Welcome

Norman C. Harbert, Chairman, President and Chief Executive Officer Ronald E. Weinberg, Chairman-Executive Committee and Treasurer

Nineteen ninety-eight was the beginning of an exciting new period for our Company, as we further strengthened Hawk Corporation's position as a worldwide manufacturer and marketer of friction material and powder metal components. Over the course of the year, we completed our initial public offering (IPO), continued to increase our market share in existing markets, expanded our product offerings and capitalized on emerging opportunities in the acquisition arena.

We hope to better acquaint you with Hawk Corporation through our inaugural annual report. Specifically, we hope you will gain a clearer understanding of our products, markets, customers, financial performance and growth strategies. These strategies have been central to achieving and sustaining a leadership position in the niche markets we serve and will continue to fuel our growth and enhance shareholder value.

Achieving Record Financial Results
Hawk's revenues and profits have grown tenfold since our founding in 1989, and 1998 marked a year of record performance. Revenues grew to $182.1 million, an increase of 14.5 percent from $159.1 million in 1997. Net income, before extraordinary charges, grew to $12.2 million, or $1.51 per share, in 1998 from $2.9 million, or $0.45 per share, in 1997.

Our record of outstanding performance resulted largely from new product development, greater market penetration and strategic acquisitions, as well as contributions from ongoing cost containment initiatives. For example, the cost-saving benefits from the 1996 consolidation of Wellman Friction Products, through the merger of S.K. Wellman Corporation and Friction Products Co., were fully realized in 1998. This consolidation, as well as many shop floor process improvements, is evidence of our ongoing commitment to improve operating efficiencies.

Hawk's balance sheet continues to gain strength through operating cash flows and proceeds from the IPO. The Company used the net proceeds from the offering to pay down debt and fund growth. At year-end, our long-term debt-to-total capitalization ratio was 60 percent, providing a strong position through which we can fund our research and development efforts, acquisition program and capital expenditure projects for expansion and process improvements. During 1998, we expanded production capacity at Clearfield Powdered Metals, Sinterloy Corporation and our Wellman Friction Products facility in Medina, Ohio. Additionally, we added new capacity at our Wellman Friction Products business in Orzinuovi, Italy.

Growing Through Strategic Acquisitions
While the IPO in May was Hawk's most publicized event during the past year, we had many other exciting accomplishments that will generate long-term shareholder value. Perhaps most significantly, we acquired Clearfield Powdered Metals, Inc. and, more recently, Allegheny Powder Metallurgy, Inc., which we acquired in February 1999. These acquisitions further position Hawk as one of the leading manufacturers of powder metal components for industrial applications and represent a continuation of our strategy to be a leading consolidator in the attractive powder metal industry.

Both Clearfield and Allegheny are Pennsylvania-based powder metal component manufacturers. We were particularly attracted by the strong management teams, complementary customer bases and superior operating results of these companies. Clearfield serves primarily the lawn and garden, home appliance, power hand tool and truck markets, while Allegheny serves the lawn and garden and automotive markets. Clearfield and Allegheny had full-year 1998 revenues of $11.5 million and $17.4 million, respectively.

The Clearfield and Allegheny acquisitions are classic examples of the numerous acquisition opportunities in Hawk's key markets. The powder metal component industry is highly fragmented and characterized by many small manufacturers. Both the friction products and powder metal industries are undergoing consolidation. Much of this consolidation is due to the additional capital and research and development resources needed to satisfy customers' increasingly stringent quality and performance criteria and to meet just-in-time delivery requirements. We continue to aggressively seek acquisitions that are accretive to earnings, and we remain very selective in our approach.

Fueling Internal Growth
We are committed to growing Hawk not only through strategic acquisitions but also through internal growth, as we expand our product offerings and process capabilities. We are constantly striving to enhance our technology and improve performance characteristics of our products, while maintaining our leading position in technology and maximizing returns for our shareholders. Our continuous commitment to strategic capital investments and cost saving programs will further fuel internal growth.

In an effort to maximize shareholder value in relation to the capital deployed in the business, we are beginning to embrace Economic Value Added (EVA) as a management tool. We view EVA not simply as a financial metric, but a concept that, when integrated properly, enables all employees to more readily identify with common goals. Further, as large shareholders, we personally are driven to enhance the value of our stake in the business by being increasingly effective in our use of capital and mindful of its true cost. We also encourage our employees to share in this thinking through the use of incentive benefits such as stock options, profit sharing, a 401(k) program and other progressive rewards to appropriately motivate and incentivize their performance.

International expansion is another essential component of our growth strategy. To be a global manufacturer, we believe it is important to market around the world and manufacture at strategic geographic locations to reach various markets. International revenues represented 17 percent of total revenues for 1998, or $31.7 million. This past year, we completed the expansion of our facility in Italy to ease capacity constraints and take advantage of the growing demand in Europe. In addition, we are beginning to build a presence in China, which we believe will offer long-term growth opportunities. We have had limited exposure to the recent downturns in the Asian markets and believe now is an appropriate time to seek long-term opportunities.

The foundation for Hawk's success has been our entrepreneurial roots, which have allowed us to be flexible and aggressive in growth; less apprehensive to take advantage of opportunities; quick to respond to changes in the economy and the needs of our customers; and more likely to take calculated risks. It is with that entrepreneurial spirit that we have created a worldwide enterprise and taken this business from revenues of $20 million in 1989 to nearly $200 million today.

Long-term, we envision Hawk to be a global manufacturing enterprise composed of market-leading companies manufacturing proprietary engineered components, with annual sales growth exceeding 15 percent per year, 20 percent EBITDA margins and creating a positive EVA for our shareholders. While we will remain focused on this overall goal of consistently generating year-to-year revenue and profit growth, there are factors in our outlook for 1999 that cause us to remain cautious. Although our large aftermarket business and diverse end markets give us some cushion from economic downturns, we are not totally immune and expect softness in the agricultural markets to impact our business this year. Nevertheless, the basics of our business remain strong. In fact, our record operating performance is a testament to the wisdom of incorporating consumables and aftermarket products into our strategy, which has enabled us to perform better than the overall economy.

Increasing the Investment
Community's Awareness
In the fourth quarter of 1998, the Board of Directors authorized the repurchase of up to $5 million of Hawk common stock. Reflecting management's conviction in your Company's long-term growth prospects and our belief that Hawk's recent stock price levels are not reflective of the Company's true long-term value, we have taken advantage of opportunities to buy back Hawk stock in the open market. We view Hawk's stock as a compelling investment opportunity and will continue to use the buyback program as market conditions warrant.

We believe our stock price will continue to be undervalued until the investment community fully understands the factors that make Hawk a particularly attractive investment. We are committed to increasing the awareness and investment attributes of Hawk with the investment community. As you will learn from reading this annual report, we manufacture "designed in" consumable products in niche markets to meet the specific needs of our customers - which gives us a stable aftermarket business and a competitive edge due to the high barriers to entry. Our revenue base will continue to be diversified as we further our growth. As a leading industry consolidator with positive cash flow and an operator in highly fragmented markets, we are positioned to take advantage of acquisition opportunities. Each of these value drivers increases our appeal to investors.

Looking back at the great year our Company had in 1998, we want to extend a special thanks to our worldwide team of 1,400 conscientious, talented associates. Their efforts are exemplified by their collective expertise, innovative spirit, commitment to hard work and passion for quality. With their dedication, Hawk has grown to be the leader in its respective industries and is fully capable of growing these leading market positions.

We also remain deeply appreciative of our customers, who continue to place their trust in us for innovative solutions and continually challenge to deliver only the best. We would also like to extend a special thanks to you, our fellow shareholders, for expressing your confidence in Hawk's growth prospects. We look forward to reporting our progress to you.

Norman C. Harbert Chairman, President and Chief Executive Officer	Ronald E. Weinberg Chairman-Executive Committee and Treasurer