10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

Commission File Number 001-13797

HAWK CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware	34-1608156
(State of incorporation)	(I.R.S. Employer Identification No.)

200 Public Square, Suite 1500, Cleveland, Ohio 44114

(Address of principal executive offices) (Zip Code)

(216) 861-3553

(Registrant’s telephone number, including area code)

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 R  No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a smaller reporting company, or a non-accelerated filer.  See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one): Large Accelerated Filer £    Accelerated Filer R   Non-accelerated Filer £   Smaller Reporting Company £

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £ No R

As of November 1, 2008, the Registrant had the following number of shares of common stock outstanding:

Class A Common Stock, $0.01 par value:	8,979,677
Class B Common Stock, $0.01 par value:	None (0)

As used in this Form 10-Q, the terms “Company,” “Hawk,” “Registrant,” “we,” “us,” and “our” mean Hawk Corporation and its consolidated subsidiaries, taken as a whole, unless the context indicates otherwise.  Except as otherwise stated, the information contained in this Form 10-Q is as of September 30, 2008.

Table of Contents

			Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)	3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
	Item 4.	Controls and Procedures	38
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	38
	Item 1A.	Risk Factors	38
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
	Item 3.	Defaults upon Senior Securities	39
	Item 4.	Submission of Matters to a Vote of Security Holders	39
	Item 5.	Other Information	39
	Item 6.	Exhibits	39
	SIGNATURES

2

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

HAWK CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands, except share data)

	September 30		December 31
	2008		2007
	(Unaudited)		(Note A)
Assets
Current assets:
Cash and cash equivalents	$	42,258	$	21,992
Short-term investments		44,848		58,999
Accounts receivable, less allowance of $1,084 in 2008 and $847 in 2007		50,392		37,486
Inventories:
Raw materials		10,495		9,830
Work-in-process		19,254		15,882
Finished products		12,480		11,007
Total inventories		42,229		36,719
Deferred income taxes		1,000		1,355
Other current assets		4,753		4,766
Current assets of discontinued operations		2,793		5,509
Total current assets		188,273		166,826
Property, plant and equipment:
Land and improvements		1,172		1,186
Buildings and improvements		16,292		15,459
Machinery and equipment		91,965		86,977
Furniture and fixtures		8,358		8,203
Construction in progress		4,799		2,524
		122,586		114,349
Less accumulated depreciation		78,347		74,774
Total property, plant and equipment		44,239		39,575
Other assets:
Finite-lived intangible assets		6,706		7,157
Deferred income taxes		-		685
Other		5,001		4,491
Long-term assets of discontinued operations		-		1,170
Total other assets		11,707		13,503
Total assets	$	244,219	$	219,904

3

HAWK CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands, except share data)

	September 30			December 31
	2008			2007
	(Unaudited)			(Note A)
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	32,644		$	30,325
Accrued compensation		11,072			8,675
Accrued interest		1,911			3,816
Accrued taxes		7,540			1,762
Other accrued expenses		6,102			7,181
Current portion of long-term debt		-			59
Current liabilities of discontinued operations		457			1,740
Total current liabilities		59,726			53,558
Long-term liabilities:
Long-term debt		87,090			87,090
Deferred income taxes		701			922
Pension liabilities		670			679
Other accrued expenses		10,875			10,331
Total long-term liabilities		99,336			99,022
Shareholders' equity
Series D preferred stock, $.01 par value; an aggregate liquidation value of $1,530, plus any unpaid dividends with 9.8% cumulative dividend (1,530 shares authorized, issued and outstanding)		1			1
Series E preferred stock, $.01 par value;  100,000 shares authorized; none issued or outstanding		-			-
Class A common stock, $.01 par value; 75,000,000 shares authorized; 9,187,750 issued; 8,979,677 and 8,966,969 outstanding in 2008 and 2007, respectively		92			92
Class B common stock, $.01 par value; 10,000,000 shares authorized; none issued or outstanding		-			-
Additional paid-in capital		53,500			53,068
Retained earnings		33,399			15,092
Accumulated other comprehensive income		1,130			2,041
Treasury stock, at cost, 208,073 and 220,781 shares in 2008 and 2007, respectively		(2,965	)		(2,970	)
Total shareholders' equity		85,157			67,324
Total liabilities and shareholders' equity	$	244,219		$	219,904

Note A: The consolidated balance sheet at December 31, 2007, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  See notes to consolidated financial statements (unaudited).

4

HAWK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In Thousands, except per share data)

	Three Months Ended September 30						Nine Months Ended September 30
	2008			2007			2008			2007
Net sales	$	74,181		$	51,490		$	211,761		$	161,007
Cost of sales		49,070			39,775			148,140			121,822
Gross profit		25,111			11,715			63,621			39,185
Operating expenses:
Selling, technical and administrative expenses		9,332			6,983			29,426			23,612
Amortization of finite-lived intangible assets		139			182			451			545
Total operating expenses		9,471			7,165			29,877			24,157
Income from operations		15,640			4,550			33,744			15,028
Interest expense		(2,013	)		(2,265	)		(6,041	)		(7,376	)
Interest income		488			1,053			1,679			2,894
Other income (expense), net		1,198			(501	)		1,552			(435	)
Income from continuing operations, before income taxes		15,313			2,837			30,934			10,111
Income tax provision		5,016			910			10,632			4,341
Income from continuing operations, after income taxes		10,297			1,927			20,302			5,770
(Loss) income from discontinued operations, net of tax expense (benefit) of $3 and ($906) for the three and nine months ended September 30, 2008 respectively, and ($147) and $2,100 for the three and nine months ended September 30, 2007, respectively		(41	)		(266	)		(1,883	)		10,794
Net income	$	10,256		$	1,661		$	18,419		$	16,564
Earnings per share:
Basic earnings per share:
Income from continuing operations, after income taxes	$	1.14		$	0.21		$	2.25		$	0.63
Discontinued operations, after income taxes		-			(0.03	)		(0.21	)		1.21
Net earnings per basic share	$	1.14		$	0.18		$	2.04		$	1.84
Diluted earnings per share:
Income from continuing operations, after income taxes	$	1.09		$	0.20		$	2.15		$	0.61
Discontinued operations, after income taxes		-			(0.02	)		(0.20	)		1.15
Net earnings per diluted share	$	1.09		$	0.18		$	1.95		$	1.76
Average shares outstanding - basic		8,974			8,941			8,969			8,983
Average shares and equivalents outstanding - diluted		9,403			9,356			9,375			9,368
Income Available to Common Shareholders	$	10,219		$	1,624		$	18,307		$	16,452

See notes to consolidated financial statements (unaudited).

5

HAWK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

	Nine Months Ended September 30
	2008			2007
Cash flows from operating activities
Net income	$	18,419		$	16,564
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations, net of tax		627			960
Loss (gain) on sale of discontinued operations, net of tax		1,256			(11,754	)
Depreciation and amortization		5,762			5,908
Deferred income taxes		819			2,896
Amortization of discount on short-term investments		(1,078	)		(2,042	)
Loss on sale or disposal of fixed assets		134			112
Write-off of deferred financing fees		-			583
Stock option expense		476			312
Changes in operating assets and liabilites:
Accounts receivable		(13,630	)		(2,933	)
Inventories		(5,852	)		2,167
Other assets		(788	)		621
Accounts payable		1,393			820
Accrued expenses		5,907			(3,317	)
Other liabilities		355			905
Net cash provided by operating activities of continuing operations		13,800			11,802
Net cash provided by (used in) operating activities of discontinued operations		500			(6,449	)
Cash flows from investing activities
Proceeds from sale of discontinued operations		250			93,354
Purchases of held to maturity securities		-			(78,969	)
Proceeds from maturity of held to maturity securities		-			80,475
Purchases of available for sale securities		(273,437	)		(205,991	)
Proceeds from available for sale securities		288,571			148,596
Purchases of property, plant and equipment		(9,198	)		(5,828	)
Proceeds from sale of property, plant and equipment		12			3
Net cash provided by investing activities of continuing operations		6,198			31,640
Net cash used in investing activities of discontinued operations		(30	)		(1,410	)
Cash flows from financing activities
Payments on short-term debt		-			(980	)
Proceeds from long-term debt		-			10,964
Payments on long-term debt		(61	)		(33,971	)
Receipts from government grants		387			-
Proceeds from stock options and issuance of treasury stock as compensation, net		266			835
Stock repurchase		(305	)		(2,975	)
Payments of preferred stock dividends		(112	)		(112	)
Net cash provided by (used in) financing activities of continuing operations		175			(26,239	)
Net cash used in financing activities of discontinued operations		-			(14	)
Effect of exchange rate changes on cash		(377	)		384
Net cash provided by continuing operations		19,796			17,587
Net cash provided by (used in) discontinued operations		470			(7,873	)
Net increase in cash and cash equivalents		20,266			9,714
Cash and cash equivalents at beginning of period		21,992			6,163
Cash and cash equivalents at end of period	$	42,258		$	15,877

See notes to consolidated financial statements (unaudited).

6

HAWK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2008

(In Thousands, except share data)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and nine month periods ended September 30, 2008, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2008.  For further information, refer to the consolidated financial statements and footnotes thereto in the Form 10-K for Hawk Corporation (the Company or Hawk) for the year ended December 31, 2007.

Hawk Corporation, through its friction products segment, designs, engineers, manufactures and markets specialized components used in a variety of industrial, commercial and aircraft applications.

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

Certain prior period amounts have been reclassified to conform to the 2008 reporting presentation.

Since the divestiture of the precision components segment in early 2007 and the discontinued operations classification of the performance racing segment in early 2008, the Company reports its operations within one segment.  The Company’s revenue is generated primarily in the U.S. and Italy.

2.  Recent Accounting Developments

In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) No. 03-6-1, Determining Whether Instruments Granted in Share-based Payment Transactions Are Participating Securities (FSP 03-6-1).  Under FSP 03-6-1, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computed EPS.  FSP 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years, and is not expected to have any impact on the Company’s results of operations, financial condition or liquidity.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are prepared in conformance with GAAP. Unlike Statement on Auditing Standards No. 69, The Meaning of Present in Conformity With Generally Accepted Accounting Principles, SFAS 162 is directed to the entity rather than the auditor. The statement is effective 60 days following the approval by the Securities and Exchange Commission (SEC) of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles, and is not expected to have any impact on the Company’s results of operations, financial condition or liquidity.

7

In April 2008, the FASB issued FSP SFAS No. 142-3, Determination of the Useful Life of Intangible Assets, (FSP 142-3) which amends the factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). FSP 142-3 requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset, and is an attempt to improve consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141, Business Combinations. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and the guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date. FSP 142-3 is not expected to have a significant impact on the Company’s results of operations, financial condition or liquidity.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (SFAS 161).   SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities in order to improve the transparency of financial reporting. SFAS 161 is effective prospectively for fiscal years beginning after November 15, 2008. The Company does not expect the adoption of SFAS 161 to have a material impact on our results of operations, financial condition or liquidity.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS 141(R)).  SFAS 141(R) modifies the accounting for business combinations by requiring that acquired assets and assumed liabilities be recorded at fair value, contingent consideration arrangements be recorded at fair value on the date of the acquisition, and pre-acquisition contingencies generally be accounted for in purchase accounting at fair value. The pronouncement also requires that transaction costs be expensed as incurred, acquired research and development be capitalized as an indefinite-lived intangible asset, and the requirements of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, be met at the acquisition date in order to accrue for a restructuring plan in purchase accounting. SFAS 141(R) is required to be adopted prospectively effective for fiscal years beginning after December 15, 2008.  SFAS 141(R) may not be adopted early.

3.  Grant Income

     Grant income is recognized when there is reasonable assurance that the Company has complied with the conditions attached to the respective grant and the grant income will be received.  Grant income is recognized in the Company’s Consolidated Statements of Income on a systematic basis over the periods necessary to match the grant income with related costs.  Specifically, grants related to capital assets are deducted from the carrying amount of the related asset and recognized in the Company’s Consolidated Statements of Income as a reduction of depreciation expense over the useful life of the asset.  Grant income received for expenses is recorded as a reduction to the related expense in the Consolidated Statements of Income, recognized ratably as the related costs are incurred.

     During the third quarter of 2008, the Company recognized grants of $675 as a reduction to the carrying value of Property, plant and equipment.  The government grant contains obligations to provide periodic progress reporting, maintenance of records and various other terms and conditions, and provides for repayment in the event of default by the Company.  The Company has complied with all conditions attached to the grant as of September 30, 2008.  No depreciation has been taken on the related capital assets as of September 30th and therefore there is no corresponding reduction to depreciation expense.  At September 30, 2008, $288 of the $675 was not yet received on a cash basis by the Company and is reported as a component of Other current assets in the Consolidated Balance Sheets.

4.  Discontinued Operations

During the first quarter of 2008, the Company committed to a plan to sell its performance racing segment, with two operating facilities in the United States.  This segment, which engineers, manufactures and markets premium branded clutches, transmissions and driveline systems for the performance racing market, failed to achieve a certain level of profitability and, after completing an extensive analysis, the Company determined that a divestiture of this segment would allow the Company to concentrate on its remaining friction products segment.

8

The Company began reporting the performance racing segment as a discontinued operation for financial reporting purposes as of March 31, 2008, and for all periods presented in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144).  The sale of the Company’s performance racing facility in North Carolina closed on May 30, 2008, and the Company reported a loss on sale of $1,896 ($1,256, net of tax).  This loss is reported in (Loss) income from discontinued operations, net of tax in the Consolidated Statement of Income for the nine month period ended September 30, 2008.  The Company currently anticipates completing the sale of its remaining performance racing business by the end of 2008.

As previously reported in the Company’s Form 10-Q for the three months ended March 31, 2007, the sale of the Company’s precision components segment closed in the first quarter of 2007, and the Company reported a gain on sale of the precision components segment of $15,023 ($11,754, net of tax).  This gain is reported in (Loss) income from discontinued operations, net of tax in the Consolidated Statement of Income for the nine month period ended September 30, 2007.  There are no remaining assets or liabilities of the precision components segment classified as discontinued operations recorded in the Consolidated Balance Sheets for any period presented in this Form 10-Q.

Operating results from discontinued operations are summarized as follows:

	Three Months Ended September 30						Nine Months Ended September 30
	2008			2007			2008			2007
Net sales	$	1,058		$	2,859		$	6,825		$	17,726
Loss from discontinued operations, before income taxes	$	(38	)	$	(413	)	$	(893	)	$	(2,129	)
(Loss) gain on sale of discontinued operations, before income taxes		-			-			(1,896	)		15,023
Income tax expense (benefit)		3			(147	)		(906	)		2,100
(Loss) income from discontinued operations, after income taxes	$	(41	)	$	(266	)	$	(1,883	)	$	10,794

The following table presents the composition of basic and diluted earnings per share from discontinued operations, after income taxes for the three and nine months ended September 30, 2008 and 2007:

	Three Months Ended September 30					Nine Months Ended September 30
	2008		2007			2008			2007
Basic (loss) earnings per share from discontinued operations, after income taxes
Loss from discontinued operations, after income taxes	$	-	$	(0.03	)	$	(0.07	)	$	(0.10	)
(Loss) gain on sale of discontinued operations, after income taxes		-		-			(0.14	)		1.31
Basic (loss) earnings per share from discontinued operations, after income taxes	$	-	$	(0.03	)	$	(0.21	)	$	1.21
Diluted (loss) earnings per share from discontinued operations, after income taxes
Loss from discontinued operations, after income taxes	$	-	$	(0.02	)	$	(0.07	)	$	(0.10	)
(Loss) gain on sale of discontinued operations, after income taxes		-		-			(0.13	)		1.25
Diluted (loss) earnings per share from discontinued operations, after income taxes	$	-	$	(0.02	)	$	(0.20	)	$	1.15

9

The assets and liabilities of the performance racing segment, which have been classified as assets and liabilities of discontinued operations in the Consolidated Balance Sheets, consist of the following at September 30, 2008 and December 31, 2007:

	September 30		December 31
	2008		2007
Cash	$	1	$	23
Accounts receivable		398		1,105
Inventory		1,613		4,331
Other current assets		41		50
Property, plant and equipment		740		-
Total current assets of discontinued operations	$	2,793	$	5,509
Property, plant and equipment		-		1,170
Total assets of discontinued operations	$	2,793	$	6,679
Accounts payable	$	259	$	1,124
Other accrued expenses		198		616
Total liabilities of discontinued operations	$	457	$	1,740

5.  Fair Value Measurements

Effective January 1, 2008, the Company adopted SFAS No. 157 Fair Value Measurements (SFAS 157).  In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which provided a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually.  Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only.  The adoption of SFAS 157 did not have a material impact on the Company’s consolidated results of operations or financial position.  On October 10, 2008, FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3).  FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued.  The provisions of FSP 157-3 did not have an impact on the Company’s financial condition or results of operations.

SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosure about fair value measurements.  Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the liability in an orderly transaction between market participants on the measurement date.  Valuation techniques under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs.  The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The fair values of obligations available for sale issued by U.S. government agencies and U.S. corporations held by the Company were determined by obtaining quoted prices from nationally recognized securities broker-dealers.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of September 30, 2008, the Company held certain assets that are required to be measured at fair value on a recurring basis. These assets included the Company’s cash investments and certain other investments, including those associated with the Company’s non-qualified deferred compensation plan.  In accordance with SFAS 157, the following table represents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of September 30, 2008.

10

	Total		Level 1		Level 2		Level 3
Money market funds	$	30,688	$	30,688	$	-	$	-
Commercial paper		28,887		-		28,887		-
U.S. govt. agencies		14,997	$	-		14,997		-
Other trading		977		977		-		-
Total	$	75,549	$	31,665	$	43,884	$	-

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159).  SFAS 159 permits entities to choose to measure many financial assets and liabilities at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings.  The Company adopted SFAS 159 effective January 1, 2008.  Upon adoption, the Company did not elect the fair value option for any items within the scope of SFAS 159 and, therefore, the adoption of SFAS 159 did not have an impact on the Company’s consolidated results of operations or financial position.

6.  Investments

The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date.  Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity.  Held-to-maturity securities are reported at amortized cost with dividends, interest income and the amortization of any discount or premium reported in Interest income in the Consolidated Statements of Income.  Available-for-sale securities are reported at fair value with unrealized holding gains and losses, net of tax, included in Accumulated other comprehensive income in the Consolidated Balance Sheets.  The amortized cost of debt securities in this category is adjusted for the amortization of any discount or premium to maturity computed under the effective interest method.  Dividend and interest income, including the amortization of any discount or premium, as well as realized gains or losses, are included in Interest income in the Consolidated Statements of Income.  Both the cost of any security sold and the amount reclassified out of Accumulated other comprehensive income into earnings is based on the specific identification method.

All short-term investments on the Company’s Consolidated Balance Sheet as of September 30, 2008, are available-for-sale securities.

The following is a summary of the Company's available-for-sale securities as of September 30, 2008, by contractual maturity dates:

	Available-for-Sale Securities
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value (Net Carrying Amount)
Other debt securities - due in one year or less	$	44,887	$	61	$	-	$	44,848

As of September 30, 2008 and December 31, 2007, unrealized gains on available-for-sale securities, net of tax, of $39 and $65, respectively, are included in Accumulated other comprehensive income in the accompanying Consolidated Balance Sheets.

Other long-term assets as of September 30, 2008 and December 31, 2007 include $977 and $216, respectively, of trading securities recorded at fair value.  The Company reported realized and unrealized losses totaling $116 for the three months ended September 30, 2008 and $120 for the nine months ended September 30, 2008, which is included in Other income (expense), net on the Company’s Consolidated Statements of Income.  The Company did not have any realized or unrealized gains (losses) on its trading securities for the three and nine month periods ended September 30, 2007.

11

7.  Intangible Assets

The components of finite-lived intangible assets are as follows:

	September 30, 2008						December 31, 2007
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Product certifications	$	20,820	$	14,114	$	6,706	$	20,820	$	13,663	$	7,157
Other intangible assets		2,575		2,575		-		2,575		2,575		-
	$	23,395	$	16,689	$	6,706	$	23,395	$	16,238	$	7,157

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

The Company estimates that amortization expense for finite-lived intangible assets for the full year 2008 will be $590 and $553 in each of the next five fiscal years 2009 through 2013.  The weighted average amortization period for product certifications is 32 years.

8.  Comprehensive Income

Comprehensive income is as follows:

	Three Months Ended September 30					Nine Months Ended September 30
	2008			2007		2008			2007
Net income	$	10,256		$	1,661	$	18,419		$	16,564
Amortization of prior service cost, net loss and  transition obligation		125			150		375			450
Unrealized (loss) gain on available for sale securities		(20	)		105		(26	)		105
Foreign currency translation (loss) income		(3,531	)		1,495		(1,260	)		2,291
Comprehensive income	$	6,830		$	3,411	$	17,508		$	19,410

9.  Stock Compensation Plan

The Company uses the modified prospective transition method provisions of SFAS No. 123(R), Share-Based Payment (SFAS 123(R)), for its stock option accounting.  The modified prospective transition method requires that compensation cost be recognized in the financial statements for all awards granted after the date of adoption (January 1, 2006) as well as for existing awards for which the requisite service has not been rendered as of the date of adoption.  The Company’s 2000 Long Term Incentive Plan, which was amended and approved at the Company’s annual meeting of stockholders on June 4, 2008, provides for the granting of up to 1,315,000 shares of common stock of the Company.  The Company’s 2000 Long Term Incentive Plan had 553,483 shares available for grant as of September 30, 2008.  Options generally vest over a five year period after the grant date and expire no more than ten years after the grant date.

The Company recognized $221 and $477 of compensation expense for the three and nine month period ended September 30, 2008, respectively.  Net cash proceeds from the exercise of stock options were $41 and $219, and the intrinsic value of stock options exercised was $128 and $303, for the three and nine months ended September 30, 2008, respectively.  As of September 30, 2008, there was $1,476 of total unrecognized compensation cost related to the non-vested share-based compensation arrangements under the Company’s stock compensation plans.  The remaining cost is expected to be recognized over the next 2.7 years.

12

Stock-based option activity during the nine months ended September 30, 2008, was as follows:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contract Term	Aggregate Intrinsic Value (in thousands)
Options outstanding at January 1, 2008		657,181		$	6.26
Granted		135,000			17.76
Exercised		(27,053	)		8.10
Forfeited or expired		(10,000	)		17.00
Options outstanding at September 30, 2008		755,128		$	8.11	5.3 yrs.	$	9,077
Exercisable at September 30, 2008		505,928		$	4.90	3.6 yrs.	$	7,707

The aggregate intrinsic value in the table above represents the total pre-tax difference between the $20.13 closing price of shares of common stock of the Company on September 30, 2008, over the exercise price of the stock option, multiplied by the number of options outstanding and exercisable.  Under SFAS 123(R), the aggregate intrinsic value is not recorded for financial accounting purposes and the value changes based on the daily changes in the fair market value of the Company's shares of common stock.

On October 14, 2008, the Company issued 44,000 incentive stock options to certain employees.  The options vest over a five year period and will expire ten years after the grant date.

10.  Employee Benefits

A summary of the components of net periodic benefit cost of the Company’s defined benefit pension plans for the periods presented in the Consolidated Statements of Income is as follows:

	Three Months Ended						Nine Months Ended
	September 30						September 30
Components of net periodic pension cost:	2008			2007			2008			2007
Service cost	$	56		$	47		$	170		$	139
Interest cost		436			427			1,312			1,278
Expected return on plan assets		(568	)		(522	)		(1,706	)		(1,563	)
Amortization of prior service cost		60			60			180			180
Amortization of net loss		63			101			191			301
Net periodic pension cost of defined benefit plans	$	47		$	113		$	147		$	335

The Company continues to expect to contribute $1,267 on a cash basis in 2008 to fund its defined benefit pension plans for the 2008 plan year based on the contribution expectation provided by its third party actuary.

11.  Income Taxes

The effective income tax rate from continuing operations for the nine months ended September 30, 2008 was 34.4%, compared to 42.9% for the nine months ended September 30, 2007.  The Company’s effective tax rate is lower than the U.S. statutory rate primarily due to lower rates for foreign subsidiaries.

In December 2007, the Italian Parliament approved the Budget Law for 2008, effective January 1, 2008, which resulted in a decrease in the corporate income tax rate in Italy from 33.0% to 27.5% and an additional reduction in the regional rate from 4.25% to 3.90%.  The rate reduction was offset in part by changes which broadened the tax base.  The Company has evaluated the impact of the law change and has implemented these favorable changes for its Italian operations, which reduced the worldwide continuing operations effective rate in 2008.  Additionally, the law change provided for an election under which the Company would reverse the accelerated depreciation taken in prior years at a substantially lower rate.  The Company made this election in the quarter ended June 30, 2008.  The impact of this election was a one time decrease of $391 to the tax provision.

13

The Company adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement 109 (FIN 48), on January 1, 2007.  As a result of the implementation of FIN 48, the Company was not required to recognize any change in the liability for unrecognized tax benefits.  The total amount of unrecognized tax benefits as of September 30, 2008, was $1,777 (including $721 of accrued interest and penalties), the recognition of which would have had an effect of $579 on the continuing operations effective tax rate.  During the third quarter of 2008, the Company recorded a reduction of $144 for unrealized tax benefits due to a lapsing of applicable tax statutes in the quarter ended September 30, 2008.  There were no other significant changes for unrecognized tax benefits in the nine months ended September 30, 2008.  During 2007, the Company recorded $1,146 of unrecognized tax benefit, including interest and penalties of $629 relating to an audit in Mexico.  An additional $52 has been recorded for interest on the Mexican assessment in 2008.  The Company does not agree with the assessment and is continuing to vigorously contest this matter with the Mexican tax authorities.  The Company anticipates reaching a settlement on this matter within the next 12 months.  The assessment relates to a discontinued operation and therefore, will not impact the effective rate from continuing operations.    

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.  The Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2001.  The years 2001 – 2007 are open years available for examination by tax authorities.

The Company was granted a five year tax holiday upon its entry into China by the Chinese taxing authority/government commencing in the year the Company first became subject to tax.  Effective January 1, 2008, a change in the Chinese tax law required that all tax holidays not active begin to take effect as of January 1, 2008, and remain in effect for the stated period for which they were originally issued.  Under this arrangement, the tax holiday available to the Company’s China subsidiary will expire after December 31, 2012.

12.  Earnings Per Share

Basic and diluted earnings per share are computed as follows:

	Three Months Ended					Nine Months Ended
	September 30					September 30
	2008		2007			2008			2007
Income from continuing operations, after income taxes	$	10,297	$	1,927		$	20,302		$	5,770
Less: Preferred stock dividends		37		37			112			112
Income from continuing operations, after income taxes available to common shareholders	$	10,260	$	1,890		$	20,190		$	5,658
Net income	$	10,256	$	1,661		$	18,419		$	16,564
Less: Preferred stock dividends		37		37			112			112
Net income available to common shareholders	$	10,219	$	1,624		$	18,307		$	16,452
Weighted average shares outstanding (in thousands):
Basic weighted average shares outstanding		8,974		8,941			8,969			8,983
Diluted:
Basic weighted average shares outstanding		8,974		8,941			8,969			8,983
Dilutive effect of stock options		429		415			406			385
Diluted weighted average shares outstanding		9,403		9,356			9,375			9,368
Earnings per share:
Basic earnings from continuing operations, after income taxes	$	1.14	$	0.21		$	2.25		$	0.63
Discontinued operations		-		(0.03	)		(0.21	)		1.21
Net earnings per basic share	$	1.14	$	0.18		$	2.04		$	1.84
Diluted earnings from continuing operations, after income taxes	$	1.09	$	0.20		$	2.15		$	0.61
Discontinued operations		-		(0.02	)		(0.20	)		1.15
Net earning per diluted share	$	1.09	$	0.18		$	1.95		$	1.76

14

A weighted average of 75,000 and 34,467 options were not included in the calculation of diluted weighted shares outstanding because they were anti-dilutive for the three and nine months periods ended September 30, 2008, respectively.  A weighted average of 132,000 and 103,604 options were not included in the calculation of diluted weighted shares outstanding because they were anti-dilutive for the three and nine months periods ended September 30, 2007, respectively.

13.  Business Segments

As a result of the decision to divest the performance racing segment, the Company’s Unaudited Condensed Consolidated Financial Statements, accompanying notes and other information provided in this Form 10-Q reflect the performance racing segment as a discontinued operation for all periods presented.

After reclassifying the performance racing segment to discontinued operations, the Company has one remaining operating segment, the friction products segment.  The friction products segment manufactures friction products used in off-highway, on-highway, industrial, agricultural, performance and aircraft applications.

14.  Supplemental Guarantor Information

Each of the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and several basis, to pay principal, premium, and interest with respect to the Company’s 8¾% Senior Notes due 2014 (senior notes).  The Guarantor Subsidiaries are direct or indirect wholly-owned subsidiaries of the Company.

The following supplemental consolidating condensed financial statements present:

·   Consolidating condensed balance sheets as of September 30, 2008 and December 31, 2007, consolidating condensed statements of income for the three and nine months ended September 30, 2008 and 2007, and consolidating condensed statements of cash flows for the nine months ended September 30, 2008 and 2007.

·   Hawk Corporation (Parent), combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries consisting of the Company's subsidiaries in Italy, Canada and China with their investments in subsidiaries accounted for using the equity method.

·   Elimination entries necessary to consolidate the financial statements of the Parent and all of its subsidiaries.

The Company does not believe that separate financial statements of the Guarantor Subsidiaries provide material additional information to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented.  The Company’s Credit and Security Agreement, dated November 1, 2004, with KeyBank National Association, serving as Administrative Agent and Letter of Credit Issuer (the bank facility) contains covenants with respect to the Company and its subsidiaries that, among other things, would prohibit the payment of dividends to the Company by the subsidiaries (including Guarantor Subsidiaries) in the event of a default under the terms of the bank facility.  The indenture governing the Company’s senior notes permits the payment of dividends to the Company by the subsidiaries (including Guarantor Subsidiaries) provided that no event of default has occurred under the terms of the indenture.

15

Supplemental Consolidating Condensed

Balance Sheet

	September 30, 2008
	Parent			Combined Guarantor Subsidiaries		Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	28,725		$	35	$	13,498		$	-		$	42,258
Short-term investments		43,884			-		964			-			44,848
Accounts receivable, net		(25	)		19,078		31,339			-			50,392
Inventories, net		-			24,516		18,080			(367	)		42,229
Deferred income taxes		1,000			-		-			-			1,000
Other current assets		1,640			1,158		1,955			-			4,753
Assets of discontinued operations		-			2,793		-			-			2,793
Total current assets		75,224			47,580		65,836			(367	)		188,273
Investment in subsidiaries		49,170			-		-			(49,170	)		-
Inter-company advances, net		-			14,730		(14,695	)		(35	)		-
Property, plant and equipment, net		-			30,118		14,121			-			44,239
Other assets:
Finite-lived intangible assets		-			6,706		-			-			6,706
Other		4,064			937		-			-			5,001
Total other assets		4,064			7,643		-			-			11,707
Total assets	$	128,458		$	100,071	$	65,262		$	(49,572	)	$	244,219
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	216		$	16,914	$	15,528		$	(14	)	$	32,644
Accrued compensation		4,868			3,366		2,838			-			11,072
Accrued interest		1,911			-		-			-			1,911
Accrued taxes		2,509			90		5,029			(88	)		7,540
Other accrued expenses		1,813			1,882		2,415			(8	)		6,102
Current portion of long-term debt		-			-		-			-			-
Liabilities of discontinued operations		-			457		-			-			457
Total current liabilities		11,317			22,709		25,810			(110	)		59,726
Long-term liabilities:
Long-term debt		87,090			-		-			-			87,090
Deferred income taxes		406			-		295			-			701
Other		1,754			5,868		3,923			-			11,545
Inter-company advances, net		(57,266	)		51,435		6,123			(292	)		-
Total long-term liabilities		31,984			57,303		10,341			(292	)		99,336
Shareholders’ equity		85,157			20,059		29,111			(49,170	)		85,157
Total liabilities and shareholders’ equity	$	128,458		$	100,071	$	65,262		$	(49,572	)	$	244,219

16

Supplemental Consolidating Condensed

Balance Sheet

	December 31, 2007
	Parent			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	11,964		$	42		$	9,986		$	-		$	21,992
Short-term investments		57,980			-			1,019			-			58,999
Accounts receivable, net		-			11,867			25,619			-			37,486
Inventories, net		-			20,382			16,744			(407	)		36,719
Deferred income taxes		983			372			-			-			1,355
Other current assets		1,828			1,180			1,758			-			4,766
Current assets of discontinued operations		-			5,509			-			-			5,509
Total current assets		72,755			39,352			55,126			(407	)		166,826
Investment in subsidiaries		11,606			-			-			(11,606	)		-
Inter-company advances, net		-			16,007			(16,007	)		-			-
Property, plant and equipment, net		-			27,272			12,303			-			39,575
Other assets:
Finite-lived intangible assets		-			7,157			-			-			7,157
Other		4,184			992			-			-			5,176
Long-term assets of discontinued   operations		-			1,170			-			-			1,170
Total other assets		4,184			9,319			-			-			13,503
Total assets	$	88,545		$	91,950		$	51,422		$	(12,013	)	$	219,904
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	(141	)	$	13,425		$	17,041		$	-		$	30,325
Accrued compensation		2,532			3,430			2,713			-			8,675
Accrued interest		3,816			-			-			-			3,816
Accrued taxes		948			93			794			(73	)		1,762
Other accrued expenses		1,647			3,107			2,415			12			7,181
Current portion of long-term debt		-			-			59			-			59
Liabilities of discontinued operations		-			1,740			-			-			1,740
Total current liabilities		8,802			21,795			23,022			(61	)		53,558
Long-term liabilities:
Long-term debt		87,090			-			-			-			87,090
Deferred income taxes		-			-			922			-			922
Other		1,080			5,948			3,982			-			11,010
Inter-company advances, net		(75,751	)		69,951			6,146			(346	)		-
Total long-term liabilities		12,419			75,899			11,050			(346	)		99,022
Shareholders’ equity		67,324			(5,744	)		17,350			(11,606	)		67,324
Total liabilities and shareholders’ equity	$	88,545		$	91,950		$	51,422		$	(12,013	)	$	219,904

17

Supplemental Consolidating Condensed

Statement of Income

	Three Months Ended September 30, 2008
	Parent		Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries		Eliminations			Consolidated
Net sales	$	-	$	44,483		$	32,507	$	(2,809	)	$	74,181
Cost of sales		-		28,097			23,782		(2,809	)		49,070
Gross profit		-		16,386			8,725		-			25,111
Operating expenses:
Selling, technical and administrative expenses		-		7,342			1,990		-			9,332
Amortization of finite-lived intangible assets		-		139			-		-			139
Total operating expenses		-		7,481			1,990		-			9,471
Income from operations		-		8,905			6,735		-			15,640
Interest (expense) income, net		-		(1,664	)		139		-			(1,525	)
Income from equity investee		10,256		4,904			-		(15,160	)		-
Other income (expense), net		-		1,182			16		-			1,198
Income from continuing operations, before income taxes		10,256		13,327			6,890		(15,160	)		15,313
Income tax provision		-		2,859			2,157		-			5,016
Income from continuing operations, after income taxes		10,256		10,468			4,733		(15,160	)		10,297
Discontinued operations, net of tax		-		(212	)		171		-			(41	)
Net income	$	10,256	$	10,256		$	4,904	$	(15,160	)	$	10,256

18

Supplemental Consolidating Condensed

Statement of Income

	Three Months Ended September 30, 2007
	Parent			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	-		$	31,896		$	22,280		$	(2,686	)	$	51,490
Cost of sales		-			23,924			18,537			(2,686	)		39,775
Gross profit		-			7,972			3,743			-			11,715
Operating expenses:
Selling, technical and administrative expenses		-			5,444			1,539			-			6,983
Amortization of finite-lived intangible assets		-			182			-			-			182
Total operating expenses		-			5,626			1,539			-			7,165
Income from operations		-			2,346			2,204			-			4,550
Interest (expense) income, net		-			(1,315	)		103			-			(1,212	)
Income from equity investee		1,675			1,365			-			(3,040	)		-
Other (expense) income, net		-			(533	)		32			-			(501	)
Income from continuing operations, before income taxes		1,675			1,863			2,339			(3,040	)		2,837
Income tax (benefit) provision		-			(53	)		963			-			910
Income from continuing operations, after income taxes		1,675			1,916			1,376			(3,040	)		1,927
Discontinued operations, net of tax		(14	)		(241	)		(11	)		-			(266	)
Net income	$	1,661		$	1,675		$	1,365		$	(3,040	)	$	1,661

19

Supplemental Consolidating Condensed

Statement of Income

	Nine Months Ended September 30, 2008
	Parent		Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	-	$	118,458		$	101,730		$	(8,427	)	$	211,761
Cost of sales		-		79,032			77,535			(8,427	)		148,140
Gross profit		-		39,426			24,195			-			63,621
Operating expenses:
Selling, technical and administrative expenses		-		23,234			6,192			-			29,426
Amortization of finite-lived intangible assets		-		451			-			-			451
Total operating expenses		-		23,685			6,192			-			29,877
Income from operations		-		15,741			18,003			-			33,744
Interest (expense) income, net		-		(4,715	)		353			-			(4,362	)
Income from equity investee		18,419		13,126			-			(31,545	)		-
Other income (expense) , net		-		1,167			385			-			1,552
Income from continuing operations, before income taxes		18,419		25,319			18,741			(31,545	)		30,934
Income tax provision		-		5,183			5,449			-			10,632
Income from continuing operations, after income taxes		18,419		20,136			13,292			(31,545	)		20,302
Discontinued operations, net of tax		-		(1,717	)		(166	)		-			(1,883	)
Net income	$	18,419	$	18,419		$	13,126		$	(31,545	)	$	18,419

20

Supplemental Consolidating Condensed

Statement of Income

	Nine Months Ended September 30, 2007
	Parent		Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	-	$	100,514		$	68,372		$	(7,879	)	$	161,007
Cost of sales		-		75,179			54,522			(7,879	)		121,822
Gross profit		-		25,335			13,850			-			39,185
Operating expenses:
Selling, technical and administrative expenses		-		18,777			4,835			-			23,612
Amortization of finite-lived intangible assets		-		545			-			-			545
Total operating expenses		-		19,322			4,835			-			24,157
Income from operations		-		6,013			9,015			-			15,028
Interest (expense) income, net		-		(4,656	)		174			-			(4,482	)
Income from equity investee		5,972		5,241			-			(11,213	)		-
Other (expense) income, net		-		(466	)		31			-			(435	)
Income from continuing operations, before income taxes		5,972		6,132			9,220			(11,213	)		10,111
Income tax provision		-		597			3,744			-			4,341
Income from continuing operations, after income taxes		5,972		5,535			5,476			(11,213	)		5,770
Discontinued operations, net of tax		10,592		437			(235	)		-			10,794
Net income	$	16,564	$	5,972		$	5,241		$	(11,213	)	$	16,564

21

Supplemental Consolidating Condensed

Cash Flows Statement

	Nine Months Ended September 30, 2008
	Parent			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities of continuing operations	$	1,528		$	4,585		$	7,687		$	-	$	13,800
Net cash provided by (used in) operating activities of discontinued operations		-			666			(166	)		-		500
Cash flows from investing activities:
Proceeds from sale of discontinued operations		250			-			-			-		250
Purchases of available for sale securities		(272,441	)		-			(996	)		-		(273,437	)
Proceeds from available for sale securities		287,575			-			996			-		288,571
Purchases of property, plant and equipment		-			(5,621	)		(3,577	)		-		(9,198	)
Proceeds from sale of property, plant and equipment		-			6			6			-		12
Net cash provided by (used in) investing activities of continuing operations		15,384			(5,615	)		(3,571	)		-		6,198
Net cash used in investing activities of discontinued operations		-			(30	)		-			-		(30	)
Cash flows from financing activities:
Payments on long-term debt		-			-			(61	)		-		(61	)
Receipts from government grants					387								387
Proceeds from stock options and issuance of treasury stock as compensation, net		266			-			-			-		266
Stock repurchase		(305	)		-			-			-		(305	)
Payments of preferred stock dividend		(112	)		-			-			-		(112	)
Net cash (used in) provided by financing activities of continuing operations		(151	)		387			(61	)		-		175
Effect of exchange rate changes on cash		-			-			(377	)		-		(377	)
Net cash provided by (used in) continuing operations		16,761			(643	)		3,678			-		19,796
Net cash provided by (used in) discontinued operations		-			636			(166	)		-		470
Net increase (decrease) in cash and cash equivalents		16,761			(7	)		3,512			-		20,266
Cash and cash equivalents at beginning of period		11,964			42			9,986			-		21,992
Cash and cash equivalents at end of period	$	28,725		$	35		$	13,498		$	-	$	42,258

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Supplemental Consolidating Condensed

Cash Flows Statement

	Nine Months Ended September 30, 2007
	Parent			Combined Guarantor Subsidiaries			Combined Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net cash (used in) provided by operating activities of continuing operations	$	(6,123	)	$	10,351		$	7,574		$	-	$	11,802
Net cash used in operating activities of discontinued operations		-			(5,981	)		(468	)		-		(6,449	)
Cash flows from investing activities:
Proceeds from sale of discontinued operations		93,354			-			-			-		93,354
Purchases of held to maturity securities		(78,969	)		-			-			-		(78,969	)
Proceeds from held to maturity securities		80,475			-			-			-		80,475
Purchases of available for sale securities		(205,059	)					(932	)				(205,991	)
Proceeds from available for sale securities		148,596			-			-			-		148,596
Purchases of property, plant and equipment		-			(2,946	)		(2,882	)		-		(5,828	)
Proceeds from sale of property, plant and equipment		-			1			2			-		3
Net cash provided by (used in) investing activities of continuing operations		38,397			(2,945	)		(3,812	)		-		31,640
Net cash used in investing activities of discontinued operations		-			(1,410	)		-			-		(1,410	)
Cash flows from financing activities:
Proceeds from short-term debt		-			-			-			-		-
Payments on short-term debt		-			-			(980	)		-		(980	)
Proceeds from long-term debt		10,964			-			-			-		10,964
Payments on long-term debt		(33,874	)		-			(97	)		-		(33,971	)
Stock options and issuance of treasury stock as compensation, net		835			-			-			-		835
Stock repurchase		(2,975	)		-			-			-		(2,975	)
Payments of preferred stock dividend		(112	)		-			-			-		(112	)
Net cash used in financing activities of continuing operations		(25,162	)		-			(1,077	)		-		(26,239	)
Net cash used in financing activities of discontinued operations		-			(14	)		-			-		(14	)
Effect of exchange rate changes on cash		-			-			384			-		384
Net cash provided by continuing operations		7,112			7,406			3,069			-		17,587
Net cash used in discontinued operations		-			(7,405	)		(468	)		-		(7,873	)
Net increase in cash and cash equivalents		7,112			1			2,601			-		9,714
Cash and cash equivalents at beginning of period		500			41			5,622			-		6,163
Cash and cash equivalents at end of period	$	7,612		$	42		$	8,223		$	-	$	15,877

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

You should read this discussion in conjunction with the consolidated financial statements, notes and tables included in Part I, Item 1 of this Form 10-Q.  Statements that are not historical facts, including statements about our confidence in our prospects and strategies,  our expectations about growth of existing markets and new products and our ability to expand into new markets and to identify and acquire complementary businesses, are forward-looking statements that involve risks and uncertainties.  In addition to statements that are forward-looking by reason of context, the words “believe,” “expect,” “anticipate,” “intend,” “designed,” “goal,” “objective,” “optimistic,” “will” and other similar expressions identify forward-looking statements.  In light of the risks and uncertainties inherent in all future projections, the inclusion of the forward-looking statements should not be regarded as a guarantee of performance.  Although we believe that our plans, objectives, intentions and expenditures reflected in our forward-looking statements are reasonable, we can give no assurance that our plans, objectives, intentions and expectations will be achieved.  Our forward-looking statements are made based on our current expectations and beliefs concerning future events and are subject to uncertainties, risks and factors relating to our operations and business environments, all of which are difficult to predict and many of which are beyond our control.  Future events could cause our actual results to differ materially from those matters expressed or implied by our forward-looking statements.

When considering these risk factors, you should keep in mind the cautionary statements elsewhere in this report and the documents incorporated by reference.  New risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us.  We assume no obligation to update any forward-looking statements or risk factors after the date of this report as a result of new information, future events or developments, except as required by the federal securities law.

Recent Developments

Subsequent to September 30, 2008, economic events have resulted in a moderating effect on the cost of many of the raw materials that we use, including steel, copper and other metal commodities.  Due to the uncertainty in the financial markets and  due to the recent volatility in the commodity markets, we cannot determine if these cost fluctuations will be in effect for any length of time.  In addition, during the third quarter of 2008 we benefited in part because of then lower cost steel inventories and first in first out (FIFO) inventory accounting.  However, this FIFO benefit will not continue through the remainder of 2008 or into 2009, as our current higher priced inventory will be matched with sales on a going forward basis.  With the financial and commodity markets uncertainty, we cannot predict what, if any, impact this will have on our operating results for 2009.

General

Through our various subsidiaries, we operate in one reportable segment: friction products.  Our results of operations are affected by a variety of factors, including but not limited to, global economic conditions, manufacturing efficiency, customer demand for our products, competition, raw material pricing and availability, our ability to pass through to our customers increases in raw material prices, labor relations with our employees and political conditions in the countries in which we operate. We sell a wide range of products that have a correspondingly wide range of gross margins.  Our consolidated gross margin is affected by product mix, selling prices, material and labor costs, as well as our ability to absorb overhead costs resulting from fluctuations in demand for our products.

Friction Products

We believe that, based on net sales, we are one of the top worldwide manufacturers of friction products used in off-highway, on-highway, industrial, agricultural, performance and aircraft applications. Our friction products businesses manufacture parts and components made from proprietary formulations of composite materials, primarily consisting of metal powders and synthetic and natural fibers applied to steel backing plates.  Friction products are used in brakes, clutches and transmissions to absorb vehicular energy and dissipate it through heat and normal mechanical wear.  Our friction products include parts for brakes, clutches and transmissions used in construction and mining vehicles, agricultural vehicles, trucks, motorcycles and race cars, and brake parts for landing systems used in commercial and general aircraft. We believe we are:

·   a leading domestic and international supplier of friction products for construction and mining equipment, agricultural equipment and trucks,

·   the leading North American independent supplier of friction materials for braking systems for new and existing series of many commercial and military aircraft models, including Boeing, EADS, Lockheed and United Technologies, as well as the Canadair regional jet series,

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·   the largest supplier of friction materials for the growing general aviation market, including numerous new and existing series of Cessna, Hawker, Lear and Pilatus aircraft, and

·   a leading domestic supplier of friction products for performance and specialty markets, such as motorcycles, race cars, performance automobiles, military vehicles, ATV’s and snowmobiles.

Critical Accounting Policies

Some of our accounting policies require the application of significant judgment by us in the preparation of our consolidated financial statements.  In applying these policies, we use our best judgment to determine the underlying assumptions that are used in calculating the estimates that affect the reported values on our financial statements.  On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.

We review our financial reporting and disclosure practices and accounting policies quarterly to ensure that they provide accurate and transparent information relative to the current economic and business environment.  We base our estimates and assumptions on historical experience and other factors that we consider relevant.  If these estimates differ materially from actual results, the impact on our consolidated financial statements may be material.  However, historically our estimates have not been materially different from actual results.  Our critical accounting policies include the following:

·   Revenue Recognition.  We recognize revenues when products are shipped and title has transferred to our customer.

·   Accounts Receivable.  We maintain an allowance for doubtful accounts for estimated losses from the failure of our customers to make required payments for products delivered.  We estimate this allowance based on the age of the related receivable, knowledge of the financial condition of our customers, review of historical receivable and reserve trends and other pertinent information.  If the financial condition of our customers deteriorates or we experience an unfavorable trend in receivable collections in the future, additional allowances may be required.  Historically, our reserves have approximated actual experience.

·   Inventory.  Inventories are stated at the lower of cost or market.  Cost includes materials, labor and overhead and is determined by the first-in, first-out (FIFO) method.  We review the net realizable value of inventory in detail on an on-going basis, with consideration given to deterioration, obsolescence, and other factors.  If actual market conditions differ from those projected by management, and our estimates prove to be inaccurate, write-downs of inventory values and adjustments to cost of sales may be required.  Historically, our reserves have approximated actual experience.

·   Fair Value Disclosures.  We have certain financial assets recorded at fair value. In accordance with SFAS No. 157, Fair Value Measurement (SFAS 157), we have classified our financial assets as Level 1, 2 or 3 within the fair value hierarchy.  Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset. The majority of our financial assets at September 30, 2008 have been classified as Level 2. These assets have been initially valued at the transaction price and subsequently valued utilizing third party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates, and other industry and economic events. We validate the prices provided by our third party pricing services by understanding the models used, obtaining market values from other pricing sources, if appropriate, and challenging pricing data in certain instances.  Excluding cash equivalents, the largest portion of our marketable securities are comprised of investments that may be sensitive to changes in economic factors such as interest rates or credit spreads.  We have no financial assets classified as Level 3 as of September 30, 2008.

·   Investments.  As of September 30, 2008, and December 31, 2007, we accounted for all of our short-term investments as available-for-sale.  We report our available-for-sale securities at fair value in our Consolidated Balance Sheets with unrealized holding gains and losses, net of tax, included in Accumulated other comprehensive income.  Dividend and interest income, including the amortization of any discount or premium, as well as realized gains or losses, are included in Interest income in our Consolidated Statements of Income.  We periodically evaluate our investments for other-than-temporary impairment.  We did not find it necessary to record any other-than-temporary impairment charges to our short-term investments in the three or nine months ended September 30, 2008 or 2007.

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·   Long-Lived Assets.  We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  In assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors.  Estimates of future undiscounted cash flows are highly subjective judgments based on our experience and knowledge of our operations.  These estimates can be significantly impacted by many factors, including changes in global and local business and economic conditions, operating costs, inflation and competitive trends.  If our estimates or underlying assumptions change in the future, we may be required to record impairment charges.  In our continuing operations, we did not find it necessary to record any impairment charges to our tangible or indefinite lived intangible assets in the three or nine months ended September 30, 2008 or 2007.

·   Pension Benefits.  We account for our defined benefit pension plans in accordance with SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158), an amendment of FASB Statements No. 87, 88, 106 and 132, which requires the recognition of the overfunded or underfunded status of a plan as an asset or liability in the statement of financial position and the recognition of changes in the funded status in the year in which the changes occur through Accumulated other comprehensive income.  Pension expense continues to be recognized in the financial statements on an actuarial basis.  The most significant elements in determining our net pension expense are the expected return on plan assets and appropriate discount rates.  We assumed that the expected weighted average long-term rate of return on plan assets would be 8.25% for 2008.  However, should the rate of return differ materially from our assumed rate, we could experience a material adverse effect on the funded status of our plans and our future pension expense.  The assumed long-term rate of return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years.  This calculation produces the expected return on plan assets that is included in net pension expense.  The difference between this expected return and the actual return on plan assets is recorded to Accumulated other comprehensive income.  Net periodic pension cost was $0.1 million for the nine months ended September 30, 2008 and $0.3 million for the nine months ended September 30, 2007.  For the potential impact to asset values of our pension plans in 2009, see “Item 3. Quantitative and Qualitative Disclosures About Market Risk – Benefit Plan Valuations.”

We determine the discount rate to be used to discount plan liabilities at their measurement date, December 31.  The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year.  At December 31, 2007, we determined this rate to be 6.0%.  Changes in discount rates over the past three years have not materially affected net pension expense.

·   Income Taxes.  Our effective tax rate, taxes payable and other tax assets and liabilities reflect the current tax rates in the domestic and foreign tax jurisdictions in which we operate.  Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for reporting and income tax purposes.  Our effective tax rate is substantially driven by the impact of the mix of our foreign and domestic income and losses and the federal and local tax rate differences on each.

We adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement 109 (FIN 48), on January 1, 2007.  As a result of the implementation of FIN 48, we were not required to recognize any change in the liability for unrecognized tax benefits.  The total amount of unrecognized tax benefits as of September 30, 2008, was $1.8 million (including $0.7 million of accrued interest and penalties), the recognition of which would have an effect of $0.6 million on our continuing operations effective tax rate.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense.  We recorded $0.02 million of interest and penalties in continuing operations tax expense for the three months ended September 30, 2008.

SFAS No. 109, Accounting for Income Taxes (SFAS 109), provides certain guidelines to follow in making the determination of the need for a valuation allowance. We must demonstrate that taxable income is expected to be available for future periods sufficient to realize the benefits of temporary differences and carryforwards to avoid recording a valuation allowance against deferred tax assets.  We recorded a valuation allowance for our Canadian subsidiary for the year ended December 31, 2007.  We have determined that no additional valuation allowance was necessary as of September 30, 2008.

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·   Foreign Currency Translation and Transactions.  We have foreign manufacturing operations in Italy, China and Canada. Revenue and expenses from these operations are denominated in local currency, thereby creating exposures to changes in exchange rates. As such, fluctuations in these operations, respective currencies may have an impact on our business, results of operations and financial position. We currently do not use financial instruments to hedge our exposure to exchange rate fluctuations with respect to our foreign operations. As a result, we may experience substantial foreign currency translation gains or losses due to the volatility of other currencies compared to the U.S. dollar, which may positively or negatively affect our results of operations attributed to these operations. For the nine months ended September 30, 2008 and 2007, revenue from non-U.S. countries represented 43.3% and 38.5% of our consolidated revenue, respectively.  Other comprehensive income included translation losses of $3.5 million and $1.3 million for the three and nine months ended September 30, 2008, respectively.  Gains or losses resulting from foreign currency transactions are translated to local currency at the rates of exchange prevailing at the dates of the transactions.  Sales or purchases in foreign currencies, other than the subsidiary’s local currency, are exchanged at the date of the transaction.  The effect of transaction gains or losses is included in Other income (expense), net in our Consolidated Statements of Income.  Foreign currency transaction gains or losses were not material to the results of operations for the three and nine months ended September 30, 2008 or September 30, 2007, respectively.

·   Recent Accounting Developments

·   In June 2008, the Financial Accounting Standard Board (FASB) issued Staff Position Emerging Issues Task Force (EITF) No. 03-6-1, Determining Whether Instruments Granted in Share-based Payment Transactions Are Participating Securities (FSP 03-6-1).  Under FSP 03-6-1, unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computed EPS.  FSP 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years, and is not expected to have a significant impact on our results of operations, financial condition or liquidity.

·   In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are prepared in conformance with generally accepted accounting principles. Unlike Statement on Auditing Standards No. 69, The Meaning of Present in Conformity With Generally Accepted Accounting Principles, SFAS 162 is directed to the entity rather than the auditor. The statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles, and is not expected to have any impact on our results of operations, financial condition or liquidity.

·   In April 2008, the FASB issued FSP SFAS No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3), which amends the factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset under FAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). FSP 142-3 requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset, and is an attempt to improve consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141, Business Combinations. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and the guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date. FSP 142-3 is not expected to have a significant impact on our results of operations, financial condition or liquidity.

·   In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161).  SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities in order to improve the transparency of financial reporting. SFAS 161 is effective prospectively for fiscal years beginning after November 15, 2008. We do not expect the adoption of SFAS 161 will have a material impact on our results of operations, financial condition or liquidity.

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·   In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS 141(R)).  SFAS 141(R) modifies the accounting for business combinations by requiring that acquired assets and assumed liabilities be recorded at fair value, contingent consideration arrangements be recorded at fair value on the date of the acquisition and pre-acquisition contingencies will generally be accounted for in purchase accounting at fair value. The pronouncement also requires that transaction costs be expensed as incurred, acquired research and development be capitalized as an indefinite-lived intangible asset and the requirements of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, be met at the acquisition date in order to accrue for a restructuring plan in purchase accounting.  SFAS 141(R) is required to be adopted prospectively effective for fiscal years beginning after December 15, 2008.  SFAS 141(R) may not be adopted early.

·   On October 10, 2008, FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued.  The provisions of FSP 157-3 did not have an impact on our financial condition or results of operations.

The following charts show our net sales by market segment and geographic location of our manufacturing facilities for the nine months ended September 30, 2008:

Nine Months Ended September 30, 2008 Sales by Market

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Nine Months ended September 30, 2008 Sales by Geographic Location of our Manufacturing Facilities

Third Quarter of 2008 Compared to the Third Quarter of 2007

In the first quarter of 2008, we committed to selling our performance racing segment which was comprised of two operating facilities in the United States.  We have classified the performance racing segment as a discontinued operation in our financial results for all periods presented.  We sold Tex Racing Enterprises, Inc. in May 2008 as part of that commitment.  Additionally, with the sale of our precision components segment in January 2007 and its prior classification as discontinued operations, our continuing operations are organized into one strategic segment, friction products.

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The following table summarizes our results of operations for the three month periods ended September 30, 2008 and 2007, respectively:

	Three Months Ended September 30
	2008			% of Sales			2007			% of Sales
	(dollars in millions)
Net sales	$	74.2			100.0	%	$	51.5			100.0	%
Cost of sales	$	49.1			66.1	%	$	39.8			77.2	%
Gross profit	$	25.1			33.9	%	$	11.7			22.8	%
Selling, technical and administrative expenses	$	9.3			12.6	%	$	7.0			13.6	%
Income from operations	$	15.6			21.1	%	$	4.6			8.8	%
Interest expense	$	(2.0	)		-2.7	%	$	(2.3	)		-4.4	%
Interest income	$	0.5			0.7	%	$	1.1			2.0	%
Other income (expense), net	$	1.2			1.6	%	$	(0.5	)		-1.0	%
Income taxes	$	5.0			6.8	%	$	0.9			1.8	%
Income from continuing operations, after income taxes	$	10.3			13.9	%	$	1.9			3.7	%
Discontinued operations, net of tax	$	-			0.0	%	$	(0.3	)		-0.5	%
Net income	$	10.3			13.8	%	$	1.7			3.2	%

Net Sales.  Our net sales for the third quarter of 2008 were $74.2 million, an increase of $22.7 million or 44.1% from the same period in 2007.  Sales increases during the period resulted primarily from increased shipment volumes as a result of strong demand in all of our end markets and new product introductions, pricing actions pursuant to the terms of long-term supply agreements as well as to offset the increase in our raw material input costs, and favorable foreign currency exchange rates.  Of our total sales increase of 44.1% in the third quarter of 2008, volume represented approximately 24.3% of the total percentage points, pricing accounted for approximately 14.4 percentage points, and favorable foreign currency exchange rates represented 5.4 percentage points.

We experienced sales increases in most of our major markets, primarily led by construction and mining, aircraft and defense and agriculture.  Our sales to the construction and mining market, our largest, were up 50.9% in the third quarter of 2008, compared to the third quarter of 2007, as a result of strong global market conditions, especially in a number of developing countries.  Sales in the agriculture sector were up 50.0% in the third quarter of 2008, compared to the third quarter of 2007, as a result of strong market conditions in North and South America.  Our aircraft and defense markets were up 63.7% in the third quarter of 2008, compared to the third quarter of 2007, due to strong demand, especially in our defense market.  Sales to our heavy truck market increased 7.8% during the third quarter of 2008, compared to the third quarter of 2007 as the impact of the 2007 emission standards change negatively impacted our third quarter 2007 sales.  During 2008, we continued to focus our efforts on the friction direct aftermarket that we service through the Velvetouch® and Hawk Performance® brand names.  Sales in this product category were $7.2 million in the third quarter of 2008, compared to $6.9 million in 2007, an increase of 4.3%.

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Net sales from our foreign facilities represented 39.9% of our total net sales in the third quarter of 2008 compared to 38.9% for the comparable period of 2007.  Sales at our Italian operation, on a local currency basis, were up 38.4% in the third quarter of 2008, compared to the third quarter of 2007, and sales at our Chinese operation, on a local currency basis, were up 19.6% during the same period.

Cost of Sales.  Cost of sales was $49.1 million during the third quarter of 2008, an increase of $9.3 million, or 23.4%, compared to cost of sales of $39.8 million in the third quarter of 2007.  The primary driver of the increase in our cost of sales in the third quarter of 2008 was increased production volumes through our manufacturing facilities.  Production volume increases represented approximately 19.1 percentage points of the total cost of sales increase of 23.4%.  The effect of foreign currency exchange rates accounted for 4.8 percentage points of our total cost of sales increase of 23.4% during the third quarter of 2008.  As a percent of sales, our cost of sales represented 66.1% of our net sales in the third quarter of 2008 compared to 77.2% of net sales in the third quarter of 2007.  The improvement in our cost of sales percentage was driven by increase volumes, a FIFO benefit of lower cost steel inventories flowing out of inventory during the quarter and product mix partially offset by the effect of foreign currency exchange rates on our cost of sales and the impact of higher costs of a number of our raw material inputs.  The FIFO inventory benefit will not continue through the remainder of 2008 as our higher priced inventory will be matched with sales on a going forward basis.

Gross Profit.  Gross profit was $25.1 million, an increase of $13.4 million, or 114.5%, during the third quarter of 2008, compared to gross profit of $11.7 million for the third quarter of 2007.  Our gross profit margin improved to 33.9% of our net sales in the third quarter of 2008 compared to 22.8% of our net sales in the third quarter of 2007.  The factors impacting the change in gross margin are detailed under Net Sales and Cost of Sales.

Selling, Technical and Administrative Expenses.  Selling, technical and administrative (ST&A) expenses increased $2.3 million, or 32.9%, to $9.3 million in the third quarter of 2008 from $7.0 million during the third quarter of 2007.  As a percentage of net sales, ST&A was 12.6% in the third quarter of 2008 compared to 13.6% in the third quarter of 2007. The increase in ST&A expenses resulted primarily from an increase in incentive compensation, salary and wage expense, totaling approximately 15.2 percentage points of the 32.9% increase to support the higher levels of business activity during the quarter, compared to the third quarter of 2007.  During the third quarter of 2008 we incurred $0.5 million in legal expenses net of insurance reimbursement, related to the previously disclosed SEC and DOJ investigations compared to $0.4 million in the third quarter of 2007.  Additionally, we spent $1.3 million, or 1.8%, of our net sales on product research and development in the third quarter of 2008, compared to $1.2 million or 2.3%, of our net sales for the third quarter of 2007.

Income from Operations. As a result of the factors discussed above, income from operations was $15.6 million in the third quarter of 2008, an increase of $11.0 million or 239.1%, compared to $4.6 million during the third quarter of 2007.  Income from operations as a percentage of net sales increased to 21.1% in the third quarter of 2008 from 8.8% in the same period of 2007 for the reasons discussed above.  The effect of foreign currency exchange rates accounted for 17.6 percentage points of our total operating income increase of 239.1% during the third quarter of 2008. 

Interest Expense.  Interest expense decreased $0.3 million during the third quarter of 2008 to $2.0 million from $2.3 million in the third quarter of 2007, as a result of a $22.9 million senior note redemption in August 2007 resulting in lower average debt levels outstanding during the third quarter of 2008 compared to the third quarter of 2007.  Included as a component of Interest expense in our Consolidated Statements of Income is the amortization of deferred financing costs.  Amortization of deferred financing costs was $0.1 million in both the third quarter of 2008 and 2007.

Interest Income.   We invested our excess cash in various short-term interest bearing investments.  Interest income was $0.5 million in the third quarter of 2008 compared to $1.1 million during the third quarter of 2007.  Effective interest rates on our investments have dropped significantly in the quarter ended September 30, 2008, compared to rates available to us in the quarter ended September 30, 2007.

Other Income (Expense), Net.  Other income was $1.2 million during the third quarter of 2008, an increase of $1.7 million compared to expense of $0.5 million reported in the third quarter of 2007.  In the third quarter of 2008, we reported income of $1.3 million from the cancellation of a specific portion of a joint development project.  In the third quarter of 2007, as a result of a partial senior note redemption, we recorded an expense of $0.6 million related to the write-off of deferred financing costs.  There was no comparable expense in the third quarter of 2008.  We reported no foreign currency exchange transaction gains or losses during the third quarter of 2008 compared to foreign currency exchange transaction gains of $0.3 million in the third quarter of 2007.

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Income Taxes.  We recorded a tax provision for our continuing operations of $5.0 million for the quarter ended September 30, 2008, compared to $0.9 million in the comparable period of 2007.  Our effective income tax rate of 32.8% in the third quarter of 2008 differs from the current federal U.S. statutory rate of 35.0%, primarily as a result of a lower tax rates in the foreign tax jurisdictions where we have operations.  Our worldwide provision for income taxes is based on annual tax rates for the year applied to all of our sources of income.

Discontinued Operations, Net of Tax. During the first quarter of 2008, we committed to a plan to divest our performance racing segment which operated two facilities in the United States.  In May 2008, we sold Tex Racing Enterprises, Inc. and we continue to negotiate with potential buyers for the remaining business.  The operating activity of the performance racing segment is reflected in the following summary of results of our discontinued operations for the three months ended September 30, 2008 and 2007.  An analysis of discontinued operations is contained in Note 4 “Discontinued Operations” in the accompanying Consolidated Financial Statements of this Form 10-Q.

	Three Months Ended September 30
	2008		2007
	(dollars in millions)
Net sales	$	1.1	$	2.9
Loss from discontinued operations, before income taxes	$	-	$	(0.4	)
(Loss) gain on sale of discontinued operations, before income taxes		-		-
Income tax (benefit) expense		-		(0.1	)
(Loss) income from discontinued operations, after income taxes	$	-	$	(0.3	)

Net Income.  As a result of the factors noted above, we reported net income of $10.3 million in the third quarter of 2008, an increase of $8.6 million, or 505.9% compared to net income of $1.7 million during the third quarter of 2007.

First Nine Months of 2008 Compared to First Nine Months of 2007

The following table summarizes our results of operations for the nine month periods ended September 30, 2008 and 2007, respectively:

	Nine Months Ended September 30
	2008			% of Sales			2007			% of Sales
	(dollars in millions)
Net sales	$	211.8			100.0	%	$	161.0			100.0	%
Cost of sales	$	148.1			70.0	%	$	121.8			75.7	%
Gross profit	$	63.6			30.0	%	$	39.2			24.3	%
Selling, technical and administrative expenses	$	29.4			13.9	%	$	23.6			14.7	%
Income from operations	$	33.7			15.9	%	$	15.0			9.3	%
Interest expense	$	(6.0	)		-2.9	%	$	(7.4	)		-4.6	%
Interest income	$	1.7			0.8	%	$	2.9			1.8	%
Other income (expense), net	$	1.6			0.7	%	$	(0.4	)		-0.3	%
Income taxes	$	10.6			5.0	%	$	4.3			2.7	%
Income from continuing operations, after income taxes	$	20.3			9.6	%	$	5.8			3.6	%
Discontinued operations, net of tax	$	(1.9	)		-0.9	%	$	10.8			6.7	%
Net income	$	18.4			8.7	%	$	16.6			10.3	%

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Net Sales.  Our consolidated net sales for the nine month period ended September 30, 2008 were $211.8 million, an increase of $50.8 million or 31.6% from the same period in 2007. We experienced sales increases primarily from increased shipment volumes caused by strong demand during the period in all of our end markets and new product introductions, pricing actions pursuant to the terms of  long-term supply agreements and increases to offset higher raw material input costs and favorable foreign currency exchange rates during the period.  Of our total sale increase of 31.6% during the nine months ended September 30, 2008, volume represented approximately 15.3 percentage points, of the total  pricing represented approximately 9.8 percentage points and favorable foreign exchange rates represented 6.5 percentage points.

Our sales to the construction and mining market were up 38.1% in the first nine months of 2008, compared to 2007, as a result of strong global market conditions as well as market share gains.  Sales in the agriculture sector were up 42.6% in the first nine months 2008, compared to the first nine months of 2007.  Our aircraft and defense businesses were up 32.3% in the first nine months of 2008 compared to the same period of 2007.  Sales to our heavy truck market increased 11.1% during the first nine months of 2008 compared to same period of 2007 as the impact of the emission standards change in January 2007 diminished.  During 2008, we continued to focus our efforts on the friction direct aftermarket that we service through the Velvetouch® and Hawk Performance® brand names.  Sales in this product category were $23.6 million in the first nine months of 2008, compared to $19.8 million in 2007, an increase of 19.2% primarily due to strong markets, new customers and product introductions during the period.

Net sales from our foreign facilities represented 43.3% of our total net sales for the nine months ended September 30, 2008, compared to 38.5% for the same period of 2007.  Sales at our Italian operation, on a local currency basis, were up 30.8% in the nine months ended September 30, 2008, compared to the same period of 2007, while sales at our Chinese operation, on a local currency basis, were up 51.1% during the same period.

Cost of Sales.  Cost of sales was $148.1 million during the first nine months of 2008, an increase of $26.3 million, or 21.6%, compared to cost of sales of $121.8 million in the first nine months of 2007.  The primary driver of the increase in our cost of sales for the nine months ended September 30, 2008, was increased production volumes through our manufacturing facilities.  Production volume increases represented approximately 13.1 percentage points and increased manufacturing costs represented 2.7 percentage points of the total cost of sales increase of 21.6%.  Our manufacturing costs were favorably impacted during the period by a FIFO benefit lower cost steel inventories flowing out of inventory during the third quarter of 2008 and by lean manufacturing and localization initiatives.  The effect of foreign currency exchange rates accounted for 5.8 percentage points of our total cost of sales increase of 21.6% during the first nine months of 2008.  As a percent of sales, our cost of sales represented 70.0% of our net sales for the nine month period ended September 30, 2008, compared to 75.7% of net sales in same period of 2007.  The improvement in our cost of sales percentage was driven by increased volumes, the  FIFO inventory benefit and product mix partially offset by the effect of foreign exchange rates on our cost of sales as well as the impact of higher costs of a number of our raw material inputs.

Gross Profit.  Gross profit increased $24.4 million to $63.6 million during the first nine months of 2008, a 62.2% increase compared to gross profit of $39.2 million for the same period of 2007. Our gross profit margin improved to 30.0% of our net sales in the first nine months of 2008 compared to 24.3% of our net sales in the same period of 2007.  The factors impacting the change in gross margin are detailed under Net Sales and Cost of Sales.

ST&A Expenses.  ST&A expenses increased $5.8 million, or 24.6%, to $29.4 million for the first nine months of 2008 from $23.6 million during the first nine months of 2007. As a percentage of net sales, ST&A expenses decreased to 13.9% for the first nine months of 2008 compared to 14.7% for the same period of 2007. The increase in ST&A expenses resulted primarily from an increase in employee incentive compensation, salary and wages expenses totaling approximately 15.2 percentage points of the 24.6% increase to support the higher levels of business activity during the nine months ended September 30, 2008.  We spent $0.9 million in legal fees, net of insurance reimbursement during the first nine months of 2008 compared to $1.3 million during the first nine months of 2007 related to the previously announced SEC and DOJ investigations.  We spent $4.0 million, or 1.9% of our net sales on product research and development for the first nine months of 2008 compared to $3.4 million or 2.1% of our net sales for the same period of 2007.

Income from Operations. As a result of the factors discussed above, income from operations was $33.7 million for the first nine months of 2008, an increase of $18.7 million or 124.7%, compared to $15.0 million during the same period of 2007.  Income from operations as a percentage of net sales increased to 15.9% for the first nine months of 2008 from 9.3% in the comparable period of 2007.  The effect of foreign currency exchange rates accounted for 18.6 percentage points of our total operating income increase of 124.7% during the nine months ended September 30, 2008.

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Interest Expense.  Interest expense decreased $1.4 million during the nine month period ended September 30, 2008, to $6.0 million from $7.4 million in the comparable period of 2007 as a result of  a $22.9 million senior note redemption in August 2007 resulting in lower average debt levels outstanding during 2008 compared to 2007.  Included as a component of Interest expense in our Consolidated Statements of Income is the amortization of deferred financing costs.  Amortization of deferred financing costs included in interest expense was $0.3 million for both the nine months ended September 30, 2008 and 2007.

Interest Income.  We invested our excess cash into various short-term interest bearing investments.  As a result of these investments, interest income was $1.7 million during the nine months ended September 30, 2008 compared to $2.9 million during the nine months ended September 30, 2007.  The decline in interest income was primarily the result of fewer funds available for investment resulting from the senior note debt paydown in August 2007 as well as lower interest rates on available investments during 2008 compared to the same period in 2007.

  Other Income (Expense), Net.  Other income was $1.6 million, an increase of $2.0 million compared to expense of $0.4 million reported for the first nine months of 2008.  In the third quarter of 2008, we reported income of $1.3 million from the cancellation of a specific portion of a joint development project. During the nine month period ended September 30, 2007, as a result of a partial senior note redemption, we recorded an expense of $0.6 million related to the write-off of deferred financing costs.  There was no comparable expense in the same period of 2008.  Additionally, we reported foreign currency exchange transaction gains of $0.4 million during the nine months ended September 30, 2008, compared to foreign currency exchange transaction losses of $0.3 million in the nine month period of 2007.

Income Taxes.  We recorded a tax provision for our continuing operations of $10.6 million for the nine months ended September 30, 2008, compared to $4.3 million in the same period of 2007.  Our worldwide provision for income taxes is based on annual tax rates for the year applied to all of our sources of income.  During 2007, the Italian government passed a major tax reform act which lowered the statutory rate from 37.25% to 31.4%.  The change became effective January 1, 2008.  During the nine months ended September 30, 2008, we recorded a one-time benefit of $0.4 million at a foreign subsidiary for a reversal of accelerated depreciation.  We also recorded a one-time benefit of $0.2 million for a depreciation change of method.  Excluding these benefits, the effective rate would have been 36.7% for the nine months ended September 30, 2008.

Discontinued Operations, Net of Tax.  During the first quarter of 2008, we committed to a plan to divest our performance racing segment.  In May 2008, we sold Tex Racing Enterprises, Inc. and reported a loss on the sale of $1.9 million for the nine months ended September 30, 2008.  In February 2007, we sold our precision components segment.  We have accounted for both of these business segments in our financial statements on the line item “Discontinued operations, net of tax.”  The operating activity of the performance racing and precision components segments are reflected in the following summary of results of our discontinued operations for the nine months ended September 30, 2008 and 2007.  An analysis of Discontinued Operations is contained in Note 4 “Discontinued Operations” in the accompanying unaudited Consolidated Financial Statements of this Form 10-Q.

	Nine Months Ended September 30
	2008			2007
	(dollars in millions)
Net sales	$	6.8		$	17.7
Loss from discontinued operations, before income taxes	$	(0.9	)	$	(2.1	)
(Loss) gain on sale of discontinued operations, before income taxes		(1.9	)		15.0
Income tax (benefit) expense		(0.9	)		2.1
(Loss) income from discontinued operations, after income taxes	$	(1.9	)	$	10.8

Net Income.  As a result of the factors noted above, including the gain on the sale of our precision components segment of $15.0 million in the first quarter of 2007 included as part of our discontinued operations in 2007, we reported net income of $18.4 million in the nine months ended September 30, 2008 compared to net income of $16.6 million in the nine months ended September 30, 2007 an increase of 10.8%.

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Liquidity and Capital Resources

Our primary financing requirements are:

·   for capital expenditures for maintenance, replacement and acquisition of equipment, expansion of capacity, productivity improvements, research and product development,

·   for funding our day-to-day working capital requirements, and

·   to pay interest on, and to repay principal of, our indebtedness.

Historically, our primary source of funds for conducting our business activities and servicing our indebtedness has been cash generated from operations, cash on hand and borrowings under our bank facilities and our senior notes.  Currently, we also have available to us the sale proceeds of the precision components segment.  The following selected measures of liquidity and capital resources outline various metrics that are reviewed by our management in the ordinary course of the operations of our business and are provided to our stockholders to enhance their understanding of our business.  We have maintained sufficient cash to sustain operations during all periods presented.

Selected Measures of Liquidity and Capital Resources from Continuing Operations

	September 30
	2008			2007
	(dollars in millions)
Cash and cash equivalents	$	42.3		$	15.9
Short-term investments	$	44.8		$	58.1
Working capital (1)	$	128.5		$	115.6
Current ratio (2)	3.2 to 1			3.8 to 1
Net debt as a % of capitalization (3)		0.0	%		17.1	%

(1)	Working capital is defined as current assets minus current liabilities.
(2)	Current ratio is defined as current assets divided by current liabilities.
(3)	Net debt is defined as long-term debt, including current portion, and short-term borrowings, less cash and short-term investments.  Capitalization is defined as net debt plus shareholders’ equity.

Cash and cash equivalents increased $26.4 million from September 30, 2007.  One driver of the increase was a decision made by the Company during the third quarter of 2008 to invest the proceeds from the sale or maturity of our available for sale commercial paper investments in money market funds, due to the overall uncertainty in the commercial paper market.  As a result of this investment decision, short-term investments decreased $13.3 million.  In addition, cash at our Italian facility has increased $5.4 million due an overall increase in sales levels and to differences in the timing of collections of accounts receivable in the third quarter of 2008 compared to the third quarter of 2007.  Lastly, the Company continues to generate positive cash from its current operations, which provided $13.8 million during the nine month period ended September 30, 2008 and $11.8 million during the nine month period ended September 30, 2007.

Working capital of $128.5 million at September 30, 2008 increased by $12.9 million from $115.6 million at September 30, 2007.  The increase was primarily due to the $12.4 million increase in accounts receivable that resulted from increased sales in 2008, the $9.4 million increase in inventory to support higher levels of sales, and the $13.1 million increase in the sum of cash and cash equivalents and short-term investments.  These increases were partially offset by the increase in accounts payable of $9.7 million, the increase in accrued taxes of $5.5 million due to increased taxable income and changes in FIN 48 items and a net increase in other working capital items.

35

At September 30, 2008, the Company’s current ratio was 3.2, a decrease from the current ratio of 3.8 at September 30, 2007.  The reduction in the current ratio was due primarily to increases in cash and cash equivalents, accounts receivable and inventory that were more than offset by increases in accounts payable, accrued taxes and other current accruals on a percentage basis.

Net debt as a percentage of capitalization is 0% at September 30, 2008 because the Company’s total net debt as defined above is $0.  Total net debt at September 30, 2007 was $13.2 million.

Contractual Obligations and Other Commercial Commitments

There have been no material changes to the contractual obligations table presented in our Annual Report on Form 10-K for the year ended December 31, 2007.  The table excludes our long-term liability for unrecognized tax benefits, which totaled $0.6 million as of September 30, 2008 and $0.7 million December 31, 2007, because we cannot predict with reasonable reliability the timing of cash settlements with the respective taxing authorities.

Debt

The following table summarizes the components of our indebtedness:

	September 30		December 31
	2008		2007
	(dollars in millions)
Senior notes	$	87.1	$	87.1
Bank facility		-		-
Other		-		0.1
Total debt	$	87.1	$	87.2

At September 30, 2008, there were no amounts borrowed under our bank facility and $0.8 million of letters of credit outstanding under our $5.0 million letter of credit sub-facility.  At September 30, 2008, we had $21.9 million available to borrow under our $30.0 million bank facility based on our eligible collateral less the letters of credit outstanding.

We have entered into a short-term, variable-rate, unsecured line of credit of up to $3.3 million (2.3 million Euros) with an Italian financial institution at our facility in Italy.  There were no borrowings under this credit facility at September 30, 2008.

As of September 30, 2008, we were in compliance with the provisions of all of our debt instruments.

Cash Flow

The following table summarizes the major components of cash flow:

	Nine Months Ended September 30
	2008			2007
	(dollars in millions)
Cash provided by operating activities of continuing operations	$	13.8		$	11.8
Cash provided by investing activities of continuing operations		6.2			31.6
Cash provided by (used in) financing activities of continuing operations		0.2			(26.2	)
Effect of exchange rates on cash		(0.4	)		0.4
Cash provided by (used in) discontinued operations		0.5			(7.9	)
Net increase in cash and cash equivalents	$	20.3		$	9.7

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Cash provided by our operating activities from continuing operations was $13.8 million for the nine month period ended September 30, 2008, compared to cash provided by operations of $11.8 million for the same period in 2007.  Our income from continuing operations, after income taxes increased to $20.3 million in the nine month period ended September 30, 2008 compared to $5.8 million in the same period in 2007.  However, operating cash flows have been impacted by the use of $13.6 million and $5.9 million, respectively, of cash related to increases in accounts receivable and inventory in the 2008 period resulting from increased sales volume.

Our investing activities from continuing operations provided $6.2 million for the period ended September 30, 2008, compared to cash provided by investing activities of $31.6 million for the period ended September 30, 2007.  During the third quarter of 2008, we received cash proceeds of $0.3 million from the sale of our Tex Racing facility, which was reported as a discontinued operation as of March 31, 2008.  In the first quarter of 2007, we received cash proceeds from the sale of our precision components segment of $93.4 million.  Net short-term investment activity in the nine months ended September 30, 2008, generated $14.1 million of cash compared to the use of $55.9 million in the comparable prior year period.

We used $9.2 million and $5.8 million for the purchase of property, plant and equipment in the periods ended September 30, 2008 and 2007, respectively.  We estimate capital expenditures will be an additional $8.0 million for the remainder of 2008.  Planned expenditures for the remainder of 2008 include plant improvements and expansion, machinery, equipment and tooling for new products, and research and development initiatives.  The principal sources of financing for these capital expenditures will be existing cash and internally generated funds.

Cash provided by financing activities was $0.2 million for the period ended September 30, 2008, compared to cash used of $26.2 million for the period ended September 30, 2007.  We used $0.3 million and $3.0 million to repurchase shares pursuant to our previously announced stock repurchase program in the periods ended September 30, 2008 and 2007, respectively.  As of June 30, 2008, the stock repurchase program was complete.  We received $0.4 million in government grants during the third quarter of 2008.  In the 2007 period, we repaid $35.0 million of outstanding debt, including the repayment of $1.0 million of local debt of our Chinese facility and $22.9 million of Senior Notes related to our tender offer completed during the third quarter of 2007.  We had no outstanding borrowings under our bank facility at September 30, 2008 or 2007.

We believe that cash, cash equivalents, interest on and proceeds from short-term investments, cash flow from operating activities and borrowing availability under our bank facilities will be sufficient to satisfy our working capital, capital expenditures, debt requirements and to finance our internal growth needs for the next twelve months.

 ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Disclosures.  The following discussion about our market risk disclosures involves forward-looking statements.  Actual results could differ materially from those projected in the forward-looking statements.  We are exposed to market risk related to changes in interest rates and foreign currency exchange rates.  In seeking to minimize the risks and costs associated with market risk, we manage our exposures to interest rates and foreign currency exchange rates through our regular operating and financial activities and through foreign currency hedge contracts.  We had no foreign currency hedge contracts outstanding as of September 30, 2008.  We do not use derivative financial instruments for speculative or trading purposes.

Interest Rate Sensitivity.  At September 30, 2008, none of our total outstanding debt bore interest at a variable rate.  Typically, our primary interest rate risk exposure results from floating rate debt and investment instruments.  Our cash is primarily invested in bank deposits, money market funds and other marketable debt securities, including commercial paper and U.S. agency debt. The assets held by our non-qualified deferred compensation plan are invested in equity securities.  The primary objective of our investments is to preserve principal while maximizing yields without significantly increasing risk.  In undertaking this strategy, we are exposed to financial market risks including default risk, cash balances included in bank deposits exceeding insurance limits set by the Federal Deposit Insurance Corporation, changes in marketable debt prices, equity security prices and interest rates.  Due to the short-term nature of our investments, a 1% change in market interest rates would have an impact of approximately $0.9 million on an annual basis as of September 30, 2008.  

Inflation Risk. We manage our inflation risks by ongoing review of product selling prices and production costs.  Overall, the impact of inflation has not been significant to us because of the relatively low rates of inflation experienced by us during the last few years.  However, in recent months, we have faced inflationary and other pricing pressures with respect to steel, copper and fuel, which have been partially mitigated by pricing adjustments to our customers, though we do usually experience delays between our raw material cost increases and sales price increases.  The ability to pass on these expected price increases to our customers is dependent on market conditions.  Inflation or other pricing pressures could impact any or all of these components, with a possible adverse effect on our profitability, especially where increases in these raw material costs exceed price increases on products we are able to pass on to our customers.

37

Foreign Currency Exchange Risk.  We have foreign manufacturing operations in Italy, China and Canada. Revenue and expenses from these operations are denominated in local currency, thereby creating exposures to changes in exchange rates. As such, fluctuations in these operations respective currencies may have an impact on our business, results of operations and financial position. We currently do not use financial instruments to hedge our exposure to exchange rate fluctuations with respect to our foreign operations. As a result, we may experience substantial foreign currency translation gains or losses due to the volatility of other currencies compared to the U.S. dollar, which may positively or negatively affect our results of operations attributed to these operations. Gains or losses resulting from foreign currency transactions are translated to local currency at the rates of exchange prevailing at the dates of the transactions.  Sales or purchases in foreign currencies, other than the subsidiary’s local currency, are exchanged at the date of the transaction.  The effect of transaction gains or losses is included in Other income (expense), net in our Consolidated Statements of Income.

Benefit Plan Valuations.  Asset returns for our defined benefit pension plans have been significantly impacted through September 30, 2008, by the overall decrease in fair market value that has been experienced on a year-to-date basis on our pension plan assets. As a result, we believe that our actual plan asset returns could be significantly reduced from our expected rate of return used to measure pension expense for the year ended 2008, which could result in a lower fair market value of plan assets at year end. We also believe that current market conditions may lead to an increase in the discount rate used to value the year-end benefit obligations covered by these plans, which could partially mitigate the effects of the lower asset returns. Overall, we expect that the net effects of actual plan asset returns, potentially lower fair market values at year-end 2008 and any increase in the year-end discount rate could lead to significantly higher pension expense in 2009 as compared to 2008.

 ITEM 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.  As of September 30, 2008, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures.  The evaluation was carried out under the supervision of and with the participation of our management, including our Chief Executive Officer and  Chief Financial Officer, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (the “Exchange Act”).  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting.  There have been no changes in our internal control over financial reporting in the third quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

 ITEM 1.   LEGAL PROCEEDINGS

Except as previously disclosed in our Form 10-K filed with the SEC on March 17, 2008, we are involved in lawsuits that have arisen in the ordinary course of our business. We are contesting each of these lawsuits vigorously and believe we have defenses to the allegations that have been made.  In our opinion, the outcome of these lawsuits will not have a material adverse effect on our financial condition, cash flows or results of operations, except as described in our Form 10-K filed with the SEC on March 17, 2008.

 ITEM 1A.   RISK FACTORS

We have no material changes to the disclosures on this matter since the end of our most recent fiscal year, December 31, 2007, filed on Form 10-K on March 17, 2008 and in our Quarterly Report on Form 10-Q for the period ended March 31, 2008 filed on May 9, 2008, with the exception of a risk factor related to investment risk of our marketable securities.

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There has been significant deterioration and instability in the financial markets.

Even though we believe we take a conservative approach to investing our funds, this period of disruption in the financial markets could expose us to investment risk, including the risks that the value and liquidity of our investments could deteriorate significantly and the issuers of the securities we hold could be subject to credit rating downgrades.  Any loss of value could result in future impairment charges with respect to our investment portfolio and cash flows and our operating results could be negatively affected.  As of November 6, 2008, the majority of our marketable securities were invested in U.S. Treasury bills, U.S. Government Agency notes and money market funds, which are guaranteed under a recently adopted money market fund guarantee program by the Board of Governors of the Federal Reserve System.

 ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

 ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None

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

None

 ITEM 5.   OTHER INFORMATION

None

 ITEM 6.   EXHIBITS

(a)           Exhibits:

31.1*           Certification of the Chairman of the Board and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*           Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*           Certification of the Chairman of the Board and Chief Executive Officer 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 the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

___________

* Filed or Furnished herewith

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SIGNATURES

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

Date: November 6, 2008                                                                           HAWK CORPORATION

By: /s/ RONALD E. WEINBERG                                                                  

Ronald E. Weinberg

Chairman of the Board and Chief Executive Officer

By: /s/ JOSEPH J. LEVANDUSKI                                                                  

Joseph J. Levanduski

Vice President and Chief Financial Officer

40

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)

I, Ronald E. Weinberg, Chairman of the Board and Chief Executive Officer of Hawk Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hawk Corporation;

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

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

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to produce reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 6, 2008

/s/ RONALD E. WEINBERG                                                                           

Ronald E. Weinberg

Chairman of the Board and

Chief Executive Officer

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EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER)

I, Joseph J. Levanduski, Chief Financial Officer of Hawk Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hawk Corporation;

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

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

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such Internal Control over financial reporting, or caused such Internal Control over financial reporting to be designed under our supervision, to produce reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 6, 2008

/s/ JOSEPH J. LEVANDUSKI                                                                           

Joseph J. Levanduski

Vice President and Chief Financial Officer

42

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Hawk Corporation (the “Company”) on Form 10-Q for the period ending September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ronald E. Weinberg, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ RONALD E. WEINBERG                                                                                     

Ronald E. Weinberg

Chairman of the Board and Chief Executive Officer

November 6, 2008

This certification is made solely for the purpose of 18 U.S.C. § 1350, subject to the knowledge standard contained in that statute, and not for any other purpose.

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EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Hawk Corporation (the “Company”) on Form 10-Q for the period ending September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph J. Levanduski, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ JOSEPH J. LEVANDUSKI                                                                                     

Joseph J. Levanduski

Vice President and Chief Financial Officer

November 6, 2008

This certification is made solely for the purpose of 18 U.S.C. § 1350, subject to the knowledge standard contained in that statute, and not for any other purpose.

44