10-K 1 l04501ae10vk.txt SIFCO INDUSTRIES, INC. 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2003 or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ___________________ Commission file number 1-5978 SIFCO INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Ohio 34-0553950 ------------------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 970 East 64th Street, Cleveland Ohio 44103 ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) (216) 881-8600 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: Common Shares, $1 Par Value American Stock Exchange --------------------------- ------------------------------------------- (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: NONE 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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter is $4,590,774. The number of the Registrant's Common Shares outstanding at November 11, 2003 was 5,152,233. The aggregate market value of Common Shares held by non-affiliates of the Registrant as of November 11, 2003 computed on the basis of the last reported sale price per share of $3.83 of such stock on the American Stock Exchange, was $11,769,651. Documents incorporated by reference: Portions of the Proxy Statement for Annual Meeting of Shareholders on January 27, 2004 (Part III). PART I ITEM 1. BUSINESS A. THE COMPANY SIFCO Industries, Inc. ("Company"), an Ohio corporation, was incorporated in 1916. The executive offices of the Company are located at 970 East 64th Street, Cleveland, Ohio 44103, and its telephone number is (216) 881-8600. The Company is engaged in the production and sale of a variety of metalworking processes, services and products produced primarily to the specific design requirements of its customers. The processes and services include forging, heat-treating, coating, welding, machining and selective electrochemical finishing; and the products include forged parts, machined forgings and other machined metal parts, remanufactured component parts for aerospace and industrial turbine engines, and selective electrochemical finishing solutions and equipment. The Company's operations are conducted in three business segments: (1) Turbine Component Services and Repair Group, (2) Aerospace Component Manufacturing Group and (3) Metal Finishing Group. B. PRINCIPAL PRODUCTS AND SERVICES 1. Turbine Component Services and Repair Group The Company's Turbine Component Services and Repair Group ("Repair Group") segment is headquartered in Cork, Ireland. This segment of the Company's business consists principally of the repair and remanufacture of aerospace and industrial turbine engine components. The business also performs machining and applies high temperature-resistant coatings to new turbine engine hardware. Operations The aerospace portion of the Repair Group requires the procurement of licenses/authority, which certify that the Company has obtained approval to perform certain proprietary repair processes. Such approvals are generally specific to an engine and its components, a process and a repair facility/location. Without possession of such approvals, a company would be precluded from competing in the aerospace turbine engine component repair business. Approvals are issued by either the original equipment manufacturers ("OEM") of aerospace turbine engines or the Federal Aviation Administration ("FAA"). Historically, the aerospace portion of the Repair Group has elected to procure approvals primarily from the OEM and currently maintains a variety of OEM proprietary repair process approvals issued by each of the primary OEM (i.e. General Electric, SNECMA, Pratt & Whitney, Rolls-Royce). In exchange for being granted an OEM approval, the Repair Group is obligated to pay royalty amounts to the OEM for each type of component repair that it performs utilizing the OEM approved proprietary repair process. The aerospace portion of Repair Group continues to be successful in procuring FAA repair process approvals. There is no royalty payment obligation associated with the use of a repair process approved by the FAA. To procure an OEM or FAA approval, the Repair Group is required to demonstrate its technical competence in the process of repairing such turbine engine components. The development of remanufacturing and repair processes is an ordinary part of the Repair Group. The Repair Group continues to invest time and money on research and development activities. During fiscal 2003, the Repair Group incurred $0.5 million of research and development expenses. One such activity is the development of an advanced coating technology. At the present time, a small portion of the Company's repair business is dependent on advanced coating processes and it believes that it can continue to access such capabilities on a subcontract basis when required. However, the Company believes that such requirements will likely increase in the future. While there is a patented advanced coating technology available for the Company to acquire, it has chosen not to do so because it believes that the cost/benefit justification for having that particular advanced coating capability (in-house) does not exist at this time. Instead, the Company, as part of a research group with several other parties, continues to advance in the research and development of an equivalent/alternative, cost effective coating technology. Operating costs related to such activities are expensed during the period in which they are incurred. The Company has recognized the evolution of the industrial turbine engine market. The Company's technologies have had many years of evolution in the aerospace turbine engine sector. The application of similar technologies to the industrial turbine engine sector has resulted in benefits to the industrial turbine engine operator. Over the past three years, the 2 Company has invested capital in new equipment in both the United States and Ireland that facilitates the repair and remanufacture of these larger (than aerospace) industrial turbine engine components. Entry into this sector significantly increases the market size for the application of the Company's technologies. The Repair Group generally has multiple sources for its raw materials, which consist primarily of investment castings essential to this business, although certain raw materials may be provided by a limited number of suppliers. Certain items are procured directly from the OEM to satisfy repair process requirements. Suppliers of such materials are located in many areas throughout North America and Europe. The Repair Group generally does not depend on a single source for the supply of its materials and management believes that its sources are adequate for its business. Industry The performance of the domestic and international air transport industry directly and significantly impacts the performance of the Repair Group. Historically, the air transport industry's long-term outlook has, for many years, been for continued, steady growth. Such outlook suggested the long-term need for additional aircraft and growth in the requirement for aircraft and aerospace turbine engine repairs. The events of September 11, 2001 resulted in an immediate reduction in the demand for passenger travel both in the U.S. and internationally. Aircraft manufacturers have announced reductions in forecasted aircraft deliveries in the next few years as a result of reduced demand, and many airlines have cancelled or rescheduled deliveries of new aircraft to which they had previously committed. In addition, the financial condition of many airlines in the U.S. and throughout the world is weak. The U.S. airline industry has received U.S. government assistance while some airlines have entered bankruptcy proceedings, and others have announced major restructuring initiatives, including significant reductions in service and the grounding of aircraft. These factors continued to have a negative impact on demand for aerospace turbine engine component repairs, which in turn negatively impacted the Repair Group's net sales, operating results and cash flows. It is difficult to determine at this time what the long-term impact of these events will be on air travel and the demand for services and products provided by the Repair Group. The world's fleet of aircraft has been in transition. Several older models of certain aircraft (727, 737-100/200, 747-100/200 and DC-9) and the engines (JT8D and JT9D) that power such aircraft have either been retired from use or their in-flight service intervals are being increased. In addition, as a direct result of the previously mentioned reduced demand for commercial flight miles, airlines have accelerated the timing of such retirements. As a result, the overall demand for repairs to such older model engines has significantly decreased. At the same time, newer generation aircraft (newer generation 737-700/800/900 and 747-400; 767, A320, A330, A340, etc.) and engines (CFM-56, PW4000, Trent, etc.) are in use with newer technology required to both operate and maintain such engines. The introduction of such newer generation aerospace turbine engines has in general reduced the frequency with which such engines and related components need to be repaired. The longer times between repairs has been attributed to improved technology, including the improved ability to monitor an engine's condition while still in operation. Although the newer generation aerospace turbine engines require less frequent overhaul, such aerospace turbine engines generally have a greater number of components that require repair. This could result in a larger aerospace turbine engine component repair market in the future. Recent years have seen the installation of numerous industrial turbine engines as means of generating electric power for residential, commercial and industrial consumers. The high cost of installation and maintenance of such units has provided the Repair Group with the opportunity to bring value to this significant market. Industrial turbine engine units are in use throughout the world. Industrial turbine engine units operate in different modes. Some units operate on a continuous base loading at a percentage of their maximum output, while other units may operate at maximum output during specific periods of electric power shortages (e.g. power blackouts, peak demand periods, etc.). The latter units are called peak power systems. In general, industrial turbine engine units are managed either by a government entity, electric power utility, or independent power producer ("IPP"). IPPs originated principally in response to deregulation of the organizations that operate electric power utilities. Electric power deregulation has created greater competition and therefore, more economical electric power for the end user. Repair and remanufacture of industrial turbine engine components is a growing element of cost management in the industrial turbine engine industry. The Repair Group's experience, knowledge and technology in the more demanding aerospace market augurs well for its further entry into the industrial turbine engine market. Competition In recent years, while the absolute number of competitors has decreased as a result of industry consolidation and vertical integration, competition in the component repair business has nevertheless increased, principally due to the increasing direct involvement of the aerospace turbine engine manufacturer into the turbine engine overhaul and component repair businesses. With the entry of the OEM into the market, there has been a general reluctance on the part of the OEM to issue, to the independent component repair companies, its approvals for the repair of its newer model engines and related components. 3 However, if an OEM repair process approval is not available, the Repair Group has, in many cases, been successful in procuring, and subsequently marketing to its customers, FAA approvals and related repair processes. It appears that the Repair Group will, more likely than not, become more dependent on its ability to successfully procure and market FAA approved licenses and related repair processes in the future and/or on close collaboration with engine manufacturers. However, the Repair Group believes it has partially compensated for these factors by its success in broadening its product lines and developing new geographic markets and customers, more recently by expanding into the repair of industrial turbine engine components. Repair and remanufacture of industrial turbine engine components has evolved through the need for the operator of electric power utilities to improve the economics of its industrial turbine engine operations. To participate in the industrial turbine engine sector, it is necessary to have a proven record of application of the appropriate technologies. Most competitors involved in the industrial turbine engine component repair sector are either the OEM or entities that have a history of application of component repairs in the aerospace sector. Metallurgical analysis of component material removed from an industrial turbine engine determines the precise nature of the necessary technologies to be used to return the component to service. The determination of qualification to repair such components is the responsibility of the industrial turbine engine owner/operator. Several OEM such as ABB, General Electric, Siemens, Alstom, etc. participate to varying degrees in the repair and remanufacture of industrial turbine engine components. The Repair Group's broad product capability (multiple OEM types) and technology base augurs well for continued growth in the sector. Customers The identity and ranking of the Repair Group's principal customers can vary from year to year. The Repair Group attempts to rely on its ability to adapt its services and operations to changing requirements of the market in general and its customers in particular, rather than relying on high volume production of a particular item or group of items for a particular customer or customers. During fiscal 2003, the Repair Group had one customer, Avio SpA, which accounted for 14% of the Repair Group's net sales. Although there is no assurance that this will continue, historically as one or more major customers have reduced their purchases, the business has generally been successful in replacing such reduced purchases, thereby avoiding a material adverse impact on the business. No material part of the Repair Group's business is seasonal. Backlog of Orders The Repair Group's backlog as of September 30, 2003 increased to $8.9 million, of which $7.3 million is scheduled for delivery during fiscal 2004 and $1.6 million is on hold, compared with $5.3 million as of September 30, 2002, of which $4.2 million was scheduled for delivery during fiscal 2003 and $1.1 million was on hold. All orders are subject to modification or cancellation by the customer with limited charges. The Repair Group believes that the backlog may not necessarily be indicative of actual sales for any succeeding period. 2. Aerospace Component Manufacturing Group Operations The Company's Aerospace Component Manufacturing Group ("ACM Group") is a manufacturer of forged parts ranging in size from 2 to 400 pounds (depending on configuration and alloy) in various alloys utilizing a variety of processes for application in the aerospace and other industrial markets. The ACM Group's forged products include: OEM and aftermarket components for aircraft and land-based turbine engines; structural airframe components; components for aircraft landing gear, wheels and brakes; critical rotating components for helicopters; and commercial/industrial products. The ACM Group also provides heat-treatment and some machining of forged parts. The forging, machining, or other preparation of prototype parts to customers' specifications, which may require research and development of new parts or designs, is an ordinary part of the ACM Group. The ACM Group generally has multiple sources for its raw materials, which consist primarily of high quality metals essential to this business, although certain raw materials may be provided by a limited number of suppliers. Suppliers of such materials are located in many areas throughout North America and Europe. The ACM Group does not depend on a single source for the supply of its materials and believes that its sources are adequate for its business. The business is ISO 9001:2000 registered and AS 9100:2001 certified. In addition, the ACM Group's heat-treating and non-destructive testing facilities are NADCAP (National Aerospace and Defense Contractors Accreditation Program) accredited. 4 Industry The performance of the domestic and international air transport industries directly and significantly impacts the performance of the ACM Group. Historically, the air transport industry's long-term outlook has for many years been for continued steady growth. Such outlook suggested the long-term need for additional aircraft and growth in the requirement for aircraft and turbine engines. The events of September 11, 2001 resulted in an immediate reduction in the demand for passenger travel both in the U.S. and internationally. Aircraft manufacturers have announced reductions in forecasted aircraft deliveries in the next few years as a result of reduced demand, and many airlines have cancelled or rescheduled deliveries of new aircraft to which they had previously committed. In addition, the financial condition of many airlines in the U.S. and throughout the world is weak. The U.S. airline industry has made requests for U.S. government assistance while some airlines have entered bankruptcy proceedings, and others have announced major restructuring initiatives, including significant reductions in service and the grounding of aircraft These factors continued to have a negative impact on demand for airframe and engine components, which in turn negatively impacted the ACM Group's net sales, operating results and cash flows. The ACM business also supplies new and spare components for military aircraft. Increases in military airframe and turbine engine component net sales have partially offset the decreases in commercial aerospace components. Competition There is excess capacity in many segments of the forging industry. The ACM Group believes this limits the ability to raise prices. The ACM Group believes, however, that its focus on quality, customer service, new technology and offering a broad range of capabilities help to give it an advantage in the primary markets it serves. The ACM Group believes it can broaden its product lines by investing in equipment that expands capabilities and by developing new customers in markets which require similar technical competence, quality and service as the aerospace industry. Customers During fiscal 2003, the ACM Group had one customer, Rolls-Royce Corporation, which accounted for 26% of the segment's net sales. The ACM Group believes that the total loss of sales to such customer would result in a materially adverse impact on the business and income of the ACM Group. However, the ACM Group has maintained a business relationship with this customer for well over ten years and is currently conducting business with it under a multi-year agreement. Although there is no assurance that this will continue, historically as one or more major customers have reduced their purchases, the ACM Group has generally been successful in replacing such reduced purchases, thereby avoiding a material adverse impact on the segment. The ACM Group attempts to rely on its ability to adapt its services and operations to changing requirements of the market in general and its customers in particular. No material part of the Company's ACM Group's business is seasonal. Backlog of Orders The ACM Group's backlog as of September 30, 2003 decreased to $21.4 million, of which $18.6 million is scheduled for delivery during fiscal 2004 and $1.6 million is on hold, compared with $24.9 million as of September 30, 2002, of which $21.9 million was scheduled for delivery during fiscal 2002 and $0.1 million was on hold. All orders are subject to modification or cancellation by the customer with limited charges. The ACM Group believes that the backlog may not necessarily be indicative of actual sales for any succeeding period. 3. Metal Finishing Business Group The Company's Metal Finishing Group is a provider of specialized electrochemical technologies, including the electroplating process called "brush plating", as well as anodizing and electropolishing systems, which are used to apply metal coatings and finishes to a selective area of a component. The Metal Finishing Group's SIFCO Selective Plating business provides (i) equipment and metal solutions to customers to do their own in-house selective electrochemical finishing and (ii) customized selective electrochemical finishing on a contract service basis. Operations A variety of metals, determined by the customer's design requirements, can be brush plated onto metal surfaces. Metals available using SIFCO Process solutions include: cadmium, cobalt, copper, nickel, tin and zinc. Precious metal solutions such as gold, iridium, palladium, platinum, rhodium, and silver are also available. The Metal Finishing Group has also developed a number of alloy-plating solutions including: nickel-cobalt, nickel-tungsten, cobalt-tungsten, and tin-zinc. It also offers a complete line of functional chromic, sulfuric, hard coat, phosphoric and boric-sulfuric anodizing finishes and electropolishing. The Metal Finishing Group's process has a wide range of both manufacturing and repair applications to 5 functionally enhance, protect or restore the underlying component. The process is environmentally friendlier than traditional plating methods because it does not require the use of tanks and, therefore, it generates minimal waste. While the Metal Finishing Group offers the equipment and solutions to customers so that they can conduct their own selective electrochemical finishing operations, it also offers to provide services to customers that either do not want to invest in the equipment, do not want to have responsibility for hazardous materials, or who have decided to outsource non-core operations. Selective electrochemical finishing services occur either at one of the Group's job shop service facilities or at the customer's site by manual or fully automated processes. Service facilities are located within a six-hour drive of most major industrial locations in the United States and in Europe. The Metal Finishing Group generally has alternate sources for its raw materials, consisting primarily of various industrial chemicals and metal salts, as well as graphite anodes and other electronic components for equipment manufactured by the Group. There are multiple sources for all these materials and the Metal Finishing Group generally does not depend on a single source for the supply of its materials, so management believes that its sources are adequate for its business. The Metal Finishing Group sells its products and services under the following brand names: SIFCO Process(R), Dalic(R), USDL(R) and Selectron(R), all of which are specified in military and industrial specifications. The Metal Finishing Group's manufacturing operations have ISO 9001:2001 and AS 9100A certifications. In addition a certain facility is NADCAP (National Aerospace and Defense Contractors Accreditation Program) certified. Three of the service centers are FAA approved repair shops. Other Metal Finishing Group approvals include ABS (American Bureau of Ships), ARR (American Railroad Registry), FAA (Federal Aviation Administration), JRS (Japan Registry of Shipping), and KRS (Korean Registry of Shipping). Industry While the Metal Finishing Group fits into the broad metal finishing industry, it fills a very specific niche where either engineering demands for finishing only selective areas of a component or scheduling requirements preclude other metal finishing options. The Metal Finishing Group's process is used to provide functional, engineered finishes, as opposed to decorative, to a variety of industries, including aerospace, heavy machinery, medical, petroleum exploration, electric power generation, pulp and paper, printing and railroad. The diversity of industries served helps to mitigate the impact of economic cycles on the segment. Competition Brush plating technology was developed in the 1940's in France. The industry is fragmented into numerous product and service suppliers, resulting in a competitive environment. The Metal Finishing Group attempts to differentiate itself from the competition by creating high value applications for larger, technically demanding customers. The Metal Finishing Group believes that it is the largest supplier of selective electrochemical finishing supplies and service in the world and the only supplier with strong technical and product development capabilities. Customers The Metal Finishing Group has a customer base of over 1,000 customers. However, approximately 20 customers, all of whom come from a variety of industries, account for approximately 50% of the Group's annual sales. In fiscal 2003, no one customer accounted for 10% or more of the Group's net sales. No material part of the Metal Finishing Group's business is seasonal. Backlog of Orders The Metal Finishing Group essentially had no backlog at September 30, 2003 and 2002. 4. General For financial information concerning the Company's reportable segments see Note 13 of Notes to Consolidated Financial Statements included in Item 8. 6 C. ENVIRONMENTAL REGULATIONS In common with other companies engaged in similar businesses, the Company is required to comply with various laws and regulations relating to the protection of the environment. The costs of such compliance have not had, and are not presently expected to have, a material effect on the capital expenditures, earnings or competitive position of the Company and its subsidiaries under existing regulations and interpretations. D. EMPLOYEES The number of the Company's employees decreased from 643 at the beginning of fiscal year 2003 to 570 at the end of fiscal year 2003. The Company is a party to collective bargaining agreements with its hourly employees located at its Cleveland, Ohio; Minneapolis, Minnesota; and Cork, Ireland facilities. Management considers its relations with the Company's employees to be good. E. NON-U.S. OPERATIONS The Company's products and services are distributed and performed in U.S. as well as non-U.S. markets. The Company commenced its operations in Ireland in 1981. The Company commenced its operations in the United Kingdom and France as a result of an acquisition of a business in 1992. Wholly-owned subsidiaries operate service and distribution facilities in Ireland, United Kingdom and France. Financial information about the Company's U.S. and non-U.S. operations is set forth in Note 13 to the Consolidated Financial Statements included in Item 8. As of September 30, 2003, essentially all of the Company's cash and cash equivalents are in the possession of its non-U.S. subsidiaries and relate to undistributed earnings of these non-U.S. subsidiaries. During fiscal 2003, the Company received a distribution of $1.5 million from its non-U.S. subsidiaries. This distribution was used to repay a portion of the outstanding balance under the Company's revolving credit agreement. Effective October 1, 2000, the Company began to accrue U.S. income taxes on the undistributed earnings of its non-U.S. subsidiaries in anticipation that distributions from such earnings, to the extent they may occur in the future, would result in an additional income tax liability. Distributions from the Company's non-U.S. subsidiaries to the Company may be subject to statutory restrictions, adverse tax consequences or other limitations. ITEM 2. PROPERTIES The Company's property, plant and equipment include the plants described below and a substantial quantity of machinery and equipment, most of which is industry specific machinery and equipment using special jigs, tools and fixtures and in many instances having automatic control features and special adaptations. In general, the Company's property, plant and equipment are in good operating condition, are well maintained and substantially all of its facilities are in regular use. The Company considers its investment in property, plant and equipment as of September 30, 2003 suitable and adequate given the current product offerings for the respective business segments' operations in the current business environment. The square footage numbers set forth in the following paragraphs are approximations: o The Turbine Component Services and Repair Group operates four (4) facilities with a total of 196,000 square feet that are involved in the repair and remanufacture of aerospace and industrial turbine engine components. Three of these plants are located in Cork, Ireland (137,000 square feet) and one is in Minneapolis, Minnesota (59,000 square feet). A portion of the Minneapolis facility is also the site of some of the Repair Group's machining operations. All of these facilities are owned. The Repair Group ceased operations at the Tampa, Florida facility (68,000 square feet) during fiscal 2003 and is pursuing the sale of the facility. o The Aerospace Component Manufacturing Group operates in a single owned 262,000 square foot facility located in Cleveland, Ohio. This facility is also the site of the Company's corporate headquarters. 7 o The Metal Finishing Group is headquartered in an owned 30,000 square foot plant in Independence, Ohio. The Metal Finishing Group operates a leased 6,000 square foot plant in Redditch, England. The Metal Finishing Group also leases space for sales offices and/or for its contract selective electrochemical finishing services in Norfolk, Virginia; Hartford (East Windsor), Connecticut; Los Angeles (San Dimas), California; Tacoma (Fife), Washington; Houston, Texas; and Paris (Saint Maur Cedex), France (totaling approximately 31,000 square feet). ITEM 3. LEGAL PROCEEDINGS In addition to the matter noted below, in the normal course of business, the Company maybe involved in other pending legal actions. The Company cannot reasonably estimate future costs related to these matters and other matters that may arise, if any. Although it is possible that the Company's future operating results could be affected by future cost of litigation, it is management's belief at this time that such costs will not have a material adverse affect on the Company's consolidated financial position or results of operations. o The Company filed a complaint in Cuyahoga County Court of Common Pleas against the Company's insurance carrier on the grounds that it refused to provide indemnity to the Company for an employment action. The Company's complaint sought a declaratory judgment that the insurance carrier owes a duty to indemnify the Company with respect to the action. In March 2002, the Company received a Ruling on its Motion for Summary Judgment denying the Company's complaint. Management of the Company believed that the Court's Ruling on its Motion for Summary Judgment was not consistent with existing case law and, therefore, the Company appealed this decision to the Cuyahoga County Court of Appeals. However, because the outcome of this appeal was uncertain and the initial ruling was unfavorable, the Company provided $0.9 million in its second quarter fiscal 2002 financial statements, the full amount of this contingent obligation. In November 2002, the Cuyahoga County Court of Appeals reversed the Summary Judgment. In February 2003, the insurance carrier filed a Notice of Appeal with the Ohio Supreme Court and asked the Court to exercise its discretionary jurisdiction and hear an appeal of the Court of Appeal's November 2002 decision. In May 2003, the Ohio Supreme Court accepted jurisdiction to hear the appeal pending the outcome of a similar case already pending before the Court. In July 2003, the Ohio Supreme Court dismissed the insurance carrier's appeal as having been improvidently allowed. The insurance carrier filed a motion for reconsideration, which the Court denied in September 2003, thereby concluding this matter in favor of the Company. Because of the favorable resolution of this matter, the Company reversed the $0.9 million contingent obligation in its fourth quarter fiscal 2003 financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the Company's 2003 fiscal year. 8 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the executive officers of the Company.

Name Age Title and Business Experience ---- --- ----------------------------- Jeffrey P. Gotschall (1) 55 Chairman of the Board since 2001; Director of the Company since 1986; Chief Executive Officer since 1990; President from 1989 to 2002; Chief Operating Officer from 1986 to 1990; Executive Vice President from 1986 to 1989; and from 1985 to 1989, President of SIFCO Turbine Component Services. Timothy V. Crean 55 President and Chief Operating Officer since 2002; Executive Vice-President of SIFCO Industries, Inc. from 1998 to 2002; Managing Director of the SIFCO Turbine Components Services and Repair Group from 1995 to 2002, and Managing Director of SIFCO Turbine Components, Ltd. from 1986 to 2002. Frank A. Cappello 45 Vice President-Finance and Chief Financial Officer since 2000. Prior to joining the Company, Mr. Cappello was employed by ASHTA Chemicals Inc, a commodity chemical manufacturer, from August 1990 to December 1991 and from June 1992 to February 2000, last serving as Vice President Finance and Administration and Chief Financial Officer; and previously KPMG LLP, last serving as a Senior Manager in its Assurance Group. Hudson D. Smith (1) 52 Executive Vice President since September 2003 and Director of the Company since 1988. Mr. Smith has served as Treasurer of the Company since 1983. Mr. Smith previously served as President of the Aerospace Component Manufacturing Group from 1998 to 2003; Vice President and General Manager of SIFCO Forge Group from 1995 to 1997; General Manager of SIFCO Forge Group's Cleveland Operations from 1989 to 1995 and Group General Sales Manager of SIFCO Forge Group from 1985 to 1989. Carolyn J. Buller, Esq. 48 Secretary and General Counsel since 2000. Ms. Buller is a partner in the law firm of Squire, Sanders & Dempsey LLP, and has been an attorney with the firm since 1981. Remigijus H. Belzinskas 47 Corporate Controller since 2000. Prior to joining the Company, Mr. Belzinskas was employed by Signature Brands, Inc., a manufacturer and distributor of consumer products, from August 1990 to December 1999, serving as Corporate Controller; and previously by KPMG LLP, last serving as a Senior Manager in its Assurance Group.

(1) Hudson D. Smith and Jeffrey P. Gotschall are cousins. 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's Common Shares are traded on the American Stock Exchange under the symbol "SIF". The following table sets forth, for the periods indicated, the high and low closing sales price for the Company's Common Shares as reported by the American Stock Exchange.

YEARS ENDED SEPTEMBER 30, ------------------------------------ 2003 2002 ---------------- ---------------- HIGH LOW HIGH LOW ------ ------ ------ ------ First Quarter .......................... $ 3.20 $ 2.30 $ 5.70 $ 4.50 Second Quarter ......................... 2.60 1.50 5.95 4.55 Third Quarter ......................... 2.65 1.35 5.94 5.15 Fourth Quarter ......................... 2.49 1.85 5.15 2.85

The Company has not declared or paid any cash dividends within the last two (2) fiscal years and does not anticipate paying any such dividends in the foreseeable future. The Company currently intends to retain all of its earnings for the operation and expansion of its businesses. The Company's ability to declare or pay cash dividends is limited by its credit agreement covenants. At November 11, 2003, there were approximately 781 shareholders of record of the Company's Common Shares, as reported by National City Corporation, the Company's Transfer Agent and Registrar, which maintains its corporate offices at National City Center, 1900 East Ninth Street, Cleveland, Ohio 44101-0756. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company. The data presented below should be read in conjunction with the audited Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8.

YEARS ENDED SEPTEMBER 30, ---------------------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA Net sales .............................................. $ 79,939 $ 80,033 $105,633 $106,138 $115,490 Income (loss) before income tax provision (benefit) .... (5,373) (13,448) 4,668 2,479 4,105 Income tax provision (benefit) ......................... (26) (1,462) 1,694 57 332 Net income (loss) ...................................... (5,347) (11,986) 2,974 2,422 3,773 Net income (loss) per share (basic) .................... (1.02) (2.30) 0.58 0.47 0.73 Net income (loss) per share (diluted) .................. (1.02) (2.30) 0.58 0.47 0.72 Cash dividends per share ............................... -- -- -- 0.20 0.20 SHARES OUTSTANDING AT YEAR END ......................... 5,226 5,258 5,237 5,134 5,193 BALANCE SHEET DATA Working capital ........................................ $ 16,439 $ 19,485 $ 36,943 $ 28,676 $ 31,924 Property, plant and equipment, net ..................... 25,704 29,106 29,383 29,009 31,392 Total assets ........................................... 61,678 69,642 86,596 80,500 88,662 Long-term debt, net of current maturities .............. 9,033 11,093 15,107 11,962 12,985 Total shareholders' equity ............................. 30,281 37,735 49,374 45,500 50,046 Shareholders' equity per share ......................... 5.79 7.18 9.43 8.86 9.64 FINANCIAL RATIOS Return on beginning shareholders' equity ............... (14.2)% (24.3)% 6.5% 4.8% 7.6% Long-term debt to equity percent ....................... 29.8 % 29.4 % 30.6% 26.3% 25.9% Current ratio .......................................... 2.1 2.2 3.3 2.6 2.6

10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIFCO Industries, Inc. and its subsidiaries engage in the production and sale of a variety of metalworking processes, services and products produced primarily to the specific design requirements of its customers. The processes and services include forging, heat-treating, coating, welding, machining and selective electrochemical finishing. The products include forgings, machined forged parts and other machined metal parts, remanufactured component parts for turbine engines, and selective electrochemical finishing solutions and equipment. A. RESULTS OF OPERATIONS 1. Fiscal Year 2003 Compared With Fiscal Year 2002 Fiscal 2003 net sales of $79.9 million were essentially comparable to fiscal 2002 net sales of $80.0 million. Net loss for fiscal 2003 was $5.3 million, or $1.02 per diluted share, compared with net loss of $12.0 million, or $2.30 per diluted share, in fiscal 2002. Turbine Component Services and Repair Group ("Repair Group") The Repair Group, which accounted for 51.0% of the Company's business in fiscal 2003, had net sales of $40.7 million, up 11.5% from the $36.5 million in fiscal 2002. Turbine engine component manufacturing and repair net sales increased $0.9 million to $32.5 million in fiscal 2003, compared with $31.6 million in fiscal 2002, reflecting a $2.3 million recovery in the fourth quarter of fiscal 2003. Demand for component repairs for both small and large aerospace turbine engines increased in fiscal 2003, compared with fiscal 2002. Such increased demand reflects a strong recovery relative to large aerospace turbine engines in the fourth quarter of fiscal 2003. This reflects a reduction in component repairs for older model large aerospace turbine engines offset by increased demand for component repairs for newer model large aerospace turbine engines. The reduced utilization of older generation aircraft that negatively impacted the Company in fiscal 2002 continued during 2003. Despite the increase in component repairs for newer model aerospace turbine engines, the commercial airline industry in general continues to experience reduced commercial flight hours, which determines the need for component repairs to newer model aerospace turbine engines. Lower demand for component repairs for industrial turbine engines partially offset the increase in demand for component repairs for both small and large aerospace turbine engines. Net sales associated with the demand for replacement parts, which often complement turbine engine component repair services provided to customers, were up $3.3 million in 2003 to $8.2 million, compared with $4.9 million in fiscal 2002. The increase in replacement parts net sales is attributable to a change in product mix with certain major customers. During fiscal 2003, the Repair Group's selling, general and administrative expenses decreased $1.8 million to $6.0 million, or 14.7% of net sales, from $7.8 million, or 21.4% of net sales, in fiscal 2002. Included in the $6.0 million of selling, general and administrative expenses in fiscal 2003 were charges aggregating $1.3 million related to equipment impairment and $0.4 million of severance charges related to the further consolidation of the Repair Group's operations during fiscal 2003. Included in the $7.8 million of selling, general and administrative expenses in fiscal 2002 were $1.9 million of charges related to goodwill and equipment impairment, a $0.3 million increase in a contingency reserve related to a vendor dispute that was resolved during fiscal 2003, and $0.9 million of severance charges associated with the reduction of the Repair Group's capacity for the repairing of components related to older generation aerospace turbine engines. The remaining selling, general and administrative expenses of $4.3 million, or 10.5% of net sales, in fiscal 2003 were $0.4 million less than the remaining $4.7 million, or 12.9% of net sales, of such expenses in fiscal 2002. The Repair Group's operating loss in fiscal 2003 decreased $6.2 million to $5.3 million from an $11.5 million loss in fiscal 2002. Included in the operating loss in fiscal 2003 were charges aggregating $1.3 million related to the impairment of equipment and $0.4 million of severance charges. Included in the operating loss in fiscal 2002 were charges aggregating $6.1 million related to inventory write-downs ($3.3 million), the impairment of goodwill ($0.7 million), and the impairment of equipment ($1.2 million); and the $0.9 million of severance charges. During the first quarter of fiscal 2002, the Repair Group performed an evaluation of its existing operations in light of the anticipated impacts on its business of the September 11, 2001 terrorist attacks. The principal result of this evaluation process was the decision to optimize the Repair Group's multiple operations by reducing certain of its capacity for the repairing of components related to older generation aerospace turbine engines, principally the JT8D. As a result of this decision, the Repair Group recognized, during fiscal 2002, the aforementioned charges. In addition, during fiscal 2002, the Repair Group increased, by $0.3 million, a contingency reserve related to the previously discussed vendor dispute. The Repair Group's $3.6 million operating loss, before the $1.7 million of aforementioned impairment and severance charges, during fiscal 2003 is a decrease of $1.5 million, when compared to the $5.1 million operating loss, before the $6.4 million of aforementioned impairment, severance, and contingency charges, during fiscal 2002. The reduced operating loss, before the aforementioned charges in both years, was primarily due to the 11 positive impact on margins of a 40% increase in fiscal 2003 fourth quarter sales volumes for both component manufacturing and repair services and replacement parts. Partially offsetting the positive impact of the Repair Group's increased sales volumes in fiscal 2003 was the negative impact on margins of reduced pricing for its products. Such downward pressure on pricing is expected to continue, the magnitude of which is difficult to predict at this time. During fiscal 2003, the euro had strengthened against the U.S. dollar when compared to fiscal 2002. The Repair Group's non-U.S. operations have a significant portion of its operating costs denominated in euros and, therefore, as the euro strengthens, such costs are negatively impacted. During the first nine months of fiscal 2003, the Repair Group was able to hedge much of its exposure to the strengthening euro thereby mitigating the negative impact on its operating results. Had the Repair Group not hedged such exposure during the first nine months of fiscal 2003, its operating loss would have been greater by approximately $2.0 million during fiscal 2003. The impact on the Repair Group's operating results in the fourth quarter of fiscal 2003, the period during which it did not hedge much of its exposure to the strengthening euro, was higher operating costs of approximately $0.7 million related to its non-U.S. operations, when compared to the same fiscal 2002 period. In an effort to curtail the Repair Group's operating losses, which stem primarily from its current excess capacity for component repairs, the Company ceased operations at its Tampa, Florida turbine engine component repair facility during fiscal 2003 and continues to optimize its remaining turbine engine component repair capacity through consolidation of operations and other productivity improvement efforts. The Repair Group is currently pursuing the sale of its Tampa, Florida facility. Aerospace Component Manufacturing Group ("ACM Group") Net sales in fiscal 2003 decreased 10.4% to $29.7 million, compared with $33.2 million in fiscal 2002. For purposes of this discussion, the ACM Group considers aircraft that can accommodate less than 100 passengers to be small aircraft, and those that can accommodate 100 or more passengers to be large aircraft. Net sales of airframe components for large aircraft decreased $1.7 million in fiscal 2003 to $2.1 million, compared with $3.8 million in fiscal 2002. Net sales of airframe components for small aircraft were $15.2 million in both fiscal 2003 and 2002. Net sales of turbine engine components for smaller aircraft declined $1.2 million to $10.5 million in fiscal 2003, compared with $11.7 million in fiscal 2002. $1.1 million of the aforementioned net sales decrease is attributable to a decrease in net sales to Rolls-Royce Corporation consisting primarily of components for small turbine engines, such as the AE series latest generation turbine engines for business and regional jets, as well as military transport and surveillance aircraft. Net sales of non-aerospace related products decreased $0.3 million in fiscal 2003 to $1.0 million, compared with $1.3 million in fiscal 2002. Certain of the ACM Group's products have both military and commercial aircraft applications. Net sales of airframe and turbine engine components for military applications increased $1.0 million to $15.3 million in fiscal 2003, compared with $14.3 million in fiscal 2002. Selling, general and administrative expenses in fiscal 2003 were $1.5 million. The primary factor impacting the ACM Group's selling, general and administrative expenses is a $0.9 million reversal in fiscal 2003 of a charge that was recorded in the second quarter of fiscal 2002. Such charge was recorded in connection with an employment action and a related claim that was settled in favor of the Company during the fourth quarter of fiscal 2003. The Company had filed a claim against its insurance carrier for its failure to provide coverage. See Legal Proceedings in Item 3 above. Selling, general and administrative expenses, before the impact of this legal contingency reserve, were $2.4 million, or 8.0% of net sales, in fiscal 2003, compared with $2.5 million, or 7.4% of net sales, in fiscal 2002. Selling, general and administrative expenses in fiscal 2003 benefited by a reduction of $0.1 million in the ACM Group's bad debt expense, compared with fiscal 2002. The ACM Group's operating income was $1.6 million in fiscal 2003, compared with an operating loss of $0.3 million in fiscal 2002. Operating results in fiscal 2003 were favorably impacted by the reversal of the $0.9 million legal contingency accrual, while operating results in fiscal 2002 were unfavorably impacted by the establishment of such legal contingency accrual as discussed above. Operating income, before the impact of this legal contingency reserve, was $0.8 million in fiscal 2003, compared with $0.5 million in fiscal 2002. Operating results were favorably impacted in fiscal 2003 by a $0.8 million decrease in variable tooling expenses and by a $0.2 million decrease in outside services expense. Such decreases were primarily attributable to the ACM Group's efforts to reduce such expenditures and to perform the work in-house. As noted previously, selling, general and administrative expenses in fiscal 2003 benefited by a reduction of $0.1 million in the ACM Group's bad debt expense, compared with fiscal 2002. These expense decreases were offset in part by a $0.4 million increase in energy expenses. The balance of the change in operating income is primarily attributable to the interplay between overall lower net sales in relation to fixed manufacturing, selling, general and administrative expenses in fiscal 2003. During fiscal 12 2003, the ACM Group continued the cost containment and reduction actions initiated in fiscal 2002 to mitigate, in part, the impact of reduced revenues. Metal Finishing Group Net sales in fiscal 2003 decreased 8.0% to $9.5 million, compared with $10.3 million in fiscal 2002. In fiscal 2003, product net sales, consisting of selective electrochemical metal finishing equipment and solutions, decreased 10.7% to $5.3 million, compared with $5.9 million in fiscal 2002. In fiscal 2003, contract service net sales decreased 6.2% to $4.0 million, compared with $4.2 million in fiscal 2002. Net sales to customers in the power generation, general manufacturing, and aerospace industries decreased approximately $0.6 million, $0.4 million and $0.3 million, respectively, in fiscal 2003 due to overall weakness in these industries, compared with fiscal 2002. These net sales decreases were partially offset by an increase in net sales to customers in the automotive industry of approximately $0.5 million in fiscal 2003, compared with fiscal 2002, attributable primarily to increased net sales from existing customers in this industry. Selling, general and administrative expenses were $2.9 million in both fiscal 2003 and 2002, or 31.1% and 28.0% of net sales, respectively. In fiscal 2003 selling, general and administrative expenses were negatively impacted by a $0.1 million increase in compensation expense and a $0.1 million increase in legal and professional expense, compared with fiscal 2002. These increases were offset by a $0.1 million decrease in employee incentive expense. The Metal Finishing Group's operating income in fiscal 2003 was $0.8 million, compared with $1.5 million in fiscal 2002. Operating results were negatively impacted by a $0.1 million increase in legal and professional expense. This increase was offset by a $0.2 million decrease in total employee incentive expense in fiscal 2003, compared with fiscal 2002. The balance of the decrease in operating income is primarily attributable to the interplay between overall lower net sales in relation to fixed manufacturing, selling, general and administrative expenses in fiscal 2003, compared with fiscal 2002. Corporate Unallocated Expenses Corporate unallocated expenses, consisting of corporate salaries and benefits, legal and professional and other corporate expenses, were $1.7 million in fiscal 2003, compared with $1.9 million in fiscal 2002. In fiscal 2003, corporate unallocated expenses were favorably impacted by lower corporate pension expense of $0.1 million due to the decision in fiscal 2003 to cease the accrual of future benefits under a defined benefit pension plan. Lower legal and professional and consulting expenses also favorably impacted corporate unallocated expenses in fiscal 2003, compared with fiscal 2002. Other/General Interest income was $0.1 million in fiscal 2003, compared with $0.3 million in fiscal 2002. The reduction of interest income is attributable to lower average cash and cash equivalent balances outstanding and to lower interest rates available from short-term investments during fiscal 2003, compared with fiscal 2002. Interest expense was $0.8 million in both fiscal 2003 and 2002. Term note interest expense decreased slightly in fiscal 2003, compared with fiscal 2002. The decrease in the weighted average term note outstanding balance of $6.3 million in fiscal 2003, compared with $7.5 million in fiscal 2002, was partially offset by an increase in the weighted average interest rate payable under the term note in fiscal 2003. Revolving credit agreement interest expense was comparable in both fiscal 2003 and 2002. The decrease in the interest rate payable under the revolving credit agreement was offset by an increase in the weighted average revolving credit agreement outstanding balance of $2.2 million in fiscal 2003, compared with $1.9 million in fiscal 2002. The interest rate payable under the industrial development variable rate demand revenue bond decreased in fiscal 2003, compared with fiscal 2002. The weighted average industrial development variable rate demand revenue bond outstanding balance during fiscal 2003 was $3.1 million, compared with $3.4 million in fiscal 2002. Foreign currency exchange loss was $0.3 million in fiscal 2003, compared with nil in the comparable period in fiscal 2002. This loss is the result of foreign currency exchange rate fluctuations, resulting primarily from the decline in the value of the U.S. dollar in relation to the euro, on the Company's monetary assets and liabilities that are not denominated in U.S. dollars. In fiscal 2003, the income tax benefit related to the Company's U.S. and non-U.S. subsidiary losses was offset by a valuation allowance based upon an assessment of the Company's ability to realize such benefits. In assessing the Company's ability to realize its net deferred tax assets, management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Future reversal of the valuation allowance will be achieved either when the tax benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future taxable income. The modest tax benefit recognized in fiscal 2003 is attributable to the 13 realization of a residual portion of fiscal 2002's tax loss carryback in fiscal 2003 by one of the Company's non-U.S. subsidiaries. 2. Fiscal Year 2002 Compared With Fiscal Year 2001 In fiscal 2002, net sales decreased 24.2% to $80.0 million from $105.6 million in 2001. Net loss for the year ended September 30, 2002 was $12.0 million, or $2.30 per diluted share, compared with net income of $3.0 million, or $0.58 per diluted share, in fiscal 2001. Turbine Component Services and Repair Group ("Repair Group") The Repair Group, which accounted for 45.7% of the Company's business in fiscal 2002, had net sales of $36.5 million, down 32.8% from the $54.4 million level in 2001. Turbine engine component repair sales were down approximately $11.4 million in fiscal 2002 compared to fiscal 2001. Demand for component repairs for virtually all models of large aerospace turbine engines, especially the older model JT8D engines, was down in fiscal 2002 compared to fiscal 2001. The continued retirement and reduced utilization of older generation aircraft that negatively impacted the Company in fiscal 2001 was accelerated/exacerbated during fiscal 2002 as a direct consequence of the September 11, 2001 terrorist attacks on the United States, as many airlines chose to reduce capacity by retiring many of the older aircraft in their fleets. In addition, the impact of the terrorist attacks on the commercial airline industry in general has also resulted in the reduced demand for turbine engine component repairs for the CFM-56 (General Electric /Snecma), RB211 and Tay (both Rolls-Royce) engines due to reduced commercial flight demand, which determines the need for such repairs. However, higher demand for component repairs for smaller aerospace turbine engines and industrial turbine engines partially offset the decline in demand for component repairs for the large aerospace turbine engines. Revenues associated with the demand for replacement parts, which complement turbine engine component repair services provided to customers, were down approximately $6.5 million in fiscal 2002 compared to fiscal 2001 due principally to the reduced component repair volumes in general. During fiscal 2002, the Repair Group's selling, general and administrative expenses increased $1.9 million to $7.8 million, or 21.4% of net sales, from $5.9 million, or 10.9% of net sales, in fiscal 2001. Included in the $7.8 million of selling, general and administrative expenses for fiscal 2002 were $1.9 million of charges related to goodwill and equipment impairments, $0.9 million of restructuring charges, and a $0.3 million increase in a reserve related to a vendor dispute. The remaining $4.7 million of selling, general and administrative expenses for fiscal 2002 represented 12.9% of net sales and reflected an $0.8 million reduction in the Repair Group's provision for doubtful accounts, when compared to fiscal 2001. Operating income (loss) in fiscal 2002 decreased $14.1 million to an $11.5 million loss from $2.6 million of income in fiscal 2001. Included in the decreased operating results for fiscal 2002 were charges aggregating $6.1 million, $1.8 million of which were incurred in the fourth quarter, related to the impairment of inventory ($3.3 million), the impairment of goodwill ($0.7 million), the impairment of equipment ($1.2 million), and the $0.9 million of restructuring charges. During fiscal 2002, the Repair Group performed evaluations of its existing operations primarily in light of the current and anticipated impacts of the September 11, 2001 terrorist attacks on its business. The principal result of these evaluation processes was the decision to optimize/rationalize the Repair Group's multiple operations by reducing its capacity for the repair of certain turbine engine components, principally related to older generation JT8D turbine engines, and the Repair Group's decision to optimize the size of its workforce. As a result of these decisions, the Repair Group recognized, during fiscal 2002, the aforementioned charges. In addition, the Repair Group increased by $0.3 million, the reserve related to a vendor dispute. The remaining $7.7 million decrease in operating results during fiscal 2002, compared to fiscal 2001, was primarily due to the negative impact on margins of the significantly reduced sales volumes for turbine engine component repair services and related replacement parts. The restructuring actions taken by the Repair Group in fiscal 2002 are expected to have a positive impact on fiscal 2003 operating costs when compared to fiscal 2002. The Repair Group will continue to evaluate the need for additional optimization/rationalization of operations if and to the extent that the demand for turbine engine component repair services may not recover in the future. Aerospace Component Manufacturing Group ("ACM Group") Net sales in fiscal 2002 decreased 18.9% to $33.2 million, compared with $40.9 million in fiscal 2001. For purposes of this discussion, the ACM Group considers aircraft that can accommodate less than 100 passengers to be small aircraft, and those that can accommodate 100 or more passengers to be large aircraft. Net sales of turbine engine components for small aircraft decreased $7.7 million in fiscal 2002 to $11.7 million, compared with $19.4 million in fiscal 2001. $7.4 million of the aforementioned net sales decrease is attributable to a decrease in net sales to Rolls-Royce Corporation of which $1.0 million is attributable to a reduction in selling prices and the balance consists of a decrease in net sales of primarily components for small turbine engines, such as the AE series latest generation turbine engines for business and regional jets, as well as 14 military transport and surveillance aircraft, as a direct consequence of reduced flight schedules, cancellation of aircraft orders, workforce reductions and declining financial performance of the airline industry as a consequence of the September 11, 2001 terrorist attacks on the United States. As a further consequence of the overall decline in the airline industry, net sales of airframe components for large aircraft decreased $1.8 million to $3.8 million in fiscal 2002, compared with $5.6 million in fiscal 2001. Net sales of turbine engine components for large aircraft decreased $0.8 million to $1.0 million in fiscal 2002, compared with $1.8 million in fiscal 2001. Net sales of non-aerospace related components in fiscal 2002 decreased approximately $0.7 million. These net sales decreases were partially offset by an increase in net sales of airframe components for small aircraft of $2.8 million to $15.3 million in 2002, compared with $12.5 million in fiscal 2001. Certain of the ACM Group's products have both military and commercial aircraft applications. Net sales of airframe and turbine engine components for military applications increased $3.0 million to $14.3 million in fiscal 2002, compared with $11.3 million in fiscal 2001. Selling, general and administrative expenses in fiscal 2002 were $3.3 million. The primary factor impacting the ACM Group's selling, general and administrative expenses in fiscal 2002 is a $0.9 million charge incurred in connection with the settlement, during the second quarter of fiscal 2002, of an employment action and a related claim that the Company had filed against its insurance carrier for its failure to provide coverage. Selling, general and administrative expenses before this legal accrual was $2.4 million in fiscal 2002, compared with $2.2 million in fiscal 2001. Selling, general and administrative expenses were negatively impacted in fiscal 2002 by a $0.2 million increase in the ACM Group's provision for doubtful accounts and a $0.1 million increase in employee benefit expenses, offset by lower travel and other discretionary expenses. The ACM Group's operating loss in fiscal 2002 was $0.3 million, compared with operating income of $3.5 million in fiscal 2001. The ACM Group's operating results in fiscal 2002 were impacted by the $0.9 million legal accrual discussed above. In fiscal 2002, the ACM Group's operating income before legal accrual was $0.6 million, or 1.7% of net sales, compared with $3.5 million, or 8.5% of net sales, in fiscal 2001. The ACM Group's operating results in fiscal 2002 were also negatively impacted by a $1.0 million reduction in selling prices to Rolls-Royce Corporation, its largest customer, that was implemented during the first quarter of fiscal 2002 and is expected to affect future periods. Operating results were negatively impacted in 2002 by a $0.2 million LIFO provision, compared with a $0.1 benefit in 2001. The remaining $1.6 million decrease in operating income in fiscal 2002, compared with fiscal 2001, was primarily due to the negative impact on operating income of the reduced operating levels in 2002. Operating results as a percentage of net sales was negatively impacted in fiscal 2002 by the interplay between overall lower net sales in relation to fixed manufacturing costs. This was offset in part by lower material cost in 2002 due to product mix consisting of a greater percentage of products made from lower cost materials than in 2001. Fiscal 2002 operating results also benefited from lower utilization of outside services, such as heat-treating, as in-house capabilities were sufficient to support such requirements. During fiscal 2002, the ACM Group took a number of actions, including a salary freeze; cutbacks in discretionary spending and other cost containment and cost reduction actions, to mitigate, in part, the impact of significantly reduced revenues. Metal Finishing Group Net sales were $10.3 million in both fiscal 2002 and 2001. In fiscal 2002 product net sales, consisting of selective electrochemical finishing equipment and solutions, declined 7.2% to $5.9 million, compared with $6.4 million in fiscal 2001. Product net sales continued the decline that began in the first quarter of fiscal 2003 due to the overall weakness in most markets served by the Metal Finishing Group, including aerospace, power generation, petroleum, steel, and railroad industries. In fiscal 2002, contract service net sales increased 12.9% to $4.2 million, compared with $3.8 million in fiscal 2001. Overall, declines in net sales to commercial customers were offset by increased sales to military customers. Selling, general and administrative expenses were $2.9 million in both fiscal 2002 and 2001. In fiscal 2002, selling, general and administrative expenses benefited from lower advertising, travel and commissions expenditures, offset by higher compensation and employee benefit expenses. The Metal Finishing Group does not necessarily anticipate experiencing similar levels of expenditures for advertising and travel in future periods as economic conditions within the industries served by the Metal Finishing Group improve. The Metal Finishing Group's operating income in fiscal 2002 was $1.5 million, or 14.5% of net sales, compared with $1.7 million, or 16.7% of net sales, in fiscal 2001. Operating income in fiscal 2002, compared with fiscal 2001, was negatively impacted by a shift in sales mix to higher contract service sales, which generate a lower margin than product sales. Additionally, a shift in the mix of contract service sales toward smaller contracts also negatively impacted operating results. Operating income in fiscal 2002 was also negatively impacted by additional fixed costs associated with a new service facility that opened in fiscal 2002 that has not reached full operating levels. 15 Corporate Unallocated Expenses Corporate unallocated expenses, consisting of corporate salaries and benefits, legal and professional and other corporate expenses, were $1.9 million in both fiscal 2002 and 2001. Corporate unallocated expenses were favorably impacted in 2002 by $0.2 million of lower expenses related to management incentive and public company expenses. During 2002, additional staffing, employee benefit and general insurance expenses totaling $0.2 million, partially offset the favorable decreases. The decrease in management incentive expense is attributable to the financial performance of the Company, while the decline in public company expenses is in part the result of the reduction in the size of the Company's Board of Directors. Other/General Interest income was $0.3 million in fiscal 2002, compared with $0.5 million in fiscal 2001. The reduction in interest income is attributable to lower average cash and cash equivalent balances outstanding and lower interest rates during 2002, compared with 2001. Interest expense in fiscal 2002 was $0.8 million, compared with $1.2 million in fiscal 2001. The decrease in interest expense is attributable to overall lower borrowings outstanding under the Company's revolving credit agreement, as well as lower interest rates. Foreign currency exchange gain was minimal in fiscal 2002, compared with a foreign currency exchange loss of $0.6 million in fiscal 2002. Effective October 1, 2001, the Company changed the functional currency of its Irish subsidiary from the local currency to the U.S. dollar. The functional currency was changed because a substantial majority of the subsidiary's transactions are now denominated in U.S. dollars. Other expense increased $0.6 million in fiscal 2002, compared with fiscal 2001, as a result of a $0.8 million provision recorded in 2003 to adjust the amount of the unamortized portion of deferred grant revenue for a possible future repayment obligation due to the Company's recently reduced employment levels. See Note 4 to the consolidated financial statements for further discussion. This provision was partially offset by an increase in the amount of nonrefundable research and other grants received during fiscal 2002, compared with fiscal 2001, as well as a one-time gain from the sale of the ACM Group's interest in certain natural gas wells. The Company's fiscal 2002 income tax benefit of $1.5 million consists primarily of anticipated tax refunds from the carry back of U.S. and non-U.S. operating losses. In the fourth quarter of fiscal 2002, the Company recognized a $1.6 million valuation allowance against its net U.S. deferred income tax assets, which were primarily recorded during the first three quarters of fiscal 2002. In assessing the Company's ability to realize its net deferred tax assets, management considered whether it is more likely than not that some portion or all of its net deferred tax assets may not be realized. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Future reversal of the valuation allowance will be achieved either when the tax benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future taxable income. B. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased to $4.5 million at September 30, 2003 from $7.6 million at September 30, 2002. At present, essentially all of the Company's cash and cash equivalents are in the possession of its non-U.S. subsidiaries and relate to undistributed earnings. During fiscal 2003, the Company received a distribution of $1.5 million from its non-U.S. subsidiaries. This distribution was utilized to repay a portion of the outstanding balance under the Company's revolving credit agreement. Effective October 1, 2000, the Company began to accrue U.S. income taxes on the undistributed earnings of its non-U.S. subsidiaries in anticipation that distributions from such earnings, to the extent they may occur in the future, would result in an additional income tax liability. Distributions from the Company's non-U.S. subsidiaries to the Company may be subject to statutory restrictions, adverse tax consequences or other limitations. The Company's operating activities provided cash of $0.7 million in fiscal 2003, which was a decrease of 71.5% compared with $2.6 million in fiscal 2002. The decrease in cash provided by operating activities in fiscal 2003 is primarily due to (i) a $2.2 million increase in accounts receivable due to higher fourth quarter fiscal 2003 net sales, compared with fourth quarter fiscal 2002 net sales; and (ii) a net reduction in accrued liabilities and other long-term liabilities of $2.2 million that is primarily attributable to a $0.9 million reversal of the ACM Group's legal contingency accrual as a result of obtaining a favorable court ruling (See Legal Proceedings in Item 3 above) and a $0.8 million payment of accrued severance. This was partially offset by (i) an increase in accounts payable of $2.4 million that is primarily attributable to the impact of extended payment terms negotiated with vendors during fiscal 2003 and (ii) income tax refunds of $1.4 million received by the Company during fiscal 2003. 16 Capital expenditures were $2.1 million in fiscal 2003, compared with $5.0 million in fiscal 2002. Capital expenditures in fiscal 2003 consisted primarily of equipment to expand and diversify the Repair Group's repair capabilities, including heavy industrial turbine engine component repair. At September 30, 2003, the Company had outstanding commitments for capital expenditures totaling $0.4 million. The Company anticipates that total fiscal 2004 capital expenditures will approximate $3.1 million. Fiscal 2004 capital expenditures are anticipated to (i) provide increased range of manufacturing capabilities; (ii) automate certain machining operations; and (iii) enhance the Company's service and repair capabilities. The Company and certain of its subsidiaries sponsor defined benefit pension plans covering most of its employees. During fiscal 2003, the Company's Board of Directors adopted a resolution to cease accrual of future benefits under one of its defined benefit pension plans, which covers substantially all non-union employees of the Company's U.S. operations. The plan will otherwise continue. Because the unrecognized actuarial loss exceeded the curtailment gain, there was no income or expense recognized in 2003 related to these changes. In conjunction with the changes to the plan, the Company made certain enhancements to the defined contribution plan that is available to substantially all non-union employees of the Company's U.S. operations. At September 20, 2003, the Company has a 15-year industrial development variable rate revenue bond outstanding, which was issued with an original face amount of $4.1 million and was used to expand the Repair Group's Tampa, Florida facility. The industrial development variable rate revenue bond requires annual principal payments ranging from $0.2 million in fiscal 2004 to $0.4 million in fiscal 2013. The interest rate is reset weekly based on prevailing tax-exempt money market rates. The interest rate at September 30, 2003 was 1.23%. The outstanding balance of the industrial development variable rate revenue bond at September 30, 2003 was $3.0 million. The bank's annual commitment fee on the standby letter of credit that collateralizes the industrial development bond is 2.75%, of the outstanding balance. The ceasing of operations at the Tampa, Florida facility in fiscal 2003 has no impact on the tax-exempt status of the industrial development variable rate revenue bond. The eventual sale of the facility may result in one of the following occurring: (i) repayment of the industrial development variable rate revenue bond; (ii) continued servicing of the industrial development variable rate revenue bond by the Company; or (iii) assumption of the industrial development variable rate revenue bond by the buyer of the facility. The ultimate use of the facility determines, in part, which options maybe available. At September 30, 2003, the Company has a term note that is repayable in quarterly installments of $0.3 million through February 2005, with the remaining balance of $3.9 million due May 1, 2005. The term note has a variable interest rate, which, after giving effect to an interest rate swap agreement, becomes an effective fixed rate term note, subject to adjustment based upon the level of certain financial ratios. The effective fixed interest rate at September 30, 2003 was 9.49%. The interest rate swap agreement has a notional amount equal to the amount owed under the term note and bears interest at a fixed rate of 5.99%. The outstanding balance of the term note at September 30, 2003 was $5.7 million. At September 30, 2003, the Company has a $6.0 million revolving credit agreement, subject to sufficiency of collateral, that expires on September 30, 2004 and bears interest at the bank's base rate plus 0.50%. The interest rate was 4.5% at September 30, 2003. A 0.375% commitment fee is incurred on the unused balance of the revolving credit agreement. At September 30, 2003, the outstanding balance under the revolving credit agreement was $1.8 million and the Company had $2.9 million available under its $6.0 million revolving credit agreement. All of the Company's long-term debt is secured by substantially all of the Company's assets located in the U.S., a guarantee by its U.S. subsidiaries and a pledge of 65% of the Company's ownership interest in its non-U.S. subsidiaries. Under its credit agreements, the Company is subject to certain customary covenants. These include, without limitations, covenants (as defined) that limit the amount of annual capital expenditures and require maintenance of certain specified financial ratios, including a minimum tangible net worth level, a maximum liability to tangible net worth ratio and an interest coverage ratio. During fiscal 2003, the Company entered into agreements with its bank to waive (i) the interest coverage ratio covenant for the period ended September 30, 2002 through the period ended December 31, 2004; (ii) the minimum tangible net worth covenant for the period ended September 30, 2002; and (iii) the capital expenditure limitation for the year ended September 30, 2002. On November 26, 2003, the Company entered into an agreement with its bank to amend certain provisions of its credit agreements. The amendment extends the maturity date of the Company's $6.0 million revolving credit agreement to March 31, 2005. The amendment waives and terminates all of the Company's credit agreements' financial covenants in their entirety. New covenants are substituted for the terminated covenants: minimum tangible net worth level and a minimum adjusted fixed charge coverage to EBITDA ratio. In addition, the definition of eligible collateral against which the Company 17 may borrow on its revolving credit agreement was amended. Taking into consideration the impact of this amendment, the Company was in compliance with all applicable covenants at September 30, 2003. The Company believes that cash flow from its operations together with existing cash reserves and the funds available under its revolving credit agreement will be sufficient to meet its working capital requirements through the end of fiscal year 2004. However, no assurances can be given as to the sufficiency of the Company's working capital to support the Company's operations. If the existing cash reserves, cash flow from operations and funds available under the revolving credit agreement are insufficient; if working capital requirements are greater than currently estimated; and/or if the Company is unable to satisfy the covenants set forth in its credit agreements, the Company may be required to adopt one or more alternatives, such as reducing or delaying capital expenditures, restructuring indebtedness, selling assets or operations, or issuing additional shares of capital stock in the Company. There can be no assurance that any of these actions could be accomplished, or if so, on terms favorable to the Company, or that they would enable the Company to continue to satisfy its working capital requirements. C. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any obligations that meet the definition of an off-balance sheet arrangement and that have or are reasonably likely to have a material effect on the Company's financial position or results of operations. D. OTHER CONTRACTUAL OBLIGATIONS The following table summarizes the Company's outstanding contractual obligations and other commercial commitments at September 30, 2003, and the effect such obligations are expected to have on liquidity and cash flow in future periods. (Amounts in thousands)

PAYMENTS DUE BY PERIOD --------------------------------------------------------- LESS THAN MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS ----------------------- --------- --------- --------- --------- --------- Long-term debt ................. $ 10,484 $ 1,451 $ 6,807 $ 573 $ 1,653 Capital lease obligations ...... -- -- -- -- -- Operating lease obligations .... 1,007 258 359 253 136 Purchase obligations ........... -- -- -- -- -- Other long-term liabilities .... -- -- -- -- -- --------- --------- --------- --------- --------- Total ..................... $ 11,491 $ 1,709 $ 7,166 $ 826 $ 1,789 ========= ========= ========= ========= =========

Excluded from the foregoing Other Contractual Obligations table are open purchase orders at September 30, 2003 for raw materials and supplies required in the normal course of business. 18 E. OUTLOOK The Company's business continues to be heavily dependent upon the strength of the commercial airlines as well as the aircraft and related engine manufacturers. Consequently, the performance of the domestic and international air transport industry directly and significantly impacts the performance of the Repair and ACM Groups' businesses. The air transport industry's long-term outlook has, for many years, been one of continued growth. Such outlook suggested the need for additional aircraft and growth in the requirement for aircraft and engine repairs. The events of September 11, 2001 resulted in an immediate reduction in the demand for passenger travel both in the U.S. and internationally. Aircraft manufacturers have announced reductions in forecasted aircraft deliveries in the next few years as a result of reduced demand, and many airlines cancelled or rescheduled deliveries of new aircraft to which they had previously committed. In addition, the financial condition of many airlines in the U.S. and throughout the world is weak. The U.S. airline industry has made requests for U.S. government assistance, while some airlines have entered bankruptcy proceedings, and others have announced major restructuring initiatives, including significant reductions in service and grounding of aircraft. This reduction in the demand for passenger travel and aircraft deliveries, and the increase in the number of idle aircraft, the number of which is skewed heavily toward older models, resulted in a decrease in orders and, therefore, negatively impacted the ACM and Repair Groups' net sales, operating results, and cash flows in fiscal 2003. This was due to the concentration of the ACM Group providing new parts for aircrafts and engines, and the Repair Group providing replacement parts and component repair services for the engines that power these aircraft. Declines in the commercial airline, aircraft and related engine industries have been partially offset by increases in U.S. military spending for aircraft and related components. The ACM business supplies new and spare components for military aircraft. Increases in military component demand have partially offset the decreases in commercial aerospace component net sales. It is difficult to determine at this time what the long-term impact of these events will be on air travel and the demand for the services and products provided by the Company. These factors could result in a further decrease in orders for new and after-market commercial aerospace products and services; an increase in credit risk associated with doing business with the financially troubled airlines and their suppliers; and an increase in slow moving and/or obsolete replacement parts inventory related to older model engines that are experiencing reduced usage. All of these consequences, to the extent that they occur, could negatively impact the Company's net sales, operating profits and cash flows. However, in light of the current business environment, the Company believes that that cash on-hand, funds available under its revolving credit agreement and anticipated funds generated from operations will be adequate to meet its liquidity needs through the foreseeable future. F. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Allowances for Doubtful Accounts The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of certain customers to make required payments. The Company evaluates the adequacy of its allowances for doubtful accounts each quarter based on the customers' credit-worthiness, current economic trends or market conditions, past collection history, aging of outstanding accounts receivable and specific identified risks. Inventories The Company maintains allowances for obsolete and excess inventory. The Company evaluates its allowances for obsolete and excess inventory each quarter. Each business segment maintains formal policies, which require at a minimum that reserves be established based on an analysis of the age of the inventory on a part-by-part basis. In addition, if the Company learns of specific obsolescence, other than that identified by the aging criteria, an additional reserve will be recognized as well. Specific obsolescence may arise due to a technological or market change, or based on cancellation of an order. Impairment of Long-Lived Assets (excluding goodwill) The Company at least annually reviews the carrying value of its long-lived assets, including property, plant and equipment, or when events and circumstances warrant such a review. This review is performed using estimates of future undiscounted cash flows. If the carrying value of a long-lived asset is greater than the estimated undiscounted future cash flows, the long-lived asset is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. The Company has a significant amount of property, plant and equipment. The determination as to whether events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable involves judgment. The Company 19 believes that its estimate of future undiscounted cash flows is a critical accounting estimate because (i) it requires the Company to make assumptions about future results and (ii) the impact of recognizing an impairment charge could have a material impact on the Company's financial position and results of operations. In projecting future undiscounted cash flows, the Company relies on internal budgets and forecasts; and projected proceeds upon disposal of long-lived assets. The Company's budgets and forecasts are based on historical results and anticipated future market conditions, such as the general business climate and the effectiveness of competition. The Company believes that its estimates of future undiscounted cash flows and fair value are reasonable; however, changes in estimates of such undiscounted cash flows and fair value could change the Company's estimates of fair value. Further, actual results can differ significantly from assumptions used by the Company in making its estimates. Future changes in the Company's estimates could result in future impairment charges. Goodwill All of the Company's net goodwill of $2.6 million at September 30, 2003 is attributable to the Company's Metal Finishing Group. The Company evaluates its goodwill for impairment annually. Accounting standards require goodwill to be tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of the segment. If the fair value of the segment exceeds its book value, goodwill of the segment is not considered impaired. To estimate the fair value of the Metal Finishing Group, the Company computed the segment's projected debt free cash flows related to future periods. Applying present value techniques to the debt free cash flow information the Company estimated the fair value of the segment. As a result, the Company determined that the fair value of the Metal Finishing Group exceeded its book value. As a consequence, the Company concluded that the Metal Finishing Group's goodwill was not impaired at September 30, 2003. The Company believes that its estimate of the Metal Finishing Group's projected debt free cash flows is a critical accounting estimate because (i) it requires the Company to make assumptions about future results and (ii) the impact of recognizing an impairment of goodwill could have a material impact on the Company's financial position and results of operations. In projecting debt free cash flow, the Company relied on internal budgets and forecasts. The Company's budgets and forecasts are based on historical results and anticipated future market conditions, such as the general business climate and the effectiveness of competition. The Company believes that its estimate of future debt free cash flows and fair value are reasonable; however, changes in estimates of future debt free cash flows and fair value could effect the valuations. Any increase in projected debt free cash flow beyond the amounts used in the impairment evaluation would have no impact on the reported value of goodwill. However, if the Company reduced its projections of debt free cash flow by 35%, the resulting fair value of the Metal Finishing Group would have been such that the Company would have been required to recognize a goodwill impairment loss of approximately $2.6 million. Valuation of deferred tax allowance The Company accounts for deferred taxes in accordance with SFAS No. 109, "Accounting for Income Taxes", whereby the Company recognizes an income tax benefit related to its consolidated net losses and other temporary differences between financial reporting basis and tax reporting basis. At September 30, 2003, the Company's net deferred tax asset before any valuation allowance was $3.4 million. At September 30, 2003, the income tax benefit related to its consolidated net losses and other temporary differences between financial reporting basis and tax reporting basis was offset by a valuation allowance of $3.4 million based on an assessment of the Company's ability to realize such benefits. In assessing the Company's ability to realize its net deferred tax assets, management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Future reversal of the valuation allowance will be achieved either when the tax benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future taxable income. 20 G. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". The standard changes financial accounting and reporting for acquired goodwill and indefinite life intangible assets. SFAS No. 142 provides that intangible assets with finite useful lives will continue to be amortized and goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested for impairment by applying a fair value based test upon adoption and on an annual basis thereafter. The Company completed its tests for impairment and concluded that goodwill was not impaired at adoption on October 1, 2002 and at September 30, 2003. Other than the cessation of goodwill amortization, the adoption of this standard did not have an impact on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. The standard applies to legal obligations associated with the retirement of long-lived assets that result from acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period incurred. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and was adopted by the Company effective October 1, 2002. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. In September 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement superceded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", related to the disposal of a segment of a business. This statement amends certain provisions of Accounting Research Bulletin No. 51, " Consolidated Financial Statements". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and was adopted by the Company effective October 1, 2002. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This standard addresses financial accounting and reporting for costs associated with exit or disposal activities and replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring)" ("EITF No. 94-3"). SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity to be recognized when the liability is incurred. Under EITF No. 94-3, a liability for exit costs is recognized at the date of an entity's commitment to an exit plan. Beginning January 1, 2003, the Company recognizes liabilities associated with exit or disposal activities as they are incurred in accordance with SFAS No. 146. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure - an Amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based compensation. It also requires prominent disclosure in the significant accounting policy note of both annual and interim financial statements of the method of accounting for stock-based compensation and the related pro forma disclosures when the intrinsic value method continues to be used. The statement is effective for fiscal years beginning after December 15, 2002, and disclosure provisions are effective for the first fiscal quarters beginning after December 15, 2002. Early application of the disclosure provisions is encouraged. The Company adopted the disclosure provisions of SFAS 148 in the quarter ended December 31, 2002. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 changes the accounting for certain financial instruments, which under previous guidance, issuers could account for as equity. This standard requires that those financial instruments be classified as liabilities in statements of financial position. This standard is effective for interim periods beginning after June 15, 2003. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. 21 H. FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations may contain various forward-looking statements and includes assumptions concerning the Company's operation, future results and prospects. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides this cautionary statement identifying important economic, political and technological factors, among others, the absence or effect of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (1) future business environment, including capital and consumer spending; (2) competitive factors, including the ability to replace business which may be lost due to increased direct involvement by the turbine engine manufacturers in turbine engine component services and repair markets; (3) successful procurement of certain repair materials and new repair process licenses from turbine engine manufacturers and/or the Federal Aviation Administration; (4) fluctuating foreign currency (primarily the euro) exchange rates; (5) successful development and market introductions of new products, including an advanced coating technology and the continued development of industrial turbine repair processes; (6) regressive pricing pressures on the Company's products and services, with productivity improvements as the primary way to maintain margins; (7) success with the further development of strategic alliances with certain turbine engine manufacturers for turbine component repair services; (8) the long-term impact on the aerospace industry of the September 11, 2001 terrorist attacks on the United States, including collection risks due to failure of airlines, engine overhaul companies and other aerospace related industries; the reduced number of aircraft in service; and the accelerated declining use of older model aerospace turbine engines such as the JT8D; (9) successful replacement of declining demand for repair services for turboprop engine components with component repair services for small turbofan engines utilized in the business and regional aircraft markets; (10) continued reliance on several major customers for revenues; (11) the Company's ability to continue to have access to its revolving credit facility, including the Company's ability to (i) continue to comply with the terms of its credit agreements, including financial covenants, (ii) continue to enter into amendments to its credit agreement containing financial covenants, which it and its bank lender find mutually acceptable, or (iii) continue to obtain waivers from its bank lender with respect to its compliance with the covenants contained in its credit agreement; (12) the difficulty in predicting the timing and outcome of legal proceedings; and (13) stable government, business conditions, laws, regulations and taxes in economies where business is conducted. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK In the ordinary course of business, the Company is subject to foreign currency and interest rate risk. The risks primarily relate to the sale of the Company's products in transactions denominated in non-U.S. dollar currencies (primarily the euro); the payment in local currency, of wages and other costs related to the Company's non-U.S. operations; and changes in interest rates on the Company's long-term debt obligations. The Company does not hold or issue financial instruments for trading purposes. The Company believes that inflation has not materially affected its results of operations in 2003, and does not expect inflation to be a significant factor in fiscal 2004. A. FOREIGN CURRENCY RISK The U.S. dollar is the functional currency for all of the Company's U.S. operations. Effective October 1, 2001, the Company changed the functional currency of its Irish subsidiary from the local currency to the U.S. dollar. The functional currency was changed because a substantial majority of the subsidiary's transactions are now denominated in U.S. dollars. For these operations, all gains and losses from completed currency transactions are included in income currently. For the Company's other non-U.S. subsidiaries, the functional currency is the local currency. Assets and liabilities are translated into U.S. dollars at the rate of exchange at the end of the period and revenues and expenses are translated using average rates of exchange. Foreign currency translation adjustments are reported as a component of accumulated other comprehensive loss. Historically, the Company has been able to mitigate the impact of foreign currency risk by means of hedging such risk through the use of foreign currency exchange contracts, which typically expire within one year. However, such risk is mitigated only for the periods for which the Company has foreign currency exchange contracts in effect, and only to the extent of the U.S. dollar amounts of such contracts. At September 30, 2003, there were no forward exchange contracts outstanding. The Company will continue to evaluate its foreign currency risk, if any, and the effectiveness of using similar hedges in the future to mitigate such risk. 22 At September 30, 2003, the Company's assets and liabilities denominated in British pounds and the euro were as follows (Amounts in thousands):

BRITISH POUNDS EURO -------------- ----- Cash and cash equivalents .... 715 1,136 Accounts receivable .......... 372 207 Accounts payable ............. 90 1,384 Accrued liabilities .......... 57 28

B. INTEREST RATE RISK The Company's primary interest rate risk exposure results from the variable interest rate mechanisms associated with the Company's long-term debt consisting of a term note, a revolving credit agreement and industrial development variable rate demand revenue bond. These interest rate exposures are managed in part by an interest rate swap agreement to fix the interest rate of the term note. If interest rates were to increase or decrease 100 basis points (1%) from September 30, 2003 rates, and assuming no changes in the amounts outstanding under the revolving credit agreement and industrial development variable rate demand revenue bond, annual interest expense to the Company would increase or decrease $0.05 million, respectively. The Company's sensitivity analyses of the effects of changes in interest rates do not consider the impact of a potential change in the level of variable rate borrowings or derivative instruments outstanding that could take place if these hypothetical conditions prevail. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of SIFCO Industries, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of SIFCO Industries, Inc. (an Ohio Corporation) and Subsidiaries as of September 30, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of SIFCO Industries, Inc. and Subsidiaries as of September 30, 2001 and for the year ended September 30, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated October 26, 2001. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SIFCO Industries, Inc. and Subsidiaries as of September 30, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2003 to conform to Statement of Financial Accounting Standards No. 142. As discussed above, the consolidated financial statements of SIFCO Industries, Inc. and Subsidiaries as of September 30, 2001 and for the year then ended were audited by other auditors who have ceased operations. Those consolidated financial statements have been revised as follows: 1. As described in Note 1, these consolidated financial statements have been revised to include the disclosure required by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123", which was adopted by the Company in the first quarter of 2003. Our audit procedures with respect to 2001 included (a) agreeing the adjustments to reported net income representing stock compensation expense (including any related tax effects) to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of pro forma net income to reported net income, and the related earnings-per-share amounts. 24 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS - (CONTINUED) 2. As described in Note 1, these consolidated financial statements have been revised to include the transition disclosures required by Statement of Financial Accounting Standards; No. 142, "Goodwill and Other Intangible Assets", which was adopted by the Company as of October 1, 2002. Our audit procedures with respect to 2001 included (a) agreeing previously reported net income to the previously issued consolidated financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized relating to goodwill to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of pro forma net income to reported net income, and the related earnings-per-share amounts. In our opinion, such disclosures and reclassifications are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such disclosures and reclassifications, and accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole. /s/ GRANT THORNTON LLP Cleveland, Ohio October 29, 2003, (except for the last paragraph of Note 5, as to which the date is November 26, 2003) REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II To the Board of Directors and Shareholders of SIFCO Industries, Inc. and Subsidiaries In connection with our audit of the consolidated financial statements of SIFCO Industries, Inc. and Subsidiaries referred to in our report dated October 29, 2003, which is incorporated in this Form 10-K, we have also audited Schedule II for the years ended September 30, 2003 and 2002. In our opinion, this schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The financial statements of SIFCO Industries, Inc. and Subsidiaries as of September 30, 2001 and for the year ended September 30, 2001, were audited by other auditors who have ceased operations and whose report dated October 26, 2001, stated that the information in Schedule II as of September 30, 2001 and for the year ended September 30, 2001 is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. /s/ GRANT THORNTON LLP Cleveland, Ohio October 29, 2003 25 The following is a copy of a previously issued Report of Independent Public Accountants. The predecessor auditors (who have ceased operations) have not revised this report. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of SIFCO Industries, Inc., and Subsidiaries We have audited the accompanying consolidated balance sheets of SIFCO Industries, Inc. (an Ohio Corporation) and Subsidiaries as of September 30, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express and opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SIFCO Industries, Inc. and Subsidiaries as of September 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Cleveland, Ohio, October 26, 2001. 26 The following is a copy of a previously issued Report of Independent Public Accountants on the Financial Statement Schedule. The predecessor auditors (who have ceased operations) have not revised this report. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of SIFCO Industries, Inc.: We have audited in accordance with auditing stands generally accepted in the United States, the consolidated financial statements included in SIFCO Industries, Inc. and Subsidiaries' annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated October 26, 2001. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index of financial statement schedules is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly sates in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Cleveland, Ohio, October 26, 2001. 27 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

YEARS ENDED SEPTEMBER 30, -------------------------------- 2003 2002 2001 -------- -------- -------- Net sales .................................................... $ 79,939 $ 80,033 $105,633 Operating expenses: Cost of goods sold ........................................ 72,380 76,331 86,761 Selling, general and administrative expenses .............. 12,172 15,952 12,960 -------- -------- -------- Total operating expenses ............................... 84,552 92,283 99,721 -------- -------- -------- Operating income (loss) ............................. (4,613) (12,250) 5,912 Interest income .............................................. (106) (258) (530) Interest expense ............................................. 827 838 1,189 Foreign currency exchange loss (gain), net ................... 345 (34) 568 Other expense (income), net .................................. (306) 652 17 -------- -------- -------- Income (loss) before income tax provision (benefit) .... (5,373) (13,448) 4,668 Income tax provision (benefit) ............................... (26) (1,462) 1,694 -------- -------- -------- Net income (loss) ................................... $ (5,347) $(11,986) $ 2,974 ======== ======== ======== Net income (loss) per share (basic) .......................... $ (1.02) $ (2.30) $ 0.58 Net income (loss) per share (diluted) ........................ $ (1.02) $ (2.30) $ 0.58 Weighted-average number of common shares (basic) ............. 5,252 5,219 5,144 Weighted-average number of common shares (diluted) ........... 5,252 5,236 5,165

See notes to consolidated financial statements. 28 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

SEPTEMBER 30, -------------------- 2003 2002 -------- -------- ASSETS Current Assets: Cash and cash equivalents ............................................ $ 4,524 $ 7,583 Receivables, net ..................................................... 16,648 14,505 Inventories .......................................................... 9,184 10,701 Refundable income taxes .............................................. 23 1,423 Prepaid expenses and other current assets ............................ 473 1,501 -------- -------- Total current assets ....................................... 30,852 35,713 Property, plant and equipment: Land ................................................................. 859 859 Buildings ............................................................ 19,455 19,402 Machinery and equipment .............................................. 59,858 59,763 -------- -------- 80,172 80,024 Less - accumulated depreciation ...................................... 54,468 50,918 -------- -------- Property, plant and equipment, net ......................... 25,704 29,106 Other assets: Goodwill and other intangible assets, net ............................ 2,574 2,574 Other assets ......................................................... 2,548 2,249 -------- -------- Total other assets .......................................... 5,122 4,823 -------- -------- Total assets .......................................... $ 61,678 $ 69,642 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt ................................. $ 1,451 $ 1,440 Accounts payable ..................................................... 6,491 4,130 Accrued liabilities .................................................. 6,471 10,658 -------- -------- Total current liabilities ................................... 14,413 16,228 Long-term debt, net of current maturities ................................. 9,033 11,093 Other long-term liabilities ............................................... 7,951 4,586 Shareholders' equity: Serial preferred shares, no par value, authorized 1,000 shares ....... -- -- Common shares, par value $1 per share, authorized 10,000 shares; issued 5,294 shares in 2003 and 5,358 shares in 2002; outstanding 5,226 shares in 2003 and 5,258 shares in 2002 .... 5,294 5,358 Additional paid-in capital ........................................... 6,661 6,936 Retained earnings .................................................... 28,282 33,629 Accumulated other comprehensive loss ................................. (9,247) (7,034) Unearned compensation - restricted common shares ..................... (309) (562) Common shares held in treasury at cost, 68 shares in 2003 and 100 shares in 2002 .............................................. (400) (592) -------- -------- Total shareholders' equity .................................. 30,281 37,735 -------- -------- Total liabilities and shareholders' equity ......... $ 61,678 $ 69,642 ======== ========

See notes to consolidated financial statements. 29 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)

YEARS ENDED SEPTEMBER 30, -------------------------------- 2003 2002 2001 -------- -------- -------- Cash flows from operating activities: Net income (loss) ........................................................... $ (5,347) $(11,986) $ 2,974 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ..................................... 4,183 4,706 4,368 Loss (gain) on disposal of property, plant and equipment .......... 34 (7) 160 Deferred income taxes ............................................. -- 15 1,286 Asset impairment charges .......................................... 1,309 5,160 -- Changes in operating assets and liabilities: Receivables .................................................. (2,143) 4,200 1,205 Inventories .................................................. 1,517 4,054 2,081 Refundable income taxes ...................................... 1,400 (1,423) -- Prepaid expenses and other current assets .................... (7) (923) 84 Other assets ................................................. (408) (563) (119) Accounts payable ............................................. 2,361 (2,588) (2,268) Accrued liabilities .......................................... (4,187) 1,916 176 Other long-term liabilities .................................. 2,026 28 (886) -------- -------- -------- Net cash provided by operating activities .............. 738 2,589 9,061 Cash flows from investing activities: Capital expenditures .............................................. (2,149) (5,043) (4,082) Decrease in funds held by trustee for capital project ............. -- 92 438 Proceeds from sale of property, plant and equipment ............... 158 105 -- Other ............................................................. 137 99 44 -------- -------- -------- Net cash used for investing activities .................. (1,854) (4,747) (3,600) Cash flows from financing activities: Proceeds from revolving credit agreement .......................... 31,770 24,735 30,132 Repayments of revolving credit agreement .......................... (32,393) (27,309) (25,557) Repayments of long-term debt ...................................... (1,440) (1,430) (1,420) Repurchase of common shares ....................................... -- (143) -- Proceeds from other indebtedness .................................. 14 -- -- Issuance of common shares ......................................... -- -- 13 Share transactions under restricted stock program ................. 106 101 -- -------- -------- -------- Net cash provided by (used for) financing activities .... (1,943) (4,046) 3,168 -------- -------- -------- Increase (decrease) in cash and cash equivalents ................................. (3,059) (6,204) 8,629 Cash and cash equivalents at beginning of year ................................... 7,583 3,787 4,687 Effect of exchange rate changes on cash and cash equivalents ..................... -- -- 471 -------- -------- -------- Cash and cash equivalents at end of year ................. $ 4,524 $ 7,583 $ 13,787 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest ...................................................... $ (750) $ (845) $ (1,082) Cash recovered from (paid for) income taxes, net ............................ 1,449 (573) 460

See notes to consolidated financial statements. 30 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

ACCUMULATED COMMON ADDITIONAL OTHER SHARES TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED HELD IN SHAREHOLDERS' SHARES CAPITAL EARNINGS INCOME (LOSS) COMPENSATION TREASURY EQUITY ------ ---------- -------- ------------- ------------ -------- ------------- BALANCE - SEPTEMBER 30, 2000 $5,205 $ 6,413 $ 42,641 $ (8,310) $ -- $ (449) $ 45,500 Comprehensive income (loss): Net income ................................ -- -- 2,974 -- -- -- 2,974 Foreign currency translation adjustment ... -- -- -- 1,191 -- -- 1,191 Unrealized loss on interest rate swap agreement, net of income tax benefit of $156 ................................. -- -- -- (304) -- -- (304) ----------- Total comprehensive income ............ 3,861 Shares issued to vendor as payment for services .................................. 3 10 -- -- -- -- 13 Shares issued under restricted stock plan ... 100 360 -- -- (460) -- -- ------ -------- -------- ------------ ------------ -------- ----------- BALANCE - SEPTEMBER 30, 2001 ................ $5,308 $ 6,783 $ 45,615 $ (7,423) $ (460) $ (449) $ 49,374 Comprehensive income (loss): Net loss .................................. -- -- (11,986) -- -- -- (11,986) Foreign currency translation adjustment ... -- -- -- 112 -- -- 112 Currency exchange contract adjustment ..... -- -- -- 1,035 -- -- 1,035 Unrealized loss on interest rate swap agreement, net of income tax provision of $156 ................................. -- -- -- (254) -- -- (254) Minimum pension liability adjustment .... -- -- -- (504) -- -- (504) ----------- Total comprehensive loss .............. (11,597) Shares repurchased and held in treasury .... -- -- -- -- -- (143) (143) Share transactions under restricted stock plan ............................... 50 153 -- -- (102) -- 101 ------ -------- -------- ------------ ------------ -------- ----------- BALANCE - SEPTEMBER 30, 2002 ................ $5,358 $ 6,936 $ 33,629 $ (7,034) $ (562) $ (592) $ 37,735 Comprehensive income (loss): Net loss .................................. -- -- (5,347) -- -- -- (5,347) Foreign currency translation adjustment ... -- -- -- 162 -- -- 162 Currency exchange contract adjustment ..... -- -- -- (1,035) -- -- (1,035) Unrealized gain on interest rate swap agreement ............................... -- -- -- 169 -- -- 169 Minimum pension liability adjustment ...... -- -- -- (1,509) -- -- (1,509) ----------- Total comprehensive loss ............ (7,560) Share transactions under restricted stock plan ..................................... (64) (275) -- -- 253 192 106 ------ -------- -------- ------------ ------------ -------- ---------- BALANCE - SEPTEMBER 30, 2003 ................ $5,294 $ 6,661 $ 28,282 $ (9,247) $ (309) $ (400) $ 30,281 ====== ======== ======== ============ ============ ======== ==========

See notes to consolidated financial statements. 31 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. DESCRIPTION OF BUSINESS SIFCO Industries, Inc. and Subsidiaries (the "Company") are engaged in the production and sale of a variety of metalworking processes, services and products produced primarily to the specific design requirements of its customers. The processes and services include forging, heat-treating, coating, welding, machining and selective electrochemical finishing and the products include forgings, machined forged parts and other machined metal parts, remanufactured component parts for turbine engines, and selective electrochemical finishing solutions and equipment. B. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. C. CASH EQUIVALENTS The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. D. INVENTORY VALUATION Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method for approximately 28% and 35% of the Company's inventories at September 30, 2003 and 2002, respectively. Cost is determined using the specific identification method for approximately 33% of the Company's inventories at September 30, 2003 and 2002. The first-in, first-out ("FIFO") method is used to value the remainder of the Company's inventories. E. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is generally computed using the straight-line method, except for certain divisions, which use the declining balance method. Depreciation is provided in amounts sufficient to amortize the cost of the assets over their estimated useful lives. Depreciation provisions are based on estimated useful lives: buildings and building improvements: 5 to 50 years and machinery and equipment, including office and computer equipment: 3 to 20 years. F. GOODWILL AND OTHER INTANGIBLE ASSETS Effective October 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". This standard changes financial accounting and reporting for acquired goodwill and indefinite life intangible assets. SFAS No. 142 provides that intangible assets with finite useful lives will continue to be amortized and goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested for impairment by applying a fair value based test upon adoption and on an annual basis thereafter. The Company completed its tests for impairment and concluded that goodwill was not impaired at adoption of SFAS No. 142 on October 1, 2002 and at September 30, 2003. Other than the cessation of goodwill amortization, the adoption of SFAS No. 142 did not have an impact on the Company's financial position or results of operations. 32 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following table presents pro forma net income (loss) and net income (loss) per share information as if SFAS No. 142 had been adopted on October 1, 2000.

YEARS ENDED SEPTEMBER 30, -------------------------------------- 2003 2002 2001 Net income (loss) as reported ................................ $ (5,347) $ (11,986) $ 2,974 Goodwill amortization ........................................ -- 93 116 ---------- ---------- ---------- Pro forma net income (loss) ........................ $ (5,347) $ (11,893) $ 3,090 ========== ========== ========== Basic net income (loss) per share: Net income (loss) as reported ........................... $ (1.02) $ (2.30) $ 0.58 Goodwill amortization ................................... -- 0.02 0.02 ---------- ---------- ---------- Pro forma net income (loss) per share (basic) ..... $ (1.02) $ (2.28) $ 0.60 ========== ========== ========== Diluted net income (loss) per share: Net income (loss) as reported ........................... $ (1.02) $ (2.30) $ 0.58 Goodwill amortization ................................... -- 0.02 0.02 ---------- ---------- ---------- Pro forma net income (loss) per share (diluted) .... $ (1.02) $ (2.28) $ 0.60 ========== ========== ==========

Prior to the adoption of SFAS No. 142 in fiscal 2003, goodwill was amortized using the straight-line method over 40 years. Other intangible assets included a 10-year non-compete agreement with the former owner of an acquired company. This asset, which became fully amortized during 2002, was amortized using the straight-line method over 10 years. At September 30, 2003 and 2002, accumulated amortization of goodwill and other intangible assets was $881. G. NET INCOME PER SHARE The Company's net income per basic share has been computed based on the average number of common shares outstanding. Net income per diluted share reflects the effect of the Company's outstanding stock options under the treasury stock method. H. REVENUE RECOGNITION The Company recognizes revenue in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". Revenues are generally recognized when products are shipped or services are provided to customers. I. NEW ACCOUNTING STANDARDS In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. The standard applies to legal obligations associated with the retirement of long-lived assets that result from acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period incurred. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and was adopted by the Company effective October 1, 2002. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. In September 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement superceded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of Accounting Principals Board Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", related to the disposal of a segment of a business. This statement amends certain provisions of Accounting Research Bulletin No. 51, "Consolidated Financial Statements". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and was adopted by the Company effective October 1, 2002. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. 33 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This standard addresses financial accounting and reporting for costs associated with exit or disposal activities and replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" ("EITF No. 94-3"). SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity to be recognized when the liability is incurred. Under EITF No. 94-3, a liability for exit costs as defined in EITF No. 94-3 is recognized at the date of an entity's commitment to an exit plan. Beginning January 1, 2003, the Company recognizes liabilities associated with exit or disposal activities as they are incurred in accordance with SFAS No. 146. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure - an Amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based compensation. It also requires prominent disclosure in the significant accounting policy note of both annual and interim financial statements of the method of accounting for stock-based compensation and the related pro forma disclosures when the intrinsic value method continues to be used. The statement is effective for fiscal years beginning after December 15, 2002, and disclosure provisions are effective for the first fiscal quarters beginning after December 15, 2002. Early application of the disclosure provisions is encouraged. The Company adopted the disclosure provisions of SFAS 148 in the quarter ended December 31, 2002. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 changes the accounting for certain financial instruments, which under previous guidance, issuers could account for as equity. This standard requires that those financial instruments be classified as liabilities in statements of financial position. This standard is effective for interim periods beginning after June 15, 2003. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. J. STOCK-BASED COMPENSATION The Company employs the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The following pro forma information regarding net income and earnings per share was determined as if the Company had accounted for its stock options under the fair value method prescribed by SFAS No. 123. For purposes of pro forma disclosure, the estimated fair value of the stock options is amortized over the options' vesting period. The pro forma information is as follows:

YEARS ENDED SEPTEMBER 30, -------------------------------------- 2003 2002 2001 ---------- ---------- ---------- Net income (loss) as reported .................................... $ (5,347) $ (11,986) $ 2,974 Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects .................................... 138 171 153 ---------- ---------- ---------- Pro forma net income (loss) as if the fair value based method had been applied to all awards ............................ $ (5,485) $ (12,157) $ 2,821 ========== ========== ========== Net income (loss) per share: Basic - as reported ....................................... $ (1.02) $ (2.30) $ 0.58 Basic - pro forma ......................................... $ (1.04) $ (2.33) $ 0.55 Diluted - as reported ..................................... $ (1.02) $ (2.30) $ 0.58 Diluted - pro forma ....................................... $ (1.04) $ (2.33) $ 0.55

34 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) K. USE OF ESTIMATES Accounting principles generally accepted in the United States require management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the period in preparing these financial statements. Actual results could differ from those estimates. L. CONCENTRATIONS OF CREDIT RISK Receivables are presented net of allowance for doubtful accounts of $1,045 and $1,250 at September 30, 2003 and 2002, respectively. Bad debt expense totaled $114, $481 and $1,098 in fiscal 2003, 2002 and 2001, respectively. Most of the Company's receivables represent trade receivables due from manufacturers of turbine engines and aircraft components, airlines, and turbine engine overhaul companies located throughout the world, including a significant concentration of U.S. based companies. Approximately 40% of the Company's sales in 2003 were to its 5 largest customers. The Company performs ongoing credit evaluations of its customers' financial conditions. The Company believes its allowance for doubtful accounts is sufficient based on the credit exposures outstanding at September 30, 2003. However, certain customers have filed for bankruptcy protection in the last several years and it is possible that additional credit losses could be incurred if other customers seek bankruptcy protection. M. DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes an interest rate swap agreement and from time-to-time foreign exchange rate contracts as part of the management of its interest rate and foreign currency exchange rate exposures. The Company has no financial instruments held for trading purposes. All financial instruments are put into place to hedge specific exposure. To qualify as a hedge, the item to be hedged must expose the Company to interest rate or foreign currency exchange risk and the hedging instrument must effectively reduce that risk. If the financial instrument is designated as a cash flow hedge, the effective portions of changes in the fair value of the financial instrument are recorded in accumulated other comprehensive income (loss) in the shareholders' equity section of the consolidated balance sheets. Ineffective portions of changes in the fair value of the financial instrument, to the extent they may exist, are recognized in the consolidated statements of operations. The Company uses an interest rate swap agreement to reduce risks related to variable-rate debt, which is subject to changes in the market rates of interest. These are designated as cash flow hedges. During 2003, the Company held one interest rate swap agreement with a notional amount of $5,700 at September 30, 2003. Cash flows related to the interest rate swap agreements are included in interest expense. The Company's interest rate swap agreement and its variable-rate term debt are based upon three-month LIBOR. During 2003, the interest rate swap agreement qualified as a fully effective cash flow hedge against the Company's variable-rate term note interest risk. N. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. Research and development expense was approximately $500, $500 and $400 for the years ended September 30, 2003, 2002 and 2001, respectively. O. RECLASSIFICATIONS Certain amounts in prior years have been reclassified to conform to the 2003 consolidated financial statement presentation. 2. INVENTORIES Inventories at September 30, consist of:

2003 2002 ------- ------- Raw materials and supplies ..... $ 2,537 $ 3,411 Work-in-process ................ 3,028 3,525 Finished goods ................. 3,619 3,765 ------- ------- Total inventories .... $ 9,184 $10,701 ======= =======

If the FIFO method had been used for the entire Company, inventories would have been $3,230 and $3,114 higher than reported at September 30, 2003 and 2002, respectively. 35 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 3. ACCRUED LIABILITIES Accrued liabilities at September 30, consist of:

2003 2002 -------- -------- Accrued employee compensation and benefits ....... $ 1,450 $ 1,609 Accrued workers' compensation .................... 1,099 1,029 Accrued pension .................................. 684 1,040 Accrued severance ................................ 37 752 Accrued income taxes ............................. 354 415 Accrued royalties ................................ 1,131 973 Accrued legal and professional ................... 416 1,388 Unamortized portion of deferred grant revenue .... -- 2,005 Other accrued liabilities ........................ 1,300 1,447 -------- -------- Total accrued liabilities .............. $ 6,471 $ 10,658 ======== ========

4. GOVERNMENT GRANTS The Company receives grants from certain government entities as an incentive to invest in facilities, research and employees. Certain of these grants require that the Company maintain operations for up to ten years after receipt of grant proceeds in order to qualify for the full value of the benefits received. These amounts are recorded as deferred revenue when received. Capital grants are amortized into income over the estimated useful lives of the related assets. Employment grants are amortized into income over five years. Training, research, marketing and other grants are recognized as income when received. During 2002, the Company's workforce was impacted through attrition and staff reductions such that employment levels were reduced to amounts that were expected to remain, for the foreseeable future, below certain minimum levels as stipulated in certain employment related grant agreements. In certain circumstances, such employment level reductions may trigger an obligation for repayment of certain employment related grants. Accordingly, the Company recognized in 2002 a $770 provision to adjust the amount of the unamortized portion of deferred grant revenue and reclassified $2,005 of deferred grant revenue from other long-term liabilities to accrued liabilities. During 2003, the Company renegotiated the terms of certain of its grant agreements. The amended agreements revised the minimum employment level threshold that could trigger repayment; provided for annual employment level performance reviews to commence in December 2004; extended the expiration date of certain grants; and cancelled any further grant payments under certain grant agreements. The Company accounted for this amendment by reclassifying $2,517 from accrued liabilities to other long-term liabilities in recognition of the fact that no grants are repayable during fiscal 2004. The Company has elected to treat this amount as an obligation and will not commence amortizing it into income until such time as it is more certain that the Company will not be required to repay a portion of these grants. Because these grants are denominated in euros, the Company will continue to adjust the balance in response to currency exchange rate fluctuations for as long as such grants are treated as an obligation. The unamortized portion of deferred grant revenue was $3,063 and $2,645 at September 30, 2003 and 2002, respectively. As of September 30, 2003, the entire amount is included in other long-term liabilities. As of September 30, 2002, $2,005 is included in accrued liabilities, and $640 is included in other long-term liabilities. The Company recognized grant income of $133 in fiscal 2003, and net grant expense of $422 in fiscal 2002. Prior to expiration, a grant may be repayable in certain circumstances, principally upon the sale of related assets, or discontinuation or reduction of operations. The contingent liability for such potential repayments, including the previously discussed unamortized portion of deferred grant revenue, was $6,160 and $4,902 at September 30, 2003 and 2002, respectively. 36 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 5. LONG-TERM DEBT Long-term debt at September 30, consists of:

2003 2002 -------- -------- Term note payable to bank ................................... $ 5,700 $ 6,900 Revolving credit agreement .................................. 1,775 2,398 Industrial development variable rate demand revenue bond .... 2,995 3,235 Other ....................................................... 14 -- -------- -------- Total debt ........................................ 10,484 12,533 Less - current maturities ................................... 1,451 1,440 -------- -------- Total long-term debt .............................. $ 9,033 $ 11,093 ======== ========

The term note is payable in quarterly installments of $300 through February 1, 2005 with the remaining balance of $3,900 due May 1, 2005. The term note has a variable interest rate, which, after giving effect to an interest rate swap agreement with the same bank, becomes an effective fixed rate term note, subject to adjustment based upon the level of certain financial ratios. The effective fixed interest rate at September 30, 2003 was 9.49%. The interest rate swap agreement has a notional amount equal to the amount owed under the term note and bears interest at a fixed rate of 5.99%. The Company has a $6,000 revolving credit agreement, subject to sufficiency of collateral, that expires on September 30, 2004 and bears interest at the bank's base rate plus 0.50%. The interest rate was 4.50% at September 30, 2003. The daily average balance outstanding against the revolving credit agreement was $2,161 and $1,875 during 2003 and 2002, respectively. A commitment fee of 0.375% is incurred on the unused balance. At September 30, 2003, the Company had $2,912 available under its $6,000 revolving credit agreement. The Company has a 15-year industrial development variable rate revenue bond outstanding, which was issued with an original face amount of $4,100 and was used to expand the Turbine Component Services and Repair Group's Tampa, Florida facility. The interest rate is reset weekly based on prevailing tax-exempt money market rates (1.23% at September 30, 2003). The industrial development variable rate revenue bond requires annual principal payments ranging from $250 in 2004 to $355 in 2013. The bank's annual commitment fee on the standby letter of credit that collateralizes the industrial development variable rate revenue bond is 2.75% of the outstanding balance. All of the Company's long-term debt is secured by substantially all of the Company's assets located in the U.S., a guarantee by its U.S. subsidiaries and a pledge of 65% of the Company's ownership interest in its non-U.S. subsidiaries. Under its credit agreements, the Company is subject to certain customary covenants. These include, without limitations, covenants (as defined) that limit the amount of annual capital expenditures and require the maintenance of certain specified financial ratios, including minimum tangible net worth level, a maximum liability to tangible net worth ratio and an interest coverage ratio. During fiscal 2003, the Company entered into agreements with its bank to waive (i) the interest coverage ratio covenant for the period ended September 30, 2002 through the period ended December 31, 2004; (ii) the minimum tangible net worth covenant for the period ended September 30, 2002; and (iii) the capital expenditure limitation for the year ended September 30, 2002. On November 26, 2003, the Company entered into an agreement with its bank to amend certain provisions of its credit agreements. The amendment extends the maturity date of the Company's $6,000 revolving credit agreement to March 31, 2005. The amendment waives and terminates all of the Company's credit agreements' financial covenants in their entirety. New covenants are substituted for the terminated covenants: minimum tangible net worth level and a minimum adjusted fixed charge coverage to EBITDA ratio. In addition, the definition of eligible collateral against which the Company may borrow on its revolving credit agreement was amended. Taking into consideration the impact of this amendment, the Company was in compliance with all applicable covenants at September 30, 2003. 37 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. INCOME TAXES The components of income (loss) before income tax provision (benefit) are as follows:

YEARS ENDED SEPTEMBER 30, -------------------------------- 2003 2002 2001 -------- -------- -------- U.S .............................................................. $ (3,189) $ (8,369) $ 519 Non-U.S .......................................................... (2,184) (5,079) 4,149 -------- -------- -------- Income (loss) before income tax provision (benefit) ..... $ (5,373) $(13,448) $ 4,668 ======== ======== ========

The income tax provision (benefit) consists of the following:

YEARS ENDED SEPTEMBER 30, -------------------------------- 2003 2002 2001 -------- -------- -------- Current income tax provision (benefit): U.S. federal ................................................ $ -- $ (1,114) $ (117) State and local ............................................. -- -- 36 Non-U.S ..................................................... (26) (477) 489 -------- -------- -------- Total current tax provision (benefit) ................... (26) (1,591) 408 Deferred U.S. federal income tax provision ....................... -- 129 1,286 -------- -------- -------- Income tax provision (benefit) .......................... $ (26) $ (1,462) $ 1,694 ======== ======== ========

The income tax provision (benefit) differs from amounts currently payable or refundable due to certain items reported for financial statement purposes in periods that differ from those in which they are reported for tax purposes. The income tax provision (benefit) in the accompanying consolidated statements of operations differs from amounts determined by using the statutory rate as follows:

YEARS ENDED SEPTEMBER 30, -------------------------------- 2003 2002 2001 -------- -------- -------- Income (loss) before income tax provision (benefit) ....................... $ (5,373) $(13,448) $ 4,668 Less-U.S., state and local income tax provision (benefit) ................. -- -- 36 -------- -------- -------- Income (loss) before federal income tax provision (benefit) ....... (5,373) (13,448) 4,632 ======== ======== ======== Income tax provision (benefit) at U.S. federal statutory rate ............. (1,827) (4,572) 1,575 Tax effect of: U.S. losses for which no U.S. federal tax benefit has been recognized ........................................................ 1,106 1,598 -- Non-US losses for which no-U.S. federal tax benefit has been recognized ........................................................ 717 1,251 -- Other ................................................................ (22) 261 83 -------- -------- -------- U.S. federal and non-U.S. income tax provision (benefit) .................. (26) (1,462) 1,658 Add - U.S., state and local income tax provision (benefit) ................ -- -- 36 -------- -------- -------- Income tax provision (benefit) .................................... $ (26) $ (1,462) $ 1,694 ======== ======== ========

38 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Deferred tax assets and liabilities at September 30, consist of the following:

2003 2002 -------- -------- Deferred tax assets: Net U.S. operating loss carryforwards ........ $ 2,073 $ 903 Net non-U.S. operating loss carryforwards .... 411 -- Employee benefits ............................ 911 1,143 Investment valuation reserve ................. 511 511 Inventory reserves ........................... 440 473 Asset impairment reserve ..................... 272 80 Allowance for doubtful accounts .............. 230 263 Foreign tax credits .......................... 161 161 Interest rate swap ........................... 132 190 Additional pension liability ................. 685 171 -------- -------- Total deferred tax assets .......... 5,826 3,895 Deferred tax liabilities: Depreciation ................................. 1,915 1,688 Unremitted foreign earnings .................. 26 368 Other ........................................ 455 116 -------- -------- Total deferred tax liabilities ..... 2,396 2,172 -------- -------- Deferred tax assets net of liabilities ............ 3,430 1,723 Valuation allowance ............................... (3,430) (1,723) -------- -------- Net deferred tax assets ............ $ -- $ -- ======== ========

At September 30, 2003, the Company has U.S. federal and non-U.S. tax loss carryforwards of approximately $6,096 and $3,899, respectively. The U.S. federal tax loss carryforwards expire in 2022 and 2023. The non-U.S. tax loss carryforwards do not expire. At September 30, 2003, the Company recognized an additional $1,707 valuation allowance against its net deferred tax assets. In assessing the Company's ability to realize its net deferred tax assets, management considers whether it is more likely than not that some portion or all of its net deferred tax assets may not be realized. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Future reversal of the valuation allowance may be achieved either when the tax benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future taxable income. The Company considers the undistributed earnings, accumulated prior to October 1, 2000, of its non-U.S. subsidiaries to be indefinitely reinvested in operations outside the U.S. Distribution of these non-U.S. subsidiary earnings would be subject to U.S. income taxes. Cumulative undistributed earnings of non-U.S. subsidiaries for which no U.S. federal deferred income tax liabilities have been established were approximately $25,000 at September 30, 2003. During 2001, the Company provided $934 for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries accumulated in fiscal 2001. The Company received distributions from its non-U.S. subsidiaries during fiscal 2003 and 2002. The distributions reduced the accrued U.S. income tax on the undistributed earnings of the Company's non-U.S. subsidiaries to $26 and $368 at September 30, 2003 and 2002, respectively. 39 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 7. RETIREMENT BENEFIT PLANS The Company and certain of its subsidiaries sponsor defined benefit pension plans covering most of its employees. The Company's funding policy for U.S. defined benefit pension plans is based on an actuarially determined cost method allowable under Internal Revenue Service regulations. Non-U.S. plans are funded in accordance with the requirements of regulatory bodies governing the plans. During fiscal 2003, the Company's Board of Directors adopted a resolution to cease the accrual of future benefits under one of its defined benefit plans, which covers substantially all non-union employees of the Company's U.S. operations. The plan will otherwise continue. Because the unrecognized actuarial losses exceeded the curtailment gain, there was no income or expense recognized in 2003 related to these changes. In conjunction with the changes to the plan, the Company made certain enhancements to the defined contribution plan that is available to substantially all non-union employees of the Company's U.S. operations. Net pension expense for the Company-sponsored defined benefit plan consists of the following:

YEARS ENDED SEPTEMBER 30, -------------------------------- 2003 2002 2001 -------- -------- -------- Service cost ............................................... $ 675 $ 899 $ 813 Interest cost .............................................. 1,379 1,255 1,180 Expected return on plan assets ............................. (1,483) (1,445) (1,483) Amortization of transition obligation (asset) .............. (11) (11) (11) Amortization of prior service cost ......................... 132 42 42 Amortization of net gain ................................... (63) (104) (262) -------- -------- -------- Net pension expense for defined benefit plans .... $ 629 $ 636 $ 279 ======== ======== ========

The status of all significant U.S. and non-U.S. defined benefit pension plans at September 30, is as follows:

2003 2002 -------- -------- Benefit obligation: Benefit obligation at beginning of year ........ $ 20,124 $ 17,327 Service cost ................................... 675 899 Interest cost .................................. 1,379 1,257 Participant contributions ...................... 164 193 Amendments ..................................... (2,507) 898 Actuarial loss ................................. 2,820 1,071 Benefits paid .................................. (1,217) (1,890) Currency translation adjustment ................ 934 369 -------- -------- Benefit obligation at end of year .... $ 22,372 $ 20,124 ======== ========

2003 2002 -------- -------- Plan assets: Plan assets at beginning of year ............... $ 15,099 $ 16,571 Actual return (loss) on plan assets ............ 1,023 (823) Employer contributions ......................... 1,777 743 Participant contributions ...................... 164 193 Benefits paid .................................. (1,217) (1,890) Currency translation adjustment ................ 756 305 -------- -------- Plan assets at end of year ........... $ 17,602 $ 15,099 ======== ========

40 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

PLANS IN WHICH PLANS IN WHICH ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS EXCEED BENEFITS AT ASSETS AT SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2003 2002 2003 2002 -------- -------- -------- -------- RECONCILIATION OF FUNDED STATUS: Plan assets in excess of (less than) projected benefit obligations .... $ 1,146 $ 1,391 $ (5,916) $ (6,416) Unrecognized net (gain) loss .......................................... (696) (1,176) 3,704 3,150 Unrecognized prior service cost ....................................... 803 896 303 343 Unrecognized transition asset ......................................... -- -- (28) (38) Currency translation adjustment ....................................... -- -- 102 76 -------- -------- -------- -------- Net amount recognized in the consolidated balance sheets ......... $ 1,253 $ 1,111 $ (1,835) $ (2,885) ======== ======== ======== ======== AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS ARE: Other assets .......................................................... $ 1,253 $ 1,111 $ 1,166 $ 923 Accrued liabilities ................................................... -- -- (684) (1,040) Other long-term liabilities ........................................... -- -- (4,330) (3,272) Accumulated other comprehensive loss .................................. -- -- 2,013 504 -------- -------- -------- -------- Net amount recognized in the consolidated balance sheets ......... $ 1,253 $ 1,111 $ (1,835) $ (2,885) ======== ======== ======== ========

Assumptions used for defined benefit plans consist of:

YEARS ENDED SEPTEMBER 30, ------------------------- 2003 2002 2001 ---- ---- ---- Discount rate for liabilities ..... 6.1% 6.6% 7.1% Expected return on assets ......... 8.3% 8.4% 8.4% Rate of compensation increase ..... 3.9% 3.9% 4.0%

The Company also contributes to a U.S. multi-employer retirement plan for certain union employees. The Company's contributions to the plan in 2003, 2002 and 2001 were $49, $55 and $47, respectively. Substantially all non-union U.S. employees of the Company and its U.S. subsidiaries are eligible to participate in the Company's U.S. defined contribution plan. The Company's matching contribution expense for this defined contribution plan in 2003, 2002 and 2001 was $137, $79 and $77, respectively. The Company's Irish subsidiary sponsors, for all of its employees, a tax-advantage profit sharing program. Company discretionary contributions and employee elective contributions are invested in Common Shares of the Company without being subject to personal income taxes if held for at least three years. Employees have the option of taking taxable cash distributions. There was no contribution expense in 2003, 2002 and 2001. The Company's Irish subsidiary also sponsors, for certain of its employees who became participants in the Irish subsidiary's defined benefit plan after October 1, 2000, a defined contribution plan. The Company contributes annually 5.5% of eligible employee compensation, as defined. Total contribution expense in 2003, 2002 and 2001 was $14, $23 and $10, respectively. During fiscal 2003, the Company's Irish subsidiary established a Personal Retirement Savings Account Plan, a portable retirement savings plan, which is to be funded entirely by plan participant contributions. The Company is not obligated to contribute to this plan. The Company's United Kingdom subsidiary sponsors, for certain of its employees, a defined contribution plan. The Company contributes annually 5% of eligible employees' compensation, as defined. Total contribution expense in 2003, 2002 and 2001 was $13, $6 and $10. 41 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. STOCK-BASED COMPENSATION The Company awards stock options under its shareholder approved 1995 Stock Option Plan ("1995 Plan") and 1998 Long-term Incentive Plan ("1998 Plan"). Under the 1995 Plan, the aggregate number of stock options that may be granted is 200,000. At September 30, 2003, there were 25,000 options available for award under the 1995 Plan. The aggregate number of stock options that may be granted under the 1998 Plan in any fiscal year is limited to 1.5% of the total outstanding Common Shares of the Company as of September 30, 1998, up to a maximum of 5% of such total outstanding shares, subject to adjustment for forfeitures. At September 30, 2003, there were 48,519 options available for award under the 1998 Plan. At September 30, 2003, the Company also had options outstanding that were awarded under a previous plan, which authority to award additional options has expired. Option exercise price is not less than fair market value on date of grant and options are exercisable no later than ten years from date of grant. Options issued under all plans generally vest at a rate of 25% per year. Option activity is as follows:

YEARS ENDED SEPTEMBER 30, ----------------------------------- 2003 2002 2001 --------- --------- --------- Options at beginning of year ............ 390,000 344,000 276,000 Weighted average exercise price .... $ 6.71 $ 7.36 $ 8.03 Options granted during the year ......... -- 77,500 77,000 Weighted average exercise price .... $ -- $ 5.50 $ 4.75 Options canceled during the year ........ (5,000) (31,500) (9,000) Weighted average exercise price .... $ 3.75 $ 10.85 $ 5.70 Options at end of year .................. 385,000 390,000 344,000 Weighted average exercise price .... $ 6.74 $ 6.71 $ 7.36 Options exercisable at end of year ...... 276,500 210,250 174,000 Weighted average exercise price .... $ 7.23 $ 7.02 $ 7.16

The following table provides additional information regarding options outstanding as of September 30, 2003:

OPTIONS OPTIONS OPTIONS REMAINING LIFE OF EXERCISE PRICE OUTSTANDING EXERCISABLE OPTIONS (YEARS) -------------- ----------- ----------- ----------------- $ 4.25 100,000 100,000 2.1 $ 4.69 59,000 29,500 7.1 $ 5.16 10,000 5,000 2.1 $ 5.50 77,500 19,375 8.6 $ 6.81 5,000 3,750 6.4 $ 6.94 42,500 31,875 6.1 $ 7.63 16,000 12,000 1.1 $12.88 75,000 75,000 5.1 ------- ------- Total 385,000 276,500 ======= =======

The Company employs the disclosure-only provisions of Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Pro forma information required by this standard regarding net income and earnings per share can be found in Note 1 - Summary of Significant Accounting Policies. This information is required to be determined as if the Company had accounted for its stock options granted subsequent to September 30, 1995 under the fair value method of that standard. 42 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The fair values of options granted in fiscal years ending September 30, 2002 and 2001 were estimated at the dates of grants using a Black-Scholes options pricing model with the following weighted average assumptions:

YEARS ENDED SEPTEMBER 30, ------------------------- 2002 2001 --------- --------- Risk-free interest rate ........................ 3.35% 6.08% Dividend yield ................................. 0.00% 0.00% Volatility factor .............................. 43.89% 38.47% Expected life of stock options ................. 7.0 years 8.4 years

Based upon the preceding assumptions, the weighted average fair values of stock options granted during fiscal years 2002 and 2001 were $2.77 and $2.63 per share, respectively. Under the Company's restricted stock program, Common Shares of the Company may be granted at no cost to certain officers and key employees. These shares vest over either a four or five-year period, with either 25% or 20% vesting each year, respectively. Under the terms of the program, participants will not be entitled to dividends nor voting rights until the shares have vested. Upon issuance of Common Shares under the program, unearned compensation equivalent to the market value at the date of award is charged to shareholders' equity and subsequently amortized to expense over the vesting periods. In fiscal 2002 and 2001, the Company awarded 50,000 four-year vesting and 100,000 five-year vesting restricted Common Shares, respectively. Compensation expense related to the amortization of unearned compensation was $106, $100 and $0 in fiscal years 2003, 2002 and 2001, respectively. 9. SUMMARIZED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

2003 QUARTER ENDED -------------------------------------------- DEC. 31 MARCH 31 JUNE 30 SEPT. 30 -------- -------- -------- -------- Net sales ....................... $ 17,424 $ 18,430 $ 22,574 $ 21,511 Cost of goods sold .............. 16,935 17,048 19,167 19,230 Net income (loss) ............... (2,826) (3,014) 232 261 Net income (loss) per share: Basic ......................... $ (0.54) $ (0.57) $ 0.04 $ 0.05 Diluted ....................... $ (0.54) $ (0.57) $ 0.04 $ 0.05

2002 QUARTER ENDED -------------------------------------------- DEC. 31 MARCH 31 JUNE 30 SEPT. 30 -------- -------- -------- -------- Net sales ....................... $ 20,338 $ 20,747 $ 20,167 $ 18,781 Cost of goods sold .............. 21,071 18,410 17,489 19,361 Net loss ........................ (3,690) (1,333) (451) (6,512) Net loss per share: Basic ......................... $ (0.71) $ (0.26) $ (0.09) $ (1.25) Diluted ....................... $ (0.71) $ (0.26) $ (0.09) $ (1.25)

10. ASSET IMPAIRMENT AND OTHER CHARGES During fiscal 2002, the Company's Repair Group performed evaluations of its existing operations in light of the current and anticipated impacts on its business of the September 11, 2001 terrorist attacks on the United States. The principal result of these evaluation processes was the decision to optimize the Repair Group's multiple operations by reducing certain of its capacity for the repairing of components related to older generation aerospace turbine engines, principally JT8D. Consequently, the Repair Group recognized asset impairment charges of $4,088 and $1,072, during the first and fourth quarters of fiscal 2002, respectively. These charges include a goodwill write-off of $733 in the first quarter of fiscal 2002 43 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) and inventory write-downs of $2,708 and $551, along with equipment write-downs of $647 and $521, in the first and fourth quarters of fiscal 2002, respectively. As a direct consequence of the September 11, 2001 terrorist attacks on the United States, the demand for JT8D aerospace turbine engine repair services experienced an accelerated and substantial decline during the first quarter of fiscal 2002. This decline in demand continued during the balance of fiscal 2002. Because of the foregoing and as a result of the Repair Group's decision to reduce certain of its capacity for the repair of components, the recoverability of the carrying value of certain assets was adversely affected. Consequently, the inventory write-down, recorded in cost of goods sold in the consolidated statements of operations, in the first and fourth quarters of fiscal 2002 was determined to be appropriate. The write-off of goodwill was based on an analysis of projected undiscounted cash flows, which were no longer deemed adequate to support the value of goodwill associated with the Repair Group. The equipment write-downs relate to items that have been or are expected to be disposed, or will experience reduced utilization as a consequence of the Repair Group's decision to reduce certain of its capacity for the repair of components. The realization of these assets was determined based on estimated net realizable value. Both the goodwill write-off and the equipment write-downs were recorded in selling, general and administrative expenses in the consolidated statements of operations. In addition, during fiscal 2002, the Repair Group incurred charges related to severance and other employee benefits to be paid to approximately 76 personnel associated with the reduction of certain of its capacity for the repairing of components. Such charges were $33, $154 and $752 and were recorded in selling, general and administrative expenses in the consolidated statements of operations in the first, second and fourth quarters of fiscal 2002, respectively. As of September 30, 2002, $187 of payments has been made for these expenses and all but 12 personnel have been terminated. During fiscal 2003, the Company's Repair Group reevaluated its personnel requirements and determined that it would not terminate the 12 personnel that were identified in fiscal 2002 to be terminated. As a result of this decision, $218 of the $752 severance accrual outstanding at September 30, 2002 was reversed during fiscal 2003. The reversal was recorded in selling, general and administrative expenses in the consolidated statements of operations. During fiscal 2003, as a result of the continuing downturn in the commercial aviation industry and the resulting reduction in demand for third party aerospace turbine engine turbine component repair services, such as those provided by the Company, the Repair Group decided to cease operations at one of its turbine engine component repair facilities and to optimize its remaining component repair capability through consolidation of operations. The Company expects to complete these actions by March 31, 2004. As a result of this decision, the Repair Group incurred $645 of severance and other employee benefit charges to be paid to 60 personnel, all of which was incurred during fiscal 2003 and was recorded in selling, general and administrative expenses in the consolidated statements of operations. As of September 30, 2003, payments totaling $608 have been made for these expenses and all but nine of the personnel have been terminated. In connection with these decisions, asset impairment charges totaling $1,309 related primarily to machinery and equipment were recorded in selling, general and administrative expenses in the consolidated statements of operations during fiscal 2003. The machinery and equipment write-downs relate to items that are expected to be disposed or to experience significantly reduced utilization as a consequence of the Repair Group's decision to cease operations at one facility and to consolidate other operations. Fair value of these assets was determined based on estimated cash flows. The following table summarizes the remaining liabilities for qualified exit costs at September 30, 2003 and activity for the year then ended:

BALANCE TOTAL 2003 2003 BALANCE SEPTEMBER 30, 2003 CASH NON-CASH SEPTEMBER 30, 2002 CHARGES PAYMENTS CHARGES 2003 ------------- ------- -------- -------- ------------- Severance and other employee benefits ..................... $ 752 $ 645 $ 1,142 $ (218) $ 37 Asset impairments ............... -- 1,309 -- (1,309) -- ------- ------- ------- ------- ------- Total ........................... $ 752 $ 1,954 $ 1,142 $(1,527) $ 37 ======= ======= ======= ======= =======

44 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. CONTINGENCIES The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company cannot reasonably estimate future costs, if any, related to these matters. Although it is possible that the Company's future operating results could be affected by the future cost of litigation, it is management's belief at this time that such costs will not have a material adverse effect on the Company's consolidated financial position or results of operations. The Company leases various facilities and equipment under leases expiring at various dates. At September 30, 2003, minimum rental commitments under non-cancelable leases are as follows:

YEAR ENDING SEPTEMBER 30, ------------------------- 2004 $258 2005 208 2006 151 2007 128 2008 126 THEREAFTER 136

12. FOREIGN CURRENCY MANAGEMENT The U.S. dollar is the functional currency for all the Company's U.S. operations. Effective October 1, 2001, the Company changed the functional currency of its Irish subsidiary from the local currency to the U.S. dollar. The functional currency was changed because a substantial majority of the subsidiary's transactions are now denominated in U.S. dollars. For the U.S. and Ireland operations, all gains and losses from completed currency transactions are included in income currently. For the Company's other non-U.S. subsidiaries, the functional currency is the local currency. Assets and liabilities are translated into U.S. dollars at the rates of exchange at the end of the period and revenues and expenses are translated using average rates of exchange. Foreign currency translation adjustments are reported as a component of accumulated other comprehensive income (loss) in the consolidated statements of shareholders' equity. Historically, the Company has been able to mitigate the impact of foreign currency risk by means of hedging such risk through the use of foreign currency exchange contracts, which typically expire within one year. However, such risk is mitigated only for the periods for which the Company has foreign currency exchange contracts in effect, and only to the extent of the U.S. dollar amounts of such contracts. At September 30, 2003, there were no forward exchange contracts outstanding. 13. BUSINESS SEGMENTS The Company identifies reportable segments based upon distinct products manufactured and services performed. The Turbine Component Services and Repair Group ("Repair Group") consists primarily of the repair and remanufacture of aerospace and industrial turbine engine components. The Repair Group is also involved in precision component machining for aerospace applications. The Aerospace Component Manufacturing Group ("ACM Group") consists of the production, heat treatment and some machining of forgings in various alloys utilizing a variety of processes for application in the aerospace industry. The Metal Finishing Group is a provider of specialized selective electrochemical metal finishing processes and services used to apply metal coatings to a selective area of a component. The Company's reportable segments are separately managed. One customer of the Repair and ACM Groups accounted for 13% of the Company's consolidated net sales in 2003. The same customer was a customer of all three of the Company's segments and accounted for 13% and 18% of the Company's consolidated net sales in 2002 and 2001, respectively. Geographic net sales are based on location of customer. The U.S. is the single largest country for unaffiliated customer sales, accounting for 62% of consolidated net sales in fiscal 2003. No other single country represents greater than 10% of consolidated net sales. Net sales to unaffiliated customers located in various European countries in fiscal 2003 accounted for 29% of consolidated net sales. 45 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Corporate unallocated expenses represent expenses that are not of a business segment operating nature and, therefore, are not allocated to the business segments for reporting purposes. Corporate identifiable assets consist primarily of cash and cash equivalents. The following table summarizes certain information regarding segments of the Company's operations:

YEARS ENDED SEPTEMBER 30, -------------------------------------- 2003 2002 2001 ---------- ---------- ---------- Net sales: Turbine Component Services and Repair Group ....................... $ 40,734 $ 36,539 $ 54,406 Aerospace Component Manufacturing Group ........................... 29,701 33,164 40,891 Metal Finishing Group ............................................. 9,504 10,330 10,336 ---------- ---------- ---------- Consolidated net sales ....................................... $ 79,939 $ 80,033 $ 105,633 ========== ========== ========== Operating income (loss): Turbine Component Services and Repair Group ....................... $ (5,307) $ (11,514) $ 2,609 Aerospace Component Manufacturing Group ........................... 1,627 (287) 3,476 Metal Finishing Group ............................................. 788 1,495 1,724 Corporate unallocated expenses .................................... (1,721) (1,944) (1,897) ---------- ---------- ---------- Consolidated operating income (loss) ....................... (4,613) (12,250) 5,912 Interest expense, net .................................................. 721 580 659 Foreign currency exchange loss (gain), net ............................. 345 (34) 568 Other expense (income), net ............................................ (306) 652 17 ---------- ---------- ---------- Consolidated income (loss) before income tax provision (benefit) ........................... $ (5,373) $ (13,448) $ 4,668 ========== ========== ========== Depreciation and amortization expense: Turbine Component Services and Repair Group ....................... $ 3,372 $ 3,626 $ 3,242 Aerospace Component Manufacturing Group ........................... 669 680 679 Metal Finishing Group ............................................. 142 400 447 ---------- ---------- ---------- Consolidated depreciation and amortization expense .......... $ 4,183 $ 4,706 $ 4,368 ========== ========== ========== Capital Expenditures: Turbine Component Services and Repair Group ....................... $ 1,617 $ 4,598 $ 3,325 Aerospace Component Manufacturing Group ........................... 327 396 705 Metal Finishing Group ............................................. 205 49 52 ---------- ---------- ---------- Consolidated capital expenditures ........................... $ 2,149 $ 5,043 $ 4,082 ========== ========== ========== Identifiable assets: Turbine Component Services and Repair Group ....................... $ 34,233 $ 37,531 $ 41,641 Aerospace Component Manufacturing Group ........................... 15,215 16,758 21,360 Metal Finishing Group ............................................. 7,682 7,735 8,047 Corporate.......................................................... 4,548 7,618 15,548 ---------- ---------- ---------- Consolidated total assets ................................... $ 61,678 $ 69,642 $ 86,596 ========== ========== ========== Non-U.S. operations (primarily the Company's Ireland operations): Net sales ......................................................... $ 29,222 $ 23,872 $ 38,224 Operating income (loss) .......................................... (2,274) (4,842) 3,964 Identifiable assets (excluding cash) .............................. 22,752 23,239 23,579

46 SCHEDULE II SIFCO INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS - ALLOWANCE FOR DOUBTFUL ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001 (AMOUNTS IN THOUSANDS)

2003 2002 2001 -------- -------- -------- Balance beginning of period ........................... $ 1,250 $ 1,422 $ 765 Additions-charged to costs and expenses ............... 121 481 1,098 Addition - reallocation of Corporate Reserves ......... -- -- 433 Deductions-accounts determined to be uncollectible .... (326) (654) (930) Recoveries of fully reserved accounts ................. -- 2 32 Exchange rate changes and other ....................... -- (1) 24 -------- -------- -------- Balance end of period ................................. $ 1,045 $ 1,250 $ 1,422 ======== ======== ========

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On June 25, 2002, the Board of Directors of SIFCO Industries, Inc. adopted the recommendation of its Audit Committee that Arthur Andersen LLP be dismissed as the Company's auditors and that Grant Thornton LLP be engaged to serve as the Company's independent public accountants. Please see the Company's Current Report on Form 8-K dated June 27, 2002 filed with the Securities and Exchange Commission. ITEM 9A. CONTROLS AND PROCEDURES The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chairman and Chief Executive Officer of the Company and Chief Financial Officer of the Company, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based upon that evaluation, the Chairman and Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There has been no significant change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or that is reasonably likely to materially affect our internal control over financial reporting. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT The Company incorporates herein by reference the information appearing under the captions "Proposal to Elect Six (6) Directors" and "Stock Ownership of Officers, Directors and Nominees" and "Organization and Compensation of the Board of Directors" of the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about December 12, 2003. The Directors of the Company are elected annually to serve for one-year terms or until their successors are elected and qualified. Information concerning executive officers of the Company is contained in Part I of this report under the caption "Executive Officers of the Registrant". 47 The Company has adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-K under the Securities Exchange Act of 1934, as amended. The Code of Ethics is applicable to, among other people, the Company's Chief Executive Officer, Chief Financial Officer, who is the Company's Principal Financial Officer and to the Corporate Controller, who is the Company's Principal Accounting Officer. A copy of the Company's Code of Ethics can be obtained without charge upon written request addressed to Frank A. Cappello, Vice President-Finance and Chief Financial Officer, SIFCO Industries, Inc., 970 East 64th Street, Cleveland, Ohio 44103. The Company's Code of Ethics is also available on its website: www.sifco.com. ITEM 11. EXECUTIVE COMPENSATION The Company incorporates herein by reference the information appearing under the captions "Executive Compensation", "Report of the Compensation Committee" and "Performance Graph" of the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about December 12, 2003. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

NUMBER OF SECURITIES REMAINING AVAILABLE FOR NUMBER OF WEIGHTED FUTURE SECURITIES TO BE AVERAGE ISSUANCE ISSUED UPON EXERCISE PRICE UNDER EXERCISE OF OF EQUITY OUTSTANDING OUTSTANDING COMPENSATION PLAN CATEGORY OPTIONS OPTIONS OPTIONS PLANS --------------------- ---------------- -------------- --------------- Equity compensation plans approved by security holders: 1998 Long-term Incentive Plan (1) ....................... 210,000 $12.45 48,519 1995 Stock Option Plan (2) .............................. 175,000 6.98 25,000 Equity compensation plans not approved by security holders (3) .... -- -- -- ------- ------ ------ Total ............................................... 385,000 $ 6.74 73,519 ======= ====== ======

(1) Under the 1998 Long-term Incentive Plan the aggregate number of stock options that may be granted in any fiscal year is limited to 1.5% of the total outstanding Common Shares of the Company at September 30, 1998, up to a cumulative maximum of 5% of such total outstanding shares, subject to adjustment for forfeitures. (2) Under the 1995 Stock Option Plan the aggregate number of stock options that may be granted is 200,000. (3) Under the Company's restricted stock program, Common Shares may be granted at no cost to certain officers and key employees. These shares vest over either a four or five-year period, with either 25% or 20% vesting each year, respectively. Under the terms of the program, participants will not be entitled to dividends nor voting rights until the shares have vested. In fiscal 2002 and 2001, the Company awarded 50,000 four-year vesting and 100,000 five-year vesting restricted Common Shares, respectively. For additional information concerning the Company's equity compensation plans, refer to the discussion in Note 8 to the Consolidated Financial Statements. The Company incorporates herein by reference the information appearing under the caption "Outstanding Shares and Voting Rights" of the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about December 12, 2003. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 48 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The Company incorporates herein by reference the information appearing under the caption "Principal Accounting Fees and Services" of the Company's definitive Proxy Statement to be filed with the Securities and Exchange commission on or about December 12, 2003. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS: The following Consolidated Financial Statements; Notes to the Consolidated Financial Statements and the Reports of Independent Certified Public Accountants are included in Item 8. Report of Independent Certified Public Accountants Report of Independent Certified Public Accountants on the Financial Statement Schedule Copy of Report of Independent Public Accountants (who have ceased operations) Copy of Report of Independent Public Accountants (who have ceased operations) on the Financial Statement Schedule Consolidated Statements of Operations for the Years Ended September 30, 2003, 2002 and 2001 Consolidated Balance Sheets - September 30, 2003 and 2002 Consolidated Statements of Cash Flows for the Years Ended September 30, 2003, 2002 and 2001 Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 2003, 2002 and 2001 Notes to Consolidated Financial Statements - September 30, 2003, 2002 and 2001 (a) (2) FINANCIAL STATEMENT SCHEDULES: The following financial statement schedule is included in Item 8: Schedule II - Valuation and Qualifying Accounts - Allowance for Doubtful Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related regulations, are inapplicable, or the information has been included in the Notes to the Consolidated Financial Statements. (a)(3) EXHIBITS: The following exhibits are filed with this report or are incorporated herein by reference to a prior filing in accordance with Rule 12b-32 under the Securities and Exchange Act of 1934 (Asterisk denotes exhibits filed with this report.).

Exhibit No. Description ----------- ----------- 3.1 Third Amended Articles of Incorporation of SIFCO Industries, Inc., filed as Exhibit 3(a) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.1 Amended and Restated Reimbursement Agreement dated April 30, 2002 Between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4(a) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference

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Exhibit No. Description ----------- ----------- 4.2 Amended and Restated Credit Agreement Between SIFCO Industries, Inc. and National City Bank dated April 30, 2002, filed as Exhibit 4(b) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.3 Promissory Note (Term Note) dated April 14, 1998 Between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4(c) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.4 Loan Agreement Between Hillsborough County Industrial Development Authority and SIFCO Industries, Inc., dated as of May 1, 1998, filed as Exhibit 4(d) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.5 Consolidated Amendment No. 1 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated November 26, 2002 between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4.5 of the Company's Form 10-K dated September 30, 2002, and incorporated herein by reference 4.6 Consolidated Amendment No. 2 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated February 13, 2003 between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4.6 of the Company's Form 10-Q dated December 31, 2002, and incorporated herein by reference 4.7 Consolidated Amendment No. 3 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated May 13, 2003 between SIFCO Industries Inc. and National City Bank, filed as Exhibit 4.7 of the Company's Form 10-Q dated March 31, 2003, and incorporated herein by reference 4.8 Consolidated Amendment No. 4 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated July 28, 2003 between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4.8 of the Company's Form 10-Q dated June 30, 2003 and incorporated herein by reference *4.9 Consolidated Amendment No. 5 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated November 26, 2003 between SIFCO Industries, Inc. and National City Bank 9.1 Voting Trust Extension Agreement dated January 14, 2002, filed as Exhibit 9.1 of the Company's Form 10-K dated September 30, 2002, and incorporated herein by reference 9.2 Voting Trust Agreement dated January 15, 1997, filed as Exhibit 9.2 of the Company's Form 10-K dated September 30, 2002, and incorporated herein by reference 10.1 1989 Key Employee Stock Option Plan, filed as Exhibit B of the Company's Form S-8 dated January 9, 1990 and incorporated herein by reference 10.2 Deferred Compensation Program for Directors and Executive Officers (as amended and restated April 26, 1984), filed as Exhibit 10(b) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 10.3 SIFCO Industries, Inc. 1998 Long-term Incentive Plan, filed as Appendix A of the Company's Schedule 14A dated December 21, 1998, and incorporated herein by reference 10.4 SIFCO Industries, Inc. 1995 Stock Option Plan, filed as Exhibit 10(d) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 10.5 Change in Control Severance Agreement between the Company and Frank Cappello, dated September 28, 2000, filed as Exhibit 10(g) of the Company's Form 10-Q dated December 31, 2000 and incorporated herein by reference

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Exhibit No. Description ----------- ----------- 10.6 Change in Control Severance Agreement between the Company and Hudson Smith, dated September 28, 2000, filed as Exhibit 10 (h) of the Company's Form 10-Q dated December 31, 2000 and incorporated herein by reference 10.7 Change in Control Severance Agreement between the Company and Remigijus Belzinskas, dated September 28, 2000, filed as Exhibit 10 (i) of the Company's Form 10-Q dated December 31, 2000 and incorporated herein by reference 10.8 Change in Control Agreement between the Company and Frank Cappello, dated November 9, 2000, filed as Exhibit 10 (j) of the Company's Form 10-Q dated December 31, 2000 and incorporated herein by reference 10.9 Change in Control Severance Agreement between the Company and Timothy V. Crean, dated July 30, 2002, filed as Exhibit 10.9 of the Company's Form 10-K dated September 30, 2002, and incorporated herein by reference 10.10 Change in Control Severance Agreement between the Company and Jeffrey P. Gotschall, dated July 30, 2002, filed as Exhibit 10.10 of the Company's Form 10-K dated September 30, 2002, and incorporated herein by reference 10.11 Form of Restricted Stock Agreement, filed as Exhibit 10.11 of the Company's Form 10-K dated September 30, 2002, and incorporated herein by reference *14.1 Code of Ethics 16.1 Letter from Arthur Andersen LLP to the Securities and Exchange Commission dated June 27, 2002, filed as Exhibit 16 of the Company's Form 8-K dated June 27, 2002 and incorporated by reference *21.1 Subsidiaries of the Company *23.1 Consent of Grant Thornton LLP *31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / 15d-14(a) *31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / 15d-14(a) *32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 *32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

(a)(4) REPORTS ON FORM 8-K During the last quarter of fiscal year ended September 30, 2003, the Company filed one Current Report on Form 8-K on September 26, 2003 in connection with a temporary suspension of trading under one of the Company's employee benefit plans. 51 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. SIFCO Industries, Inc. and Subsidiaries By: /s/ Frank A.Cappello ---------------------------------- Frank A. Cappello Vice President-Finance and Chief Financial Officer (Principal Financial Officer) Date: December 12, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below on December 12, 2003 by the following persons on behalf of the Registrant in the capacities indicated. /s/ Jeffrey P. Gotschall /s/ Alayne L. Reitman ------------------------- --------------------- Jeffrey P. Gotschall Alayne L. Reitman Chairman of the Board and Director Chief Executive Officer /s/ Hudson D. Smith /s/ J. Douglas Whelan ------------------- ---------------------- Hudson D. Smith J. Douglas Whelan Director, Director Executive Vice President and Treasurer /s/ Michael S. Lipscomb /s/ Frank A. Cappello ----------------------- --------------------- Michael S. Lipscomb Frank A. Cappello Director Vice President-Finance and Chief Financial Officer (Principal Financial Officer) /s/ P. Charles Miller /s/ Remigijus H. Belzinskas --------------------- --------------------------- P. Charles Miller Remigijus H. Belzinskas Director Corporate Controller (Principal Accounting Officer) 52