<PAGE>
                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-Q/A

                               (Amendment No. 1)

(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: 333-124870


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


              Delaware                                  20-1844325
--------------------------------------------------------------------------------
    (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 36,885,867 shares of common stock outstanding.
<PAGE>
                 K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

                                   Form 10-Q/A
                  For the quarterly period ended June 30, 2005

                              EXPLANATORY PARAGRAPH

This Form 10-Q/A for the quarterly period ended June 30, 2005 is being filed for
the purpose of restating the Company's consolidated statement of cash flows for
the six months ended June 30, 2005. In the six months ended June, 30, 2005, an
amount of $14,773,000 was previously included in "net cash provided by operating
activities" and should have been included in "net cash used in investing
activities" as it relates to the payment of deferred purchase price to K&F
Industries, Inc.'s prior equityholders. This restatement does not affect the
total net change in cash and cash equivalents for the six months ended June 30,
2005 and has no impact on the Company's consolidated financial position, results
of operations or the related income (loss) per share amounts. Conforming changes
have been made to management's discussion and analysis of financial condition
and results of operations included in the accompanying Form 10-Q/A. See Note 16
in the notes to the condensed consolidated financial statements for further
information relating to this restatement. This Form 10-Q/A has not been updated
for events or information subsequent to the date of filing of the original Form
10-Q except in connection with the foregoing. Accordingly, this Form 10-Q/A
should be read in conjunction with the Company's filings made with the SEC
subsequent to the filing of the original Form 10-Q.

                                      INDEX

<TABLE>
<CAPTION>
Part I. Consolidated Financial Information                                  Page
                                                                            ----
<S>                                                                         <C>
   Item 1.  Condensed Consolidated Financial Statements (Unaudited)

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

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

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

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

                e)    Notes to Condensed Consolidated Financial Statements     7

   Item 2.  Management's Discussion and Analysis of Financial
                Condition and Results of Operations                           18

   Item 3.  Quantitative and Qualitative Disclosures About Market Risk        29

   Item 4.  Controls and Procedures                                           30

Part II. Other Information

   Item 6.  Exhibits                                                          31

Signatures                                                                    32
</TABLE>
<PAGE>
                          PART I. FINANCIAL INFORMATION
                          Item 1. Financial Statements
                 K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
                     Condensed Consolidated Balance Sheets

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                          June 30,            December 31,
                                                           2005                  2004
                                                      ---------------       ---------------
<S>                                                   <C>                   <C>
ASSETS:
Current Assets:
  Cash and cash equivalents                           $    63,668,000       $    15,009,000
  Accounts receivable, net                                 42,765,000            42,333,000
  Inventory                                                58,348,000            61,247,000
  Other current assets                                      3,535,000             4,173,000
                                                      ---------------       ---------------
Total current assets                                      168,316,000           122,762,000
                                                      ---------------       ---------------

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                   25,863,000            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
                                                      ---------------       ---------------
                                                      $ 1,401,828,000       $ 1,355,115,000
                                                      ===============       ===============

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                                                     --            14,773,000
  Income taxes payable                                     18,656,000             3,678,000
  Other current liabilities                                45,512,000            46,420,000
                                                      ---------------       ---------------
Total current liabilities                                  83,376,000            83,406,000
                                                      ---------------       ---------------

Pension liabilities                                        50,248,000            48,248,000
Deferred income taxes                                      20,939,000            18,951,000
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
11 1/2% senior PIK notes due 2015                          57,460,000                    --
Senior preferred stock subject to mandatory
  redemption                                                       --            94,196,000

Stockholders' Equity:
  Preferred stock, $.01 par value - authorized,
   20,000 shares; issued and outstanding, 17,395
   shares and 12,250 shares                                        --                    --
  Common stock, $.01 par value - authorized,
   250,000,000 shares; issued and outstanding,
   18,885,867 and 13,300,000 shares                           189,000               133,000
  Additional paid-in capital                              324,106,000           223,864,000
  Accumulated deficit                                      (4,727,000)           (1,778,000)
  Accumulated other comprehensive (loss) income               (81,000)               69,000
                                                      ---------------       ---------------
Total stockholders' equity                                319,487,000           222,288,000
                                                      ---------------       ---------------
                                                      $ 1,401,828,000       $ 1,355,115,000
                                                      ===============       ===============
</TABLE>

                See notes to condensed consolidated financial statements.


                                        3
<PAGE>
                 K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

                Condensed 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                                        15,085,000          14,498,000
Amortization of intangible assets                  6,028,000           2,340,000
                                               -------------       -------------
Operating income                                  41,628,000          45,355,000
Interest and investment income                       317,000             220,000
Interest expense                                 (35,770,000)        (19,724,000)
                                               -------------       -------------
Income before income taxes                         6,175,000          25,851,000
Income tax provision                              (2,277,000)         (8,592,000)
                                               -------------       -------------
Net income                                         3,898,000       $  17,259,000
                                                                   =============
Preferred stock dividends                         (6,847,000)
                                               -------------
Net loss available to common stockholders      $  (2,949,000)
                                               =============
Basic and diluted earnings per share:

  Loss per common share                        $       (0.19)
                                               =============
  Weighted average common shares                  15,193,000
                                               =============
</TABLE>

           See notes to condensed consolidated financial statements.


                                        4
<PAGE>
                 K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

                Condensed 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                                       7,537,000          7,350,000
Amortization of intangible assets                3,014,000          1,194,000
                                              ------------       ------------
Operating income                                27,799,000         22,179,000
Interest and investment income                     254,000            119,000
Interest expense                               (17,395,000)        (9,861,000)
                                              ------------       ------------
Income before income taxes                      10,658,000         12,437,000
Income tax provision                            (3,788,000)        (4,082,000)
                                              ------------       ------------
Net income                                       6,870,000       $  8,355,000
                                                                 ============
Preferred stock dividends                       (3,784,000)
                                              ------------
Net income available to common
  stockholders                                $  3,086,000
                                              ============
  Basic earnings per share                    $       0.18
                                              ============
  Weighted average common shares                17,086,000
                                              ============
  Diluted earnings per share                  $       0.18
                                              ============
  Diluted weighted average common shares        17,544,000
                                              ============
</TABLE>


           See notes to condensed consolidated financial statements.


                                        5
<PAGE>
                 K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

                Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                            Six Months Ended
                                                    -------------------------------
                                                       June 30,          June 30,
                                                        2005              2004
                                                    ------------       ------------
                                                    (As restated,      (Predecessor)
                                                     see Note 16)
<S>                                                 <C>                <C>
Cash flows from operating activities:
 Net income                                         $  3,898,000       $ 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 - 11 1/2% senior
    PIK notes                                          2,460,000                 --
   Non-cash interest expense - amortization of
    debt issuance cost                                 5,001,000            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                               1,988,000          2,199,000
   Changes in assets and liabilities:
    Accounts receivable, net                            (500,000)           925,000
    Inventory                                         (9,267,000)           (90,000)
    Other current assets                                 795,000            847,000
    Program participation costs                      (13,562,000)        (4,532,000)
    Accounts payable, interest payable and
     other current liabilities                        14,581,000         (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            33,403,000         21,017,000
                                                    ------------       ------------

Cash flows from investing activities:

 Payment of deferred purchase price                  (14,773,000)                --
 Capital expenditures                                 (3,129,000)        (1,240,000)
                                                    ------------       ------------
 Net cash used in investing activities               (17,902,000)        (1,240,000)
                                                    ------------       ------------

Cash flows from financing activities:
 Proceeds from issuance of 11 1/2% senior PIK
   notes                                              55,000,000                 --
 Equity contributions                                 93,450,000                 --
 Redemption of senior redeemable preferred
   stock                                             (94,196,000)                --
 Payments of long-term debt                          (19,000,000)                --
 Debt issuance costs                                  (2,096,000)                --
                                                    ------------       ------------
 Net cash provided by financing activities            33,158,000                 --
                                                    ------------       ------------

 Net increase in cash and cash equivalents            48,659,000         19,777,000
Cash and cash equivalents, beginning of
 period                                               15,009,000         24,464,000
                                                    ------------       ------------

Cash and cash equivalents, end of period            $ 63,668,000       $ 44,241,000
                                                    ============       ============
Supplemental cash flow information:
 Interest paid during period                        $ 23,237,000       $ 18,806,000
                                                    ============       ============
 Income taxes paid during the period                $    767,000       $  4,379,000
                                                    ============       ============
</TABLE>

           See notes to condensed consolidated financial statements.


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

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

1. Description of the Business and the Acquisition; Initial Public Offering

Description of Business

Summary

K&F Industries Holdings, Inc. ("K&F Holdings"), together with its subsidiaries
K&F Industries, Inc. and subsidiaries ("K&F Industries," and collectively with
K&F Holdings and its 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").

Initial Public Offering (Subsequent Event); Other Financing Developments

In February 2005, K&F Holdings issued $55.0 million of 11.5% Senior PIK Notes
due 2015 (the "Senior PIK Notes"). K&F Holdings used the proceeds of the Senior
PIK Notes to redeem a portion of its 15% Senior Redeemable Preferred Stock (the
"Senior Preferred Stock").

In April and May 2005, K&F Holdings received approximately $42.0 million in
proceeds from private placement offerings of its common stock and approximately
$51.5 million in proceeds from offerings of its junior preferred stock. K&F
Holdings used the proceeds of these offerings to redeem the remaining Senior
Preferred Stock.

On August 8, 2005, K&F Holdings entered into an underwriting agreement with
respect to the issuance of 18,000,000 shares of common stock at a price to the
public of $17.50 per share. The initial public offering closed on August 12,
2005. After payment of the underwriting discount and other transaction expenses,
K&F Holdings received approximately $291.4 million in net proceeds. K&F Holdings
used the net proceeds of the initial public offering, together with cash on
hand, as follows: (i) approximately $58.9 million was used to redeem the Senior
PIK Notes (such redemption will be completed on or about September 12, 2005);
(ii) approximately $184.4 million was used to redeem all of the outstanding
shares of junior preferred stock at the redemption prices set forth in K&F
Holdings certificate of incorporation; and (iii) approximately $99.0 million was
used to pay a special cash dividend to the holders of common stock immediately
prior to the initial public offering.


                                        7
<PAGE>
                 K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

As part of the underwriting agreement, K&F Holdings granted the underwriters an
option, exercisable for 30 days, to purchase an additional 2,700,000 shares of
common stock to cover over-allotments, if any. If and to the extent that the
underwriters exercise this option, K&F Holdings intends to use the net proceeds
thereof to pay a second special cash dividend to the holders of common stock
immediately prior to the initial public offering. If and to the extent that the
underwriters do not exercise this option, K&F Holdings intend to pay a special
stock dividend, consisting of any and all of the 2,700,000 shares that are not
purchased by the underwriters, to the holders of common stock immediately prior
to the initial public offering.

In connection with the initial public offering, on August 8, 2005 K&F Holdings:
(i) effected a 133 for one common stock split, which has been retroactively
reflected in the financial statements; (ii) amended its certificate of
incorporation to increase its authorized shares of common stock to 250,000,000
shares; and (iii) adopted an amended and restated stock option plan in order to
increase the number of shares issuable under the plan to 2,500,000.

K&F Holdings also 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, which will be a charge to K&F's third quarter 2005
earnings.

In addition, K&F will write-off approximately $1.8 million of unamortized debt
issuance costs related to the redemption of the Senior PIK Notes.

The Acquisition

On November 18, 2004, K&F Holdings, an affiliate of Aurora Capital Group,
acquired K&F Industries in exchange for cash consideration of approximately
$1.06 billion (excluding capitalized transaction costs of $40.4 million) (the
"Acquisition"). In addition, the former K&F Industries' 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 Industries' then existing
indebtedness and the related fees and expenses of K&F Industries and certain of
its stockholders, with the balance paid to former equityholders of K&F
Industries. In addition, K&F Holdings issued a note, in the amount of $14.8
million, payable for the benefit of the prior K&F Industries' equityholders, for
the estimated tax benefits to be received by K&F Industries due to the payments
of fees and premiums in connection with the tender offers for K&F Industries'
prior senior subordinated notes.

The Acquisition was financed with an offering by K&F Industries of $315.0
million of 7 3/4% Senior Subordinated Notes due 2014, the borrowing by K&F
Industries of $480.0 million under a new $530 million senior secured credit
facility and $309.8 million in equity investments from K&F Holdings. K&F
Holdings 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 Industries.

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.



                                        8
<PAGE>
                 K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

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:

<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 condensed 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 K&F
Industries' December 31, 2004 Annual Report on Form 10-K.



                                        9
<PAGE>
                 K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED 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 Industries 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.



                                       10
<PAGE>
                 K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED 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>

      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



                                       11
<PAGE>
                 K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

      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                                                                              3,403,000                 4,002,000
                                                                                           -----------                ----------
                                                                                           $45,512,000               $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 Holdings 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 Holdings and its subsidiaries. In
          2005, K&F Holdings issued stock options to certain of K&F's officers,
          directors, employees and advisors to purchase an aggregate of 951,740
          shares of common stock, at an exercise price of $7.52 per share, the
          estimated fair value at the date of grant and the same price that the
          Company sold common stock on November 18, 2004 in connection with the
          financing of the Acquisition. The options issued to the advisors vest
          immediately, and the options issued to officers, directors and
          employees vest at the rate of 20% per year. During the six months
          ended June 30, 2005, the expense related to options issued to advisors
          totaled approximately $70,000.

          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 (loss) 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:


                                       12
<PAGE>
                 K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                    Three Months Ended
                                             ---------------------------------
                                                June 30,             June 30,
                                                  2005                2004
                                             -------------       -------------
                                                                 (Predecessor)
<S>                                          <C>                 <C>
Reported net income                          $   6,870,000       $   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           (127,000)                 --
                                             -------------       -------------
Pro forma net income                             6,743,000       $   8,355,000
                                                                 =============
Less preferred stock dividends                  (3,784,000)
                                             -------------
Pro forma net income available to
 common stockholders                         $   2,959,000
                                             =============

Earnings per share

 Basic - as reported                         $        0.18
                                             =============
 Basic - pro forma                           $        0.17
                                             =============
 Diluted - as reported                       $        0.18
                                             =============
 Diluted - pro forma                         $        0.17
                                             =============
</TABLE>

<TABLE>
<CAPTION>
                                                      Six Months Ended
                                             ---------------------------------
                                                June 30,            June 30,
                                                 2005                2004
                                             -------------       -------------
                                                                 (Predecessor)
<S>                                          <C>                 <C>
Reported net income                          $   3,898,000       $  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           (254,000)                --
                                             -------------       -------------
Pro forma net income                             3,644,000       $  17,259,000
                                                                 =============
Less preferred stock dividends                  (6,847,000)
                                             -------------
Pro forma net loss available to common
 stockholders                                $  (3,203,000)
                                             =============

Loss per share

 Basic and diluted - as reported             $       (0.19)
                                             =============
 Basic and diluted - pro forma               $       (0.21)
                                             =============
</TABLE>

          The Company has not included earnings per share information for the
          Predecessor period as it believes it is not meaningful as the
          Predecessor capital structure is not representative of the current
          capital structure.

          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 the stock options granted during
          the six months June 30, 2005 was $3.24 per stock option, estimated on
          the

                                       13
<PAGE>


                 K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

          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 35.5% and 36.9% for the three and
          six months ended June 30, 2005 differs from the statutory rate of 35%
          due to the different treatment of dividends on the Senior Preferred
          Stock for book versus tax, partially offset by 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.

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                               $ 6,870,000   $   8,355,000

          Other comprehensive (loss) income:

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

          Comprehensive income                     $ 6,752,000   $   8,324,000
                                                   ===========   =============
</TABLE>

<TABLE>
<CAPTION>
                                                         Six Months Ended
                                                   ---------------------------
                                                     June 30,       June 30,
                                                       2005           2004
                                                   -----------   -------------
                                                                 (Predecessor)
<S>                                                <C>           <C>
          Net income                               $ 3,898,000   $  17,259,000

          Other comprehensive (loss) income:

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

          Comprehensive income                     $ 3,748,000   $  17,321,000
                                                   ===========   =============
</TABLE>


                                       14
<PAGE>
                 K&F INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED 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 (loss):
              Aircraft Braking Systems       $  27,035,000       $  19,937,000
              Engineered Fabrics                 1,640,000           2,242,000
              K&F Holdings                        (876,000)                 --
                                             -------------       -------------
                Operating income                27,799,000          22,179,000
              Interest expense, net            (17,141,000)         (9,742,000)
                                             -------------       -------------
                Income before income taxes   $  10,658,000       $  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 (loss):
              Aircraft Braking Systems       $  40,730,000       $  40,898,000
              Engineered Fabrics                 2,043,000           4,457,000
              K&F Holdings                      (1,145,000)                 --
                                               -----------       -------------
                Operating income                41,628,000          45,355,000
              Interest expense, net            (35,453,000)        (19,504,000)
                                             -------------       -------------
                Income before income taxes   $   6,175,000       $  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                        60,462,000       9,474,000
                                                  --------------  --------------
                                                  $1,401,828,000  $1,355,115,000
                                                  ==============  ==============
</TABLE>


                                       15

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

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

13.       Earnings (loss) per share

          Computations of basic and diluted earnings (loss) per share for the
          three and six months ended June 30, 2005, give effect to a 133 for one
          stock split which occurred on August 8, 2005, and are as follows:

<TABLE>
<CAPTION>
                                                               Three Months
                                                                  Ended
                                                              June 30, 2005
                                                              -------------
<S>                                                           <C>
Basic Earnings Per Share:
 Net income                                                   $   6,870,000
 Less: preferred stock dividends                                 (3,784,000)
                                                              -------------

 Net income available to common stockholders
  (numerator)                                                 $   3,086,000

 Weighted average common shares outstanding
  (denominator)                                                  17,086,000
                                                              -------------
 Basic earnings per share                                     $        0.18
                                                              =============

Diluted earnings per share:
 Net income available to common stockholders                  $   3,086,000
  (numerator)
 Weighted average common shares outstanding                      17,086,000
 Effect of dilutive stock options                                   458,000
                                                              -------------
 Total diluted weighted average common shares
  outstanding (denominator)                                      17,544,000
                                                              -------------
 Diluted earnings per share                                   $        0.18
                                                              =============
</TABLE>

<TABLE>
<CAPTION>
                                                                Six Months
                                                                  Ended
                                                              June 30, 2005
                                                              -------------
<S>                                                           <C>
Basic Loss Per Share:
 Net income                                                   $   3,898,000
 Less: Preferred stock dividends                                 (6,847,000)
                                                              -------------
 Net loss available to common stockholders
  (numerator)                                                 $  (2,949,000)

 Weighted average common shares outstanding
  (denominator)                                                  15,193,000
                                                              -------------
 Basic loss per share                                         $       (0.19)
                                                              =============
</TABLE>

          Since the Company had a net loss for the six months ended June 30,
          2005, shares issuable pursuant to options would have had an
          anti-dilutive effect, and therefore have been excluded from the
          computation of net loss per share for this period.

          The Company has not included earnings per share information for the
          Predecessor period as it believes it is not meaningful as the
          Predecessor capital structure is not representative of the current
          capital structure.


                                       16

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

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


14. Product Warranties

Estimated costs of product warranty are accrued when individual claims arise
with respect to a product. When the Company becomes aware of a defect in a
particular product, the estimated costs of all potential warranty claims
arising from similar defects of all similar products are fully accrued. An
analysis of changes in the liability for product warranty for the six months
ended June 30, 2005 is as follows:

<Table>
<S>                                                           <C>
Balance at December 31, 2004................................  $12,858,000
Current provisions..........................................    3,981,000
Expenditures................................................   (3,111,000)
                                                              -----------
Balance at June 30, 2005....................................  $13,728,000
                                                              ===========
</Table>

     The current and long-term portions of product warranties are as follows:

<Table>
<Caption>
                                                                June 30,      December 31,
                                                                  2005            2004
                                                              -------------   ------------
<S>                                                           <C>             <C>
Current liabilities.........................................   $13,131,000    $12,261,000
Long-term liabilities.......................................       597,000        597,000
                                                               -----------    -----------
Total.......................................................   $13,728,000    $12,858,000
                                                               ===========    ===========
</Table>

15. Employee Benefit Plans

The following represents the net periodic benefit cost for the defined benefit
and postretirement benefit plans:
<Table>
<Caption>
                                           Pension Benefits                          Postretirement Benefits
                       ---------------------------------------------------------   ---------------------------
                           Three Months Ended              Six Months Ended            Three Months Ended
                                June 30,                       June 30,                     June 30,
                       ---------------------------   ---------------------------   ---------------------------
                          2005           2004           2005           2004           2005           2004
                       -----------   -------------   -----------   -------------   -----------   -------------
                                     (Predecessor)                 (Predecessor)                 (Predecessor)
<S>                    <C>           <C>             <C>           <C>             <C>           <C>
Service cost.........  $   836,000    $ 1,080,000    $ 2,061,000    $ 2,160,000    $   478,000    $   473,000
Interest cost........    2,192,000      2,102,000      4,385,000      4,204,000      1,396,000      1,574,000
Expected return on
  plan assets........   (2,228,000)    (2,267,000)    (4,446,000)    (4,534,000)            --             --
Amortization of prior
  service cost.......           --         98,000             --        196,000             --     (1,305,000)
Recognized actuarial
  loss...............           --        990,000             --      1,980,000             --        586,000
                       -----------    -----------    -----------    -----------    -----------    -----------
Net periodic benefit
  cost...............  $   800,000    $ 2,003,000    $ 2,000,000    $ 4,006,000    $ 1,874,000    $ 1,328,000
                       ===========    ===========    ===========    ===========    ===========    ===========

<Caption>
                         Postretirement Benefits
                       ---------------------------
                             Six Months Ended
                                 June 30,
                       ---------------------------
                          2005           2004
                       -----------   -------------
                                     (Predecessor)
<S>                    <C>           <C>
Service cost.........  $   956,000    $   946,000
Interest cost........    2,792,000      3,148,000
Expected return on
  plan assets........           --             --
Amortization of prior
  service cost.......           --     (2,610,000)
Recognized actuarial
  loss...............           --      1,172,000
                       -----------    -----------
Net periodic benefit
  cost...............  $ 3,748,000    $ 2,656,000
                       ===========    ===========
</Table>

     The Company did not make any contributions to its pension plans during the
first six months of 2005 and will not make any during the remainder of 2005.

16. Restatement

Subsequent to the issuance of the Company's consolidated financial statements
for the quarterly period ended June 30, 2005, management determined that the
Company's consolidated statement of cash flows for the six months ended June
30, 2005 should be restated. In the six months ended June 30, 2005, an amount
of $14,773,000 was previously included in "net cash provided by operating
activities" and should have been included in "net cash used in investing
activities" as it relates to the payment of deferred purchase price to K&F
Industries' prior equityholders.


     A summary of the affect of the restatement on the Company's condensed
consolidated statement of cash flows for the six months ended June 30, 2005 is
as follows:


<TABLE>
<CAPTION>
                                                   For the Six Months
                                                  Ended June 30, 2005
                                             ------------------------------
                                              Previously
                                               Reported        As Restated
                                             -------------    -------------
<S>                                          <C>              <C>
Cash Flows from Operating Activities:
Payment of deferred purchase price           $ (14,773,000)   $          --
Net cash provided by operating
  activities                                    18,630,000       33,403,000
Cash Flows from Investing Activities:
Payment of deferred purchase price                      --      (14,773,000)
Net cash used in investing activities           (3,129,000)     (17,902,000)
</TABLE>


                                       17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Restatement

The discussion of cash flows in the Liquidity and Capital Resources section of
Management's Discussion and Analysis of Financial Condition and Results of
Operation for the six months ended June 30, 2005 has been restated. In the six
months ended June 30, 2005, an amount of $14,773,000 was previously included in
"net cash provided by operating activities" and should have been included in
"net cash used in investing activities" as it relates to the payment of deferred
purchase price to K&F Industries, Inc.'s prior equityholders. This restatement
does not affect the total net change in cash and cash equivalents for the six
months ended June 30, 2005 and has no impact on the Company's consolidated
financial position, results of operations or the related income (loss) per share
amounts.

General

K&F Industries Holdings, Inc., or "K&F Holdings," together with its subsidiaries
K&F Industries, Inc. and subsidiaries, or "K&F Industries," and collectively
with K&F Holdings, "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. 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".

Initial Public Offering (Subsequent Event); Other Financing Developments

In February 2005, K&F Holdings issued $55.0 million of 11.5% Senior PIK Notes
due 2015, or the "Senior PIK Notes." K&F Holdings used the proceeds of the
Senior PIK Notes to redeem a portion of its 15% Senior Redeemable Preferred
Stock, or the "Senior Preferred Stock."

In April and May 2005, K&F Holdings received approximately $42.0 million in
proceeds from private placement offerings of its common stock and approximately
$51.5 million in proceeds from offerings of its junior preferred stock. K&F
Holdings used the proceeds of these offerings to redeem the remaining Senior
Preferred Stock.

On August 8, 2005, K&F Holdings entered into an underwriting agreement with
respect to the issuance of 18,000,000 shares of common stock at a price to the
public of $17.50 per share. The initial public offering closed on August 12,
2005. After payment of the underwriting discount and other transaction expenses,
K&F Holdings received approximately $291.4 million in net proceeds. K&F Holdings
used the net proceeds of the initial public offering, together with cash on
hand, as follows: (i) approximately $58.9 million was used to redeem the Senior
PIK Notes (such redemption will be completed on or about September 12, 2005);
(ii) approximately $184.4 million was used to redeem all of the outstanding
shares of junior preferred stock at the redemption prices set forth in K&F
Holdings certificate of incorporation; and (iii) approximately $99.0 million was
used to pay a special cash dividend to the holders of common stock immediately
prior to the initial public offering.



                                       18

<PAGE>
As part of the underwriting agreement, K&F Holdings granted the underwriters an
option, exercisable for 30 days, to purchase an additional 2,700,000 shares of
common stock to cover over-allotments, if any. If and to the extent that the
underwriters exercise this option, K&F Holdings intends to use the net proceeds
thereof to pay a second special cash dividend to the holders of common stock
immediately prior to the initial public offering. If and to the extent that the
underwriters do not exercise this option, K&F Holdings intend to pay a special
stock dividend, consisting of any and all of the 2,700,000 shares that are not
purchased by the underwriters, to the holders of common stock immediately prior
to the initial public offering.

In connection with the initial public offering, on August 8, 2005 K&F Holdings:
(i) effected a 133 for one common stock split, which has been retroactively
reflected in the financial statements; (ii) amended its certificate of
incorporation to increase its authorized shares of common stock to 250,000,000
shares; and (iii) adopted an amended and restated stock option plan in order to
increase the number of shares issuable under the plan to 2,500,000.

K&F Holdings also 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, which will be a charge to K&F's third quarter 2005
earnings.

In addition, K&F will write-off approximately $1.8 million of unamortized debt
issuance costs related to the redemption of the Senior PIK Notes.

The Acquisition

On November 18, 2004, K&F Holdings, an affiliate of Aurora Capital Group,
acquired K&F Industries in exchange for cash consideration of approximately
$1.06 billion (excluding capitalized transaction costs of $40.4 million). In
addition, the former K&F Industries' 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 Industries' then existing indebtedness and the related
fees and expenses of K&F Industries and certain of its stockholders, with the
balance paid to the former equityholders. In addition, K&F Holdings issued a
note in the amount of $14.8 million, payable for the benefit of the prior K&F
Industries' equityholders, for the estimated tax benefits to be received by K&F
Industries due to the payments of fees and premiums in connection with the
tender offers for K&F Industries' prior senior subordinated notes. We refer to
this as the "Acquisition".

The Acquisition was financed with an offering by K&F Industries of $315.0
million of 7 3/4% Senior Subordinated Notes due 2014, the borrowing by K&F
Industries of $480.0 million under a new $530 million senior secured credit
facility and $309.8 million in equity investments from K&F Holdings. K&F
Holdings 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 Industries.

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


                                       19

<PAGE>
depreciation expenses. Accordingly, all references to events or activities which
occurred prior to the completion of the Acquisition relate to K&F Industries 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.


                                       20
<PAGE>
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                                  $   6,870,000       $   8,355,000
 Adjustments:
   Depreciation and amortization expense         6,236,000           3,006,000
   Interest expense, net                        17,141,000           9,742,000
   Income tax provision                          3,788,000           4,082,000
                                             -------------       -------------
 EBITDA                                      $  34,035,000       $  25,185,000
                                             =============       =============
</TABLE>

<TABLE>
<CAPTION>
                                                      Six Months Ended
                                             ---------------------------------
                                                June 30,            June 30,
                                                  2005                2004
                                             -------------       -------------
                                                                 (Predecessor)
<S>                                          <C>                 <C>
 Net income                                  $   3,898,000       $  17,259,000
 Adjustments:
   Depreciation and amortization expense        12,369,000           5,882,000
   Interest expense, net                        35,453,000          19,504,000
   Income tax provision                          2,277,000           8,592,000
                                             -------------       -------------
 EBITDA                                      $  53,997,000       $ 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
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.


                                       21
<PAGE>
<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, 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


                                       22
<PAGE>
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 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


                                       23
<PAGE>
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 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


                                       24
<PAGE>
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-100 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 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:


                                       25
<PAGE>
<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 increased by $557,000 during the
six months ended June 30, 2005, as compared with the same period in the prior
year. This increase was primarily due to costs associated with the
implementation of our productivity enhancement program and expenses related to
the management services agreement, partially offset by lower compensation costs.

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 $15,949,000 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 $4,083,000 during the six months ended June 30, 2005, as
compared with the same period in the prior year.

Our effective tax rate of 36.9% for the six months ended June 30, 2005 differs
from the statutory rate of 35% due to the different treatment of dividends on
the Senior Preferred Stock for book versus tax, partially offset by tax benefits
derived from export sales. Our effective tax rate of 33.2% for the six month
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.


                                       26
<PAGE>
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>

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 increased by $187,000 during the
three months ended June 30, 2005, as compared with the same period in the prior
year. This decrease was primarily due to costs associated with the
implementation of our productivity enhancement program and expenses related to
the management services agreement, partially offset by lower compensation costs.

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 $7,399,000 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


                                       27
<PAGE>
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 $1,678,000 during the three months ended June 30, 2005, as compared with the
same period in the prior year.

Our effective tax rate of 35.5% for the three months ended June 30, 2005 differs
from the statutory rate of 35% due to the different treatment of dividends on
the Senior Preferred Stock for book versus tax, partially offset by 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 $63.7 million at June 30, 2005, compared
with $15.0 million at December 31, 2004. Our total debt was $829.0 million at
June 30, 2005 and $790.6 million at December 31, 2004. 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.

In April and May 2005, we received approximately $42.0 million in proceeds from
offerings of our common stock and approximately $51.5 million in proceeds from
offerings of our junior preferred stock. In February 2005, we used the net
proceeds from the offering of our Senior PIK Notes to redeem a portion of our
Senior Preferred Stock at par, plus accrued dividends. In May 2005, we used a
portion of the proceeds from the offerings of our common stock and junior
preferred stock to fund the redemption at par, plus accrued dividends, of our
remaining Senior Preferred Stock.

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 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 K&F Industries 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 $33,403,000, compared with $21,017,000 for the same
period in the prior year, an increase of $12,386,000. 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 participation payments and lower tax
payments, partially offset by 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 $17,902,000 versus $1,240,000 for the same period in the prior year,
an increase of $16,662,000. This increase was due to the payment of $14,773,000
of deferred purchase price to the former K&F Industries'  equityholders and
higher capital expenditures of $1,889,000 relating to our new carbon
manufacturing facility in Danville, Kentucky.


                                       28
<PAGE>
During the six months ended June 30, 2005, net cash provided by financing
activities amounted to $33,158,000 versus $0 for the same period in the prior
year. This increase was due to the issuance in April and May 2005 of
approximately $42.0 million of common stock and approximately $51.5 million of
junior preferred stock, the issuance in February 2005 of $55 million of Senior
PIK Notes, partially offset by the redemption of all our Senior Preferred Stock,
plus accrued dividends and the prepayment of $19 million of long-term debt,
versus no activity 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 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 $373.0 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 4.506%, beginning January
          24, 2006. The notional amount of the swaps is initially $47.7 million
          and declines to $39.4 million on


                                       29
<PAGE>
          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 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.


                                       30
<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.


                                       31
<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 HOLDINGS, INC.
                                                       Registrant

                                              /s/  DIRKSON R. CHARLES
                                                   ------------------
                                                   Dirkson R. Charles

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

Dated:      November 7, 2005


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