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

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

Recent Developments

During the first quarter of 2009, we executed an Employment Termination Program (the Program) that impacted selected salaried employees from all departments of Wellman Products Group with payroll in the United States. Involuntarily terminated employees were offered a severance package that included severance pay and outplacement services. The total expected expense to be incurred under the Program is $0.3 million.

As a result of implementing the Program, we recognized $0.3 million in severance expense in the first quarter of 2009. At March 31, 2009, we had accrued $0.1 million for amounts not yet paid out under the Program. We anticipate that all payouts under the Program will be completed in the second quarter of 2009.

Friction Products Segment Information

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

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

·

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

·

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

·

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

·

a leading domestic supplier of friction products into performance, defense and specialty markets such as military vehicles, motorcycles, race cars, performance automobiles, ATVs and snowmobiles, and

·

a leading supplier of critical stack components used in the manufacture of phosphoric acid fuel cells. The fuel cells which use our stack components dominate the on-site stationary fuel cell market. We are working with the State of Ohio to develop manufacturing equipment and processes which advance the state of fuel cell component manufacturing.

Critical Accounting Policies

The following discussion of our financial position and results of operations is based on the consolidated financial statements included in this Form 10-Q, which have been prepared in accordance with U.S. generally accepted accounting principles. Some of our accounting policies require the application of significant judgment by us in the preparation of our consolidated financial statements. In applying these policies, we use our best judgment to determine the underlying assumptions that are used in calculating estimates that affect the reported values on our financial statements. On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We review our financial reporting and disclosure practices and accounting policies quarterly to ensure that they provide accurate and transparent information relative to the current economic and business environment. We base our estimates and assumptions on historical experience and other factors that we consider relevant. If these estimates differ materially from actual results, the impact on our consolidated financial statements may be material. However, historically our estimates have not been materially different from actual results. During the first quarter of 2009, there have been no significant changes to the critical accounting policies that we disclosed in Management's Discussion and Analysis of Financial Position and Results of Operations on our 2008 Form 10-K filed with the Securities and Exchange Commission (SEC) on March 10, 2009.

New Accounting Pronouncements

The following new pronouncements became effective for us commencing with our first fiscal quarter of 2009:

·

In November 2008, the FASB ratified EITF 08-7. EITF 08-7 applies to defensive intangible assets, which are acquired intangible assets that the acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. As these assets are separately identifiable, EITF 08-7 requires an acquiring entity to account for defensive intangible assets as a separate unit of accounting which should be amortized to expense over the period the asset diminished in value. Defensive intangible assets must be recognized at fair value in accordance with SFAS 141(R), and SFAS 157. To date, EITF 08-7 has not had any impact on our consolidated financial statements. However, EITF 08-7 could have an impact on our consolidated financial statements in the future, but the nature and magnitude of the specific effects will depend on the nature, terms and value of the intangible assets purchased after January 1, 2009.

·

In June 2008, the FASB issued FSP03-6-1. Under FSP 03-6-1, unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computed earnings per share. Because we have not awarded such participating securities, FSP 03-6-1 has not and is not expected to have any impact on our results of operations, financial position or liquidity.

·

In April 2008, the FASB issued FSP 142-3, which amends the factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset under SFAS 142. FSP 142-3 requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset, and is an attempt to improve consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141.
The guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date. FSP 142-3 has not and is not expected to have a material impact on our results of operations, financial position or liquidity.

·

In March 2008, the FASB issued SFAS 161, which requires enhanced disclosures about an entity's derivative and hedging activities in order to improve the transparency of financial reporting. SFAS 161 was effective prospectively for our fiscal year commencing January 1, 2009. SFAS 161 did not have any impact on our results of operations, financial position or liquidity.

·

In December 2007, the FASB issued SFAS 141 (R), which modifies the accounting for business combinations by requiring that acquired assets and assumed liabilities be recorded at fair value, contingent consideration arrangements be recorded at fair value on the date of the acquisition and pre-acquisition contingencies generally be accounted for in purchase accounting at fair value. The pronouncement also requires that transaction costs be expensed as incurred, acquired research and development be capitalized as an indefinite-lived intangible asset and the requirements of SFAS 146, be met at the acquisition date in order to accrue for a restructuring plan in purchase accounting. We expect SFAS 141(R) could have an impact on our consolidated financial statements, but the nature and magnitude of the specific events will depend on the nature, terms and size of the acquisitions we consummate after the effective date of January 1, 2009.

In addition the following pronouncements have been issued by the FASB which will be adopted by us in future periods:

·

In April 2009, the FASB issued FSP 157-4, which provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 also provides additional guidance on circumstances that may indicate that a transaction is not orderly.
This guidance is effective for interim reporting periods ending after June 15, 2009 and will apply to our disclosures beginning with our second fiscal quarter of 2009. We do not believe the adoption of this staff position will materially impact our consolidated financial statements and disclosures.

·

In April 2009, the FASB issued FSP 107-1 and APB 28-1, which require disclosures about fair value of financial instruments for interim reporting periods. This guidance is effective for interim reporting periods ending after June 15, 2009 and will apply to our disclosures beginning with our second fiscal quarter of 2009. We have not determined the effect that the adoption of this staff position will have on our consolidated financial statements and disclosures.

·

Also in April 2009, the FASB issued FSP 115-2 and SFAS 124-2, which amends the other than temporary impairment guidance for debt securities to make the guidance more operations and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance is effective for interim reporting periods ending after June 15, 2009 and will apply to our disclosure beginning with our second fiscal quarter of 2009. We have not yet determined the effect that the adoption of this staff position will have on our consolidated financial statements and disclosures.

·

In December 2008, the FASB issued FSP 132(R)-1. FSP 132(R)-1 amends the disclosure requirements for employer's disclosure of plan assets for defined benefit pensions and other postretirement plans. The objective of this FSP is to provide users of financial statements with an understanding of how investment allocation decisions are made, the major categories of plan assets held by the plans, the inputs and valuation techniques used to measure the fair value of plan assets, significant concentration of risk within the company's plan assets, and for fair value measurements determined using significant unobservable inputs a reconciliation of changes between the beginning and ending balances. FSP
132(R)-1 is effective for fiscal years ending after December 15, 2009. We are currently evaluating the impact of FSP 132(R)-1 on our financial statements and intend to adopt the new disclosure requirements with our year ending December 31, 2009.

First Quarter of 2009 Compared to the First Quarter of 2008

The following charts show our net sales by market segment and geographic location for the three months ended March 31, 2009:

Three months ended March 31, 2009 Sales by Geographic Location of our Manufacturing Facilities

[[Image Removed: [final1stqform10q003.gif]]]

In the first quarter of 2008, we committed to selling our performance racing segment, which was comprised of two operating facilities in the United States.
We completed the sale of our performance racing segment in December 2008. We have classified the performance racing segment as a discontinued operation in our financial results for all periods presented.

Our continuing operations are organized into one strategic segment, friction products.

The following table summarizes our results of operations for the three month periods ended March 31, 2009 and 2008:

                                       Three Months Ended March 31
                                2009   % of *Sales        2008   % of *Sales       2008    % of *Sales   2007    % of *Sales
                                                                  (dollars in millions)
Net sales                      $ 44.3         1.0%       $ 65.8         1.0%      $ 199.9         1.0%  $ 161.0         1.0%
Cost of sales                  $ 32.3         0.7%       $ 48.4         0.7%      $ 155.0         0.8%  $ 121.8         0.8%
Gross profit                   $ 12.0         0.3%       $ 17.4         0.3%       $ 44.9         0.2%   $ 39.2         0.2%
Selling, technical and
administrative expenses         $ 7.5         0.2%        $ 9.7         0.1%       $ 29.0         0.1%   $ 23.6         0.1%
Income from operations          $ 4.4         0.1%        $ 7.5         0.1%       $ 15.4         0.1%   $ 15.0         0.1%
Interest expense               $ (2.0)       -0.0%       $ (2.0)       -0.0%      $ (11.2)       -0.1%   $ (7.4)       -0.0%
Interest income                 $ 0.2         0.0%        $ 0.7         0.0%        $ 0.1         0.0%    $ 2.9         0.0%
Other income (expense), net      $ -          0.0%        $ 0.3         0.0%        $ 0.1         0.0%   $ (0.4)       -0.0%
Income taxes                    $ 0.9         0.0%        $ 2.7         0.0%        $ 2.8         0.0%    $ 4.3         0.0%
Income from continuing
operations, after income
taxes                           $ 1.6         0.0%        $ 3.8         0.1%      $ (-1.$)       -1.$%  $ (-1.$)       -1.$%
Discontinued operations, net
of tax                           $ -          0.0%       $ (0.7)       -0.0%        $ 1.4         0.0%   $ 10.8         0.1%
Net income                      $ 1.6         0.0%        $ 3.2         0.0%        $ 3.0         0.0%   $ 16.6         0.1%

Net Sales. Our net sales for the first quarter of 2009 were $44.3 million, a decrease of $21.5 million or 32.7% from the same period in 2008. Sales declines during the period resulted primarily from the severe downturn in most of our end-markets. Of our total sales decrease of 32.7% in the first quarter of 2009, volume represented approximately 32.5 of the total percentage point decrease, unfavorable foreign currency exchange rates represented 2.6 of the total percentage point decline and pricing accounted for a benefit of approximately 2.4 of the total percentage point change.

Our aircraft and defense markets were up 10.8% in the first quarter of 2009, compared to the first quarter of 2008, due to strong demand in our defense market. However, we experienced sales decreases in most of our other major markets due to severe global market conditions during the period. Our sales to the construction and mining market, our largest, were down 49.8% in the first quarter of 2009, compared to the first quarter of 2008. Sales in the agriculture sector were down 30.3% in the first quarter of 2009, compared to the first quarter of 2008, as a result of weak market conditions, especially in Europe. Sales to our heavy truck market decreased 36.0% during the first quarter of 2009, compared to the first quarter of 2008 due to the decline in truck production during the period and reduced freight volumes being shipped with existing vehicles. Sales in our friction direct aftermarket that we service through the Velvetouch® and Hawk Performance® brand names decreased 24.0% in the first quarter of 2009 compared to the first quarter of 2008.

Net sales from our foreign facilities represented 27.9% of our total net sales in the first quarter of 2009 compared to 45.0% for the comparable period of 2008. The decline in our foreign facility revenues as a percent of total revenues, in addition to the market downturn, was also affected by product mix.
Sales at our Italian operation, on a local currency basis, were down 53.0% in the first quarter of 2009, compared to the first quarter of 2008, and sales at our Chinese operation, on a local currency basis, were down 64.0% during the same period, primarily due to declines in the construction and agriculture markets served by those facilities.

Cost of Sales. Cost of sales was $32.3 million during the first quarter of 2009, a decrease of $16.1 million, or 33.3%, compared to cost of sales of $48.4 million in the first quarter of 2008. The primary drivers of the reduction in our cost of sales in the first quarter of 2009 were decreased sales and production volumes through all of our manufacturing facilities, which represented approximately 24.8 percentage points of the total cost of sales decrease. Additionally, product mix represented 6.0 percentage points of the total decrease of 33.3% during the quarter. The effect of foreign currency exchange rates accounted for 2.5 percentage points of our total cost of sales decrease of 33.3% during the first quarter of 2009. As a percent of sales, our cost of sales represented 72.9% of our net sales in the first quarter of 2009 compared to 73.6% of net sales in the first quarter of 2008. The improvement in our cost of sales percentage was driven by labor reductions and a benefit from product mix partially offset by the lower production volumes and the effect of foreign currency exchange rates on our cost of sales. During the first quarter of 2009, we reduced our global production workforce by approximately 20.0% from December 31, 2008 levels in response to production requirements.

Gross Profit. Gross profit was $12.0 million during the first quarter of 2009, a decrease of $5.4 million, or 31.0%, compared to gross profit of $17.4 million in the first quarter of 2008. Our gross profit margin improved to 27.1% of our net sales in the first quarter of 2009 compared to 26.4% of our net sales in the first quarter of 2008. The factors impacting the change in gross margin are detailed under Net Sales and Cost of Sales.

Selling, Technical and Administrative Expenses. Selling, technical and administrative (ST&A) expenses decreased $2.2 million, or 22.7%, to $7.5 million in the first quarter of 2009 from $9.7 million during the first quarter of 2008.
As a percentage of net sales, ST&A was 16.9% in the first quarter of 2009 compared to 14.7% in the first quarter of 2008. The decrease in ST&A expenses resulted primarily from a decrease in incentive compensation totaling approximately 11.1 percentage points of the 22.7% decrease in response to the lower levels of business activity during the quarter, compared to the first quarter of 2008. Additionally, sales and marketing expenses, down in response to lower demand represented 4.0 percentage points of the total 22.7%. We spent $1.2 million, or 2.7% of our net sales on product research and development in the first quarter of 2009, compared to $1.3 million or 2.0%, of our net sales for the first quarter of 2008.

Income from Operations. As a result of the factors discussed above, income from operations was $4.4 million in the first quarter of 2009, a decrease of $3.1 million or 41.3%, compared to $7.5 million during the first quarter of 2008.
Income from operations as a percentage of net sales decreased to 9.9% in the first quarter of 2009 from 11.4% in the same period of 2008 for the reasons discussed above. The effect of foreign currency exchange rates accounted for 5.3 percentage points of our total operating income decrease of 41.3% during the first quarter of 2009.

Interest Expense. Interest expense was flat at $2.0 million in both the first quarter of 2009 and 2008 as a result of fixed interest rates on our outstanding senior notes of $87.1 million.

Interest Income. We invested our excess cash in various short-term interest bearing investments. Interest income was $0.2 million in the first quarter of 2009 compared to $0.7 million during the first quarter of 2008. The decrease was primarily the result of lower invested cash balances during the period ended March 31, 2009 compared to the three months ended March 31, 2008. Additionally, effective interest rates on our investments have dropped significantly in the quarter ended March 31, 2009, compared to rates available to us in the quarter ended March 31, 2008.

Income Taxes. We recorded a tax provision for our continuing operations of $0.9 million for the quarter ended March 31, 2009, compared to $2.7 million in the comparable period of 2008. Our effective income tax rate of 37.0% in the first quarter of 2009 differs from the current federal U.S. statutory rate of 35.0%, primarily as a result of higher taxes in certain foreign jurisdictions, foreign withholding taxes on royalty income and the impact of non-deductible expenses on our U.S. taxes. Our worldwide provision for income taxes is based on projected annual tax rates for the year applied to all of our sources of income.

Discontinued Operations, Net of Tax. During the first quarter of 2008, we committed to a plan to divest our performance racing segment which operated two facilities in the United States. In May 2008, we sold our North Carolina facility and in December 2008, we sold our Illinois facility. The residual operating activity of our former discontinued operations is reflected in the following summary of results of our discontinued operations for the period ended March 31, 2009 and 2008.

                                                Three Months Ended March 31
                                                   2009           2008
                                                   (dollars in millions)
Net sales                                       $ -          $ 3.9
Loss from discontinued operations, before       $ -          $ (0.3)
income taxes
Fair value less costs to sell adjustment,       -            (0.8)
before income taxes
Income tax benefit                              -            (0.4)
Loss from discontinued operations, after        $ -          $ (0.7)
income taxes

Net Income. As a result of the factors noted above, we reported net income of $1.6 million in the first quarter of 2009, a decrease of $1.6 million, or 50.0% compared to net income of $3.2 million during the first quarter of 2008.

Liquidity, Capital Resources and Cash Flows

Current economic and market conditions have placed significant constraints on the ability of many companies to access capital in the debt and equity markets.
At this time, our access to capital resources that provide liquidity generally has not been materially affected by the current credit environment. Our cash position at March 31, 2009, coupled with our availability under our bank facilities, continue to be sufficient to support our operations, to pay interest on our indebtedness, and to fund anticipated capital expenditures. We believe that cash, cash equivalents, interest on and proceeds from short-term investments, cash flow from operating activities and borrowing availability under our bank facilities will be sufficient to satisfy our working capital, capital expenditures, debt requirements and to finance our internal growth needs for the next twelve months.

If market conditions continue to deteriorate, the cost or availability of future borrowings and the fees we pay under our current or future credit facilities may be affected. Current market conditions also raise increased concerns that our suppliers and subcontractors may find it difficult to access credit to support their operations. To date, we have not been materially adversely affected by subcontractor or supplier credit support difficulties.

The following selected measures of liquidity, capital resources and cash flows outline various metrics that are reviewed by our management and are provided to our shareholders to enhance the understanding of our business:

                                           Three months ended    Year Ended
LIQUIDITY                                    March 31, 2009   December 31, 2008    2006
                                                        (dollars in millions)
Cash and cash equivalents                   $ 46.9             $ 62.5            $ 6.2
Short-term investments                      $ 30.8             $ 30.8            $ -
Working capital (1)                         $ 116.5            $ 126.0           $ 115.8
Current ratio (2)                                  5.0 to 1.0        3.4 to 1.0  3.0 to 1
Net debt as a % of capitalization (3) (4)                0.1%                 -        0.7%
Average number of days sales in accounts
receivable                                            42 days           52 days     61 days
Average number of days sales in inventory             74 days           78 days     81 days

                                                     Three months ended March 31
CASH FLOWS                                        2009              2008           2006
                                                                                 $ (1.0)
Cash used in operating activities of
continuing operations                       $ (7.6)            $ (8.0)                (6.3)
Cash used in investing activities of
continuing operations                                 (280.0)           (120.0)       (5.3)
Cash used in financing activities of
continuing operations                                 (430.0)            (30.0)        0.5
Effect of exchange rates on cash                       (90.0)             40.0        11.5
. . .