SIFCO INDUSTRIES INC - 10-K Annual Report

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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

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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.

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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.

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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.

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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.

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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.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information regarding the executive
officers of the Company.

(1) Hudson D. Smith and Jeffrey P. Gotschall are cousins.

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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.

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.

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)

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.

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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):

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)

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)

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.

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:

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:

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:

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:

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:

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

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:

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:

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:

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:

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

(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

49

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

50

(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