $  8,664,000
Amount capitalized during period         (6,704,000)            --
Amortization of Program Participation
 Costs                                      631,000             --
                                       ------------   ------------
Program Participation Costs expensed
 in period                             $  3,788,000   $  8,664,000
                                       ============   ============
</TABLE>

                                       22
<PAGE>

Aircraft Braking Systems' gross profit was $38,441,000, or 52.1% of sales for
the three months ended June 30, 2005, compared with $31,165,000, or 45.1% of
sales for the same period in the prior year. Aircraft Braking Systems' gross
margin increased primarily due to lower expensed investments, as discussed above
and the overhead absorption effect relating to the higher sales, partially
offset by higher depreciation expense, as discussed above. Engineered Fabrics'
gross profit was $3,662,000, or 22.1% of sales for the three months ended June
30, 2005, compared with $2,896,000, or 20.1% of sales for the same period in the
prior year. Engineered Fabrics' gross margin increased primarily due to the
overhead absorption effect relating to the higher sales and a favorable mix of
products sold.

Independent research and development costs increased by $415,000 for the three
months ended June 30, 2005, as compared with the same period in the prior year.
This increase was primarily due to higher costs on various development programs,
partially offset by lower costs on the Dassault Falcon 7X program.

Selling, general and administrative expenses decreased by $689,000 during the
three months ended June 30, 2005, as compared with the same period in the prior
year. This decrease was primarily due to lower compensation costs, partially
offset by costs associated with the implementation of our productivity
enhancement program.

Amortization expense increased by $1,820,000 during the three months ended June
30, 2005, as compared with the same period in the prior year. This increase was
due to the fair value accounting for intangible assets related to the
Acquisition.

Our net interest expense increased by $5,010,000 for the three months ended June
30, 2005, as compared with the same period in the prior year. This increase was
primarily due to the increased debt and related debt issuance costs we incurred
in connection with the Acquisition. The increase related to the amortization of
debt issuance costs was $1,593,000 during the three months ended June 30, 2005,
as compared with the same period in the prior year.

Our effective tax rate of 33.8% for the three months ended June 30, 2005 differs
from the statutory rate of 35% due to tax benefits derived from export sales.
Our effective tax rate of 32.8% for the three months ended June 30, 2004 differs
from the statutory rate of 35% due to tax benefits derived from export sales.

Liquidity and Capital Resources

Our cash and cash equivalents totaled $9.3 million at June 30, 2005, compared
with $9.6 million at December 31, 2004. Our total debt was $771.6 million at
June 30, 2005 and $790.6 million at December 31, 2004. We prepaid $19.0 million
of long-term debt during the six months ended June 30, 2005. We had $48.0
million (which is net of letters of credit of $2.0 million) available to borrow
under our $50 million revolving credit facility. In the past, the cash generated
from operations has been sufficient to pay our indebtedness.

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, make
program participation investments and to fund strategic acquisitions. Our
primary source of funds for conducting our business activities and

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<PAGE>

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,
material lease obligations and limits on the amount of acquisitions we may make.
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 June 30, 2005.

Our contractual obligations are detailed in our Annual Report on Form 10-K for
the year ended December 31, 2004. As of June 30, 2005, our contractual
obligations have not materially changed from December 31, 2004.

Cash Flows

During the six months ended June 30, 2005, net cash provided by operating
activities amounted to $21,801,000, compared with $21,017,000 for the same
period in the prior year, an increase of $784,000. Our cash flow from operating
activities increased from the prior year primarily due to the receipt of a
$15,425,000 income tax refund relating to expenses incurred in connection with
the Acquisition, lower upfront cash program participation payments and lower
income tax payments, partially offset by the payment of the $14,682,000 note to
the former K & F equityholders, a higher increase in inventory and higher
interest payments.

During the six months ended June 30, 2005, net cash used in investing activities
amounted to $3,129,000 versus $1,240,000 for the same period in the prior year,
representing capital expenditures for both periods. This increase was due to
expenditures related to our new carbon manufacturing facility in Danville,
Kentucky.

During the six months ended June 30, 2005, net cash used in financing activities
amounted to $18,980,000 versus $0 for the same period in the prior year, due to
payments of $19,000,000 of long-term debt in 2005 versus no payments made during
2004.

Accounting Pronouncements

In December 2004 the Financial Accounting Standards Board issued SFAS No. 123-R.
SFAS No. 123-R is a revision of SFAS No. 123 and supersedes APB Opinion No. 25.
SFAS No. 123-R eliminates the alternative to use the intrinsic value method of
accounting that was provided in SFAS No. 123, which generally resulted in no
compensation expense recorded in the financial statements related to the
issuance of equity awards to employees. SFAS No. 123-R requires that the cost
resulting from all share-based payment transactions be recognized in the
financial statements. SFAS No. 123-R establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires all
companies to apply a fair-value-based measurement method in accounting for
generally all share-based payment transactions with employees.

We plan to adopt SFAS No. 123-R using a modified prospective application. Under
this application, companies are required to record compensation expense for all
awards granted after the required effective date and for the unvested portion of
previously granted awards that remain outstanding at the date of

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adoption. The provisions of SFAS 123-R are effective for us on January 1, 2006.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We had $315.6 million of total fixed rate debt and $456.0 million of variable
rate debt outstanding at June 30, 2005. Borrowings under the new credit facility
bear interest that varies with the federal funds rate. Interest rate changes
generally do not affect the market value of such debt, but do impact the amount
of our interest payments and, therefore, our future earnings and cash flows,
assuming other factors are held constant. Assuming other variables remain
constant, including levels of indebtedness, a 10% increase in interest rates on
our variable debt would have an estimated impact on pre-tax earnings and cash
flows for the next twelve months of approximately $2.0 million.

As a requirement of our new credit facility, we have entered into the following
interest rate hedges:

-     a 3 month LIBOR interest rate cap at 4.5% from December 2004 to December
      2005 on $240 million of our term loans;

-     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 swaps 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 4.375%, beginning January 24, 2006.
      The notional amount of the swaps is initially $47.7 million and declines
      to $39.4 million on January 24, 2008 at the termination of the swap
      agreement.

We have no other 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
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
disclosures. Any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired 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 June 30,
2005. Based upon that evaluation and subject to the foregoing, our Chief
Executive Officer and Chief Financial Officer

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<PAGE>

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 June 30, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

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<PAGE>

                           PART II. OTHER INFORMATION

Item 6.  Exhibits

(a)  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.

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<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
                                 Executive Vice President and
                                    Chief Financial Officer
                                              and
                                      Registrant's Authorized
                                             Officer

Dated: August 15, 2005

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