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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2005



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 1-12380



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AVIALL, INC.

(Exact name of registrant as specified in its charter)



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|                                |  |                    
|------------------------------- |  | -------------------
|Delaware                        |  | 65-0433083         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|2750 Regent Boulevard                    |  |           
|DFW Airport, Texas                       |  | 75261-9048
|(Address of principal executive offices) |  | (Zip Code)



(972) 586-1000

(Registrants telephone number, including area code)



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Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No ̈



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



The number of shares of common stock, par value $0.01 per share, outstanding at
October 24, 2005 was 34,078,586.



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PART 1  FINANCIAL INFORMATION



Item 1: Financial Statements



AVIALL, INC.

CONSOLIDATED STATEMENTS
OF OPERATIONS

(Dollars in Thousands, Except Share and Per Share Data)

(Unaudited)



|                                                               |  |                                 |            |                                |            |      |            |      |           
|-------------------------------------------------------------- |  | ------------------------------- | ---------- | ------------------------------ | ---------- | ---- | ---------- | ---- | ----------
|                                                               |  | Three Months EndedSeptember 30, |            | Nine Months EndedSeptember 30,
|                                                               |  | 2005                            |            | 2004                           |            | 2005 |            | 2004
|Net sales                                                      |  | $                               | 333,741    |                                | 294,707    |      | 947,261    |      | 892,287   
|Cost of sales                                                  |  |                                 | 277,173    |                                | 247,772    |      | 777,097    |      | 748,110   
|                                                               |  |                                 |            |                                |            |      |            |      |           
|Gross profit                                                   |  |                                 | 56,568     |                                | 46,935     |      | 170,164    |      | 144,177   
|Selling and administrative expense                             |  |                                 | 31,070     |                                | 28,784     |      | 90,605     |      | 86,036    
|                                                               |  |                                 |            |                                |            |      |            |      |           
|Operating income                                               |  |                                 | 25,498     |                                | 18,151     |      | 79,559     |      | 58,141    
|Interest expense, net                                          |  |                                 | 5,277      |                                | 4,169      |      | 15,642     |      | 12,721    
|                                                               |  |                                 |            |                                |            |      |            |      |           
|Earnings before income taxes                                   |  |                                 | 20,221     |                                | 13,982     |      | 63,917     |      | 45,420    
|Provision for income taxes                                     |  |                                 | 5,959      |                                | 3,961      |      | 21,284     |      | 11,957    
|                                                               |  |                                 |            |                                |            |      |            |      |           
|Net earnings                                                   |  | $                               | 14,262     |                                | 10,021     |      | 42,633     |      | 33,463    
|                                                               |  |                                 |            |                                |            |      |            |      |           
|Basic net earnings per share                                   |  | $                               | 0.42       |                                | 0.31       |      | 1.28       |      | 1.05      
|Weighted average common shares                                 |  |                                 | 33,754,488 |                                | 32,105,401 |      | 33,346,225 |      | 31,913,426
|                                                               |  |                                 |            |                                |            |      |            |      |           
|Diluted net earnings per share                                 |  | $                               | 0.41       |                                | 0.30       |      | 1.22       |      | 1.00      
|Weighted average common and potentially dilutive common shares |  |                                 | 35,141,449 |                                | 33,820,849 |      | 34,900,831 |      | 33,516,655
|                                                               |  |                                 |            |                                |            |      |            |      |           



See accompanying notes to
consolidated financial statements.



2



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AVIALL, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share and Per Share Data)

(Unaudited)



|                                                                                                                                                                                 |  |                    |         |   |                   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | ------- | -
|                                                                                                                                                                                 |  | September 30, 2005 |         |   | December 31, 2004 |        
|                                                                                                                                                                                 |  |                   
|Assets                                                                                                                                                                           |  |                    |         |   |                   |         |  
|Current assets:                                                                                                                                                                  |  |                    |         |   |                   |         |  
|Cash and cash equivalents                                                                                                                                                        |  | $                  | 5,978   |   |                   | 91,632  |  
|Receivables, net                                                                                                                                                                 |  |                    | 177,097 |   |                   | 144,087 |  
|Inventories                                                                                                                                                                      |  |                    | 352,643 |   |                   | 328,129 |  
|Prepaid expenses and other current assets                                                                                                                                        |  |                    | 3,970   |   |                   | 2,953   |  
|Deferred income taxes                                                                                                                                                            |  |                    | 22,118  |   |                   | 40,432  |  
|                                                                                                                                                                                 |  |                    |         |   |                   |         |  
|Total current assets                                                                                                                                                             |  |                    | 561,806 |   |                   | 607,233 |  
|                                                                                                                                                                                 |  |                    |         |   |                   |         |  
|                                                                                                                                                                                 |  |                   
|Property and equipment, net                                                                                                                                                      |  |                    | 35,032  |   |                   | 33,929  |  
|Goodwill                                                                                                                                                                         |  |                    | 46,843  |   |                   | 46,843  |  
|Intangible assets                                                                                                                                                                |  |                    | 197,249 |   |                   | 46,525  |  
|Deferred income taxes                                                                                                                                                            |  |                    | 3,223   |   |                   | 3,229   |  
|Other assets                                                                                                                                                                     |  |                    | 11,881  |   |                   | 11,717  |  
|                                                                                                                                                                                 |  |                    |         |   |                   |         |  
|Total assets                                                                                                                                                                     |  | $                  | 856,034 |   |                   | 749,476 |  
|                                                                                                                                                                                 |  |                    |         |   |                   |         |  
|                                                                                                                                                                                 |  |                   
|Liabilities and Shareholders Equity                                                                                                                                             |  |                    |         |   |                   |         |  
|Current liabilities:                                                                                                                                                             |  |                    |         |   |                   |         |  
|Current portion of long-term debt                                                                                                                                                |  | $                  | 1,051   |   |                   | 1,440   |  
|Revolving line of credit                                                                                                                                                         |  |                    | 43,052  |   |                   |        |  
|Cash overdrafts due to outstanding checks                                                                                                                                        |  |                    | 34,962  |   |                   | 43,023  |  
|Accounts payable                                                                                                                                                                 |  |                    | 123,839 |   |                   | 98,629  |  
|Accrued expenses                                                                                                                                                                 |  |                    | 40,132  |   |                   | 46,741  |  
|                                                                                                                                                                                 |  |                    |         |   |                   |         |  
|Total current liabilities                                                                                                                                                        |  |                    | 243,036 |   |                   | 189,833 |  
|                                                                                                                                                                                 |  |                    |         |   |                   |         |  
|Long-term debt                                                                                                                                                                   |  |                    | 200,458 |   |                   | 201,990 |  
|Other liabilities                                                                                                                                                                |  |                    | 6,751   |   |                   | 8,652   |  
|Commitments and contingencies                                                                                                                                                    |  |                    |        |   |                   |        |  
|Shareholders equity:                                                                                                                                                            |  |                    |         |   |                   |         |  
|Common stock ($0.01 par value per share, 80,000,000 shares authorized; 36,128,997 shares and 34,582,746 shares issued at September 30,
2005 and December 31, 2004, respectively) |  |                    | 361     |   |                   | 346     |  
|Additional paid-in capital                                                                                                                                                       |  |                    | 460,939 |   |                   | 447,060 |  
|Accumulated deficit                                                                                                                                                              |  |                    | (19,497 | ) |                   | (62,130 | )
|Treasury stock, at cost (2,050,411 shares and 2,035,124 shares at September 30, 2005 and December 31, 2004,
respectively)                                                        |  |                    | (28,589 | ) |                   | (28,218 | )
|Unearned compensation - restricted stock                                                                                                                                         |  |                    | (1,047  | ) |                   | (1,679  | )
|Accumulated other comprehensive loss                                                                                                                                             |  |                    | (6,378  | ) |                   | (6,378  | )
|                                                                                                                                                                                 |  |                    |         |   |                   |         |  
|Total shareholders equity                                                                                                                                                       |  |                    | 405,789 |   |                   | 349,001 |  
|                                                                                                                                                                                 |  |                    |         |   |                   |         |  
|Total liabilities and shareholders equity                                                                                                                                       |  | $                  | 856,034 |   |                   | 749,476 |  
|                                                                                                                                                                                 |  |                    |         |   |                   |         |  



See accompanying
notes to consolidated financial statements.



3



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AVIALL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)



|                                                     |  |                                |          |   |      |         |  
|---------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | ------- | -
|                                                     |  | Nine Months EndedSeptember 30, |         
|                                                     |  | 2005                           |          |   | 2004 |        
|Operating activities:                                |  |                                |          |   |      |         |  
|Net earnings                                         |  | $                              | 42,633   |   |      | 33,463  |  
|Depreciation and amortization                        |  |                                | 18,764   |   |      | 13,200  |  
|Deferred income taxes                                |  |                                | 18,383   |   |      | 9,702   |  
|Compensation expense on restricted stock awards      |  |                                | 632      |   |      | 510     |  
|Changes in:                                          |  |                                |          |   |      |         |  
|Receivables, net                                     |  |                                | (33,010  | ) |      | (15,863 | )
|Inventories                                          |  |                                | (24,514  | ) |      | 33,751  |  
|Accounts payable                                     |  |                                | 25,210   |   |      | 10,440  |  
|Accrued expenses                                     |  |                                | (5,981   | ) |      | (735    | )
|Other, net                                           |  |                                | (3,638   | ) |      | 982     |  
|                                                     |  |                                |          |   |      |         |  
|Net cash provided by operating activities            |  |                                | 38,479   |   |      | 85,450  |  
|                                                     |  |                                |          |   |      |         |  
|Investing activities:                                |  |                                |          |   |      |         |  
|Purchase of distribution rights                      |  |                                | (160,878 | ) |      | (1,339  | )
|Capital expenditures                                 |  |                                | (8,077   | ) |      | (6,866  | )
|Sales of property, plant and equipment               |  |                                | 377      |   |      | 113     |  
|                                                     |  |                                |          |   |      |         |  
|Net cash used for investing activities               |  |                                | (168,578 | ) |      | (8,092  | )
|                                                     |  |                                |          |   |      |         |  
|Financing activities:                                |  |                                |          |   |      |         |  
|Net change in revolving credit facility              |  |                                | 43,052   |   |      | (509    | )
|Issuance of common stock                             |  |                                | 13,098   |   |      | 4,069   |  
|Cash overdrafts due to outstanding checks            |  |                                | (8,061   | ) |      | (36,539 | )
|Debt issuance cost paid                              |  |                                | (1,898   | ) |      | (752    | )
|Debt repaid                                          |  |                                | (1,437   | ) |      | (2,671  | )
|Purchase of treasury stock                           |  |                                | (371     | ) |      | (351    | )
|Debt proceeds                                        |  |                                | 62       |   |      |        |  
|                                                     |  |                                |          |   |      |         |  
|Net cash provided by (used for) financing activities |  |                                | 44,445   |   |      | (36,753 | )
|                                                     |  |                                |          |   |      |         |  
|Change in cash and cash equivalents                  |  |                                | (85,654  | ) |      | 40,605  |  
|Cash and cash equivalents, beginning of period       |  |                                | 91,632   |   |      | 23,424  |  
|                                                     |  |                                |          |   |      |         |  
|Cash and cash equivalents, end of period             |  | $                              | 5,978    |   |      | 64,029  |  
|                                                     |  |                                |          |   |      |         |  
|                                                     |  |                               
|Cash paid for interest and income taxes:             |  |                                |          |   |      |         |  
|Interest                                             |  | $                              | 17,374   |   |      | 7,831   |  
|Income taxes                                         |  | $                              | 3,029    |   |      | 1,420   |  
|                                                     |  |                               
|Noncash investing and financing activities:          |  |                                |          |   |      |         |  
|Property and equipment acquired with debt            |  | $                              | 413      |   |      | 121     |  



See accompanying notes to
consolidated financial statements.



4



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AVIALL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - BASIS OF PRESENTATION



The
accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair statement of the results for the interim periods have been included. Operating results for the three- and nine-month periods ended September 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004.



NOTE 2 - STOCK-BASED COMPENSATION



We account for our stock-based compensation plans in accordance with the
recognition and measurement principles of Accounting Principles Board Opinion No. 25, or APB 25, Accounting for Stock Issued to Employees, and related interpretations. All options granted under our plans have an exercise price equal
to the market value of the underlying common stock on the date of grant. Therefore, no compensation cost related to these option grants is included in net earnings. We also make the appropriate disclosures as required by Statement of Financial
Accounting Standards No. 123, or SFAS 123, Accounting for Stock-Based Compensation, and Statement of Financial Accounting Standards No. 148, or SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure
- an Amendment of FAS 123. Awards of restricted stock are valued at the market price of our common stock on the date of grant and recorded as unearned compensation within shareholders equity. The unearned compensation is amortized to
compensation expense over the vesting period of the restricted stock.



The following table illustrates the effect on net earnings and earnings per share, or EPS, if we had applied the fair-value recognition provisions of SFAS 123 to stock-based employee compensation:



|                                                                                                                                   |  |                                 |        |   |                                |        |   |      |        |   |      |        |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | ------ | - | ---- | ------ | - | ---- | ------ | -
|                                                                                                                                   |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |       
|(In Thousands, Except Per Share Data)                                                                                              |  | 2005                            |        |   | 2004                           |        |   | 2005 |        |   | 2004 |       
|Net earnings, as reported                                                                                                          |  | $                               | 14,262 |   |                                | 10,021 |   |      | 42,633 |   |      | 33,463 |  
|Deduct: Total stock-based compensation expense determined under fair-value-based method for all awards, net of related tax
effects |  |                                 | (589   | ) |                                | (478   | ) |      | (1,761 | ) |      | (1,379 | )
|                                                                                                                                   |  |                                 |        |   |                                |        |   |      |        |   |      |        |  
|Pro forma net earnings for purposes of computing basic net EPS                                                                     |  | $                               | 13,673 |   |                                | 9,543  |   |      | 40,872 |   |      | 32,084 |  
|                                                                                                                                   |  |                                 |        |   |                                |        |   |      |        |   |      |        |  
|Earnings per share:                                                                                                                |  |                                 |        |   |                                |        |   |      |        |   |      |        |  
|Basic - as reported                                                                                                                |  | $                               | 0.42   |   |                                | 0.31   |   |      | 1.28   |   |      | 1.05   |  
|Basic - pro forma                                                                                                                  |  | $                               | 0.41   |   |                                | 0.30   |   |      | 1.23   |   |      | 1.01   |  
|Diluted - as reported                                                                                                              |  | $                               | 0.41   |   |                                | 0.30   |   |      | 1.22   |   |      | 1.00   |  
|Diluted - pro forma                                                                                                                |  | $                               | 0.39   |   |                                | 0.28   |   |      | 1.17   |   |      | 0.95   |  



5



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NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS



In June 2005, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards
No. 154, or SFAS 154, Accounting Changes and Error Corrections - a replacement of APB No. 20 and FAS No. 3. SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period
financial statements presented on the basis of the new accounting principle. SFAS 154 also requires that a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for prospectively as a change in estimate, and
correction of errors in previously issued financial statements should be termed a restatement. SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. We will adopt SFAS 154
effective January 1, 2006 and expect no material impact on our consolidated financial statements as a result of the adoption.



In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), or SFAS 123R, Share-Based Payment,
which replaces Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FAS 123. SFAS 123R addresses the accounting for share-based payment transactions in which a
company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the companys equity instruments or that may be settled by the issuance of such equity instruments.
SFAS 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123R eliminates the ability to account for share-based
compensation transactions using the intrinsic method and generally would require that such transactions be accounted for using a fair-value-based method and recognized as expense over the period during which an employee is required to provide
services in exchange for the award. SFAS 123R is effective for annual periods beginning after June 15, 2005. As such, we will implement the provisions of SFAS 123R effective January 1, 2006. Although we have not completed evaluating the
impact the adoption of SFAS 123R will have on our future results of operations, we are currently evaluating alternatives to our unvested stock options which could result in a range of compensation expense in future periods from an immaterial amount
to an amount similar to that in our pro forma disclosures for SFAS 123R detailed in Note 2. In addition, we are currently evaluating replacing annual stock option grants with another form of incentive award and cannot currently estimate the impact
on compensation expense in 2006 or beyond.



NOTE 4 - SEGMENT INFORMATION



The following tables present information by operating
segment (in thousands):



|                             |  |                                 |         |   |                                |         |   |      |         |   |      |         |  
|---------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | ------- | - | ---- | ------- | - | ---- | ------- | -
|                             |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |        
|                             |  | 2005                            |         |   | 2004                           |         |   | 2005 |         |   | 2004 |        
|Net Sales                    |  |                                 |         |   |                                |         |   |      |         |   |      |         |  
|Aviall Services              |  | $                               | 326,275 |   |                                | 287,592 |   |      | 924,928 |   |      | 870,886 |  
|ILS                          |  |                                 | 7,466   |   |                                | 7,115   |   |      | 22,333  |   |      | 21,401  |  
|                             |  |                                 |         |   |                                |         |   |      |         |   |      |         |  
|Total net sales              |  | $                               | 333,741 |   |                                | 294,707 |   |      | 947,261 |   |      | 892,287 |  
|                             |  |                                 |         |   |                                |         |   |      |         |   |      |         |  
|                             |  |                                 |         |  
|Profit                       |  |                                 |         |   |                                |         |   |      |         |   |      |         |  
|Aviall Services              |  | $                               | 26,730  |   |                                | 19,415  |   |      | 84,364  |   |      | 62,020  |  
|ILS                          |  |                                 | 2,788   |   |                                | 2,475   |   |      | 8,264   |   |      | 7,726   |  
|                             |  |                                 |         |   |                                |         |   |      |         |   |      |         |  
|Reportable segment profit    |  |                                 | 29,518  |   |                                | 21,890  |   |      | 92,628  |   |      | 69,746  |  
|Corporate                    |  |                                 | (4,020  | ) |                                | (3,739  | ) |      | (13,069 | ) |      | (11,605 | )
|Interest expense, net        |  |                                 | (5,277  | ) |                                | (4,169  | ) |      | (15,642 | ) |      | (12,721 | )
|                             |  |                                 |         |   |                                |         |   |      |         |   |      |         |  
|Earnings before income taxes |  | $                               | 20,221  |   |                                | 13,982  |   |      | 63,917  |   |      | 45,420  |  
|                             |  |                                 |         |   |                                |         |   |      |         |   |      |         |  



6



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NOTE 5 - EARNINGS PER SHARE



A reconciliation of the denominator of the basic and diluted EPS calculations for net earnings follows:



|                                                             |  |                                 |  |                                |  |            |  |           
|------------------------------------------------------------ |  | ------------------------------- |  | ------------------------------ |  | ---------- |  | ----------
|                                                             |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                                                             |  | 2005                            |  | 2004                           |  | 2005       |  | 2004      
|Denominator                                                  |  |                                 |  |                                |  |            |  |           
|Weighted average common shares                               |  | 33,754,488                      |  | 32,105,401                     |  | 33,346,225 |  | 31,913,426
|Effect of dilutive securities:                               |  |                                 |  |                                |  |            |  |           
|Stock options                                                |  | 873,822                         |  | 1,134,910                      |  | 1,045,422  |  | 1,025,573 
|Restricted stock rights                                      |  | 250,717                         |  | 318,170                        |  | 246,772    |  | 315,308   
|Warrants                                                     |  | 262,422                         |  | 262,368                        |  | 262,412    |  | 262,348   
|                                                             |  |                                 |  |                                |  |            |  |           
|Weighted average common and dilutive potential common shares |  | 35,141,449                      |  | 33,820,849                     |  | 34,900,831 |  | 33,516,655
|                                                             |  |                                 |  |                                |  |            |  |           



Basic EPS is computed
by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net earnings by the weighted average number of common and dilutive potential common shares outstanding during
the period.



NOTE 6 - INCOME TAXES



Our income tax expense for the first nine months of 2005 was $21.3 million,
and our effective tax rate was 33.3%. Our income tax expense for the first nine months of 2004 was $12.0 million, and our effective tax rate was 26.3%. The increase in our effective tax rate from 26.3% in 2004 to 33.3% in 2005 is primarily due to
the release in the first nine months of 2004 of a $2.8 million valuation allowance for state tax net operating loss, or NOL, carryforwards. Without the release of these state tax NOL carryforwards, our provision for taxes for the nine month period
ended September 30, 2004 would have been $14.8 million, and our effective tax rate would have been 32.5%.



NOTE 7 - INTANGIBLE ASSETS



In January 2005, we entered into a distribution agreement with GE Engine Services Distribution LLC and General Electric, or GE, whereby GE has appointed us as the exclusive worldwide distributor of unique parts for the GE CF6-50 and
CF6-80A, or CF6 engines, for as long as these engines remain in service. As a result of the GE CF6 agreement, we paid $157.0 million for distribution rights which will be amortized over the estimated life of the engines.



In April 2005, we entered into two distribution agreements with Hamilton
Sundstrand which give us exclusive distribution rights for Hamilton Sundstrand-built spare parts that are unique to the 60kVA family of generators, the JT8D mechanical fuel controls and the JT9D engine accessories. We paid approximately $3.8 million
for these distribution rights which will be amortized over the ten-year terms of these agreements.



NOTE 8 - DEBT



On
January 28, 2005, we entered into an amendment to our senior secured credit facility, or the Credit Facility, to increase the facility size, restructure the borrowing base, extend the termination date and change certain financial ratios and
covenants. As of September 30, 2005, our amended Credit Facility consists of a $260.0 million revolving credit and letter of credit facility due as a balloon payment in 2008. As of September 30, 2005, we had $43.1 million of borrowings
outstanding under the Credit Facility.



NOTE 9 - PENSION PLANS AND
POSTRETIREMENT BENEFITS



The following table sets forth
the components of net pension expense for all our plans:



|                                   |  |                                 |        |   |                                |      |   |      |        |   |      |        |  
|---------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | ---- | - | ---- | ------ | - | ---- | ------ | -
|                                   |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |     
|(In Thousands)                     |  | 2005                            |        |   | 2004                           |      |   | 2005 |        |   | 2004 |       
|Service cost                       |  | $                               | 736    |   |                                | 615  |   |      | 2,208  |   |      | 1,845  |  
|Interest cost                      |  |                                 | 1,028  |   |                                | 969  |   |      | 3,084  |   |      | 2,907  |  
|Expected return on plan assets     |  |                                 | (1,087 | ) |                                | (963 | ) |      | (3,260 | ) |      | (2,889 | )
|Transition obligation amortization |  |                                 | 35     |   |                                | 35   |   |      | 103    |   |      | 105    |  
|Prior service cost amortization    |  |                                 | 1      |   |                                | 1    |   |      | 3      |   |      | 3      |  
|Net loss recognition               |  |                                 | 297    |   |                                | 117  |   |      | 891    |   |      | 351    |  
|                                   |  |                                 |        |   |                                |      |   |      |        |   |      |        |  
|Net pension expense                |  | $                               | 1,010  |   |                                | 774  |   |      | 3,029  |   |      | 2,322  |  
|                                   |  |                                 |        |   |                                |      |   |      |        |   |      |        |  



7



---

The following table sets forth the components of net postretirement benefit income for all our plans:



|                                  |  |                               |     |   |                                |     |   |      |      |   |      |      |  
|--------------------------------- |  | ----------------------------- | --- | - | ------------------------------ | --- | - | ---- | ---- | - | ---- | ---- | -
|                                  |  | ThreeMonthsEndedSeptember 30, |     |   | Nine Months EndedSeptember 30, |    
|(In Thousands)                    |  | 2005                          |     |   | 2004                           |     |   | 2005 |      |   | 2004 |     
|Service cost                      |  | $                             |    |   |                                |    |   |      |     |   |      |     |  
|Interest cost                     |  |                               | 17  |   |                                | 23  |   |      | 52   |   |      | 68   |  
|Net amortization and deferral     |  |                               | (36 | ) |                                | (33 | ) |      | (107 | ) |      | (100 | )
|                                  |  |                               |     |   |                                |     |   |      |      |   |      |      |  
|Net postretirement benefit income |  | $                             | (19 | ) |                                | (10 | ) |      | (55  | ) |      | (32  | )
|                                  |  |                               |     |   |                                |     |   |      |      |   |      |      |  



In the third quarter
of 2005, we made a $6.0 million discretionary pension contribution related to 2004.



NOTE 10 - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS



Our senior unsecured notes, or the Senior Notes, are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by each direct and indirect domestic subsidiary of Aviall, Inc., or
Aviall, each a guarantor subsidiary. Each guarantor subsidiary is directly or indirectly 100% owned by Aviall. The Senior Notes are not guaranteed by any direct or indirect foreign subsidiary of Aviall, each a nonguarantor subsidiary.



The unaudited consolidating financial information presents the consolidating
balance sheets as of September 30, 2005 and December 31, 2004, the related statements of operations for the three- and nine-month periods ended September 30, 2005 and 2004 and the statements of cash flows for the nine month periods
ended September 30, 2005 and 2004 with separate columns for:



a) Aviall, the parent;



b) the guarantor subsidiaries on a combined basis;



c) the nonguarantor subsidiaries on a combined basis; and



d) total consolidated amounts.



The information includes elimination entries necessary to consolidate Aviall, the parent, with the guarantor and nonguarantor subsidiaries.



Investments in subsidiaries are accounted for by the parent using the equity
method of accounting. The guarantor and nonguarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Separate financial statements
for the guarantor and nonguarantor subsidiaries are not presented because management believes such financial statements would not be meaningful to investors.



Pursuant to the terms of the Credit Facility, no subsidiary of Aviall other than Aviall Services, Inc., or Aviall Services, may pay cash dividends to
Aviall, other than to fund limited repurchases or redemptions of outstanding securities. In addition, Aviall Services may pay cash dividends to Aviall for the purpose of funding (i) ordinary operating expenses and scheduled debt service,
(ii) payments by Aviall of taxes in respect of Aviall and its subsidiaries, up to the amount that would be payable by Aviall Services, on a consolidated basis, if it were the taxpayer and (iii) any repurchase of the Senior Notes permitted
under the terms of the Credit Facility. Additionally, the Credit Facility restricts intercompany loans made to Aviall from its direct and indirect subsidiaries, with the exception of intercompany loans made to fund limited repurchases or redemptions
of outstanding securities and loans made by Aviall Services to fund required payments under the Senior Notes. The net assets of consolidating subsidiaries subject to these restrictions were $722.4 million and $714.8 million at September 30,
2005 and December 31, 2004, respectively.



8



---

CONSOLIDATED STATEMENT OF OPERATIONS



|                                          |  |                                       |         |   |                       |         |   |                          |        |              |         |   |                   |        
|----------------------------------------- |  | ------------------------------------- | ------- | - | --------------------- | ------- | - | ------------------------ | ------ | ------------ | ------- | - | ----------------- | -------
|                                          |  | Three Months Ended September 30, 2005
|(In Thousands)                            |  | Parent                                |         |   | GuarantorSubsidiaries |         |   | NonguarantorSubsidiaries |        | Eliminations |         |   | ConsolidatedTotal
|Net sales                                 |  | $                                     |        |   |                       | 314,789 |   |                          | 42,166 |              | (23,214 | ) |                   | 333,741
|Cost of sales                             |  |                                       |        |   |                       | 265,026 |   |                          | 35,361 |              | (23,214 | ) |                   | 277,173
|                                          |  |                                       |         |   |                       |         |   |                          |        |              |         |   |                   |        
|Gross profit                              |  |                                       |        |   |                       | 49,763  |   |                          | 6,805  |              |        |   |                   | 56,568 
|Selling and administrative expense        |  |                                       |        |   |                       | 27,125  |   |                          | 3,945  |              |        |   |                   | 31,070 
|                                          |  |                                       |         |   |                       |         |   |                          |        |              |         |   |                   |        
|Operating income                          |  |                                       |        |   |                       | 22,638  |   |                          | 2,860  |              |        |   |                   | 25,498 
|Interest expense (income)                 |  |                                       | (4,856  | ) |                       | 10,069  |   |                          | 64     |              |        |   |                   | 5,277  
|Equity in (earnings) loss of subsidiaries |  |                                       | (11,163 | ) |                       | (2,075  | ) |                          |       |              | 13,238  |   |                   |       
|                                          |  |                                       |         |   |                       |         |   |                          |        |              |         |   |                   |        
|Earnings (loss) before income taxes       |  |                                       | 16,019  |   |                       | 14,644  |   |                          | 2,796  |              | (13,238 | ) |                   | 20,221 
|Provision for income taxes                |  |                                       | 1,757   |   |                       | 3,481   |   |                          | 721    |              |        |   |                   | 5,959  
|                                          |  |                                       |         |   |                       |         |   |                          |        |              |         |   |                   |        
|Net earnings (loss)                       |  | $                                     | 14,262  |   |                       | 11,163  |   |                          | 2,075  |              | (13,238 | ) |                   | 14,262 
|                                          |  |                                       |         |   |                       |         |   |                          |        |              |         |   |                   |        



CONSOLIDATED STATEMENT OF
OPERATIONS



|                                          |  |                                      |         |   |                       |         |   |                          |         |              |         |   |                   |        
|----------------------------------------- |  | ------------------------------------ | ------- | - | --------------------- | ------- | - | ------------------------ | ------- | ------------ | ------- | - | ----------------- | -------
|                                          |  | Nine Months Ended September 30, 2005
|(In Thousands)                            |  | Parent                               |         |   | GuarantorSubsidiaries |         |   | NonguarantorSubsidiaries |         | Eliminations |         |   | ConsolidatedTotal
|Net sales                                 |  | $                                    |        |   |                       | 889,363 |   |                          | 114,739 |              | (56,841 | ) |                   | 947,261
|Cost of sales                             |  |                                      |        |   |                       | 739,073 |   |                          | 94,865  |              | (56,841 | ) |                   | 777,097
|                                          |  |                                      |         |   |                       |         |   |                          |         |              |         |   |                   |        
|Gross profit                              |  |                                      |        |   |                       | 150,290 |   |                          | 19,874  |              |        |   |                   | 170,164
|Selling and administrative expense        |  |                                      |        |   |                       | 77,945  |   |                          | 12,660  |              |        |   |                   | 90,605 
|                                          |  |                                      |         |   |                       |         |   |                          |         |              |         |   |                   |        
|Operating income                          |  |                                      |        |   |                       | 72,345  |   |                          | 7,214   |              |        |   |                   | 79,559 
|Interest expense (income)                 |  |                                      | (14,146 | ) |                       | 29,561  |   |                          | 227     |              |        |   |                   | 15,642 
|Equity in (earnings) loss of subsidiaries |  |                                      | (33,609 | ) |                       | (5,158  | ) |                          |        |              | 38,767  |   |                   |       
|                                          |  |                                      |         |   |                       |         |   |                          |         |              |         |   |                   |        
|Earnings (loss) before income taxes       |  |                                      | 47,755  |   |                       | 47,942  |   |                          | 6,987   |              | (38,767 | ) |                   | 63,917 
|Provision for income taxes                |  |                                      | 5,122   |   |                       | 14,333  |   |                          | 1,829   |              |        |   |                   | 21,284 
|                                          |  |                                      |         |   |                       |         |   |                          |         |              |         |   |                   |        
|Net earnings (loss)                       |  | $                                    | 42,633  |   |                       | 33,609  |   |                          | 5,158   |              | (38,767 | ) |                   | 42,633 
|                                          |  |                                      |         |   |                       |         |   |                          |         |              |         |   |                   |        



9



---

CONSOLIDATED STATEMENT OF OPERATIONS



|                                          |  |                                       |        |   |                       |         |   |                          |        |              |         |   |                   |        
|----------------------------------------- |  | ------------------------------------- | ------ | - | --------------------- | ------- | - | ------------------------ | ------ | ------------ | ------- | - | ----------------- | -------
|                                          |  | Three Months Ended September 30, 2004
|(In Thousands)                            |  | Parent                                |        |   | GuarantorSubsidiaries |         |   | NonguarantorSubsidiaries |        | Eliminations |         |   | ConsolidatedTotal
|Net sales                                 |  | $                                     |       |   |                       | 276,726 |   |                          | 34,143 |              | (16,162 | ) |                   | 294,707
|Cost of sales                             |  |                                       |       |   |                       | 236,308 |   |                          | 27,626 |              | (16,162 | ) |                   | 247,772
|                                          |  |                                       |        |   |                       |         |   |                          |        |              |         |   |                   |        
|Gross profit                              |  |                                       |       |   |                       | 40,418  |   |                          | 6,517  |              |        |   |                   | 46,935 
|Selling and administrative expense        |  |                                       |       |   |                       | 26,655  |   |                          | 2,129  |              |        |   |                   | 28,784 
|                                          |  |                                       |        |   |                       |         |   |                          |        |              |         |   |                   |        
|Operating income                          |  |                                       |       |   |                       | 13,763  |   |                          | 4,388  |              |        |   |                   | 18,151 
|Interest expense (income)                 |  |                                       | (4,442 | ) |                       | 8,587   |   |                          | 24     |              |        |   |                   | 4,169  
|Equity in (earnings) loss of subsidiaries |  |                                       | (7,187 | ) |                       | (3,171  | ) |                          |       |              | 10,358  |   |                   |       
|                                          |  |                                       |        |   |                       |         |   |                          |        |              |         |   |                   |        
|Earnings (loss) before income taxes       |  |                                       | 11,629 |   |                       | 8,347   |   |                          | 4,364  |              | (10,358 | ) |                   | 13,982 
|Provision for income taxes                |  |                                       | 1,608  |   |                       | 1,160   |   |                          | 1,193  |              |        |   |                   | 3,961  
|                                          |  |                                       |        |   |                       |         |   |                          |        |              |         |   |                   |        
|Net earnings (loss)                       |  | $                                     | 10,021 |   |                       | 7,187   |   |                          | 3,171  |              | (10,358 | ) |                   | 10,021 
|                                          |  |                                       |        |   |                       |         |   |                          |        |              |         |   |                   |        



CONSOLIDATED STATEMENT OF
OPERATIONS



|                                          |  |                                      |         |   |                       |         |   |                          |        |              |         |   |                   |        
|----------------------------------------- |  | ------------------------------------ | ------- | - | --------------------- | ------- | - | ------------------------ | ------ | ------------ | ------- | - | ----------------- | -------
|                                          |  | Nine Months Ended September 30, 2004
|(In Thousands)                            |  | Parent                               |         |   | GuarantorSubsidiaries |         |   | NonguarantorSubsidiaries |        | Eliminations |         |   | ConsolidatedTotal
|Net sales                                 |  | $                                    |        |   |                       | 841,148 |   |                          | 98,572 |              | (47,433 | ) |                   | 892,287
|Cost of sales                             |  |                                      |        |   |                       | 715,841 |   |                          | 79,702 |              | (47,433 | ) |                   | 748,110
|                                          |  |                                      |         |   |                       |         |   |                          |        |              |         |   |                   |        
|Gross profit                              |  |                                      |        |   |                       | 125,307 |   |                          | 18,870 |              |        |   |                   | 144,177
|Selling and administrative expense        |  |                                      |        |   |                       | 76,582  |   |                          | 9,454  |              |        |   |                   | 86,036 
|                                          |  |                                      |         |   |                       |         |   |                          |        |              |         |   |                   |        
|Operating income                          |  |                                      |        |   |                       | 48,725  |   |                          | 9,416  |              |        |   |                   | 58,141 
|Interest expense (income)                 |  |                                      | (12,931 | ) |                       | 25,470  |   |                          | 182    |              |        |   |                   | 12,721 
|Equity in (earnings) loss of subsidiaries |  |                                      | (25,213 | ) |                       | (6,694  | ) |                          |       |              | 31,907  |   |                   |       
|                                          |  |                                      |         |   |                       |         |   |                          |        |              |         |   |                   |        
|Earnings (loss) before income taxes       |  |                                      | 38,144  |   |                       | 29,949  |   |                          | 9,234  |              | (31,907 | ) |                   | 45,420 
|Provision for income taxes                |  |                                      | 4,681   |   |                       | 4,736   |   |                          | 2,540  |              |        |   |                   | 11,957 
|                                          |  |                                      |         |   |                       |         |   |                          |        |              |         |   |                   |        
|Net earnings (loss)                       |  | $                                    | 33,463  |   |                       | 25,213  |   |                          | 6,694  |              | (31,907 | ) |                   | 33,463 
|                                          |  |                                      |         |   |                       |         |   |                          |        |              |         |   |                   |        



10



---

CONSOLIDATED BALANCE SHEET



|                                              |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|--------------------------------------------- |  | ------------------ | ------- | - | --------------------- | --------- | - | ------------------------ | ------ | ------------ | ---------- | - | ----------------- | ------- | -
|                                              |  | September 30, 2005 |        
|(In Thousands)                                |  | Parent             |         |   | GuarantorSubsidiaries |           |   | NonguarantorSubsidiaries |        | Eliminations |            |   | ConsolidatedTotal |        
|Assets                                        |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|Current assets:                               |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|Cash and cash equivalents                     |  | $                  | (74     | ) |                       | 2,140     |   |                          | 3,912  |              |           |   |                   | 5,978   |  
|Receivables, net                              |  |                    |        |   |                       | 148,599   |   |                          | 28,498 |              |           |   |                   | 177,097 |  
|Inventories                                   |  |                    |        |   |                       | 334,173   |   |                          | 18,470 |              |           |   |                   | 352,643 |  
|Prepaid expenses and other current assets     |  |                    |        |   |                       | 3,736     |   |                          | 234    |              |           |   |                   | 3,970   |  
|Deferred income taxes                         |  |                    |        |   |                       | 22,096    |   |                          | 22     |              |           |   |                   | 22,118  |  
|                                              |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|Total current assets                          |  |                    | (74     | ) |                       | 510,744   |   |                          | 51,136 |              |           |   |                   | 561,806 |  
|                                              |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|                                              |  |                    |         |   |                      
|Property and equipment, net                   |  |                    |        |   |                       | 34,254    |   |                          | 778    |              |           |   |                   | 35,032  |  
|Investment in subsidiaries                    |  |                    | 772,778 |   |                       | 39,442    |   |                          |       |              | (812,220   | ) |                   |        |  
|Intercompany receivables                      |  |                    |        |   |                       | 191,440   |   |                          |       |              | (191,440   | ) |                   |        |  
|Goodwill                                      |  |                    |        |   |                       | 44,904    |   |                          | 1,939  |              |           |   |                   | 46,843  |  
|Intangible assets                             |  |                    |        |   |                       | 197,249   |   |                          |       |              |           |   |                   | 197,249 |  
|Deferred income taxes                         |  |                    |        |   |                       | 2,816     |   |                          | 407    |              |           |   |                   | 3,223   |  
|Other assets                                  |  |                    | 5,749   |   |                       | 6,129     |   |                          | 3      |              |           |   |                   | 11,881  |  
|                                              |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|Total assets                                  |  | $                  | 778,453 |   |                       | 1,026,978 |   |                          | 54,263 |              | (1,003,660 | ) |                   | 856,034 |  
|                                              |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|                                              |  |                    |         |   |                      
|Liabilities and Shareholders Equity          |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|Current liabilities:                          |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|Current portion of long-term debt             |  | $                  |        |   |                       | 1,038     |   |                          | 13     |              |           |   |                   | 1,051   |  
|Revolving line of credit                      |  |                    |        |   |                       | 43,052    |   |                          |       |              |           |   |                   | 43,052  |  
|Cash overdrafts due to outstanding checks     |  |                    | 3       |   |                       | 34,908    |   |                          | 51     |              |           |   |                   | 34,962  |  
|Accounts payable                              |  |                    |        |   |                       | 122,956   |   |                          | 883    |              |           |   |                   | 123,839 |  
|Accrued expenses                              |  |                    | 4,541   |   |                       | 31,197    |   |                          | 4,394  |              |           |   |                   | 40,132  |  
|                                              |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|Total current liabilities                     |  |                    | 4,544   |   |                       | 233,151   |   |                          | 5,341  |              |           |   |                   | 243,036 |  
|                                              |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|                                              |  |                    |         |   |                      
|Long-term debt                                |  |                    | 200,000 |   |                       | 427       |   |                          | 31     |              |           |   |                   | 200,458 |  
|Intercompany payables                         |  |                    | 168,120 |   |                       |          |   |                          | 23,320 |              | (191,440   | ) |                   |        |  
|Other liabilities                             |  |                    |        |   |                       | 6,751     |   |                          |       |              |           |   |                   | 6,751   |  
|Commitments and contingencies                 |  |                    |        |   |                       |          |   |                          |       |              |           |   |                   |        |  
|Shareholders equity                          |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|Common stock                                  |  |                    | 361     |   |                       | 33        |   |                          | 7,542  |              | (7,575     | ) |                   | 361     |  
|Additional paid-in capital                    |  |                    | 460,939 |   |                       | 867,919   |   |                          | 9,919  |              | (877,838   | ) |                   | 460,939 |  
|Retained earnings (accumulated deficit)       |  |                    | (19,497 | ) |                       | (74,925   | ) |                          | 8,110  |              | 66,815     |   |                   | (19,497 | )
|Treasury stock, at cost                       |  |                    | (28,589 | ) |                       |          |   |                          |       |              |           |   |                   | (28,589 | )
|Unearned compensation - restricted stock      |  |                    | (1,047  | ) |                       |          |   |                          |       |              |           |   |                   | (1,047  | )
|Accumulated other comprehensive (loss) income |  |                    | (6,378  | ) |                       | (6,378    | ) |                          |       |              | 6,378      |   |                   | (6,378  | )
|                                              |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|Total shareholders equity                    |  |                    | 405,789 |   |                       | 786,649   |   |                          | 25,571 |              | (812,220   | ) |                   | 405,789 |  
|                                              |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  
|Total liabilities and shareholders equity    |  | $                  | 778,453 |   |                       | 1,026,978 |   |                          | 54,263 |              | (1,003,660 | ) |                   | 856,034 |  
|                                              |  |                    |         |   |                       |           |   |                          |        |              |            |   |                   |         |  



11



---

CONSOLIDATED BALANCE SHEET



|                                              |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|--------------------------------------------- |  | ----------------- | ------- | - | --------------------- | ------- | - | ------------------------ | ------ | ------------ | ---------- | - | ----------------- | ------- | -
|                                              |  | December 31, 2004 |        
|(In Thousands)                                |  | Parent            |         |   | GuarantorSubsidiaries |         |   | NonguarantorSubsidiaries |        | Eliminations |            |   | ConsolidatedTotal |        
|Assets                                        |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|Current assets:                               |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|Cash and cash equivalents                     |  | $                 | (35     | ) |                       | 83,002  |   |                          | 8,665  |              |           |   |                   | 91,632  |  
|Receivables, net                              |  |                   |        |   |                       | 116,938 |   |                          | 27,149 |              |           |   |                   | 144,087 |  
|Inventories                                   |  |                   |        |   |                       | 315,298 |   |                          | 12,831 |              |           |   |                   | 328,129 |  
|Prepaid expenses and other current assets     |  |                   |        |   |                       | 2,824   |   |                          | 129    |              |           |   |                   | 2,953   |  
|Deferred income taxes                         |  |                   |        |   |                       | 40,410  |   |                          | 22     |              |           |   |                   | 40,432  |  
|                                              |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|Total current assets                          |  |                   | (35     | ) |                       | 558,472 |   |                          | 48,796 |              |           |   |                   | 607,233 |  
|                                              |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|                                              |  |                   |         |   |                      
|Property and equipment, net                   |  |                   |        |   |                       | 33,318  |   |                          | 611    |              |           |   |                   | 33,929  |  
|Investment in subsidiaries                    |  |                   | 764,005 |   |                       | 34,284  |   |                          |       |              | (798,289   | ) |                   |        |  
|Intercompany receivables                      |  |                   |        |   |                       | 235,007 |   |                          |       |              | (235,007   | ) |                   |        |  
|Goodwill                                      |  |                   |        |   |                       | 44,904  |   |                          | 1,939  |              |           |   |                   | 46,843  |  
|Intangible assets                             |  |                   |        |   |                       | 46,525  |   |                          |       |              |           |   |                   | 46,525  |  
|Deferred income taxes                         |  |                   |        |   |                       | 2,816   |   |                          | 413    |              |           |   |                   | 3,229   |  
|Other assets                                  |  |                   | 6,498   |   |                       | 5,214   |   |                          | 5      |              |           |   |                   | 11,717  |  
|                                              |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|Total assets                                  |  | $                 | 770,468 |   |                       | 960,540 |   |                          | 51,764 |              | (1,033,296 | ) |                   | 749,476 |  
|                                              |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|                                              |  |                   |         |   |                      
|Liabilities and Shareholders Equity          |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|Current liabilities:                          |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|Current portion of long-term debt             |  | $                 |        |   |                       | 1,429   |   |                          | 11     |              |           |   |                   | 1,440   |  
|Revolving line of credit                      |  |                   |        |   |                       |        |   |                          |       |              |           |   |                   |        |  
|Cash overdrafts due to outstanding checks     |  |                   | 4       |   |                       | 42,969  |   |                          | 50     |              |           |   |                   | 43,023  |  
|Accounts payable                              |  |                   |        |   |                       | 97,368  |   |                          | 1,261  |              |           |   |                   | 98,629  |  
|Accrued expenses                              |  |                   | 7,723   |   |                       | 35,827  |   |                          | 3,191  |              |           |   |                   | 46,741  |  
|                                              |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|Total current liabilities                     |  |                   | 7,727   |   |                       | 177,593 |   |                          | 4,513  |              |           |   |                   | 189,833 |  
|                                              |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|                                              |  |                   |         |   |                      
|Long-term debt                                |  |                   | 200,000 |   |                       | 1,981   |   |                          | 9      |              |           |   |                   | 201,990 |  
|Intercompany payables                         |  |                   | 213,740 |   |                       |        |   |                          | 21,267 |              | (235,007   | ) |                   |        |  
|Other liabilities                             |  |                   |        |   |                       | 8,652   |   |                          |       |              |           |   |                   | 8,652   |  
|Commitments and contingencies                 |  |                   |        |   |                       |        |   |                          |       |              |           |   |                   |        |  
|Shareholders equity                          |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|Common stock                                  |  |                   | 346     |   |                       | 33      |   |                          | 7,542  |              | (7,575     | ) |                   | 346     |  
|Additional paid-in capital                    |  |                   | 447,060 |   |                       | 862,357 |   |                          | 9,918  |              | (872,275   | ) |                   | 447,060 |  
|Retained earnings (accumulated deficit)       |  |                   | (62,130 | ) |                       | (83,698 | ) |                          | 8,515  |              | 75,183     |   |                   | (62,130 | )
|Treasury stock, at cost                       |  |                   | (28,218 | ) |                       |        |   |                          |       |              |           |   |                   | (28,218 | )
|Unearned compensation - restricted stock      |  |                   | (1,679  | ) |                       |        |   |                          |       |              |           |   |                   | (1,679  | )
|Accumulated other comprehensive (loss) income |  |                   | (6,378  | ) |                       | (6,378  | ) |                          |       |              | 6,378      |   |                   | (6,378  | )
|                                              |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|Total shareholders equity                    |  |                   | 349,001 |   |                       | 772,314 |   |                          | 25,975 |              | (798,289   | ) |                   | 349,001 |  
|                                              |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  
|Total liabilities and shareholders equity    |  | $                 | 770,468 |   |                       | 960,540 |   |                          | 51,764 |              | (1,033,296 | ) |                   | 749,476 |  
|                                              |  |                   |         |   |                       |         |   |                          |        |              |            |   |                   |         |  



12



---

CONSOLIDATED STATEMENT OF CASH FLOWS



|                                                     |  |                                      |         |   |                       |          |   |                          |        |   |              |         |   |                   |          |  
|---------------------------------------------------- |  | ------------------------------------ | ------- | - | --------------------- | -------- | - | ------------------------ | ------ | - | ------------ | ------- | - | ----------------- | -------- | -
|                                                     |  | Nine Months Ended September 30, 2005 |        
|(In Thousands)                                       |  | Parent                               |         |   | GuarantorSubsidiaries |          |   | NonguarantorSubsidiaries |        |   | Eliminations |         |   | ConsolidatedTotal |         
|Operating activities:                                |  |                                      |         |   |                       |          |   |                          |        |   |              |         |   |                   |          |  
|Net earnings (loss)                                  |  | $                                    | 42,633  |   |                       | 33,609   |   |                          | 5,158  |   |              | (38,767 | ) |                   | 42,633   |  
|Depreciation and amortization                        |  |                                      | 750     |   |                       | 17,824   |   |                          | 190    |   |              |        |   |                   | 18,764   |  
|Deferred income taxes                                |  |                                      |        |   |                       | 18,383   |   |                          |       |   |              |        |   |                   | 18,383   |  
|Compensation expense on restricted stock awards      |  |                                      | 632     |   |                       |         |   |                          |       |   |              |        |   |                   | 632      |  
|Changes in:                                          |  |                                      |         |   |                       |          |   |                          |        |   |              |         |   |                   |          |  
|Receivables, net                                     |  |                                      |        |   |                       | (31,661  | ) |                          | (1,349 | ) |              |        |   |                   | (33,010  | )
|Inventories                                          |  |                                      |        |   |                       | (18,875  | ) |                          | (5,639 | ) |              |        |   |                   | (24,514  | )
|Intercompany receivables and payables                |  |                                      | (19,988 | ) |                       | 23,497   |   |                          | (3,509 | ) |              |        |   |                   |         |  
|Accounts payable                                     |  |                                      |        |   |                       | 25,588   |   |                          | (378   | ) |              |        |   |                   | 25,210   |  
|Accrued expenses                                     |  |                                      | (3,182  | ) |                       | (4,002   | ) |                          | 1,203  |   |              |        |   |                   | (5,981   | )
|Other, net                                           |  |                                      |        |   |                       | (3,504   | ) |                          | (134   | ) |              |        |   |                   | (3,638   | )
|                                                     |  |                                      |         |   |                       |          |   |                          |        |   |              |         |   |                   |          |  
|Net cash provided by (used for) operating activities |  |                                      | 20,845  |   |                       | 60,859   |   |                          | (4,458 | ) |              | (38,767 | ) |                   | 38,479   |  
|                                                     |  |                                      |         |   |                       |          |   |                          |        |   |              |         |   |                   |          |  
|Investing activities:                                |  |                                      |         |   |                       |          |   |                          |        |   |              |         |   |                   |          |  
|Capital expenditures                                 |  |                                      |        |   |                       | (7,771   | ) |                          | (306   | ) |              |        |   |                   | (8,077   | )
|Purchase of distribution rights                      |  |                                      |        |   |                       | (160,878 | ) |                          |       |   |              |        |   |                   | (160,878 | )
|Investment in subsidiaries                           |  |                                      | (33,609 | ) |                       | (5,158   | ) |                          |       |   |              | 38,767  |   |                   |         |  
|Sales of property, plant and equipment               |  |                                      |        |   |                       | 342      |   |                          | 35     |   |              |        |   |                   | 377      |  
|                                                     |  |                                      |         |   |                       |          |   |                          |        |   |              |         |   |                   |          |  
|Net cash provided by (used for) investing activities |  |                                      | (33,609 | ) |                       | (173,465 | ) |                          | (271   | ) |              | 38,767  |   |                   | (168,578 | )
|                                                     |  |                                      |         |   |                       |          |   |                          |        |   |              |         |   |                   |          |  
|Financing activities:                                |  |                                      |         |   |                       |          |   |                          |        |   |              |         |   |                   |          |  
|Debt issue costs paid                                |  |                                      |        |   |                       | (1,898   | ) |                          |       |   |              |        |   |                   | (1,898   | )
|Issuance of common stock                             |  |                                      | 13,098  |   |                       |         |   |                          |       |   |              |        |   |                   | 13,098   |  
|Purchase of treasury stock                           |  |                                      | (371    | ) |                       |         |   |                          |       |   |              |        |   |                   | (371     | )
|Net change in revolving credit facility              |  |                                      |        |   |                       | 43,052   |   |                          |       |   |              |        |   |                   | 43,052   |  
|Cash overdrafts due to outstanding checks            |  |                                      | (2      | ) |                       | (8,061   | ) |                          | 2      |   |              |        |   |                   | (8,061   | )
|Debt proceeds                                        |  |                                      |         |   |                       | 62       |   |                          |        |   |              |         |   |                   | 62       |  
|Debt repaid                                          |  |                                      |        |   |                       | (1,411   | ) |                          | (26    | ) |              |        |   |                   | (1,437   | )
|                                                     |  |                                      |         |   |                       |          |   |                          |        |   |              |         |   |                   |          |  
|Net cash provided by (used for) financing activities |  |                                      | 12,725  |   |                       | 31,744   |   |                          | (24    | ) |              |        |   |                   | 44,445   |  
|                                                     |  |                                      |         |   |                       |          |   |                          |        |   |              |         |   |                   |          |  
|Change in cash and cash equivalents                  |  |                                      | (39     | ) |                       | (80,862  | ) |                          | (4,753 | ) |              |        |   |                   | (85,654  | )
|Cash and cash equivalents, beginning of period       |  |                                      | (35     | ) |                       | 83,002   |   |                          | 8,665  |   |              |        |   |                   | 91,632   |  
|                                                     |  |                                      |         |   |                       |          |   |                          |        |   |              |         |   |                   |          |  
|Cash and cash equivalents, end of period             |  | $                                    | (74     | ) |                       | 2,140    |   |                          | 3,912  |   |              |        |   |                   | 5,978    |  
|                                                     |  |                                      |         |   |                       |          |   |                          |        |   |              |         |   |                   |          |  



13



---

CONSOLIDATED STATEMENT OF CASH FLOWS



|                                                     |  |                                      |         |   |                       |         |   |                          |        |   |              |         |   |                   |         |  
|---------------------------------------------------- |  | ------------------------------------ | ------- | - | --------------------- | ------- | - | ------------------------ | ------ | - | ------------ | ------- | - | ----------------- | ------- | -
|                                                     |  | Nine Months Ended September 30, 2004 |        
|(In Thousands)                                       |  | Parent                               |         |   | GuarantorSubsidiaries |         |   | NonguarantorSubsidiaries |        |   | Eliminations |         |   | ConsolidatedTotal |        
|Operating activities:                                |  |                                      |         |   |                       |         |   |                          |        |   |              |         |   |                   |         |  
|Net earnings (loss)                                  |  | $                                    | 33,463  |   |                       | 25,213  |   |                          | 6,694  |   |              | (31,907 | ) |                   | 33,463  |  
|Depreciation and amortization                        |  |                                      | 758     |   |                       | 12,231  |   |                          | 211    |   |              |        |   |                   | 13,200  |  
|Deferred income taxes                                |  |                                      |        |   |                       | 9,721   |   |                          | (19    | ) |              |        |   |                   | 9,702   |  
|Compensation expense on restricted stock awards      |  |                                      | 510     |   |                       |        |   |                          |       |   |              |        |   |                   | 510     |  
|Changes in:                                          |  |                                      |         |   |                       |         |   |                          |        |   |              |         |   |                   |         |  
|Receivables                                          |  |                                      |        |   |                       | (10,980 | ) |                          | (4,883 | ) |              |        |   |                   | (15,863 | )
|Inventories                                          |  |                                      |        |   |                       | 34,649  |   |                          | (898   | ) |              |        |   |                   | 33,751  |  
|Intercompany receivables and payables                |  |                                      | (21,591 | ) |                       | 18,253  |   |                          | 3,338  |   |              |        |   |                   |        |  
|Accounts payable                                     |  |                                      | (34     | ) |                       | 10,253  |   |                          | 221    |   |              |        |   |                   | 10,440  |  
|Accrued expenses                                     |  |                                      | 3,813   |   |                       | (6,998  | ) |                          | 2,450  |   |              |        |   |                   | (735    | )
|Other, net                                           |  |                                      | 4,680   |   |                       | (3,702  | ) |                          | 4      |   |              |        |   |                   | 982     |  
|                                                     |  |                                      |         |   |                       |         |   |                          |        |   |              |         |   |                   |         |  
|Net cash provided by (used for) operating activities |  |                                      | 21,599  |   |                       | 88,640  |   |                          | 7,118  |   |              | (31,907 | ) |                   | 85,450  |  
|                                                     |  |                                      |         |   |                       |         |   |                          |        |   |              |         |   |                   |         |  
|Investing activities:                                |  |                                      |         |   |                       |         |   |                          |        |   |              |         |   |                   |         |  
|Capital expenditures                                 |  |                                      |        |   |                       | (6,846  | ) |                          | (20    | ) |              |        |   |                   | (6,866  | )
|Purchase of distribution rights                      |  |                                      |        |   |                       | (1,339  | ) |                          |       |   |              |        |   |                   | (1,339  | )
|Investment in subsidiaries                           |  |                                      | (25,213 | ) |                       | (6,694  | ) |                          |       |   |              | 31,907  |   |                   |        |  
|Sales of property, plant and equipment               |  |                                      |        |   |                       | 113     |   |                          |       |   |              |        |   |                   | 113     |  
|                                                     |  |                                      |         |   |                       |         |   |                          |        |   |              |         |   |                   |         |  
|Net cash provided by (used for) investing activities |  |                                      | (25,213 | ) |                       | (14,766 | ) |                          | (20    | ) |              | 31,907  |   |                   | (8,092  | )
|                                                     |  |                                      |         |   |                       |         |   |                          |        |   |              |         |   |                   |         |  
|Financing activities:                                |  |                                      |         |   |                       |         |   |                          |        |   |              |         |   |                   |         |  
|Debt issue costs paid                                |  |                                      | (130    | ) |                       | (622    | ) |                          |       |   |              |        |   |                   | (752    | )
|Issuance of common stock                             |  |                                      | 4,069   |   |                       |        |   |                          |       |   |              |        |   |                   | 4,069   |  
|Purchase of treasury stock                           |  |                                      | (351    | ) |                       |        |   |                          |       |   |              |        |   |                   | (351    | )
|Net change in revolving credit facility              |  |                                      |        |   |                       |        |   |                          | (509   | ) |              |        |   |                   | (509    | )
|Cash overdrafts                                      |  |                                      | 2       |   |                       | (36,525 | ) |                          | (16    | ) |              |        |   |                   | (36,539 | )
|Debt repaid                                          |  |                                      |        |   |                       | (2,663  | ) |                          | (8     | ) |              |        |   |                   | (2,671  | )
|                                                     |  |                                      |         |   |                       |         |   |                          |        |   |              |         |   |                   |         |  
|Net cash provided by (used for) financing activities |  |                                      | 3,590   |   |                       | (39,810 | ) |                          | (533   | ) |              |        |   |                   | (36,753 | )
|                                                     |  |                                      |         |   |                       |         |   |                          |        |   |              |         |   |                   |         |  
|Change in cash and cash equivalents                  |  |                                      | (24     | ) |                       | 34,064  |   |                          | 6,565  |   |              |        |   |                   | 40,605  |  
|Cash and cash equivalents, beginning of period       |  |                                      |        |   |                       | 21,187  |   |                          | 2,237  |   |              |        |   |                   | 23,424  |  
|                                                     |  |                                      |         |   |                       |         |   |                          |        |   |              |         |   |                   |         |  
|Cash and cash equivalents, end of period             |  | $                                    | (24     | ) |                       | 55,251  |   |                          | 8,802  |   |              |        |   |                   | 64,029  |  
|                                                     |  |                                      |         |   |                       |         |   |                          |        |   |              |         |   |                   |         |  



14



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Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations



Executive Overview



We are the largest independent global provider of new parts, supply-chain
management and other related value-added services to the aerospace aftermarket. The aerospace aftermarket consists of parts needed for the scheduled and unscheduled maintenance, repair and modification of aircraft and engines already in use but does
not include parts used in the construction of new aircraft or engines. We serve this market through our two wholly owned subsidiaries, Aviall Services, Inc., or Aviall Services, and Inventory Locator Service, LLC, or ILS. Aviall Services provides
new parts and related supply-chain management services to the aerospace industry, and ILS operates electronic marketplaces for buying and selling parts, equipment and services for the global aerospace, defense and marine industries.



Aviall Services purchases a broad range of new parts, components and supplies
from original equipment manufacturers, or OEMs, and resells them to its customers. As of December 31, 2004, Aviall Services purchased new parts, components and supplies from over 220 OEMs, including in some cases several business units within
such manufacturers, and resold them to over 18,500 government/military, general aviation/corporate and commercial airline customers, including over 300 airlines. Aviall Services also provides value-added services to our customers and suppliers, such
as repair services, supply-chain management services and information-gathering and delivery services.



ILS operates electronic marketplaces for buying and selling parts, equipment and services for the global aerospace, defense and marine industries. As of
December 31, 2004, ILS had more than 14,000 users in more than 85 countries, ILSs electronic marketplaces contained more than 55 million line items representing over five billion parts for sale and ILS also maintained databases of
over 119 million cross-referenced United States, or U.S., government records, allowing users to research manufacturers and prices for specific parts, locate alternate parts, find additional uses and markets for parts and review U.S. government
procurement histories.



Our third quarter 2005 net earnings of
$14.3 million, or $0.41 diluted earnings per share, increased 43.0% compared to net earnings of $10.0 million, or $0.30 diluted earnings per share, in the third quarter of 2004. Our operating income in the third quarter of 2005 was $25.5 million, an
increase of $7.3 million or 40.1%, from the same quarter in 2004. These improvements were driven primarily by sales of General Electric, or GE, CF6-50 and CF6-80A, or CF6, engine parts. On July 18, 2005, Aviall Services began direct shipping of
CF6 engine parts and recording net sales from these parts. From February 2005 until July 18, 2005, or the GE transition period, Aviall Services recorded only commissions and not net sales on CF6 engine parts shipped directly by GE. In the third
quarter of 2005, our selling and administrative expense increased $2.3 million compared to the third quarter of 2004 largely due to year-over-year higher salary and benefit expenses. Much of this increase is attributable to planned expenses incurred
for startup and ongoing responsibilities for the GE CF6 contract. Because we only recorded commissions paid by GE equal to the amount of gross margin that we would have earned if we had made these CF6 sales ourselves, and not net sales on CF6 engine
parts shipped directly by GE during the GE transition period, the relative efficiency of the increased selling and administrative expense as compared to the incremental net sales is understated. Nevertheless, our selling and administrative expense
as a percentage of sales decreased to 9.3% in the third quarter of 2005 from 9.8% in the third quarter of 2004, which demonstrates our ability to increase revenues while incurring proportionately less selling and administrative expense.



The combination of record high fuel costs, slowing economic growth in many
regions, a slowing of demand for Rolls-Royce T-56, or RR T56, parts on the part of U.S. government entities, an increase in backorders on parts ordered by us from Rolls-Royce and the uncertain future faced by many of our airline customers and some
general aviation aircraft operators have combined to make our future performance and opportunities less certain. This concern was evidenced by the bankruptcy filing of our largest airline customer, Delta Airlines, as well as the bankruptcy filings
by Northwest Airlines and, in October, Mesaba Airlines. These filings were widely anticipated and our credit extension and evaluation process allowed us to appropriately manage our credit exposures prior to these bankruptcies. As a result, we were
not required to significantly adjust our overall reserves for our airline customers because of the bankruptcies. We believe these tough conditions support the need for the capabilities offered by Aviall Services and ILS and are one of the principal
reasons for Avialls improved results in 2004 and into 2005.



15



---

Our future strategy continues to focus on the acquisition of new long-term supplier contracts as well as
adding other traditional supplier relationships, delivering superior customer service and investing in technology and infrastructure to increase supplier and customer efficiencies. We continue to evaluate potential strategic acquisitions and changes
to our capital structure. We believe our ability to grow at a pace similar to that which we have experienced since 2000 will depend on the award of one or a series of new long-term supplier contracts, the expansion of our traditional supplier base
and product offerings and/or completion of a strategic acquisition. The timing and length of the process to procure new long-term agreements or relationships or a strategic acquisition is unpredictable. We are currently actively pursuing a number of
opportunities for additional growth, including possible large, new long-term supplier agreements. No assurance can be given that we will be able to procure any such new arrangements. To the extent we do secure any such relationship, the economies of
scale derived from recent contracts may not be indicative of our future results, particularly in the early stages of new contract implementation. As an example of the implementation of this strategy, we announced in April 2005 the signing of an
agreement with NetJets Services, Inc., or NetJets, to assume the supply chain management of spare parts for the maintenance, repair and operation of their fleet. This agreement is a complex supply-chain management services contract designed to
simplify logistics and lower NetJets overall operating costs.



Critical Accounting Policies



For a
discussion of our critical accounting policies, refer to Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies included in our Annual Report on Form 10-K for the
year ended December 31, 2004. There have been no material changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2004.



Results of Operations-Three Months Ended September 30, 2005
Compared to Three Months Ended September 30, 2004



Net Sales. Net sales for Aviall Services were $326.3 million, an increase of $38.7 million or 13.5%, from the $287.6 million recorded in the third quarter of 2004.



The following table presents net sales for Aviall Services in each of its geographic regions and in all market sectors
(amounts in millions):



|                           |  |                               |      |   |                                 |      |   
|-------------------------- |  | ----------------------------- | ---- | - | ------------------------------- | ---- | --
|                           |  | Amount ofIncrease/ (Decrease) |      |   | Percentage Increase/ (Decrease) |     
|Geographic region:         |  |                               |      |   |                                 |      |   
|Europe                     |  | $                             | 21.0 |   |                                 | 95.1 | % 
|Asia-Pacific               |  | $                             | 12.5 |   |                                 | 42.7 | % 
|Americas                   |  | $                             | 5.2  |   |                                 | 2.2  | % 
|                           |  |                              
|Market sector:             |  |                               |      |   |                                 |      |   
|Commercial airline         |  | $                             | 40.8 |   |                                 | 59.9 | % 
|General aviation/corporate |  | $                             | 3.0  |   |                                 | 4.1  | % 
|Government/military/other  |  | $                             | (5.1 | ) |                                 | (3.5 | )%



Sales in the
commercial airline sector increased primarily due to the addition of CF6 engine parts sales, which commenced on July 18, 2005 by Aviall Services when we began shipping after the GE transition period, as well as slightly stronger sales volumes
in the sector. Sales in the general aviation/corporate sector increased because of additional flight activity tempered by the effect of high fuel prices. Sales in the government/military/other sector decreased slightly due to a softening of demand
for RR T56 parts and select part shortages offset in part by other military sales including sales of CF6 engine parts for military use. Aggregate sales of products supplied by Rolls-Royce, Honeywell and GE pursuant to exclusive contracts were $221.1
million and $191.7 million in the third quarter of 2005 and 2004, respectively. Aggregate sales of products under these contracts continued to contribute significantly to net sales during the third quarter of 2005, aggregating approximately 66% of
Avialls net sales. Sales under the Rolls-Royce contracts declined from the third quarter of 2004, which was a significant factor in the decline in the government/military/other sector. Sales under the Honeywell contracts remained relatively
stable as compared to the third quarter of 2004.



Net sales for
ILS were $7.5 million, an increase of $0.4 million or 5.6%, compared to the third quarter of 2004.



16



---

Gross Profit. Gross profit of $56.6 million increased $9.7 million or 20.7% in the third quarter
of 2005 compared to $46.9 million in the third quarter of 2004. Gross profit as a percentage of net sales was 17.0% in the third quarter of 2005 as compared to 15.9% in the third quarter of 2004. The increased gross profit percentage is primarily
due to a change in our product mix.



Selling and
Administrative Expense. Selling and administrative expense increased $2.3 million to $31.1 million in the third quarter of 2005 but decreased as a percentage of net sales to 9.3% from 9.8% in the third quarter of 2004. Selling and administrative
expense increased primarily as a result of higher salary and benefit expenses.



Interest Expense. Interest expense increased $1.1 million to $5.3 million in the third quarter of 2005 from $4.2 million in the third quarter of 2004. Noncash interest expense amounted to $0.5 million and $0.4
million in 2005 and 2004, respectively. Our net interest expense increased primarily due to higher borrowings under our senior secured credit facility, or the Credit Facility, which had a balance of $43.1 million at September 30, 2005. At
September 30, 2004, we did not have any borrowings under the Credit Facility.



Provision for Income Taxes. Our income tax expense for the third quarter of 2005 was $6.0 million, and our effective tax rate was 29.5%. Our income tax expense for the third quarter of 2004 was $4.0 million,
and our effective tax rate was 28.3%. These effective tax rates were impacted by the resolution of certain tax reserves in the third quarter of 2005 and the adjustment for an increased Extraterritorial Income exclusion in the third quarter of 2004.



Actual cash payments made for federal, state and foreign
income taxes were $1.2 million and $0.8 million in the third quarter of 2005 and 2004, respectively. Our cash income tax expense is primarily comprised of federal Alternative Minimum Tax and state income taxes that were not offset by state tax net
operating loss, or NOL, carryforwards. Our cash income tax expense has been substantially lower than the U.S. federal statutory rate through the use of our U.S. federal NOL carryforward. We anticipate our federal NOL carryforward will be fully
consumed during the fourth quarter of 2005.



Results of
Operations-Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004



Net Sales. Net sales for Aviall Services were $924.9 million, an increase of $54.0 million or 6.2%, from the $870.9 million recorded in the first
nine months of 2004.



The following table presents net sales
for Aviall Services in each of its geographic regions and in all market sectors (amounts in millions):



|                           |  |                               |       |   |                                 |      |   
|-------------------------- |  | ----------------------------- | ----- | - | ------------------------------- | ---- | --
|                           |  | Amount ofIncrease/ (Decrease) |       |   | Percentage Increase/ (Decrease) |     
|Geographic region:         |  |                               |       |   |                                 |      |   
|Europe                     |  | $                             | 31.6  |   |                                 | 51.6 | % 
|Asia-Pacific               |  | $                             | 12.6  |   |                                 | 13.7 | % 
|Americas                   |  | $                             | 9.8   |   |                                 | 1.4  | % 
|Market sector:             |  |                               |       |   |                                 |      |   
|Commercial airline         |  | $                             | 54.4  |   |                                 | 26.3 | % 
|General aviation/corporate |  | $                             | 12.7  |   |                                 | 6.0  | % 
|Government/military/other  |  | $                             | (13.1 | ) |                                 | (2.9 | )%



Sales in the
commercial airline sector increased due to the addition of GE CF6 commission income which commenced in February 2005 and beginning on July 18, 2005, CF6 engine parts sales by Aviall Services when we began shipping after the GE transition
period, as well as slightly stronger sales volumes in the sector. Sales in the general aviation/corporate sector increased because of additional flight activity tempered by the effect of high fuel prices. Sales in the government/military/other
sector decreased slightly due to a softening in demand and select part shortages. Aggregate sales of products supplied by Rolls-Royce, Honeywell and GE pursuant to exclusive contracts were $604.6 million and $584.3 million in the first nine months
of 2005 and 2004, respectively. Aggregate sales of products under these contracts continued to contribute significantly to net sales during the first nine months of 2005, aggregating approximately 64% of Avialls net sales. Sales under the
Rolls-Royce contracts declined from the first nine months of 2004, which was a significant factor in the decline in the government/military/other sector. Sales under the Honeywell contracts remained relatively stable as compared to the first nine
months of 2004.



17



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Net sales for ILS were $22.3 million, an increase of $0.9 million or 4.2%, from the $21.4 million
recorded in the first nine months of 2004.



Gross
Profit. Gross profit of $170.2 million increased $26.0 million or 18.0% in the first nine months of 2005 compared to $144.2 million in the first nine months of 2004. Gross profit as a percentage of net sales was 18.0% in the first nine months of
2005 as compared to 16.2% in the first nine months of 2004. The increased gross profit percentage is due to the addition of CF6 engine parts sales commissions, which commenced in February 2005. As of July 18, 2005, Aviall began shipping CF6
engine parts and began recording net sales from these parts at normal margins. During the GE transition period, we recorded only commissions, and not net sales, on parts shipped directly by GE.



Selling and Administrative Expense. Selling and administrative expense
increased $4.6 million to $90.6 million in the first nine months of 2005. Selling and administrative expense as a percentage of net sales was 9.6% in both 2005 and 2004. Selling and administrative expense increased largely as a result of higher
salary and benefit expenses.



Interest Expense. Interest
expense increased $2.9 million to $15.6 million in the first nine months of 2005 from $12.7 million in the first nine months of 2004. Noncash interest expense amounted to $1.3 million and $1.2 million in 2005 and 2004, respectively. Our net interest
expense increased primarily due to borrowings related to the initial funding of the GE CF6 agreement and the continued borrowings outstanding under the Credit Facility, which had a balance of $43.1 million at September 30, 2005.



Provision for Income Taxes. Our income tax expense for the first nine
months of 2005 was $21.3 million, and our effective tax rate was 33.3%. Our income tax expense for the first nine months of 2004 was $12.0 million, and our effective tax rate was 26.3%. The increase in our effective tax rate from 26.3% in 2004 to
33.3% in 2005 is primarily due to the release in the first nine months of 2004 of a $2.8 million valuation allowance for state tax NOL carryforwards and an increase of the Extraterritorial Income exclusion.



Actual cash payments made for federal, state and foreign income taxes were
$3.0 million and $1.4 million in the first nine months of 2005 and 2004, respectively. Our cash income tax expense is primarily comprised of federal Alternative Minimum Tax and state income taxes that were not offset by state tax NOL carryforwards.
Our cash income tax expense has been substantially lower than the U.S. federal statutory rate through the use of our U.S. federal NOL carryforward. We anticipate our federal NOL carryforward will be fully consumed during the fourth quarter of 2005.



Liquidity and Capital Resources



Cash Flow. Net cash flow provided by operations was $38.5 million in
the first nine months of 2005 compared to $85.5 million in the first nine months of 2004. The $47.0 million decrease in cash provided by operating activities in 2005 compared to the same period in 2004 resulted from higher receivable and inventory
levels at September 30, 2005 primarily due to the completion of working capital investments in the CF6 product lines and a decrease in accrued expenses related to interest payment timing on the $200 million of senior unsecured notes, or the
Senior Notes, partially offset by a higher September 30, 2005 ending accounts payable balance due to the timing of month end settlements with our suppliers and increased cash earnings in 2005. Aviall Services inventory turns improved from
3.2 turns in December 2004 to 3.4 turns in September 2005 due to the increased sales volumes in the third quarter of 2005. The days sales outstanding for Avialls receivables decreased from 51 days at December 31, 2004 to 48 days at
September 30, 2005 due to the increased sales volume in the third quarter of 2005.



Capital expenditures were $8.5 million in the first nine months of 2005, including $0.4 million for noncash capital expenditures, compared to $7.0 million in the first nine months of 2004, including $0.1 million for
noncash capital expenditures. Capital spending in both 2005 and 2004 was primarily for upgrades to Aviall Services enterprise resource planning software, computer hardware and operations infrastructure. During the second quarter of 2005, we
successfully upgraded our enterprise resource planning system with no disruptions to our business. This was our largest capital expenditure item over the last two years, with an aggregate cost of approximately $6.9 million. We expect to make capital
expenditures, including noncash capital amounts, totaling between $12.0 million and $15.7 million in 2005. These projects include upgrades and enhancements associated with both our systems and operations infrastructure at Aviall Services and ILS. We
review our capital expenditure program periodically and modify it as required to meet current business needs. Under the Credit Facility, our 2005 capital expenditure limit is approximately $17.2 million, comprised of a $12.0 million limit for 2005
plus $5.2 million of carryover amounts from prior years.



18



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In January 2005, we entered into a distribution agreement with GE Engine Services Distribution LLC and
GE, whereby GE has appointed us as the exclusive worldwide distributor of unique parts for the CF6 engines for as long as these engines remain in service. In April 2005, we entered into two distribution agreements with Hamilton Sundstrand which give
us exclusive distribution rights for Hamilton Sundstrand-built spare parts that are unique to the 60kVA family of generators, the JT8D mechanical fuel controls and the JT9D engine accessories. We paid approximately $160.8 million for the GE and
Hamilton Sundstrand distribution rights.



Variable Working
Capital (see definition below) increased $32.3 million in the first nine months of 2005 as compared to December 31, 2004 and decreased $28.3 million in the first nine months of 2004 as compared to December 31, 2003. In 2005, we invested
$168.8 million in net capital expenditures and distribution rights as compared to $8.1 million in 2004. The combined cash used in the first nine months of 2005 of $130.1 million by both operating and investing activities was funded by $13.1 million
received for common stock issued pursuant to the exercise of employee stock options, $43.1 million of net borrowings under our revolving credit facilities and a large portion of the $91.6 million of cash on hand at the beginning of 2005. In
addition, our cash overdraft position decreased $8.1 million in the first nine months of 2005. As a result, our cash balance decreased by $85.7 million.



By way of comparison, the combined cash provided in the first nine months of 2004 of $77.4 million for both operating and investing activities together
with the $4.1 million received for common stock issued pursuant to the exercise of employee stock options was primarily used to fund the $36.5 million decrease in our cash overdraft position. As a result, our cash balance increased by $40.6 million.
Overdraft positions arise when we settle our accounts payable by issuing checks at month end, and the recipients of these checks have not presented them to our banks for payment before period end. We classify these overdraft positions as a separate
current liability in our accompanying consolidated balance sheet because no right of offset exists against other cash accounts within the same bank. Generally accepted accounting principles, or GAAP, treat these amounts similar to debt in the
statement of cash flows by presenting cash overdrafts as a financing activity. We expect to continue large month end settlements with our major suppliers, but the overdrafts will change in accordance with the fluctuating amounts of products shipped
to us from time to time.



Assuming our current level of
internal growth, profitability, and the present relationship between increased revenues, Variable Working Capital requirements and our capital expenditure commitments, we expect to generate strong positive cash flow from operating activities,
although this may be offset from time to time by overdraft obligations and increases in Variable Working Capital, particularly when our business is growing. Our cash flow from operating activities can fluctuate significantly depending on the timing
of the delivery and payment for inventory as discussed above. In some months, we receive much larger inventory deliveries than the average of the preceding several months. These larger deliveries, which often are in the fourth quarter, can
significantly alter our cash flow for that month and on a cumulative basis for both the quarter and the fiscal year-to-date. Based on the foregoing, we continue to project cash flow from operating activities in 2005 will exceed $50.0 million.



In 2005, we have funded our internal growth and any related
capital expenditures out of cash flow from operations and borrowings under the Credit Facility. If we are awarded one or more additional long-term supplier agreements that require significant investments in distribution rights and inventory, we may
be required to increase availability and borrow significant amounts under the Credit Facility, or we may be required to sell debt, equity or other securities under our shelf registration statement or otherwise to fund the costs associated with the
investment. Likewise, if we enter into a strategic acquisition or if our current projections prove to be inaccurate in 2005, we may be required to borrow significant amounts under the Credit Facility or to sell securities.



19



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The following table presents a reconciliation of our Variable Working Capital to working capital for the
periods presented:



|                                          |  |                   |          |   |                  |         |   |                   |          |   |                  |         |  
|----------------------------------------- |  | ----------------- | -------- | - | ---------------- | ------- | - | ----------------- | -------- | - | ---------------- | ------- | -
|(In Thousands)                            |  | September 30,2005 |          |   | December 31,2004 |         |   | September 30,2004 |          |   | December 31,2003 |        
|Receivables, net                          |  | $                 | 177,097  |   |                  | 144,087 |   |                   | 155,142  |   |                  | 139,279 |  
|Plus: Inventories                         |  |                   | 352,643  |   |                  | 328,129 |   |                   | 294,109  |   |                  | 327,860 |  
|Less: Accounts payable                    |  |                   | (123,839 | ) |                  | (98,629 | ) |                   | (105,262 | ) |                  | (94,822 | )
|                                          |  |                   |          |   |                  |         |   |                   |          |   |                  |         |  
|Variable Working Capital                  |  |                   | 405,901  |   |                  | 373,587 |   |                   | 343,989  |   |                  | 372,317 |  
|                                          |  |                   |          |   |                  |         |   |                   |          |   |                  |         |  
|Plus:                                     |  |                   |          |   |                  |         |   |                   |          |   |                  |         |  
|Cash and cash equivalents                 |  |                   | 5,978    |   |                  | 91,632  |   |                   | 64,029   |   |                  | 23,424  |  
|Prepaid expenses and other current assets |  |                   | 3,970    |   |                  | 2,953   |   |                   | 3,636    |   |                  | 2,501   |  
|Deferred income taxes                     |  |                   | 22,118   |   |                  | 40,432  |   |                   | 19,075   |   |                  | 19,075  |  
|Less:                                     |  |                   |          |   |                  |         |   |                   |          |   |                  |         |  
|Current portion of long-term debt         |  |                   | (1,051   | ) |                  | (1,440  | ) |                   | (1,888   | ) |                  | (3,293  | )
|Cash overdrafts due to outstanding checks |  |                   | (34,962  | ) |                  | (43,023 | ) |                   | (7,076   | ) |                  | (43,615 | )
|Revolving line of credit                  |  |                   | (43,052  | ) |                  |        |   |                   |         |   |                  | (509    | )
|Accrued expenses                          |  |                   | (40,132  | ) |                  | (46,741 | ) |                   | (38,832  | ) |                  | (39,567 | )
|                                          |  |                   |          |   |                  |         |   |                   |          |   |                  |         |  
|Working capital                           |  | $                 | 318,770  |   |                  | 417,400 |   |                   | 382,933  |   |                  | 330,333 |  
|                                          |  |                   |          |   |                  |         |   |                   |          |   |                  |         |  



We define Variable
Working Capital as receivables plus inventories less accounts payable. In no event should Variable Working Capital be considered as an alternative to working capital or any GAAP measure as an indicator of our performance, nor should Variable Working
Capital be considered as an alternative to working capital as an indicator of our relative liquidity to meet our obligations within an ordinary business cycle. We believe that Variable Working Capital is a useful measure, along with measurements
under GAAP, in evaluating our financial performance and our ability to leverage sales and earnings from our Variable Working Capital. In addition, we use Variable Working Capital as a financial measure to evaluate our management of working capital
and as a metric to measure contract and supplier performance.



Senior Unsecured Debt. We have $200.0 million of senior unsecured notes, or the Senior Notes, outstanding. The Senior Notes bear interest at 7.625% per annum and mature on July 1, 2011, unless previously redeemed at our
option. We may redeem some or all of the Senior Notes at specified redemption prices at any time after July 1, 2007. In addition, prior to July 1, 2006, we may redeem up to 35% of the Senior Notes from the proceeds of qualifying equity
offerings.



The Senior Notes are our senior unsecured
obligations and are equal in right of payment to all of our senior indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of our domestic subsidiaries.



In November 2003, we entered into an interest rate swap agreement to manage interest rate risk exposure on $50.0 million of
the $200.0 million principal amount of Senior Notes. Under this agreement which expires in 2011, we pay floating interest amounts in exchange for giving up the right to pay a fixed amount without an exchange of the underlying principal amount.



Senior Secured Debt. The Credit Facility consists of a
$260.0 million revolving credit and letter of credit facility due as a balloon payment in 2008, with availability determined by reference to a borrowing base calculated using our eligible accounts receivable and inventory and after deducting
reserves required by the lenders. As of September 30, 2005, we had $43.1 million of borrowings outstanding under the Credit Facility and had issued letters of credit for $0.9 million. In addition, we had $213.1 million available for additional
borrowings under the Credit Facility and our borrowing base was $257.2 million. As of September 30, 2005, borrowings under the Credit Facility bear interest based upon either: (1) a Eurodollar Rate plus an applicable margin ranging from
1.5% to 2.5% depending upon our financial ratios, or (2) a Base Rate plus an applicable margin ranging from 0.5% to 1.5% depending upon the same financial ratios. We expect to utilize both of these interest rate options during 2005. As of
September 30, 2005, the weighted average interest rate on the Credit Facility was 5.35%. An annual commitment fee of 0.5% is payable monthly in arrears on the daily unused portion of the Credit Facility. Obligations under the Credit Facility
are collateralized by substantially all of our domestic assets and 65% of the stock of certain of our foreign subsidiaries. The Credit Facility also contains default clauses that permit the



20



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acceleration of all amounts due following an event of default at the discretion of the lenders, and lock-box provisions that apply our cash collections to
outstanding borrowings. Based on the terms of the Credit Facility and pursuant to EITF Issue No. 95-22, Balance Sheet Classification of Revolving Credit Agreement Obligations Involving Lock-Box Arrangements, we classify amounts
outstanding under the Credit Facility, if any, as current.



We
also maintain a Canadian $6.0 million secured revolving credit facility, or the Canadian Revolver. As of September 30, 2005, we had no borrowings outstanding under the Canadian Revolver.



Debt Covenants. The Credit Facility contains various restrictive
operating and financial covenants, including several that are based on earnings before interest, taxes, depreciation, amortization, extraordinary gains or losses, and one-time items, or Adjusted EBITDA. We must comply with a maximum leverage ratio
covenant that measures the ratio of our outstanding debt to our Adjusted EBITDA for the trailing four quarters. We must maintain a maximum leverage ratio of: 4.00 to 1 for the fiscal quarter ending September 30, 2005; 3.50 to 1 for the fiscal
quarter ending December 31, 2005; and 3.25 to 1 for the fiscal quarters ending on or after March 31, 2006. We must also comply with a minimum interest coverage ratio covenant that measures the ratio of our Adjusted EBITDA for the trailing
four quarters to our interest expense during the trailing four quarters. The minimum interest coverage ratio covenant was 3.50 to 1 at September 30, 2005 and will remain at that level for all periods thereafter. Furthermore, we must maintain a
tangible net worth of not less than $205.8 million plus 75% of the cumulative consolidated net income for each fiscal quarter ending on or after June 30, 2004. As of September 30, 2005, the required tangible net worth was $262.7 million.
We are permitted to make capital expenditures under the Credit Facility in any fiscal year up to $12.0 million, plus any unused carryover of up to $10.0 million from prior years. As a result, we must limit our capital expenditures in 2005 to no more
than $17.2 million, which includes $5.2 million of allowed carryover spending from prior years.



The Senior Notes also contain various restrictive covenants. We may not incur additional indebtedness unless we maintain a consolidated interest coverage
ratio of at least 2.0 to 1.0 or unless the debt is otherwise permitted under the indenture. The consolidated interest coverage ratio measures the ratio of our EBITDA, as defined in the indenture relating to the Senior Notes, for the trailing four
quarters to our interest expense for such quarters. Subject to specified exceptions, we may not make payments on or redeem our capital stock, make certain investments or make other restricted payments unless we maintain a consolidated interest
coverage ratio of at least 2.0 to 1.0 and otherwise have available 50% of cumulative consolidated net income or capital stock sale proceeds from which such payments may be made. We are unable to incur liens unless expressly permitted under the
Senior Notes or unless the Senior Notes are equally and ratably secured. We may not sell or otherwise dispose of any of the capital stock of our subsidiaries unless specifically authorized. We must receive fair market value for any asset sales and
the consideration must be paid at least 75% in cash, cash equivalents or assumed liabilities. To the extent such proceeds are received, we must reinvest any proceeds exceeding $10 million in additional assets within a period of 365 days or
thereafter repay senior debt or repurchase Senior Notes. Additionally, we must repurchase the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes upon a change of control. The indenture relating to the Senior Notes also
contains additional covenants.



We are currently, and expect to
remain, in compliance for at least the next twelve months in all material respects with the covenants in the Credit Facility and the Senior Notes.



The following table presents a reconciliation of our EBITDA and Adjusted EBITDA, as defined in the Credit Facility, to net earnings for the trailing four
quarters ended September 30, 2005:



|                                      |  |                   |        |   |                  |        |   |                   |        |                  |        |       |         |  
|------------------------------------- |  | ----------------- | ------ | - | ---------------- | ------ | - | ----------------- | ------ | ---------------- | ------ | ----- | ------- | -
|(In Thousands)                        |  | FourthQuarter2004 |        |   | FirstQuarter2005 |        |   | SecondQuarter2005 |        | ThirdQuarter2005 |        | Total |        
|Net earnings                          |  | $                 | 9,706  |   |                  | 13,000 |   |                   | 15,371 |                  | 14,262 |       | 52,339  |  
|Plus:                                 |  |                   |        |   |                  |        |   |                   |        |                  |        |       |         |  
|Income tax expense                    |  |                   | 4,472  |   |                  | 6,978  |   |                   | 8,347  |                  | 5,959  |       | 25,756  |  
|Interest expense                      |  |                   | 4,021  |   |                  | 5,103  |   |                   | 5,262  |                  | 5,277  |       | 19,663  |  
|Depreciation and amortization expense |  |                   | 3,736  |   |                  | 4,876  |   |                   | 6,114  |                  | 6,285  |       | 21,011  |  
|                                      |  |                   |        |   |                  |        |   |                   |        |                  |        |       |         |  
|EBITDA                                |  |                   | 21,935 |   |                  | 29,957 |   |                   | 35,094 |                  | 31,783 |       | 118,769 |  
|Noncash (gains) losses                |  |                   | (110   | ) |                  | (78    | ) |                   | 112    |                  | 23     |       | (53     | )
|                                      |  |                   |        |   |                  |        |   |                   |        |                  |        |       |         |  
|Adjusted EBITDA                       |  | $                 | 21,825 |   |                  | 29,879 |   |                   | 35,206 |                  | 31,806 |       | 118,716 |  
|                                      |  |                   |        |   |                  |        |   |                   |        |                  |        |       |         |  



21



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The Adjusted EBITDA calculation above is prepared in accordance with the terms of the Credit Facility.
The noncash gains and losses, which are included in the Adjusted EBITDA calculation in accordance with the terms of the Credit Facility, may occur again. The depreciation and amortization expense above excludes debt issuance cost amortization.
Adjusted EBITDA is presented solely to provide information on our debt covenants, and EBITDA and Adjusted EBITDA should not be considered an alternative to operating results or cash flows calculated in accordance with GAAP.



Contractual Obligations. As of September 30, 2005, there have
been no material changes in our contractual obligations as set forth in Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations in our Annual Report on Form 10-K for the
year ended December 31, 2004.



New Accounting
Pronouncements. In June 2005, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No, 154, or SFAS 154, Accounting Changes and Error Corrections - a replacement of APB No. 20 and FAS
No. 3. SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the basis of the new accounting principle. SFAS 154 also requires that a change in
method of depreciating or amortizing a long-lived nonfinancial asset be accounted for prospectively as a change in estimate, and correction of errors in previously issued financial statements should be termed a restatement. SFAS 154 is effective for
accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. We will adopt SFAS 154 effective January 1, 2006 and expect no material impact on our consolidated financial statements as a result of the
adoption.



In December 2004, the FASB issued Statement of
Financial Accounting Standards No. 123 (revised 2004), or SFAS 123R, Share-Based Payment, which replaces Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FAS 123. SFAS 123R addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair
value of the companys equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock
options, restricted stock and stock appreciation rights. SFAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and generally would require that such transactions be accounted for using a
fair-value-based method and recognized as expense over the period during which an employee is required to provide services in exchange for the award. SFAS 123R is effective for annual periods beginning after June 15, 2005. As such, we will
implement the provisions of SFAS 123R effective January 1, 2006. Although we have not completed evaluating the impact the adoption of SFAS 123R will have on our future results of operations, we are currently evaluating alternatives to our
unvested stock options which could result in a range of compensation expense in future periods from an immaterial amount to an amount similar to that in our pro forma disclosures for SFAS 123R detailed in Note 2 as set forth in our accompanying
consolidated financial statements. In addition, we are currently evaluating replacing annual stock option grants with another form of incentive award and cannot currently estimate the impact on compensation expense in 2006 or beyond.



Forward-Looking Statements



This report contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) that are based on the beliefs of our management, as well as assumptions and estimates made by, and information currently available to, our management. When used in this report, the
words anticipate, believe, estimate, expect, intend and similar expressions, as they relate to us or our management, identify forward-looking statements. Such statements reflect our current
views with respect to future events and are subject to risks, uncertainties and assumptions relating to our operations and results of operations as well as those of our customers and suppliers, including as a result of competitive factors and
pricing pressures, shifts in market demand, general economic conditions and other factors including, among others, those that effect flight activity in the commercial, business, government/military, and general/corporate aviation segments, the
business activities of our customers and suppliers and developments in information and communication technology. Additional risks are set forth in our Annual Report on Form 10-K for the year ended December 31, 2004. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described in the forward-looking statements.



22



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Item 3: Quantitative and Qualitative Disclosures About Market Risk



We are exposed to market risk from changes in interest rates and foreign
exchange rates. From time to time, we have used financial instruments to offset these risks. These financial instruments are not used for trading or speculative purposes. We did not experience any significant changes in market risk during the first
nine months of 2005. Our market risk is described in more detail in Item 7A: Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended December 31, 2004.



Item 4: Controls and Procedures



The term disclosure controls and procedures is defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that
it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Our management, including our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.



There were no changes to our internal control over financial reporting during the third quarter of 2005 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION



Item 1: Legal Proceedings



Not
applicable.



Item 2: Unregistered Sales of Equity Securities and Use of
Proceeds



Not applicable.



Item 3: Defaults Upon Senior Securities



Not applicable.



Item 4: Submission of Matters to a Vote of Security Holders



Not applicable.



Item 5: Other Information



Not applicable.



Item 6: Exhibits



|     |  |                                                                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                       
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                       
|     | 
|32.1 |  | Certifications pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002



23



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SIGNATURES



Pursuant to the requirements 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.



|                 |  |     |  |                    |  |                                                                                 |  | 
|---------------- |  | --- |  | ------------------ |  | ------------------------------------------------------------------------------- |  | 
|                 |  |     |  | AVIALL, INC.      
|                 |  |    
|November 2, 2005 |  | By: |  | /s/ Colin M. Cohen
|                 |  |     |  |                    |  | Colin M. Cohen                                                                 
|                 |  |     |  |                    |  | Senior Vice President and Chief Financial Officer (Principal Financial Officer)



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---

INDEX TO EXHIBITS



|            |  |                                                                                                                                                                                  
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                      
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                       
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                       
|            | 
|32.1        |  | Certifications pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002



25