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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2002

Commission File No. 1-11775


TIMCO AVIATION SERVICES, INC.

(Exact name of registrant as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 65-0665658                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|623 Radar Road
Greensboro, NC                                  |  | 27410                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(336) 668-4410

(Registrants telephone number)


Securities registered pursuant to Section 12(b) of the Exchange Act:

|                    |  |                                          
|------------------- |  | -----------------------------------------
|TITLE OF EACH CLASS |  | NAME OF EACH EXCHANGE
ON WHICH REGISTERED
|None                |  | N/A                                      

Securities registered pursuant to section 12(g) of the Exchange Act:

Common Stock, par value $.001 per share

Indicate by check mark whether the registrant (1) 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 periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [  ]
  NO [ X ]





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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [   ]

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

As of June 28, 2002, the aggregate market value (based on the closing sales
price of the common stock as reported on the OTC Bulletin Board maintained by
the NASD on such date, which was $1.45 per share) of the common stock held by
non-affiliates was approximately $17.5 million. At May 12, 2003, there were
31,640,994 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants definitive Proxy Statement for its 2003 Annual
Meeting of Stockholders (which Proxy Statement will be filed on or before 120
days after the end of the Registrants fiscal year ended December 31, 2002) are
incorporated by reference into Part III hereof. Certain exhibits listed in Part
IV of this Annual Report on Form 10-K are incorporated by reference from prior
filings made by the Registrant under the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended.

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PART I

ITEM 1. BUSINESS.

UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO TIMCO, WE, OUR AND
US IN THIS ANNUAL REPORT ON FORM 10-K INCLUDES TIMCO AVIATION SERVICES, INC.
AND ITS SUBSIDIARIES. THIS ANNUAL
REPORT ON FORM 10-K CONTAINS OR MAY CONTAIN FORWARD-LOOKING STATEMENTS, SUCH AS
STATEMENTS REGARDING OUR STRATEGY AND ANTICIPATED TRENDS IN THE INDUSTRY IN
WHICH WE OPERATE. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON OUR CURRENT
EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS, UNCERTAINTIES AND
ASSUMPTIONS RELATING TO OUR OPERATIONS AND RESULTS OF OPERATIONS, COMPETITIVE
FACTORS, SHIFTS IN MARKET DEMAND, AND OTHER RISKS AND UNCERTAINTIES, INCLUDING,
IN ADDITION TO THOSE DESCRIBED BELOW AND ELSEWHERE IN THIS ANNUAL REPORT ON
FORM 10-K, OUR ABILITY TO CONTINUE TO GENERATE SUFFICIENT WORKING CAPITAL TO
MEET OUR OPERATING REQUIREMENTS AND SERVICE OUR INDEBTEDNESS, OUR MAINTAINING
GOOD WORKING RELATIONSHIPS WITH OUR VENDORS AND CUSTOMERS, COMPETITIVE PRICING
FOR OUR PRODUCTS AND SERVICES, OUR ABILITY TO ACHIEVE GROSS PROFIT MARGINS AT
WHICH WE CAN BE PROFITABLE, INCLUDING MARGINS ON SERVICES WE PERFORM ON A FIXED
PRICE BASIS, COMPETITION IN THE AIRCRAFT MAINTENANCE, REPAIR AND
OVERHAUL MARKET AND THE IMPACT ON THAT MARKET AND THE COMPANY OF THE TERRORIST
ATTACKS ON SEPTEMBER 11, 2001, THE STATE OF THE DOMESTIC PASSENGER AIRLINE
INDUSTRY AND THE FINANCIAL CONDITION OF OUR AIRLINE CUSTOMERS, OUR ABILITY TO
ATTRACT AND RETAIN QUALIFIED PERSONNEL IN OUR BUSINESSES, UTILIZATION RATES FOR
OUR MR&O FACILITIES, OUR ABILITY TO EFFECTIVELY INTEGRATE FUTURE ACQUISITIONS,
OUR ABILITY TO EFFECTIVELY MANAGE OUR BUSINESS, ECONOMIC FACTORS WHICH AFFECT
THE AIRLINE INDUSTRY, GENERALLY INCLUDING THE AMOUNT OF AIRCRAFT MAINTENANCE
OUTSOURCED BY VARIOUS AIRLINES, AND CHANGES IN GOVERNMENT REGULATIONS. SHOULD
ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM RESULTS EXPRESSED OR IMPLIED IN ANY FORWARD-LOOKING STATEMENTS MADE BY US
IN THIS ANNUAL REPORT ON FORM 10-K. WE DO NOT UNDERTAKE ANY OBLIGATION TO
REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT FUTURE EVENTS OR
CIRCUMSTANCES.

General

We are among the leading providers of aviation maintenance, repair and overhaul
(MR&O) services. Based on industry statistics and industry publications, we
are one of the largest independent providers of heavy maintenance services for
aircraft in North America and among the largest providers of these services in
the world. We sell and provide aircraft maintenance, repair and overhaul
services to commercial passenger airlines and air cargo carriers.

We offer MR&O services to our customers through our seven repair stations
licensed by the Federal Aviation Authority (FAA). These services include
maintenance, repair and modification services for aircraft, and repair and
overhaul services on a wide range of aircraft components, flight control
surfaces, aircraft interiors and Pratt & Whitney JT8D engines. In addition, we
also provide modification services for the conversion of passenger aircraft to
freighter configuration, as well as, aircraft engineering services.

Our strategy is to be the vendor of choice to our customers, providing aircraft
maintenance solutions to meet our customers MR&O requirements. The services
that we offer allow our customers to reduce their costs by outsourcing some of
their MR&O functions.

We were incorporated in Delaware in 1996 under the name Aviation Sales
Company. We changed our corporate name to TIMCO Aviation Services, Inc. in
February 2002. Our principal executive offices are at 623 Radar Road,
Greensboro, North Carolina 27410, and our telephone number is (336) 668-4410.

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Overview of TIMCO Aviation Services, Inc. in Fiscal 2002

For the year ended December 31, 2002, we incurred losses from continuing
operations of $24.4 million and continue to require additional
cash flow
above amounts currently being provided from operations to meet our working
capital requirements. Additionally, as a result of current year operating
activities, we were not in compliance, at December 31, 2002, with debt covenant
requirements under our Amended Credit Facility and our Tax Retention Operating
Lease (TROL). Subsequent
to year-end, we have obtained a waiver of non-compliance with all financial
covenants and have thereby cured these covenant violations. We have also entered into agreements that reset financial
covenant requirements for the Amended Credit Agreement and TROL
financing arrangements for future periods. Debt
classification, acceleration provisions, and potential suspension of financing
obligations with repayment of all debt in the event of a material adverse
change in the business that are provided for under these financing agreements
will remain contingent upon the continued compliance or waiver of violations of
these covenant requirements and other events of default. The airline
industry, and thus our customer base, has been significantly impacted
by a number of factors including: the general state of the economy,
the rising price of jet fuel, a significant decline in passenger
airline travel since calendar year 2000, the on-going war in Iraq and
competitive airfare price reductions exceeding 15%. The result for some carriers has been the filing
for protection under Chapter 11 of the United States Bankruptcy Code. These
factors have also resulted in some of our competitors exiting the maintenance,
repair, and overhaul business.

As a result of our substantial debt, illiquidity, and our continued losses from
operations, our auditors have placed a going concern modification in their
report on our consolidated financial statements for the year ended December 31,
2002. Even in light of the extenuating situation that we face and overall
economy and airline industry circumstances, during the year ended December 31,
2002 we dealt with several significant matters, including (i) the
restructuring of our senior and subordinated indebtedness and our capital, (ii)
the settlement of our outstanding class action litigation and the resolution of
a number of significant legacy items, and (iii) the focusing of our operations
on our maintenance, repair, and overhaul business.



| |  | Capital and Equity Restructuring
| |  | --------------------------------

In February 2002, we completed a significant restructuring of our capital and
equity. This restructuring consisted of four parts. The first part was a
reverse split (on a one-share-for-ten-shares basis) of our outstanding common
stock, reducing our outstanding common shares from 15 million shares to 1.5
million shares (5% of the restructured entity) and an increase in our
authorized shares from 30.0 million to 500.0 million shares. The second part
was an offer to the holders of our $165.0 million, 8 1/8% senior subordinated
notes due 2008 (the Old Notes) to exchange their old notes for up to $10
million in cash, $100.0 million of our new 8% senior subordinated convertible
paid-in-kind (PIK) notes due 2006 (the New Notes), 4.5 million shares of
our post-reverse split common stock (15% of the restructured entity) and
five-year warrants to purchase an additional 3.0 million shares of our
post-reverse split common stock at an exercise price of $5.16 per share (the
Note Exchange). The third part was a rights offering to our existing
stockholders to raise funds to pay the cash portion of the Note Exchange offer
and the expenses of the restructuring, and to provide us with working capital
for our ongoing business operations. In the rights offering, we offered 24.0
million shares of our post-reverse split common stock (80% of the restructured
entity) to raise $20.0 million. In connection with the rights offering, Lacy J.
Harber, our principal stockholder, agreed to purchase any unsold allotments.
The last part consisted of the issuance to the pre-restructuring holders of our
common stock of five-year warrants to purchase an additional 3.0 million shares
of our post-reverse split common stock at an exercise price of $5.16 per share.

On February 28, 2002, we completed all four parts of our restructuring. In the
Note Exchange, we exchanged $148.8 million of our Old Notes (approximately 90%
of the Old Notes) for $5.1 million in cash, and all of the New Notes, shares
and warrants described above. We used the net proceeds of the rights offering,
approximating $10.0 million after payment of the cash proceeds of the Note
Exchange and expenses of the restructuring, to reduce trade payables and to
provide working capital for our ongoing business operations. See Item 7
(Managements Discussion and Analysis of Financial Condition and Results of
Operations) of Part II and Note 13 to the accompanying consolidated financial
statements for further details of our capital and equity restructuring.



| |  | Refinancing of Senior Revolving Credit Facility and Senior Term Debt
| |  | --------------------------------------------------------------------

In July 2002, we refinanced our senior credit facilities with a syndicate of
four lenders led by Citicorp USA Inc. and UPS Capital Corporation. Under the
Amended Credit Agreement, the Company obtained a $30.0 million senior secured
revolving line of credit and a $7.0 million senior secured term loan. We
utilized the proceeds from the new credit facility to repay outstanding
borrowings under our previously outstanding revolving credit facility and our
previously outstanding $12.0 million senior secured term loan. Further, from
proceeds received from the completed sale of our Aerocell Structures operations
on July 31, 2002, $3.5 million of the new $7.0 million senior secured term loan
has been paid.

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In July 2002, we also restructured our outstanding $10.0 million senior secured
term loan with Bank of America. $5.0 million of this loan is now due on
January 31, 2004. $2.5 million of the original $10.0 million term loan was
repaid through proceeds of the completed sale of our Aerocell Structures
operations. The remaining $2.5 million of the original $10.0 million term loan
has also been satisfied through a transfer of property and from the proceeds
of the Aerocell Structures sale. This transaction was completed with a related party.

See Item 7 (Managements Discussion and Analysis of Financial Condition and
Results of Operations) of Part II and Note 5 to the accompanying consolidated
financial statements for further details of these transactions.



| |  | Settlement of Class Action Litigation
| |  | -------------------------------------

Several lawsuits had been filed against us and certain of our former officers
and directors, and our former auditors, in the United States District Court for
the Southern District of Florida, which were consolidated into a single
lawsuit. Among other
matters, the consolidated complaint alleged that our reported financial results
in 1997, 1998, and 1999 were materially misleading and violated generally
accepted accounting principles. In May 2002, we entered into an agreement to
settle these claims and on September 20, 2002 this settlement agreement became
final. Under the agreement, we have paid $11.5 million in cash, all of which
has been paid by our directors and officers liability insurance carrier, and
we have issued certain securities in full settlement of the claims. As a
result of this settlement becoming final, all claims against us and the other
defendants have been dismissed without any admission of liability or
wrongdoing. See Item 3 (Legal Proceedings) of Part I and Note 9 to the
accompanying consolidated financial statements for further details regarding
this settlement.



| |  | Settlement with Kellstrom Industries, Inc.
| |  | ------------------------------------------

In July 2002, we closed on the
transactions contemplated by a Post-Closing
Resolution Agreement, dated as of June 10, 2002, between us and Kellstrom
Industries, Inc. The settlement resolved and settled globally outstanding
disputes between us and Kellstrom relating to matters arising out of our
December 2000 sale of substantially all of the assets of our redistribution
operation to Kellstrom. The closing of the settlement resulted in a net cash
payment to us of approximately $0.4 million. See Risk Factors Relating to Our
Business within Part I and Note 3 to the accompanying consolidated financial
statements for further details regarding this settlement.



| |  | Sale of Aerocell Structures Operations
| |  | --------------------------------------

In July 2002, we completed the sale of substantially all of the assets and
business of our Aerocell Structures operations. The net sale price was $9.6
million (subject to post-closing adjustments), of which $9.1 million was
received in cash at the closing and the balance of which has been placed into
escrow. We used the proceeds from the sale to repay $3.5 million of the new
$7.0 million term loan and $3.5 million to repay the $2.5 million BofA loan and
a $1.0 million related party loan. The remainder, net of expenses, was used
for working capital. See Item 7 (Managements Discussion and Analysis of
Financial Condition and Results of Operations) of Part II and Note 3 to the
accompanying consolidated financial statements for further details regarding
this transaction.



| |  | Federal Income Tax Refund
| |  | -------------------------

In April 2002, we applied for and received $11.1 million of federal income tax
refunds as a result of carrying back net operating losses to offset taxable
income from prior years. This income tax refund is the result of favorable tax
legislation passed by the U.S. Congress, that temporarily extended the number
of years that net operation losses could be carried back to offset taxable
income. This refund has been used to pay vendors and for working capital. See
Note 11 to the accompanying consolidated financial statements for further
details regarding this transaction.



| |  | Recent Financing
| |  | ----------------

On May 14, 2003, we entered into an agreement with our principal stockholder
pursuant to which he agreed to loan us $6.0 million
($2.0 million at closing and $2.0 million 30 and 60 days
thereafter), which will be used for
working capital in our operations. The new note has a three-year maturity, is
secured debt and bears a 16% PIK interest coupon. In connection with the new
loan, we issued a warrant to our majority stockholder (the
Harber Warrant) to acquire, for nominal consideration,
30% of our outstanding common stock

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(on a
fully-diluted basis) as of the day the warrant is exercised. The
warrant is exercisable on or before January 31, 2007.

See discussion of these transactions within Item 7 (Managements Discussion and
Analysis of Financial Condition and Results of Operations) of Part II and Note
18 to the accompanying consolidated financial statements.



| |  | Current Liquidity
| |  | -----------------

Even in light of the fiscal 2002 transactions and settlements discussed above
and our recent financing, we continue to require additional cash flows
above amounts currently being provided from operations to meet the
working capital requirements of our operations. While we believe that
the proceeds of the new financing, as well as funds available to us
under our revolving credit facility and from operations, will be
sufficient to allow us to operate our business over the next 12
months, we cannot assure
you of that fact. We also cannot assure you that required additional
financing will be available to us in the future if needed to continue
the operation of our business.

Industry Overview

We believe that the total worldwide market for maintenance, repair and overhaul
services will increase over the next 20 years in line with the projected
increase in passenger and cargo traffic. Boeing forecasts, in its World Demand
for Commercial Airplanes,that passenger air traffic will average a growth rate
of 4.9% per year through the year 2021. In the same report, Boeing estimates
that cargo traffic will increase 6.4% per year through the year 2021. We
believe that currently airlines perform approximately 75% of the North American
MR&O services, outsourcing the balance to independent providers like TIMCO. As
these airlines evaluate their internal cost structure and look for ways to
lower their internal measurement of cost per seat mile, we believe that more of
these carriers will look to independent providers, like TIMCO, for providing
their maintenance, repair and overhaul services.

We believe that the following trends are currently affecting our industry:



| |  | Growth in the market for aircraft maintenance and repair services
| |  | -----------------------------------------------------------------

The Boeing Report (World Demand for Commercial Airplanes)projects that:

. the worldwide fleet of commercial aircrafts will more than double by 2021;

. the worldwide freighter airplane fleet will increase approximately 73% by
2021; and

. the aircraft fleet will continue to age.

We believe that a combination of these factors will in the long term increase
the demand for maintenance and repair services.



| |  | Increased outsourcing of maintenance and repair requirements
| |  | ------------------------------------------------------------

Airlines incur substantial expenditures directly in connection with fuel,
insurance, labor and aircraft ownership, as well as, indirectly through airport
security charges and passenger mandated taxes and fees. At the same time,
airlines have come under increasing pressure during the last decade to reduce
the costs associated with providing air transportation services. The result of
these factors has equated to a lower revenue per seat mile for many airline
carriers. While several of the expenditures required to operate an airline are
beyond the direct control of airline operators, such as the price of fuel,
airport security charges, taxes and labor costs, we believe that outsourcing
maintenance and repair functions are areas in which airlines can reduce their
operating costs. Outsourcing of maintenance and repair functions by airlines
allows an integrated service provider such as TIMCO to achieve economies of
scale unavailable to individual airlines and to handle these functions less
expensively and more efficiently on our customers behalf. We believe that the
trend towards outsourcing by airlines of a larger and larger portion of their
MR&O requirements to large independent service providers such as TIMCO will
continue in the future as these carriers look to reduce their cost per seat
mile for providing air transportation services and to focus their in-house
operations on their core competency of providing airline services to their
customers.

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| |  | Diversified services and competitive strengths
| |  | ----------------------------------------------

We believe that the breadth of our services, including a range of aircraft
maintenance and repair services, allows us to be a vendor of choice to our
customers in a highly fragmented industry. In addition to our heavy airframe
maintenance and modification services, by providing engineering services, and
repair and overhaul services on aircraft components and interiors, we believe
that we maintain a competitive advantage in the MR&O market through our ability
to ensure that each of the individual parts that need repair or overhaul are
completed on a timely basis and to our quality standards. Our customers include
commercial passenger airlines, air cargo carriers, aircraft leasing companies
and maintenance and repair facilities.



| |  | Emphasis on Quality
| |  | -------------------

All of our MR&O facilities are licensed by the FAA. We emphasize quality and
on-time delivery to our customers. We are focused on meeting and exceeding FAA
requirements. Since safety is a key issue to our customers, our ability to meet
and exceed FAA requirements on a consistent basis is critical.



| |  | Impact of September 11th Terrorist Attacks and Related Matters, the State
of the Airline Industry, and the General Economy
| |  | --------------------------------------------------------------------------------------------------------------------------

The September 11, 2001 terrorist attacks against the United States of America
and the resulting increase in airline insurance costs, additional government
mandated passenger taxes and fees, and increased airport security costs, have
had a severe impact on the aviation industry. These factors, in conjunction
with an overall slow down in the U.S. economy, a greater then 9% reduction in
passenger levels, and the overall instability in the Middle East (including the
currently on-going war in Iraq) have resulted in operating losses for U.S.
airline carriers in excess of $7.7 billion for 2001 and are estimated at $9.5
billion for 2002. As a result of these terrorist attacks and their related
aftermath, including the currently on-going war in Iraq, many commercial
passenger airlines and air cargo carriers reported significant reductions in
their capacity and have taken out of service upwards of 20% of their aircraft.
This reduction in capacity has caused the airline industry to incur significant
losses in 2001 and 2002 and lessened the aircraft maintenance required by such
airlines (and thereby the amount of maintenance being outsourced to companies
like TIMCO). The impact of the September 11th attacks, the currently on-going
war in Iraq, and the overall state of the economy, has resulted in continuing
losses during 2002 for most airlines and with the filing for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Court by several
carriers. The most notable have been the filings for protection from creditors
under Chapter 11 by U.S. Airways on August 11, 2002 and United Airlines on
December 9, 2002 (United accounted for 31.8% and 23.9%, respectively, of our
2001 and 2002 revenues). In addition to U.S. Airways and United Airlines,
other carriers, including American Airlines, have publicly discussed the
potential of seeking protection from creditors through a voluntary bankruptcy
filing. As related to us, current exposures to carriers that are at risk of
filing for protection are being continuously evaluated and monitored, though we
have in the past, and may in the future, experience losses relating to these
credit exposures. Additionally, the Company is positioning itself for
potential favorable implications of these protection filings and rebirths of
the airlines as it is anticipated that additional maintenance outsourcing
opportunities could result as these airlines look for cost reduction
alternatives to internal labor sources.

We believe that all of the above factors will continue to have a negative
impact on our business in the foreseeable future. In response, during 2001 and
2002 we took steps, including head count reductions, to reduce our costs. These
terrorist attacks and related aftermath events and the overall slowdown in the
U.S. economy have also impacted our competition, with several of our
competitors exiting the MR&O business.

Operations



| |  | Our core business is the providing of maintenance, repair and overhaul
services for aircraft and aircraft components.
| |  | ---------------------------------------------------------------------------------------------------------------------

Since our customers consist of domestic and international passenger and freight
airlines, aircraft leasing companies, and maintenance and repair facilities
that service airlines, economic factors affecting the airline industry tend to
impact our business. When economic factors adversely affect the airline
industry, they tend to reduce the overall demand for aircraft maintenance and
repair services, causing downward pressure on pricing and increasing the credit
risks associated with doing business within the industry. Additionally, the
price of fuel affects the aircraft maintenance and repair markets, since older
aircraft, which consume more fuel and which account for most of our aircraft
maintenance and repair business, become less viable as the price of fuel
increases. We cannot assure you that economic and other factors which have
affected the airline industry in the past and may affect the airline industry
in the future will not adversely impact our business, financial condition or
results of operations.

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During 2002, the market for maintenance and repair services was impacted by
rising fuel costs, increased capacity of competitors, changes in fleet mix by
some airlines, and other factors. These factors caused certain
airlines and other carriers to reduce the volume of services required, thereby,
reducing the services to be outsourced to third party providers such as TIMCO.
This has resulted in excess capacity among many maintenance and repair service
providers, which has caused pricing pressures to maintain market share. We have
sought to maintain our relative market share by continuing to focus on quality
service, turn time and by offering our array of services including increased
opportunities in aircraft modification and engineering services and by, where
necessary, offering price concessions and fixed prices for certain services.



| |  | Aircraft heavy maintenance
| |  | --------------------------

We perform maintenance, repair and modification services on aircraft at TIMCOs
repair stations in Greensboro, North Carolina, Lake City, Florida, and Macon,
Georgia. We also have a repair station in Winston-Salem, North Carolina, which
we have closed until we develop customers for this facility. Further, we have
recently subleased a maintenance facility in Goodyear, Arizona from a related
party. We have recently been licensed for this facility and have recently
commenced performing services at this facility.

The services we offer principally consist of C and D level maintenance
checks and the modification of passenger aircrafts to freighter configurations.
C and D checks each involve a different degree of inspection, and the
services performed at each level vary depending upon the individual aircraft
operators FAA-approved maintenance program. C and D level checks are
comprehensive checks and usually take a minimum of several weeks to complete,
depending upon the scope of the work to be performed.

The C level check is an intermediate level service inspection that typically
includes testing and servicing of the aircrafts operational systems, external
and internal cleaning and refurbishing, and servicing of the interior. Trained
mechanics visually inspect the external and internal structure of the aircraft,
repair defects and remove corrosion found, all in a manner as required by the
manufacturers maintenance and structural repair manuals. The D level check
includes all of the work accomplished in
the C level check, but places a more detailed emphasis on the integrity of
the structure. In the D level check, the aircraft is disassembled to the
point where the entire structure can be inspected and evaluated. Once the
inspection, evaluation and repairs have been completed, the aircraft is
reassembled and its systems reinstalled to the detailed tolerances demanded in
each systems specifications. Depending upon the type of aircraft and the
FAA-certified maintenance program being followed, intervals between C level
checks can range from 12 to 18 months and 1,000 to 5,000 flight hours, and
intervals between D level checks can range from four to eight years and
10,000 to 25,000 flight hours. Structural inspections performed during C
level and D level checks provide personnel with detailed information about
the condition of the aircraft and the need to perform additional work or
repairs not provided for in the original work scope. Project coordinators and
customer support personnel work closely with the aircrafts customer service
representative in evaluating the scope of any additional work required and in
the preparation of a detailed cost estimate for the labor and materials
required to complete the job.

Each aircraft certified by the FAA is constructed under a Type Certificate.
Anything which is done subsequently to modify the aircraft from its original
type design requires the review and approval of the FAA. These modifications
are authorized by the issuance of a Supplemental Type Certificate (STC) or an
engineering order issued by the airlines engineering department. Typical
modification services include reconfiguring of passenger interiors, installing
passenger amenities such as telephones and installing crew rest areas.

We also convert passenger aircraft to freighter configuration. When we convert
a passenger plane to freighter configuration we:

completely strip the interior;

strengthen the load-bearing capacity of the flooring;

install the bulkhead or cargo net;

cut into the fuselage for the installation of a cargo door;

reinforce the surrounding door structures;

replace windows with metal plugs;

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fabricate and install the cargo doors; and

install fire detection and suppression systems.

We also need to line the aircraft interior to protect the fuselage structure
from pallet damage and modify the air conditioning system. Conversion contracts
also typically require C or D level maintenance checks as these conversion
aircraft have usually been out of service for some time and maintenance is
required for the aircraft to comply with current FAA standards. Additional
modification services performed may include cockpit reconfiguration to upgrade
the avionic systems to current technology and the integration of traffic
control and avoidance systems, windshear detection systems and navigational
aids.



| |  | Component repair and overhaul services
| |  | --------------------------------------

We provide repair and overhaul services at our three FAA-licensed repair
stations. Brice Manufacturing Company (Brice) manufactures and markets an
extensive range of aircraft seats, seat refurbishments and related products and
services. Brice also maintains over 4,000 parts manufacturing authorizations
(PMAs) which encompass all seat types. Aircraft Interior Design refurbishes
aircraft interior components, including passenger and crew seats. TIMCO Engine
Center refurbishes JT8D engines.



| |  | Engineering services
| |  | --------------------

Our engineering services group provides integrated aircraft engineering,
including aircraft certification, design and approval of modifications to
aircraft systems and structures, for customers of our heavy aircraft
maintenance operations, and for airlines, leasing companies and aerospace
original equipment manufacturers. Our engineering services group was the first
to market cockpit door bars and has obtained certification from the FAA for a
new ballistic cockpit doors that is in compliance with FAA requirements that
resulted from the September 11, 2001 terrorist attacks.



| |  | Joint venture to convert 727 aircraft
| |  | -------------------------------------

We own a 50% interest in a joint venture which has an STC for conversion of
Boeing 727 aircraft which is fully compliant with FAA regulations and
requirements for aftermarket aircraft cargo conversions. We manufacture the
kits required to complete conversions of the aircraft based upon the STC, and
we operate one of the aircraft maintenance facilities which has been licensed
by the joint venture to install the kits on passenger aircraft being converted
to cargo configuration. For the year ended December 31, 2002, there were no
sales activities for this joint venture.

Management information systems

We operate our business using two decentralized, network based systems. Each
system is fully integrated in regards to the respective business unit. One
system is utilized in the operation of our heavy airframe maintenance and
modification business. The other system is used at each of our component MR&O
businesses. We are currently assessing our systems and expect that in future
periods we will need to upgrade one or more of our systems. However, we do not
currently intend to make significant systems-related capital expenditures
during 2003.

Competition

The airline industry and the markets for our products and services are
extremely competitive, and we face competition from a number of sources. Our
competitors include airline and aircraft service companies, and other companies
providing maintenance, repair and overhaul services. Some of our competitors
have substantially greater financial and other resources than us. We cannot
assure you that competitive pressures will not materially adversely affect our
business, financial condition or results of operations. In the airframe heavy
maintenance, which currently constitutes approximately 80% of our business, our
major competitors are B.F. Goodrich and ST Mobile Aerospace Engineering, Inc.

Government regulation

The aviation industry is highly regulated by the FAA in the United States and
by similar agencies in other countries. We must be certified by the FAA, and in
some cases authorized by the original equipment manufacturers, in order to
repair aircraft components and to perform maintenance and repair services on
aircraft.

7



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##### 



The FAA regulates the manufacture, repair and operation of all aircraft and
aircraft equipment operated in the United States. Its regulations are designed
to ensure that all aircraft and aircraft equipment are continuously maintained
in proper condition to ensure safe operation of the aircraft. Similar rules
apply in other countries. All aircraft must be maintained under a continuous
condition monitoring program and must periodically undergo thorough inspection
and maintenance. The inspection, maintenance and repair procedures for the
various types of aircraft and aircraft equipment are prescribed by regulatory
authorities and can be performed only by certified repair facilities utilizing
certified technicians. Certification and conformance is required prior to
installation of a part on an aircraft. We closely monitor the FAA and industry
trade groups in an attempt to understand how possible future regulations might
impact us.

We cannot assure you that new and more stringent government regulations will
not be adopted in the future or that any such new regulations, if enacted, will
not materially adversely affect our business, financial condition or results of
operations.

Further, our operations are also subject to a variety of worker and community
safety laws. In the United States, the Occupational Safety and Health Act
mandates general requirements for safe workplaces for all employees. Specific
safety standards have been promulgated for workplaces engaged in the treatment,
disposal or storage of hazardous waste. We believe that our operations are in
material compliance with health and safety requirements under the Occupational
Safety and Health Act.

Product liability

Our business exposes us to possible claims for personal injury or death which
may result from the failure of an aircraft or an aircraft part repaired or
maintained by us or from our negligence in the repair or maintenance of an
aircraft or an aircraft part. While we maintain what we believe to
have adequate
liability insurance to protect us from claims of this type, based on our review
of the insurance coverages maintained by similar companies in our industry, we
cannot assure you that claims will not arise in the future or that our
insurance coverage will be adequate. Additionally, there can be no assurance
that insurance coverages can be maintained in the future at an acceptable cost.
Any liability of this type not covered by insurance could materially adversely
affect our business, financial condition or results of operations.

Employees

As of December 31, 2002, we employed approximately 2,000 persons. None of our
employees are covered by collective bargaining agreements. We believe that our
relations with our employees are good.

Risk Factors Relating to Our Business

In addition to the other information contained in or incorporated by reference
into this Form 10-K, you should carefully consider the following risk factors,
as well as the other information contained in this report:



| |  | General Business Risk Factors
| |  | -----------------------------

For the year ended December 31, 2002, we incurred losses from continuing
operations of $24.4 million and continue to require additional
cash flow
above amounts currently being provided from operations to meet our
working capital
requirements. Additionally, as a result of current year operating activities,
we were not in compliance, at December 31, 2002, with debt covenant requirements
under our Amended Credit Facility and our TROL. Subsequent to year-end, we
have obtained a waiver of non-compliance with all financial covenants and have
thereby cured these covenant violations.

Our ability to service our debt and
note obligations, as they come due, including maintaining compliance
with the covenants and provisions under our Amended Credit Facility,
our TROL Financing agreement, our $5.0 million BofA Term Loan, and our
New Notes, Old Notes, and Junior Notes, as well as our debt due to
our principal stockholder resulting from his recent loan to us, is dependent upon our future
financial and operating performance. This performance, in turn, is
subject to various factors, including certain factors beyond our
control, such as changes in conditions affecting the airline industry
and changes in the overall economy. Our high leverage position could
have a material impact on our liquidity and this leverage positioning
makes us vulnerable to economic downturns.

Cash flow from operations service
payments of our debt and note obligations, thereby reducing funds
available to us for other purposes. Even if we are able to meet our
debt service and other obligations when due, we may not be able to
comply with the covenants and other provisions under our debt and
note obligations. A failure to comply, unless waived by the
lenders and noteholders, would be an event of default and would
permit the lenders and noteholders to accelerate the maturity of
these debt and note obligations. It would also permit them to
terminate their commitments to extend credit under our financing
agreements. The Amended Credit Facility and the TROL financing
agreement also provide for the termination of the financing
agreements and repayment of all obligations in the event of a
material adverse change in our business or a change in control, as
defined. These actions would have an immediate material adverse
effect on our liquidity. If we were unable to repay our debt to the
lenders or obligations to the noteholders, or otherwise obtain a
waiver, the lenders and holders could proceed against the collateral
securing the financing obligations and notes, and exercise all other
rights available to them.

8



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| |  | Risks associated with the aviation services industry
| |  | ----------------------------------------------------

The condition of the airline industry has a substantial affect on our business,
since our customers consist of airlines, maintenance and repair facilities that
service airlines, as well as original equipment manufacturers. Generally, when
economic factors adversely affect the airline industry, they tend to reduce the
overall demand for maintenance and repair services, causing downward pressure
on pricing and increasing the credit risks associated with doing business with
airlines. Additionally, the price of jet fuel affects the maintenance and
repair markets, since older aircraft, which consume more fuel and which
currently account for a significant portion of our maintenance and repair services
business, become less viable as the price of fuel increases.

On September 11, 2001, four commercial aircraft were hijacked and destroyed in
terrorist attacks on the World Trade Center in New York City and the Pentagon
in Washington, D.C. These terrorist attacks and resulting increased insurance
costs, additional passenger taxes and fees, and increased airport security
costs have had a negative impact on the airline industry in general, and
thereby indirectly on us. Additionally, a recent increase in the price of jet
fuel, the currently on-going war in Iraq, the reduction in passenger levels
from 2000 (approximately 663 million) to 2002 (estimated at
approximately 601 million), and
the greater than 15% competitive reduction in airfare prices have also
negatively impacted the airline industry, with the result for some carriers
being the filing for protection under Chapter 11 of the United States
Bankruptcy Code. The combination of these factors has also adversely impacted
us through downward pricing pressures, the reduction in aircraft maintenance
needs due to declines in airline travel, and the increased credit exposure to
certain airline customers. We cannot assure you that economic and other
factors which are currently affecting and may continue to affect the airline
industry will not continue to adversely impact our business, financial
condition or results of operations in the future.



| |  | The loss of one or two of our major customers could materially hurt our
business because we depend on only a small number of customers
| |  | --------------------------------------------------------------------------------------------------------------------------------------

Our four largest customers accounted for approximately 65% of our
total revenues for the year ended December 31, 2002 and approximately 58% of
our total revenues for the year ended December 31, 2001. These four customers,
individually,
represented approximately 24%, 18%, 12%, and 11%, of our total
revenues, for the year ended December 31,
2002. The largest of these customers, United Airlines, is currently in
reorganization under Chapter 11 of the United States Bankruptcy Code. These
same four customers, individually, represented approximately 32%, 10%, 9%, and
7% of our revenues, respectively, for the year ended December 31, 2001. No
other customers represented more than 10% of our consolidated revenues for
these two fiscal years. While the relative significance of customers varies
from period to period, the loss of, or significant curtailments of purchase of
our services by, one or more of our significant customers at any time
has in the past and may in the future
adversely affect our revenue and cash flow.



| |  | Our business is subject to heavy government regulation
| |  | ------------------------------------------------------

The aviation industry is highly regulated by the Federal Aviation
Administration in the United States and by similar agencies in other countries.
We must be certified by the FAA in order to repair aircraft and aircraft
components.

We cannot assure you that new and more stringent government regulations will
not be adopted in the future or that any such new regulations, if enacted,
would not materially adversely affect our business, financial condition or
results of operations.



| |  | Our business is highly competitive
| |  | ----------------------------------

The airline industry and the markets for our products and services are
extremely competitive, and we face competition from a number of sources. Our
competitors include aircraft manufacturers, aircraft part manufacturers,
airline and aircraft service companies and other companies providing
maintenance, repair and overhaul services. Certain of our competitors are
currently experiencing financial difficulties similar to or worse than our own
and several of our competitors have ceased operations or substantially
curtailed their operations during the last fiscal year. Many of these
competitors have responded to their financial difficulties by reducing prices
on their services to increase or retain market share. Any material
deterioration in our financial condition is likely to affect our ability to
compete with price-cutting by our competitors. Some of our competitors have
substantially greater financial and other resources than we do. We cannot
assure you that competitive pressures will not materially adversely affect our
business, financial condition or results of operations.

9



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| |  | Our business is susceptible to liability claims
| |  | -----------------------------------------------

Our business exposes us to possible claims for personal injury or death which
may result if we were negligent in repairing an airplane. We cannot assure you
that claims will not arise in the future or that our insurance coverage will be
adequate to protect us in all circumstances. Additionally, we cannot assure you
that we will be able to maintain adequate insurance coverages in the future at
an acceptable cost. Any liability claim not covered by adequate insurance could
materially adversely affect our business, financial condition or results of
operations.



| |  | We depend on our executive officers and our employees
| |  | -----------------------------------------------------

Our continued success depends significantly upon the services of our executive
officers and upon our ability to attract and retain qualified personnel in all
of our operations. While we have employment agreements with each of our
executive officers and certain of our key employees, most of our employees are
employed on an at-will basis. The loss of one or more of our executive officers
and of a significant number of our other employees without capable replacements
could materially adversely affect our business, financial condition or results
of operations.

Our airframe heavy maintenance business (which constitutes more than 80% of our
current business) requires qualified mechanics and other personnel to provide
services requested by our customers, and our ability to meet customer
requirements depends on our ability to attract and retain the mechanics and
other qualified personnel necessary to provide services at the physical
locations of our operations. In that regard, we utilize outside contractors to
provide personnel when we cannot otherwise hire required personnel. While we
have been able to obtain sufficient mechanics and other required personnel to
date, there can be no assurance we will be able to obtain all personnel
required in the future. This may constrain our ability to grow our operations
from its current levels.



| |  | Control of our company is vested with our principal stockholder
| |  | ---------------------------------------------------------------

Lacy Harber, our principal stockholder, owns approximately 58% (as of December
31, 2002) of our outstanding common stock. Mr. Harber is able to control the
vote on all matters submitted to the vote of our stockholders and therefore,
able to direct our management and policies, including, but not limited to, the
election of our entire board of directors.

In addition, under such circumstances, we will not, without Mr. Harbers
approval, be able to consummate transactions involving an actual or potential
change in our control, including transactions in which the holders of our
common stock might otherwise receive a premium for their shares over then
current market prices.

Sales of business units during
2000, 2001 and 2002

During 2000, 2001, and 2002 we engaged in a restructuring of our business and
operations intended to focus our business on our maintenance, repair and
overhaul operations and to reduce and restructure our senior debt.

In July 2002, we completed the sale of substantially all of the assets and
business of our Aerocell Structures operations. The net sales price was $9.6
million (subject to post-closing adjustments described below), of which $9.1
million was received in cash at the closing and the balance of which has been
placed into escrow and will be disbursed in the manner set forth below. We
used the proceeds from the sale to repay $3.5 million of the new $7.0 million
term loan and $3.5 million to repay the $2.5 million BofA
Term Loan due August 14,
2002 and a $1.0 million related party loan. The remainder, net of expenses,
was used for working capital. For the year ended December 31, 2002, the
Company has recorded a $0.3 million gain as a result of this sale.

The agreement under which the Aerocell assets were sold provided that the value
of the Aerocell assets at the closing date would be at least $11.7 million.
The agreement provides procedures relating to the determination of the closing
date value of the Aerocell assets and requires a post-closing payment to the
purchaser (on a dollar-for-dollar basis) if it is ultimately determined that
the closing date value of the Aerocell assets was lower than the targeted
amount. We are currently in the process of reconciling the closing date value
of the Aerocell assets with the purchaser.

The Agreement also provided that the funds in escrow will be held to support
certain indemnification rights provided in the Agreement, and, provided that if
no claims for indemnity have been asserted, $250,000 of the funds being
held in escrow will be released six months after the Closing Date and the
balance of the funds being held in escrow will be released one year
after the Closing Date.

10



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As a result of unresolved purchase price issues, the
escrow balance that was due at the end of January
2003 has not yet been released. Upon resolution of these items, any residual
balance, after an offset of any agreed to or required purchase price
adjustments, will be released. The Agreement also provides that we will
receive certain rebates in the future for work which we help procure for the
Purchaser. However, before any such amounts are payable under this rebate, the
Purchaser will receive a credit to the extent that certain specified inventory
of Aerocell is not sold within one year following the Closing Date. There is
also additional inventory of Aerocell as to which we will have to pay up to
$0.2 million in cash one year from the closing if that inventory has not been
sold or consumed by that date.

In May 2001, we completed the sale of the assets of our Caribe Aviation, Inc.
component repair subsidiary for $22.5 million, of which we received $21.75
million in cash at the closing, and the balance of which was received in 2002.
We used $15.5 million of the proceeds from the sale to repay senior debt and
the remainder for working capital. In addition, the purchaser acquired the
real estate and facility on which the Caribe operation was located for an
aggregate purchase price of $8.5 million. The proceeds from the sale of the
real estate and facility were used to reduce the outstanding TROL financing.

In December 2000, we completed the sale of our Dixie Aerospace new parts
distribution operation to Wencor West, Inc. for $17.7 million, including debt
assumed by Wencor West. We used the net cash proceeds of the sale, which
approximated $13.5 million, to repay senior debt. In addition, we retained
certain accounts receivable and inventory of Dixies new parts distribution
operation which are being liquidated pursuant to collection and consignment
agreements executed with the purchaser.

In December 2000, we completed the sale of substantially all of the assets and
business of our redistribution operation in a series of transactions which were
intended to constitute a single transaction (the Transaction). The
Transaction was entered into with Kellstrom Industries, Inc. (Kellstrom) and
KAV Inventory, LLC (KAV). KAV is a 50/50 limited liability company organized
by Kellstrom and us. The aggregate purchase price received by us in the
Transaction was $156.4 million, approximately $127.0 million of which was paid
in cash ($122.0 million after payment of transaction expenses). The cash net
proceeds of the Transaction were used by us to repay senior debt.

The first component of the Transaction consisted of KAVs acquisition of
substantially all of the aircraft and engine spare parts inventory and the
engine inventory of our redistribution operation, as well as certain rotable
parts inventories from two of our MR&O operations. The purchase price paid for
this inventory was 89% of the closing date adjusted book value of such
inventory ($148.6 million), subject to post-closing adjustment as set forth in
the agreement relating to the inventory sale. As part of the Transaction, KAV
consigned the inventory to Kellstrom. All post-closing adjustments
have been resolved within the global settlement described below.

The cash portion of the purchase price paid for the inventory ($105.5 million)
was obtained by KAV from a financial institution, with the balance paid in the
form of three subordinated promissory notes. The KAV institutional financing
was secured by a lien on all of the assets of KAV. The first two subordinated
notes, each in the principal amount of $13.7 million, were five-year senior
subordinated notes bearing interest at the rate of 14% per annum (see below for
a description of Kellstroms purchase of one of these notes). The first two
notes were subordinated in all respects to the KAV institutional financing. The
third subordinated note was a five-year junior subordinated note in the
principal amount of $15.7 million bearing interest at the rate of 14% per
annum. The junior subordinated note was subordinated in all respects to both
the KAV institutional financing and to repayment of the two senior subordinated
notes. These amounts were to be paid with funds available after repayment of
the KAV institutional financing and after repayment of the two $13.7 million
senior subordinated notes.

In connection with the Transaction, we agreed with Kellstrom to equally share
the operational expenses of KAV beyond amounts permitted under the loan
agreement relating to KAVs institutional financing. Additionally, we posted an
$8.5 million letter of credit and Kellstrom posted a $6.5 million letter of
credit with Bank of America to secure (in part) KAVs institutional financing.
The letters of credit were only to be drawn upon a default by KAV of its loan
obligations and if drawn, such amounts were to be treated as loans to KAV and
repaid prior to repayment of the two $13.7 million senior subordinated notes.

Additionally, we and Kellstrom were to be repaid the approximately $2.3 million
which we each advanced to KAV for use in paying bank fees and expenses relating
to obtaining their institutional financing. We and Kellstrom were to be repaid
these amounts prior to repayment of the two $13.7 million senior subordinated
notes. See Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS for a description of the current status of the KAV
notes and the Companys $8.5 million letter of credit.

11



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The second component of the Transaction consisted of a sale to Kellstrom of
certain non-inventory assets of our redistribution
operation and the assumption by Kellstrom of a portion of the redistribution
operations accounts payable. Kellstrom also acquired one of the $13.7 million
senior subordinated notes described above. The net purchase price for these
assets (including the $13.7 million senior subordinated note), after adjustment
for assumed debt, was $21.5 million, all of which was paid in cash. The
purchase price of the non-inventory assets purchased by Kellstrom was subject
to post-closing adjustment as set forth in the agreement relating to the asset
sale. All post-closing adjustments have been resolved within the global
settlement described below.



| |  | Additionally, as part of the Transaction:
| |  | -----------------------------------------

(1)  Kellstrom leased certain furniture, fixtures and equipment (the FF&E)
used in the redistribution operation and the redistribution operations
warehouse facility in Pearland, Texas for a one-year term (the Pearland lease
and related option (described below) were cancelled in early 2002);

(2)  Kellstrom leased the redistribution operations 545,000 square foot
headquarters and warehouse facility located in Miramar, Florida (the Miramar
Lease). Pursuant to a sublease agreement (which was modified upon the closing
of the settlement contemplated by the Post Closing Resolution
Agreement described
below), Kellstrom would pay us the lesser of $384,000 or the actual lease
payment due under our lease for this facility for each year during the initial
five year lease term. We also granted Kellstrom the right to renew the sublease
for five consecutive five year periods, at a market rental rate;

(3)  Kellstrom had an option to acquire the FF&E and/or the Pearland, Texas
property during the term of the above-described leases, and for a period of 60
days thereafter, for a purchase price equal to the net book value of such
assets (approximately $9.4 million in the aggregate). We had an option (which
was modified as described below) after one year to require Kellstrom to
purchase the FF&E and/or the Pearland, Texas property for the same purchase
prices; provided, however, that if we exercised either or both of our options,
Kellstrom could defer its purchases of and continue to lease the FF&E and/or
the Pearland, Texas property for up to an additional six months under certain
circumstances;

(4)  We entered into a cooperation agreement (which was terminated upon the
closing of the settlement contemplated by the Post Closing Resolution
Agreement
described below) under which we agreed to provide repair services for the KAV
parts inventory as well as repair services to Kellstrom with respect to
Kellstroms parts inventory, and Kellstrom agreed to supply parts to our MR&O
operations, on an ongoing basis;

(5)  We entered into a non-competition agreement (which was modified in the
settlement described below) with Kellstrom whereby we are restricted for a
period of up to five years from engaging in the redistribution business; and

(6)  We granted Kellstrom a limited license to use the name Aviation Sales (if
combined with the Kellstrom name) in connection with Kellstroms redistribution
business.

In July 2002, we closed on a global settlement of outstanding disputes between
ourselves and Kellstrom (the Settlement) pursuant to the terms of a Post-Closing Resolution
Agreement, dated as of June 10, 2002 (the PCRA).

As part of the Settlement:



|a. |  | Kellstrom purchased certain furniture, fixtures and equipment (FF&E),
approximately $7.7 million, net, from one of our subsidiaries, Aviation
Sales Distribution Services Company (ASDC), which equipment is being
used by Kellstrom in the operation of its business;                                                      
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|b. |  | Kellstrom put back to us certain uncollected, fully reserved accounts
receivable, which had been sold by ASDC to Kellstrom as part of the sale of
the assets of the redistribution operation, in accordance with the terms
of the Asset Purchase Agreement, dated December 1, 2000, among us,
Kellstrom, and ASDC (the APA);
|  
|c. |  | We and Kellstrom resolved outstanding purchase price adjustment disputes
under the APA;                                                                                                                                                                                                                                         
|  
|d. |  | We and Kellstrom settled and setoff amounts (approximately $1.2 million)
due and owing in the ordinary course between us and Kellstrom, including
certain rental amounts owed by Kellstrom under the Miramar Lease (defined
below);                                                                                             

12



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|e. |  | Kellstroms sub-lease (the Miramar Lease) of our 525,000 square foot
Miramar, Florida warehouse and office facility (the Miramar Facility)
was amended (the Amended Kellstrom Lease) to provide for a term of
twenty (20) years with an annual minimum rental of $2.75 million for the
first five years, $3.0 million for years six through ten and at fair
market value thereafter (all subject to CPI increases). Further, the
Amended Kellstrom Lease provides Kellstrom with a one-time right to
terminate the Amended Kellstrom Lease upon the completion of the 7th lease
year after the closing of the Settlement;
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|f. |  | The Non-Competition Agreement between us and Kellstrom was amended to,
among other things, allow our Aerocell Structures flight surfaces MR&O
operation to exchange flight surfaces with its customers and to allow us,
during the six months following the completion of the settlement, to sell
up to $4.0 million of aircraft parts in the open market; and                                                                                                                                                                                                                                                                 
|  
|g. |  | The Cooperation Agreement between us and Kellstrom, which obligated us to
purchase aircraft parts from Kellstrom, was terminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

The closing of the Settlement occurred in connection with the sale of
Kellstroms business to an entity, Kellstrom Aerospace, LLC, organized by
Inverness Management LLC. As part of that sale, the Amended Kellstrom Lease
was assigned to Kellstrom Aerospace LLC. Such sale, and the terms of the
Settlement, were approved by the Bankruptcy Court in Kellstroms Chapter 11
bankruptcy proceeding.

In addition, simultaneous with the Settlement, we resolved certain purchase
price adjustment issues with KAV under the Inventory Purchase Agreement, dated December
1, 2000, among us, ASDC and KAV. Further, the consignment agreement between
KAV and Kellstrom (which has been assigned to Kellstrom Aerospace, LLC) and the
loan arrangement between KAV and Bank of America were simultaneously amended.

Finally, simultaneous with the Settlement, the four parties (one of which is an
entity controlled by our principal stockholder) that had provided credit
support to Kellstrom in December 2000 at the time of the sale of our
redistribution operations to Kellstrom, entered into an agreement with
Kellstroms senior lenders to share proceeds from a sale of an office and
warehouse facility owned by Kellstrom and regarding certain other matters.
Additionally, as part of the same agreement, we entered into a release
agreement with Kellstroms senior lenders with respect to certain matters.

13



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ITEM 2. PROPERTIES.

Our executive offices are located in Greensboro, North Carolina at the
headquarters of our TIMCO airframe maintenance operations. Our ownership
interests and leasehold interests in all of our facilities are pledged to our
senior lenders as collateral for amounts borrowed. See Notes 5 and 7 to
Consolidated Financial Statements. The following table identifies, as of
December 31, 2002, our principal properties:

|                                |  |                   |  |         |         |          |  |          
|------------------------------- |  | ----------------- |  | ------- | ------- | -------- |  | ---------
|FACILITY                        |  |                   |  | SQUARE  |         | OWNED OR
|DESCRIPTION                     |  | LOCATION          |  | FOOTAGE |         | LEASED  
|                                |  |                   |  |         |         |         
|Office and warehouse            |  | Miramar, FL       |  |         | 545,000 |          |  | Leased(1)
|Office and Aircraft
Maintenance |  | Greensboro, NC    |  |         | 765,000 |          |  | Leased(2)
|Office and Aircraft
Maintenance |  | Lake City, FL     |  |         | 650,000 |          |  | Leased   
|Office and Aircraft
Maintenance |  | Oscoda, MI        |  |         | 396,000 |          |  | Leased(3)
|Office and Aircraft
Maintenance |  | Phoenix, AZ       |  |         | 370,000 |          |  | Leased(4)
|Office and Aircraft
Maintenance |  | Winston-Salem, NC |  |         | 250,000 |          |  | Leased(5)
|Office and Aircraft
Maintenance |  | Macon, GA         |  |         | 140,000 |          |  | Leased   
|Office and Maintenance          |  | Pacoima, CA       |  |         | 70,000  |          |  | Leased   
|Office and Maintenance          |  | Miami, FL         |  |         | 55,000  |          |  | Leased(6)
|Office and Maintenance          |  | Dallas, TX        |  |         | 80,000  |          |  | Leased   
|Office and Maintenance          |  | Minneapolis, MN   |  |         | 34,000  |          |  | Leased(7)
|Warehouse                       |  | Covington, KY     |  |         | 38,200  |          |  | Owned    



| | (1) |  | Currently subleased to Kellstrom Aerospace, LLC.                                                                                                                   
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Our corporate headquarters is located at this facility.                                                                                                            
|
| | (3) |  | Airframe maintenance facility has been closed and we have returned control
of the facility to the airport authority; Engine repair facility is currently
operating.
|
| | (4) |  | This facility is subleased to us
until June 2006 by our principal
stockholder.                                                                                     
|
| | (5) |  | This facility has been closed until we develop customers for this facility.                                                                                        
|
| | (6) |  | This facility is leased from a former director and executive officer and
sub-leased to an unaffiliated third party.                                                
|
| | (7) |  | This facility is closed.                                                                                                                                           

14



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ITEM 3. LEGAL PROCEEDINGS.

Lawsuits and investigations

Several lawsuits had been filed against us and certain of our former officers
and directors, and our former auditors, in the United States District Court for
the Southern District of Florida, which had been consolidated into a single
lawsuit. The consolidated complaint, as amended in March 2000, September 2000
and September 2001, alleged violations of Sections 11 and 15 of the Securities
Act of 1933 (Securities Act) and Sections 10(b) and 20(a) of, and Rule 10b-5
under, the Securities Exchange Act of 1934 (Exchange Act). Among other
matters, the consolidated complaint alleged that our reported financial results
in 1997, 1998 and 1999 were materially misleading and violated generally
accepted accounting principles. The amended consolidated complaint sought
damages and certification of two classes, one consisting of purchasers of our
common stock in our June 1999 public offering and one consisting of purchasers
of our common stock during the period between April 30, 1997 and April 14,
2000.

In May 2002, we entered into an agreement to settle these claims. Under the
settlement agreement, the fairness of which was approved by the District Court
on August 21, 2002, the Company paid $11.5 million in cash, all of which was
paid by our directors and officers liability insurance carrier. We also
issued (i) 1.25 million shares of our authorized but unissued common stock,
(ii) $4.0 million of our new 8% Junior Subordinated Convertible PIK Notes due
2007 (with terms similar to, but structurally subordinated to, our
New Notes
(see Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS and Note 6 within the accompanying consolidated financial
statements), and (iii) five-year warrants to purchase 4.15 million shares of
our common stock at an exercise price of $5.16 per share, which are
exercisable upon grant. The settlement
became effective on September 20, 2002. As a result of this settlement
becoming final, all claims against us and the other defendants have been
dismissed without any admission of liability or wrongdoing.

During the first quarter of 2000, the U.S. Securities and Exchange Commission
initiated an inquiry into our accounting for certain transactions occurring
prior to 2000. We are cooperating with the SEC in its inquiry.

In November 2001, we were sued by several former employees of our Oscoda,
Michigan heavy airframe maintenance operation, on behalf of themselves and
purportedly on behalf of a class of similarly situated employees, for alleged
violations by us of the Worker Adjustment and Retraining Notification Act in
connection with our spring 2001 temporary closure of that operation. The suit,
which was filed in the U.S. District Court for the Eastern District of
Michigan, sought back pay (including salary and accrued vacations) and other
benefits for each of the affected employees for a sixty day period after such
employees were terminated. In November 2002, without admitting
liability, we entered into a settlement
agreement, which was approved by the U.S. District Court and is pending a vote
of acceptance by the former employees, relating to this suit. As part of the
settlement, we have agreed to pay these former employees $1.15 million. While
we expect the settlement to be accepted by the class of former employees, there
can be no assurance of this fact. If the settlement is not approved, we intend
to vigorously contest this matter.

We are also involved in various lawsuits and other contingencies arising out of
operations in the normal course of business.

In the opinion of management, the ultimate resolution of these claims and
lawsuits will not have a material adverse effect upon our business, financial
position or results of operations.

Environmental matters

We are taking remedial action pursuant to Environmental Protection Agency and
Florida Department of Environmental Protection (FDEP) regulations at
TIMCO-Lake City. Ongoing testing is being performed and new information is
being gathered to continually assess the impact upon us and the magnitude of
required remediation efforts. Based upon cost estimates provided by
environmental consultants as of December 31, 2002, it was estimated that the
total remaining testing, remediation and compliance costs for this facility
would be approximately $1.4 million. To comply with the financial assurances
required by the FDEP, we had issued a $1.4 million standby letter of credit in
favor of the FDEP. Subsequent to year-end, in March 2003, engineers of the
FDEP presented updated information regarding our exposure at TIMCO-Lake City.
The result of this updated information has concluded that our environmental
exposure approximates $1.2 million. As a result of this updated evaluation, we
have lowered the related environmental accrued liability for this
exposure by $0.2 million.
Additionally, the FDEP has allowed us to lower the standby letter of credit in
favor of the FDEP to approximately $0.3 million. While this reduction may only
be temporary, we are evaluating alternative means, outside of standby letter of
credits, for meeting the financial assurance requirements established by the
FDEP.

15



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##### 



In addition, testing and evaluation for all known sites on TIMCO-Lake Citys
property is substantially complete and we have commenced a remediation program.
We are currently monitoring the remediation, which will extend into the future.
Based on current testing, technology, environmental law and clean-up
experience to date, we believe that we have established an accrual for the
estimated costs associated with our current remediation strategies.

Additionally, there are other areas adjacent to TIMCO-Lake Citys facility that
could also require remediation. We do not believe that we are responsible for
these areas; however, it may be asserted that TIMCO and other parties are
jointly and severally liable and are responsible for the remediation of these
properties.

Accrued expenses in the accompanying December 31, 2001 and 2002 consolidated
balance sheets include $2.0 million and $1.5 million, respectively, relating to
obligations to remediate the environmental matters described above. Future
information and developments will require us to continually reassess the
expected impact of the environmental matters discussed above. Actual costs to
be incurred in future periods may vary from the estimates, given the inherent
uncertainties in evaluating environmental exposures. These uncertainties
include the extent of required remediation based on future testing and
evaluation and the varying costs and effectiveness of remediation methods.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of our stockholders during the fourth
quarter of 2002.

16



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##### 



PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



| |  | Shares of common stock issued in our completed restructuring of common
equity
| |  | -----------------------------------------------------------------------------

In connection with our restructuring, effective February 28, 2002 we changed
our capitalization by increasing the number of our authorized shares of common
stock from 30 million shares to 500 million shares and by reducing the number
of our issued and outstanding shares of common stock by converting every ten
shares of our issued and outstanding common stock into one share.

Prior to the restructuring, we had 15,015,317 shares of common stock
outstanding. In connection with the restructuring, these outstanding shares
became 1,501,532 post-reverse split shares of our common stock. We also issued
the following shares of our common stock in the restructuring:



| |  |  4,504,595 shares of our post-reverse split common stock were issued to
the holders of our Old Notes in the Note Exchange;
| |  | ---------------------------------------------------------------------------------------------------------------------------
|
| |  |  24,024,507 shares of our post-reverse split common stock were issued in
the rights offering.                             

At the completion of the restructuring, we had 30,030,634 post-reverse split
shares of common stock outstanding and Lacy J. Harber, our principal
stockholder, owned approximately 61% of the outstanding shares.

Further, in connection with the restructuring we issued 6,006,126 five-year
warrants to purchase shares of our post-reverse split common stock at an
exercise price of $5.16 per share, which are exercisable upon grant. Half
of these warrants were issued to the holders of our pre-restructuring common
stock. The balance of the warrants were issued to the holders of our Old Notes
in the Note Exchange. Warrants issued to the holders of our Old Notes will
trade together with the New Notes until December 31, 2003.

Pursuant to the terms of the New Notes which were issued in the Note Exchange,
we are obligated to issue additional shares of our post-reverse split common
stock when the New Notes are either redeemed or mature.

If the New Notes are redeemed (at our option) prior to their maturity, we will
issue the following shares of our post-reverse
split common stock in connection with such redemption:



| |  | If the New Notes are redeemed in 2002 or 2003, we will issue 4,504,595
shares of post-reverse split common stock as part of the redemption consideration,                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | If the New Notes are redeemed in 2004, 2005 or 2006 (prior to maturity),
we will issue 3,003,063 shares of post- reverse split common stock as part of the redemption consideration; and                               
|
| |  | If the New Notes have not been redeemed prior to their maturity at the
close of business on December 31, 2006, the New Notes will automatically convert into 270,275,706 shares of our
post-reverse split common stock.
|
| |  | Securities issued in connection with our class action settlement                                                                                                                                                       

In connection with our class action settlement, we issued 1.25 million shares
of our authorized but unissued common stock. Additionally, we issued $4.0
million of our new 8% Junior Subordinated Convertible PIK Notes due 2007 (with
terms similar to, but structurally subordinated to, our New Notes). Finally,
as a component of this settlement, we issued five-year warrants to purchase
4.15 million shares of our common stock at an exercise price of $5.16
per share, which are exercisable upon grant.

Pursuant to the terms of the Junior Notes, we are obligated to issue additional
shares of our common stock when the Junior Notes are either redeemed or mature.
If the Junior Notes are redeemed (at our option) prior to their maturity, we
will issue the following shares of our common stock in connection with the
redemption:



| |  | If the Junior Notes are redeemed in 2002 or 2003, we will issue 144,331
shares of common stock as part of the redemption
consideration; and
| |  | -------------------------------------------------------------------------------------------------------------------------------------------

17



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##### 





| |  | If the Junior Notes are redeemed in 2004, 2005, or 2006, we will issue
103,554 shares of common stock as part of the
redemption consideration.                                                        
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | If the Junior Notes have not been redeemed prior to their maturity at the
close of business on January 2, 2007, the Junior
Notes will automatically convert into 9,319,852 shares of our common
stock.
|
| |  | Recent Financing                                                                                                                                                                                      

In May 2003, in connection with our
principal stockholders loan to us, we issued a warrant to our
principal stockholder (the Harber Warrant)
to acquire, for nominal consideration, 30% of our outstanding common stock (on
a fully-diluted basis) on the date the warrant is exercised. The
warrant is exercisable on or before January 31, 2007. See Note
18 to the accompanying consolidated financial statements.

Trading Market for our Common Stock

The following information relates to the trading of our common stock, par value
$.001 per share. At December 31, 2002, we believe that there were approximately
7,000 beneficial holders of our common stock. The high and low last sales
prices of our common stock (adjusted for the one-share-for-ten-shares reverse
split which occurred on February 28, 2002) for each quarter during our two most
recent fiscal years as well as for the first and second quarter to date of 2003, as
reported by the New York Stock Exchange through December 5, 2001 and as
reported by the OTC Bulletin Board from December 6, 2001 to date, are set forth
below:

|                            |  |      |      |     |  |   |      | 
|--------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|                            |  | HIGH |      | LOW
|                            |  |      |      |    
|2001                        |  |      |      |     |  |   |      | 
|First Quarter               |  | $    | 4.75 |     |  | $ | 2.63 | 
|Second Quarter              |  | $    | 4.07 |     |  | $ | 1.18 | 
|Third Quarter               |  | $    | 1.95 |     |  | $ | 0.33 | 
|Fourth Quarter              |  | $    | 0.45 |     |  | $ | 0.22 | 
|2002                        |  |      |      |     |  |   |      | 
|First Quarter               |  | $    | 2.30 |     |  | $ | 0.83 | 
|Second Quarter              |  | $    | 2.15 |     |  | $ | 1.05 | 
|Third Quarter               |  | $    | 1.45 |     |  | $ | 0.75 | 
|Fourth Quarter              |  | $    | 0.80 |     |  | $ | 0.28 | 
|2003                        |  |      |      |     |  |   |      | 
|First Quarter               |  | $    | 0.93 |     |  | $ | 0.30 | 
|Second
Quarter (to 5/12/03) |  | $    | 0.39 |     |  | $ | 0.19 | 

No Cash Dividends

We have never declared any cash dividends on our common stock, and we do not
expect to pay cash dividends in the future. Future profits, if any, will be
retained by us for use in the operation of our business. There are also
restrictions in our credit agreements limiting our ability to pay cash
dividends. See Note 5 of Notes to consolidated financial statements and Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS  LIQUIDITY AND CAPITAL RESOURCES.

Stockholders Rights Plan

On November 2, 1999 we adopted a Stockholders Rights Plan and declared a
dividend distribution of one preferred share purchase right on each outstanding
share of our common stock. Each preferred share purchase right would entitle
stockholders to buy one one-thousandth of a share of our newly created Series A
Junior Participating Preferred Stock at an initial exercise price of $90.00. In
general, the preferred share purchase rights were to become exercisable if a
person or group acquired 15% or more of our common stock or announced a tender
offer for 15% or more of our common stock, (no limit as to ownership by Mr.
Harber). Our Board of Directors was entitled to redeem the preferred share
purchase rights at one cent per preferred share purchase right at any time before any such person acquired 15% or more of our

18



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##### 



outstanding common stock. In February 2002, in connection with the closing of
the Note Exchange and rights offering, we terminated the Stockholders Rights
Plan.

Risks associated with our equity securities



| |  | Our existing stockholders will experience substantial dilution upon the
redemption or maturity of the New Notes or Junior
Notes and upon the exercise of the Harber Warrant
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are obligated to issue additional shares of our common stock if we redeem
our New Notes or Junior Notes. Additionally, if the New Notes or Junior Notes
have not been redeemed prior to maturity, they will automatically convert into
270,275,706 and 9,319,852, respectively, of shares of our common stock.
Further, we are obligated to issue 30% of our outstanding common stock, on a
fully-diluted basis, (9,492,298 shares if the warrant were to be exercised today and
93,370,966 shares if the warrant were to be exercised after the New Notes and the Junior
Notes mature), upon the exercise of the Harber Warrant. Holders of our common
stock, as a result of the conversion of the New Notes and the Junior Notes,
and/or the exercise of the Harber Warrant, will face immediate and substantial
dilution in their percentage ownership of the total outstanding shares of our
common stock and a reduction in their voting power. Conversion of these
factors would likely have a material adverse effect on the prevailing market
price of our common stock. Finally, under our 2001 Stock Option Plan, we may
grant options or warrants to purchase up to 2,400,000 shares of our common
stock to our officers, directors and employees.



| |  | Impact of our being a Bulletin Board stock
| |  | ------------------------------------------

Our common stock is quoted on the OTC Bulletin Board which may negatively
affect the price and liquidity of our common stock. Due to the fact that we
were no longer in compliance with the NYSE continued listing criteria, which
required, among other things, that we have a market capitalization of not less
than $50 million and total shareholders equity of not less than $50 million
and due to the fact that the average closing price of our pre-reverse split
common stock had fallen below $1.00 for more than 30 consecutive trading days,
the NYSE suspended the trading of our common stock on the NYSE effective
immediately prior to the opening of the market on Thursday, December 6, 2001.
Commencing December 6, 2001, our common stock became quoted on the OTC Bulletin
Board maintained by the NASD. We cannot assure you that the market for our
common stock will be as liquid as it had historically been on the NYSE. As a
result, the market price for our common stock may become more volatile than it
has been historically.



| |  | If our common stock is deemed a penny stock, its liquidity will be
adversely affected
| |  | ---------------------------------------------------------------------------------------

The price of our common stock fell below $1.00 per share in September 2001. If
the market price for our common stock falls and remains below $1.00 per share
(as it has for some months), our common stock may be deemed to be a penny
stock. So long as our common stock is considered a penny stock, it will be
subject to rules that impose additional sales practices on broker-dealers who
sell our securities. For example, broker-dealers must make a special
suitability determination for the purchaser and have received the purchasers
written consent to the transaction prior to sale. Also, a disclosure schedule
must be prepared before any transaction involving a penny stock, and disclosure
is required about sales commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Monthly
statements are also required to be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in
penny stocks. Because of these additional obligations, some brokers may not
effect transactions in penny stocks. This could have an adverse effect on the
liquidity of our common stock.



| |  | Our common stock is thinly traded. Our stock price may fluctuate more than
the stock market as a whole
| |  | ------------------------------------------------------------------------------------------------------

As a result of the thin trading market for our stock, its market price may
fluctuate significantly more than the stock market as a whole or the stock
prices of similar companies. Of the 31,640,994 shares of our common stock
currently outstanding, approximately 58% are beneficially owned by Lacy Harber,
our principal stockholder. Without a larger float, our common stock will be
less liquid than the stock of companies with broader public ownership, and, as
a result, the trading prices for our common stock may be more volatile. Among
other things, trading of a relatively small volume of our common stock may have
a greater impact on the trading price for our stock than would be the case if
our public float were larger. In addition, sales of a substantial amount of
common stock in the public market, or the perception that these sales may
occur, could adversely affect the market price of our common stock. Possible or
actual sale of any of these shares, particularly by Mr. Harber, may decrease
the market price of our common stock.

19



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##### 





| |  | The market price of our common stock could be depressed by future sales
| |  | -----------------------------------------------------------------------

Future sales of our common stock, or the perception that these sales could
occur, could adversely affect the market price of our common stock. We cannot
assure you as to when, and how many of, the shares of our common stock will be
sold and the effect these sales may have on the market price of our common
stock. In addition, we may issue additional shares of common stock in
connection with possible future acquisitions or other transactions. Although
these securities may be subject to regulatory or contractual resale
restrictions, as these restrictions lapse or if these shares are registered for
sale to the public, they may be sold to the public. In the event we issue a
substantial number of shares of our common stock, which subsequently become
available for unrestricted resale, there could be a material adverse effect on
the prevailing market price of our common stock.



| |  | Adjustments to common stock purchase
warrant exercise prices and exercise
dates
| |  | -------------------------------------------------------------------------------

We may, in our sole discretion, and in accordance with the terms of the warrant
agreements with the warrant agents, reduce the exercise price of the common stock
purchase warrants issued in the restructuring and the class action settlement
and/or extend the time within which the warrants may be exercised, depending on
such things as the current market conditions, the price of the common stock and
the need for additional capital. Further, in the event that we issue certain
securities or make certain distributions to the holders of our common stock,
the exercise price of the warrants may be reduced. Any such price reductions
(assuming exercise of the warrants) will provide less money for us, higher
incremental expense and possibly adversely affect the market price of our
securities. The warrants issued in the Note Exchange will not trade separately
from the New Notes until December 31, 2003.



| |  | Impact of warrant exercise on market
| |  | ------------------------------------

In the event of the exercise of a substantial number of warrants within a
reasonably short period of time after the right to exercise commences, the
resulting increase in the amount of our common stock in the trading market
could substantially affect the market price of our common stock.



| |  | We are subject to significant anti-takeover provisions
| |  | ------------------------------------------------------

Our certificate of incorporation and bylaws contain provisions that may have
the effect of discouraging transactions involving an actual or threatened
change of control. In addition, our board of directors has the authority to
issue up to 1,000,000 shares of preferred stock in one or more series and to
fix the preferences, rights and limitations of any of these series without
stockholder approval. Our ability to issue preferred stock could discourage
unsolicited acquisition proposals, or make it difficult for a third party to
gain control of us, which could adversely affect the market price of our common
stock.

20



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##### 



ITEM 6. SELECTED FINANCIAL DATA

The following table represents our selected consolidated financial information.
The selected financial data set forth below should be read in conjunction with
the Consolidated Financial Statements and notes thereto and Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS which contains a description of the factors that materially affect
the comparability from period to period of the information presented herein.
Operating results from continuing operations reflect the results of operations
from our MR&O and leasing operations, including the pre-acquisition operations
for all periods presented of Whitehall Corporation (acquired in July 1998),
Caribe Aviation (acquired in March 1998 and sold in May 2001), and Aerocell
Structures (acquired in September 1997 and sold in July 2002). Discontinued
operations includes the results of operations of our redistribution operations
and our manufacturing operations, both of which were sold in 2000.

|                                                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |         |  
|------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | - | ----------------------- | ------ | ---- | - | ------------------------------------- | ------- | ---- | - | ------- | -------- | - | - | ------- | -------- | - | - | ------- | ------- | -
|                                                                                |                                                                                                |   | Year Ended December 31,
|                                                                                |                                                                                                |   |                        
|                                                                                |                                                                                                |   | 1998                    |        | 1999 |   | 2000                                  |         | 2001 |   | 2002   
|                                                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |        
|                                                                                |                                                                                                |   |                         |        |      |   | (In thousands, except per share data) |         |      |   |        
|STATEMENT OF OPERATIONS DATA:                                                   |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|Operating revenues                                                              |                                                                                                | $ | 184,448                 |        |      | $ | 371,753                               |         |      | $ | 338,077 |          |   | $ | 264,140 |          |   | $ | 181,973 |        
|Cost of sales                                                                   |                                                                                                |   | 141,569                 |        |      |   | 307,944                               |         |      |   | 353,331 |          |   |   | 259,647 |          |   |   | 179,705 |        
|                                                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|                                                                                | Gross profit(loss)                                                                             |   |                         | 42,879 |      |   |                                       | 63,809  |      |   |         | (15,254  | ) |   |         | 4,493    |   |   |         | 2,268   |  
|Operating expenses                                                              |                                                                                                |   | 17,721                  |        |      |   | 41,774                                |         |      |   | 74,580  |          |   |   | 64,305  |          |   |   | 16,107  |        
|                                                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|                                                                                | Income (loss) from operations                                                                  |   |                         | 25,158 |      |   |                                       | 22,035  |      |   |         | (89,834  | ) |   |         | (59,812  | ) |   |         | (13,839 | )
|Interest expense and other                                                      |                                                                                                |   | 12,343                  |        |      |   | 16,033                                |         |      |   | 21,229  |          |   |   | 71,416  |          |   |   | 14,387  |        
|                                                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|                                                                                | Income (loss) before income taxes,
discontinued operations, and extraordinary
gain             |   |                         | 12,815 |      |   |                                       | 6,002   |      |   |         | (111,063 | ) |   |         | (131,228 | ) |   |         | (28,226 | )
|Income tax expense (benefit)                                                    |                                                                                                |   | 4,281                   |        |      |   | 3,004                                 |         |      |   | 4,810   |          |   |   | 621     |          |   |   | (3,800  | )      
|                                                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|                                                                                | Income (loss) from continuing operations
before discontinued operations and
extraordinary gain |   |                         | 8,534  |      |   |                                       | 2,998   |      |   |         | (115,873 | ) |   |         | (131,849 | ) |   |         | (24,426 | )
|Discontinued operations:                                                        |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|                                                                                | Operations, net of income taxes                                                                |   |                         | 16,959 |      |   |                                       | (24,721 | )    |   |         | (23,432  | ) |   |         |         |   |   |         | 4,169   |  
|                                                                                | Loss on disposal, net of income tax                                                            |   |                         |       |      |   |                                       |        |      |   |         | (72,325  | ) |   |         | (9,386   | ) |   |         |        |  
|                                                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|                                                                                | Income (loss) before extraordinary gain                                                        |   |                         | 25,493 |      |   |                                       | (21,723 | )    |   |         | (211,630 | ) |   |         | (141,235 | ) |   |         | (20,257 | )
|Extraordinary gain resulting from debt
restructuring, net of income taxes of $0 |                                                                                                |   |                        |        |      |   |                                      |         |      |   |        |          |   |   |        |          |   |   | 27,279  |        
|                                                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|                                                                                | Net income (loss)                                                                              |   | $                       | 25,493 |      |   | $                                     | (21,723 | )    |   | $       | (211,630 | ) |   | $       | (141,235 | ) |   | $       | 7,022   |  
|                                                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|Basic Earnings (Loss) Per Share:                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|                                                                                | Income (loss) from continuing operations                                                       |   | $                       | 6.95   |      |   | $                                     | 2.16    |      |   | $       | (77.17   | ) |   | $       | (87.81   | ) |   | $       | (0.94   | )
|                                                                                | Income (loss) from discontinued operations                                                     |   |                         | 13.81  |      |   |                                       | (17.78  | )    |   |         | (63.77   | ) |   |         | (6.25    | ) |   |         | 0.16    |  
|                                                                                | Extraordinary gain                                                                             |   |                         |       |      |   |                                       |        |      |   |         |         |   |   |         |         |   |   |         | 1.05    |  
|                                                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|                                                                                | Net income (loss)                                                                              |   | $                       | 20.76  |      |   | $                                     | (15.62  | )    |   | $       | (140.94  | ) |   | $       | (94.06   | ) |   | $       | 0.27    |  
|                                                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|Diluted Earnings (Loss) Per Share:                                              |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|                                                                                | Income (loss) from continuing operations                                                       |   | $                       | 6.72   |      |   | $                                     | 2.12    |      |   | $       | (77.17   | ) |   | $       | (87.81   | ) |   | $       | (0.94   | )
|                                                                                | Income (loss) from discontinued operations                                                     |   |                         | 13.35  |      |   |                                       | (17.74  | )    |   |         | (63.77   | ) |   |         | (6.25    | ) |   |         | 0.16    |  
|                                                                                | Extraordinary gain                                                                             |   |                         |       |      |   |                                       |        |      |   |         |         |   |   |         |         |   |   |         | 1.05    |  
|                                                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        
|                                                                                | Net income (loss)                                                                              |   | $                       | 20.07  |      |   | $                                     | (15.62  | )    |   | $       | (140.94  | ) |   | $       | (94.06   | ) |   | $       | 0.27    |  
|                                                                                |                                                                                                |   |                         |        |      |   |                                       |         |      |   |         |          |   |   |         |          |   |   |         |        

21



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##### 



|                                             |  |                    |         |      |  |      |         |      |  |      |         |  |  |   |          |   |  |   |         |  
|-------------------------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | -------- | - |  | - | ------- | -
|                                             |  | As of December, 31
|                                             |  |                   
|                                             |  | 1998               |         | 1999 |  | 2000 |         | 2001 |  | 2002
|                                             |  |                    |         |      |  |      |         |      |  |     
|                                             |  | (In thousands)    
|BALANCE SHEET DATA:                          |  |                    |         |      |  |      |         |      |  |      |         |  |  |   |          |   |  |   |         |  
|Accounts receivable                          |  | $                  | 50,027  |      |  | $    | 91,926  |      |  | $    | 67,558  |  |  | $ | 26,936   |   |  | $ | 17,762  |  
|Inventories                                  |  |                    | 61,462  |      |  |      | 90,145  |      |  |      | 53,115  |  |  |   | 41,544   |   |  |   | 21,631  |  
|Working capital (deficiency)                 |  |                    | (82,465 | )    |  |      | (72,846 | )    |  |      | 24,673  |  |  |   | (62,747  | ) |  |   | (10,177 | )
|Total assets                                 |  |                    | 560,331 |      |  |      | 710,875 |      |  |      | 300,611 |  |  |   | 179,285  |   |  |   | 131,026 |  
|Total debt and capitalized lease
obligations |  |                    | 366,176 |      |  |      | 442,964 |      |  |      | 220,861 |  |  |   | 227,851  |   |  |   | 175,474 |  
|Stockholders equity (deficit)               |  |                    | 154,298 |      |  |      | 218,522 |      |  |      | 6,892   |  |  |   | (131,367 | ) |  |   | (96,762 | )

22



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##### 



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Capital and Equity Restructuring

In August 2001, we entered into an agreement with the holders of 73.02%, or
$120.5 million aggregate principal amount, of our 8 1/8% senior subordinated
notes due 2008 (the Old Notes) to restructure those notes. Under the
agreement, the holders of more than a majority of the outstanding Old Notes
agreed to exchange the Old Notes in an exchange offer and consent solicitation
and to waive the default arising as a result of the failure to pay the interest
payment due August 15, 2001. Also, our senior lenders approved the terms of the
restructuring and agreed to forbear until March 31, 2002, subject to certain
conditions, on the default in the senior loan agreements resulting from the
failure to make the note interest payment. We commenced the Note Exchange on
or about January 14, 2002 and the Note Exchange expired on February 22, 2002.
At a special meeting of our stockholders held on February 19, 2002, our
stockholders approved the terms of the restructuring.

On February 28, 2002, we completed an extensive restructuring of our capital
and equity. The restructuring consisted of four parts. The first part was a
reverse split (on a one-share-for-ten-shares basis) of our outstanding common
stock, reducing our outstanding common shares from 15.0 million shares to 1.5
million shares (5% of the restructured entity) and an increase in our
authorized shares from 30.0 million shares to 500.0 million shares. The second
part was an offer to the holders of our $165.0 million of 8 1/8% senior
subordinated notes due 2008 (the Old Notes) to exchange their Old Notes for
up to $10.0 million in cash, $100.0 million of new 8% senior subordinated
convertible pay-in kind notes due 2006 (the New Notes), 4.5 million shares of
our common stock (15% of the restructured entity) and five-year warrants to
purchase an additional 3.0 million shares of common stock at an exercise price
of $5.16 per share, which are exercisable upon grant, (collectively, the
Note Exchange). A condition to the closing of the Note Exchange offer was
that the holders of 80% or more of the outstanding Old Notes tender their Old
Notes in the Note Exchange. The third part was a rights offering to our
existing stockholders to raise funds to pay the cash portion of the Note
Exchange offer and the expenses of the restructuring, and to provide us with
working capital for ongoing business operations. In the rights offering, we
offered 24.0 million shares of our common stock (80% of the restructured
entity) to raise $20.0 million. In connection with the rights offering, Lacy
J. Harber, our principal stockholder, agreed to purchase unsold allotments.
The last part consisted of the issuance to the pre-restructuring holders of our
common stock of five-year warrants to purchase an additional 3.0 million shares
of common stock at an exercise price of $5.16 per share, which are exercisable upon grant.

In the rights offering, we sold 12.0 million shares of common stock to our
existing stockholders (including Mr. Harber), and Mr. Harber purchased the
balance of the shares (12.0 million shares) pursuant to his obligation to
purchase unsold allotments. In the Note Exchange, we exchanged $149.0 million
face value of Old Notes (approximately 90% of the Old Notes) for $5.1 million
in cash, and all of the New Notes, shares and warrants described above. We
used the net proceeds of the rights offering, approximating $10.0 million after
payment of the cash proceeds of the Note Exchange, accrued interest on the
bonds not tendered, and expenses of the restructuring, to reduce trade payables
and to provide working capital for our ongoing business operations.

The restructuring has been recorded in accordance with SFAS No. 15, Accounting
by Debtors and Creditors for Troubled Debt Restructurings. As a result, we
recognized an extraordinary gain of $27.3 million, net of $0 tax expense, in
the first quarter of 2002. Additionally, we will not record interest expense
on the New Notes, as the New Notes are already carried on our consolidated
financial statements at their maximum potential cash redemption value
(including interest) through their maturity. This maximum potential cash
redemption value equates to the present value, through 2006, of the $100.0
million notes plus the value of stock to be issued upon redemption of these
notes in 2006.

The New Notes are redeemable for cash at our option at the following
percentages of par plus accrued interest on the par value through the date of
redemption: 2002  70.0%, 2003  72.5%, 2004  73.0%,
2005  75.625% and 2006  77.5%. Pursuant to the terms of the New Notes, which were issued in the Note
Exchange, we are also obligated to issue additional shares of common stock when
the New Notes are either redeemed or mature. If the New Notes are redeemed in
2002 or 2003, the Company will issue 4.5 million shares of common stock as part
of the redemption consideration. If the New Notes are redeemed in 2004, 2005
or 2006 (prior to maturity), the Company will issue 3.0 million shares of
common stock as part of the redemption consideration. If the New Notes have
not been redeemed prior to their maturity at the close of business on December
31, 2006, the New Notes will automatically convert into 270.3 million shares of
our common stock.

23



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##### 



As a result of the exchange offer and consent solicitation, $16.2 million in
aggregate principal amount of the Old Notes remain outstanding. As part of the
Note Exchange, substantially all of the covenant protections contained in the
indenture for the Old Notes were removed.

Recent Financing

On May 14, 2003, we entered into an agreement with our principal stockholder
pursuant to which he agreed to loan us $6.0 million, which will be used for working
capital in our operations. The new note has a three-year maturity, is secured debt
and bears a 16% PIK interest coupon. In connection with the new loan, we
issued a warrant to our majority stockholder to acquire, for a nominal
consideration, 30% of our outstanding common stock (on a fully-diluted basis)
as of the date the warrant is exercised.

Risk factors relating to our financial condition and results of operations

We have substantial debt that we may be unable to service

As further discussed within the
Senior Credit Facilities section of this Item 7, in
July 2002 we refinanced all of our senior debt obligations. The result of
this refinance was the establishment of a new $30.0 million revolving credit
facility and a new $7.0 million senior term loan. Subsequent to the
establishment of this Amended Credit Facility, we paid down, through proceeds
received from the sale of our Aerocell Structure operations, $3.5 million of
our new senior term loan. Additionally, in July 2002, we restructured our
senior term loan with BofA. The resulting BofA term loan, subsequent to a
pay-down through proceeds of the sale of our Aerocell Structure operations and
the transfer of real estate to a related party that satisfied a portion of the
outstanding term loan, is an outstanding obligation of $5.0 million due
January 31, 2004. Finally, in July 2002, we restructured our TROL financing
arrangement. Under the amended TROL Financing Agreement, the maturity date of
the TROL financing has been extended until June 30, 2005.

As of December 31, 2002 we had
outstanding indebtedness of $175.5 million, of
which $35.5 million was senior indebtedness, which included amounts due under the
TROL Financing, which is now characterized as a capital lease, $5.0
million BofA Term Loan, $3.5 million Amended Term Loan and $2.2
million under our Amended Revolving Credit Facility. In addition, we had $11.5 million of letters
of credit outstanding under our Amended Revolving Credit Facility with $1.6
million available for borrowing under our Amended Revolving Credit Facility. As
of May 12, 2003, we have outstanding $8.5 million of term loans with
financial institutions, $24.6 million under the TROL Financing
Agreement, $10.1 million of outstanding letters of credit, $16.2
million of our Old Notes, $100.0 million of our New Notes (recorded on our
financial statements at $115.8 million), and $2.8 million of our Junior Notes.
Additionally, as of May 12, 2003 we had $1.7 million available for borrowing
under our Amended Revolving Credit Facility. The degree to which we are
leveraged could have important consequences to us, including:



| |  |  | our vulnerability to adverse general economic and industry conditions;                                                                                                               
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to obtain additional financing for future working capital
expenditures, general corporate or other purposes;                                                             
|
| |  |  | we are required to obtain consent from our lenders under our senior
credit facilities and the parties under our TROL
financing arrangement in order to obtain new debt financing; and
|
| |  |  | the dedication of a portion of our cash flow from operations to the
payment of principal and interest on indebtedness,
thereby reducing the funds available for operations.          

In addition, subject to the limitations set forth in the indenture for the New
Notes, we and our subsidiaries may incur substantial amounts of additional
indebtedness. Finally, our senior credit facilities are secured by a lien on
substantially all of our assets.

Our senior credit
facilities and TROL financing arrangement contain certain financial covenants
regarding our financial performance and certain other covenants,
including limitations on the amount of annual capital expenditures and the
incurrence of additional debt. We did not meet certain financial
covenants at December 31, 2002, and thus were in violation of the Amended
Credit Agreement and TROL financing arrangement. Subsequent to
year-end, however, we obtained waivers of non-compliance with all financial covenants and
have thereby cured the covenant violations. We also entered
into agreements that reset financial covenant requirements for the
Amended Credit Agreement and TROL financing arrangement. Going forward, debt classification will
remain contingent upon the continued compliance or waiver of violations of
these covenant requirements.

24



---



##### 



Additionally, we did not have sufficient available liquid resources to pay the
August 2001 and the February 2002 interest payments due on the Old Notes. As a
result of our failure to make the August 2001 and the February 2002 interest
payments, we were in breach of the terms of the indenture and the breach was
subsequently waived by holders of the Old Notes who exchanged such notes for
New Notes in the Note Exchange. We have now cured the default arising by reason
of our non-payment of interest by paying the remaining holders of the Old Notes
their delinquent interest. We do not currently have sufficient available liquid
resources to repay the principal balance of the Old Notes at maturity or to
refinance the New Notes and the Junior Notes prior to their maturity, and there
can be no assurance that funding will be available for such purposes in the
future.

We depend on financing transactions and going concern modification

During 1999, we relied primarily upon significant borrowings under our senior
revolving credit facility, and sales of our securities, including our
previously issued Old Notes, to satisfy our funding requirements relating to
our acquisitions of several businesses and to finance the working capital
required to operate our business. During 2000 and 2001, we relied primarily on
proceeds from sales of our various business operations and on borrowings under
our senior revolving credit facility to reduce our senior debt and to fund our
working capital requirements. During 2002, we continued to rely on proceeds
from sales of business operations, borrowings under our senior revolving credit
facility, our Note Exchange and Rights Offering, and our income tax refund to
reduce our senior debt and to fund our working capital requirements. We
continue to require cash flows above amounts currently being
provided from operations to meet the working capital requirements of our
operations, and we recently obtained additional financing from our principal
stockholder for this purpose. However, we cannot assure you that additional
financing will be available to us in the future, if required, for these
purposes.

Because of our substantial debt, illiquidity and our continued losses from
operations, our auditors have placed a going concern modification in their
report on our consolidated financial statements for the year ended December 31,
2002.

Our lenders impose significant restrictions on us

Our senior credit facilities and the New Notes impose significant operating and
financial restrictions on us. These restrictions may significantly limit our
ability to incur additional indebtedness, pay dividends, repay indebtedness
prior to its stated maturity, sell assets or engage in mergers or acquisitions.
In addition, our failure to comply with these restrictions could result in an
event of default which, if not cured or waived, could materially adversely
affect our business, financial condition or results of operations.

We have incurred losses in the past and we may incur losses in the future.
If we incur losses in the future, our ability
     to
obtain sufficient working capital for our operations and our ability to
service our indebtedness may be impaired.

We incurred losses from continuing operations of $115.9 million, $131.8
million and $24.4 million, respectively, during the 2000, 2001 and 2002
fiscal years. If we continue to incur losses in the future, we will likely
limit our ability to obtain sufficient working capital for our operations and
our ability to execute our business strategy. In addition, our ability to
service our indebtedness may be harmed because we may not generate sufficient
cash flow from operations to pay principal or interest when due.

A large portion of our operating expenses are relatively fixed and
cancellations, reductions or delays in orders by a customer or group of
customers has in the past and could in the future have a material adverse
effect on our business, financial condition or results of operations.

25



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##### 



Results of Operations

Operating revenues consist primarily of service revenues and sales of materials
consumed while providing services, net of allowances for returns. Cost of sales
consists primarily of labor, materials, overhead, and freight charges.

Our operating results have fluctuated in the past and may fluctuate
significantly in the future. Many factors affect our operating results,
including:



| |  |  | decisions made regarding sales of our assets to reduce our debt,                                                                                                                                                                       
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | timing of repair orders and payments from large customers,                                                                                                                                                                             
|
| |  |  | the state of the economy generally, the state of the airline industry
generally, and the financial condition of our airline
customers specifically,                                                                                    
|
| |  |  | competition from other third-party MR&O service providers,                                                                                                                                                                             
|
| |  |  | the number of airline customers seeking repair services at any time,                                                                                                                                                                   
|
| |  |  | the impact of fixed pricing on gross margins and our ability to
accurately project our costs in a dynamic environment,                                                                                                                 
|
| |  |  | our ability to fully utilize our hangar space dedicated to maintenance
and repair services,                                                                                                                                            
|
| |  |  | the volume and timing for 727 cargo conversions and the impact during
future periods on airline use of both the 727 fleet
type and JT8D engines (both of which are older models) as a result of
increased fuel costs and other factors,
|
| |  |  | our ability to attract and retain a sufficient number of mechanics to
perform the maintenance, overhaul and repair services
requested by our customers, and                                                                            
|
| |  |  | the timeliness of customer aircraft arriving for scheduled maintenance.                                                                                                                                                                

Large portions of our operating expenses are relatively fixed. Since we
typically do not obtain long-term commitments from our customers, we must
anticipate the future volume of orders based upon the historic patterns of our
customers and upon discussions with our customers as to their future
requirements. Cancellations, reductions or delays in orders by a customer or
group of customers have in the past and could in the future have a material
adverse effect on our business, financial condition and results of operations.

26



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##### 



Year Ended December 31, 2001
Compared to Year Ended December 31, 2002

The following tables set forth certain information relating to our operations
for the periods indicated:

|                                                                                |                                                                                       |                   |                          |          |                         |         |       |       |                |       |         |         |       |         |       |       |     |       |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------- | ------------------------ | -------- | ----------------------- | ------- | ----- | ----- | -------------- | ----- | ------- | ------- | ----- | ------- | ----- | ----- | --- | ----- | -
|                                                                                |                                                                                       |                   |                          |          | Year Ended December 31,
|                                                                                |                                                                                       |                   |                          |          |                        
|                                                                                |                                                                                       |                   |                          |          | 2001                    |         | 2002 
|                                                                                |                                                                                       |                   |                          |          |                         |         |      
|                                                                                |                                                                                       |                   |                          |          | $                       |         | %     |       | $              |       | %      
|                                                                                |                                                                                       |                   |                          |          |                         |         |       |       |                |       |        
|                                                                                |                                                                                       |                   |                          |          |                         |         |       |       | (In thousands) |       |         |         |      
|Operating revenues:                                                             |                                                                                       |                   |                          |          |                         |         |       |       |                |       |         |         |       |         |       |      
|                                                                                | Sales                                                                                 |                   | $                        | 262,303  |                         |         |       | 99.3  | %              |       | $       | 181,760 |       |         |       | 99.9  | %  
|                                                                                | Other                                                                                 |                   |                          | 1,837    |                         |         |       | 0.7   | %              |       |         | 213     |       |         |       | 0.1   | %  
|                                                                                |                                                                                       |                   |                          |          |                         |         |       |       |                |       |         |         |       |         |       |       |    
|                                                                                |                                                                                       |                   | Total operating revenues |          |                         | 264,140 |       |       |                | 100.0 | %       |         |       | 181,973 |       |       |     | 100.0 | %
|Cost of sales                                                                   |                                                                                       |                   | 259,647                  |          |                         |         | 98.3  | %     |                |       | 179,705 |         |       |         | 98.8  | %    
|                                                                                |                                                                                       |                   |                          |          |                         |         |       |       |                |       |         |         |       |         |       |       |    
|                                                                                | Gross profit                                                                          |                   |                          | 4,493    |                         |         |       | 1.7   | %              |       |         | 2,268   |       |         |       | 1.2   | %  
|Operating expenses                                                              |                                                                                       |                   | 64,305                   |          |                         |         | 24.3  | %     |                |       | 16,107  |         |       |         | 8.9   | %    
|                                                                                |                                                                                       |                   |                          |          |                         |         |       |       |                |       |         |         |       |         |       |       |    
|                                                                                | Loss from operations                                                                  |                   |                          | (59,812  | )                       |         |       | (22.6 | %)             |       |         | (13,839 | )     |         |       | (7.6  | %) 
|Interest expense                                                                |                                                                                       |                   | 25,778                   |          |                         |         | 9.8   | %     |                |       | 14,174  |         |       |         | 7.8   | %    
|Charge for settlement of class action
litigation                                |                                                                                       |                   |                         |          |                         |         |      |       |                |       | 4,410   |         |       |         | 2.4   | %    
|Other expense (income)                                                          |                                                                                       |                   | 45,638                   |          |                         |         | 17.3  | %     |                |       | (4,197  | )       |       |         | 2.3   | %    
|                                                                                |                                                                                       |                   |                          |          |                         |         |       |       |                |       |         |         |       |         |       |       |    
|Loss before income taxes, discontinued
operations and extraordinary gain        |                                                                                       |                   | (131,228                 | )        |                         |         | (49.7 | %)    |                |       | (28,226 | )       |       |         | (15.5 | %)   
|Income tax expense (benefit)                                                    |                                                                                       |                   | 621                      |          |                         |         | 0.2   | %     |                |       | (3,800  | )       |       |         | (2.1  | %)   
|                                                                                |                                                                                       |                   |                          |          |                         |         |       |       |                |       |         |         |       |         |       |       |    
|                                                                                | Loss from continuing operations before
discontinued operations and extraordinary
gain |                   |                          | (131,849 | )                       |         |       | (49.9 | %)             |       |         | (24,426 | )     |         |       | (13.4 | %) 
|Discontinued operations, net of income taxes                                    |                                                                                       |                   | (9,386                   | )        |                         |         | (3.6  | %)    |                |       | 4,169   |         |       |         | 2.3   | %    
|                                                                                |                                                                                       |                   |                          |          |                         |         |       |       |                |       |         |         |       |         |       |       |    
|                                                                                | Loss before extraordinary gain                                                        |                   |                          | (141,235 | )                       |         |       | (53.5 | %)             |       |         | (20,257 | )     |         |       | (11.1 | %) 
|Extraordinary gain resulting from debt
restructuring, net of income taxes of $0 |                                                                                       |                   |                         |          |                         |         |      |       |                |       | 27,279  |         |       |         | 15.0  | %    
|                                                                                |                                                                                       |                   |                          |          |                         |         |       |       |                |       |         |         |       |         |       |       |    
|                                                                                |                                                                                       | Net (loss) income |                          | $        | (141,235                | )       |       |       | (53.5          | %)    |         | $       | 7,022 |         |       |       | 3.9 | %    
|                                                                                |                                                                                       |                   |                          |          |                         |         |       |       |                |       |         |         |       |         |       |       |    

Operating revenue for the year ended December 31, 2002 decreased $82.2 million
or 31.1% to $182.0 million, from $264.1 million for the year ended December 31,
2001. Operating revenue for the year ended December 31, 2001 included $34.7
million from facilities and operations that were closed or sold during 2001.
Additionally, revenues from the operations of Aerocell Structures of $3.9
million in fiscal 2002 (business sold August 1, 2002) and $16.6 million in
fiscal 2001 are included within operating revenues. Excluding the revenue from
these former facilities and operations, comparative fiscal 2002 and 2001
revenues would have been $178.1 million and $212.8 million, respectively.
Finally, 2002 revenues from our Brice Manufacturing operation, which was
acquired in October 2002, was $1.9 million.

The decrease in revenue is primarily attributable to decreased revenue from our
heavy airframe maintenance operations. This decrease was generally caused by a
reduction in market opportunities due to adverse market conditions, which have
caused many of our customers to delay maintenance on their aircraft or park
older aircraft maintained by us due to rising fuel prices, reduced passenger
levels, and general economic conditions. Our revenue was also adversely
impacted during 2002 by increased price competition and downward pricing
pressures from airline customers, and, during 2001, by increased competition in
the airframe heavy maintenance business. These factors forced us during fiscal
2001 and 2002 to reduce pricing and take fixed priced work at lower rates,
which adversely impacted revenues and gross margins. Further, during this
period, several of our customers, including our largest customer for 2001 and
2002, experienced severe adverse financial problems of their own, and in some
cases substantially delayed their on-going maintenance due to their situation,
which further adversely impacted our operating results for the period. In
addition, revenue decreased due to the sale of our Aerocell flight surface
maintenance operation at the end of July 2002, the sale of our Caribe MR&O
operation in the second quarter of 2001, the consolidation of our Winston
Salem, North Carolina heavy airframe maintenance facility into our Greensboro,
North Carolina operations and the closure of our Oscoda airframe heavy
maintenance MR&O operation. Finally, 2001 revenues included revenues from
sales of leased assets from our leasing portfolio. All such leases have now
expired and all lease packages have been sold.

27



---



##### 



Gross profit decreased to $2.3 million for the year ended December 31, 2002,
compared with a gross profit of $4.5 million for the year ended December 31,
2001. This deterioration is due primarily to inventory valuation charges
recorded during the second and fourth quarter of 2002 (see discussion below).
These charges completely offset operating efficiencies, resulting in a higher
revenue realization per labor hour, and cost reductions achieved through
consolidation of operations. Additionally, company-wide salary and benefit
reductions implemented in 2001 have favorably impacted our gross margin in
2002. Gross profit results for the second half of 2002, as compared to the
first half of 2002, have been unfavorably impacted by the completion of
significant, long-duration maintenance work for specific aircraft types, the
receipt of new one-off aircraft types, and delayed customer maintenance. While
the receipt of one-off aircraft types present significant opportunities to
TIMCO, the short-term impact is a lower revenue realization per labor hour.
Our fiscal 2001 and fiscal 2002 cost of sales were also impacted by the
reduction in revenue described above relative to our primarily fixed cost
structure and the impact of price competition and fixed pricing on all of our
heavy airframe maintenance operations. Gross profit as a percentage of
revenues decreased to 1.2% for the year ended December 31, 2002, from 1.7% for
the year ended December 31, 2001.

Gross profit levels during any particular period are dependent upon the number
and type of aircraft serviced, the contract terms under which services are
performed and the efficiencies that can be obtained in the performance of such
services. Significant changes in any one of these factors could have a
material impact on the amount and percentage of gross profits. Additionally,
gross profits have in the past and could in the future be impacted in the future
by considerations as to the value of our inventory. While we believe that we
have valued our inventory at the lower of cost or market, for the reasons set
forth below, during 2002 we substantially increased our valuation allowance
against our current inventory. As a result of market conditions in the
aircraft parts market, during the second quarter ended June 30, 2002, we
recognized inventory write-downs of $1.6 million. In addition, as a result of
the general economy, the current state of the airline industry, the economic
condition of a number of our significant airline customers (including our
largest customer, which is currently in a Chapter 11 bankruptcy proceeding) and
the current on-going war in the Middle East, as well as exposures generated
through actions of our customer base as related to aircraft fleet type and our
inventory as related to these aircraft fleets, during the fourth quarter ended
December 31, 2002, we elected to recognize inventory write-downs of
an additional $6.7 million. We will continue to evaluate all market and industry exposures
in connection with our adjustments to inventory valuations and
cannot assure you that additional inventory write-downs will not be required in
future periods.

Operating expenses decreased $48.2 million or 75.0% to $16.1 million for the
year ended December 31, 2002, compared with $64.3 million for the year ended
December 31, 2001. Operating expenses as a percentage of revenues were 8.9%
for the year ended December 31, 2002, compared to 24.3% for the year ended
December 31, 2001. Included in operating expenses for the year ended December
31, 2001 are an aggregate of $25.0 million in non-cash adjustments to the
carrying value of certain of our long-lived assets, including the write-off of
goodwill and certain fixed assets associated with the closure of the Oscoda,
Michigan heavy airframe maintenance facility and an impairment relating to the
Oscoda, Michigan engine overhaul operation, Winston-Salem heavy airframe
facility, and an allowance for a receivable from an airframe customer that was
experiencing significant financial difficulties. These costs were partially
offset by a reduction in operating expenses resulting from the closure of two
heavy airframe maintenance facilities during 2001 and the savings associated
with the consolidation of the operations of Aircraft Interior Design. The
remaining reduction in operating expenses from prior year is mainly due to the
lower sales volumes noted above, the closing of our Miramar headquarters and
moving those offices to our Greensboro location, the sale of Caribe and
Aerocell, the salary and benefit reductions noted above, and a year-over-year
headcount reduction (including Aerocell) of approximately 300 employees. These
reduction have been partially offset by operating expenses of $0.3 million for
Brice Manufacturing, which was acquired in October 2002, $1.15 million
settlement charges with former Oscoda, Michigan employees (see Item
3. LEGAL PROCEEDINGS), and the recording in
2002 of accounts receivable valuation allowances of approximately $1.3 million
for customers with identified credit exposures, including our largest customer.

As a result of these factors, our loss from operations was $13.8 million for
the year ended December 31, 2002, compared to a loss from operations of $59.8
million for the year ended December 31, 2001.

Interest expense (excluding amortization of deferred financing fees) for the
twelve months ended December 31, 2002 decreased by $11.2 million or 56.3% to
$8.7 million, from $19.9 million for the twelve months ended December 31, 2001.
The decrease is primarily attributable to completion of the Note Exchange and
Rights Offering which eliminated interest expense on $149.0 million of notes
since the end of February 2002 (see Note 13 of the Notes to the Consolidated
Financial Statements for an explanation as to why interest is not recorded on
the New Notes), lower outstanding debt balances as a result of selling Aerocell
and Caribe, completion of the restructuring and slightly lower interest rates
from period to period. These reductions have been partially offset by
the accretion of our Junior Notes, which will mature

28



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in January 2007, to their redemption value. This accretion, which
approximated $113 for 2002 and is a non-cash item (since the note is a PIK
instrument), is included as a component of interest expense.

Amortization of deferred financing costs, which is included within interest
expense, was $5.5 million for the year ended December 31, 2002, compared to
$5.9 million for fiscal 2001.

We recorded a charge of $8.0 million during the first quarter of 2002 related
to an agreement to settle our outstanding class action securities litigation.
For the period ended June 30, 2002, since the settlement had not yet become
final, the securities to be issued in this settlement were revalued, resulting
in a gain which we recorded of $1.875 million. For the quarter ended September
30, 2002, based on the settlement becoming final September 20, 2002, we again
revalued the securities to be issued in this settlement and recorded a gain of
$1.715. As a result of this settlement becoming final, this gain establishes
the final valuation of the securities to be issued, and, accordingly, we have
recorded charges of $4.4 million for the 2002 fiscal year relating to the
settlement. See Note 9 within the accompanying consolidated financial
statements.

During 2001, we recorded a charge of $37.9 million to write-off the notes
receivable due from KAV. There was no comparable charge in 2002. See Item 1.
BUSINESS for a description of our 2002 global settlement of outstanding matters
with Kellstrom.

Other income  net was $4.2 million for the year ended December 31, 2002.
Other income  net for fiscal 2002 is mainly comprised of rent of the Companys
Miramar facility located in Miami, Florida (approximately $2.3 million), a
portion of the gain on the global settlement with Kellstrom (approximately $0.7
million), and the gain on sale of the Aerocell operations (approximately $0.3
million). Other expense  net was $45.6 million for the year ended December
31, 2001. Other expense  net for fiscal 2001 included a gain on the sale of
the Caribe operations and income on a lease deposit totaling
$7.9 million offset by equity method losses of affiliates of $6.6 million, a charge to fully
reserve the notes receivable due from KAV in the amount of $37.9 million (as
discussed above), and a charge of $9.0 million relating to our purchase
obligation on the property securing our TROL financing in which the obligation
price exceeded the fair market value of the property. Included within the loss
from affiliates is a charge of $6.3 million to fully reserve our investment in
a limited liability corporation that was established to convert certain Boeing
727 aircraft from passenger configuration to cargo configuration.

As a result of the above factors, our loss from continuing operations before
income taxes, discontinued operations and extraordinary gain for the twelve
months ended December 31, 2002 was $28.2 million, compared to $131.2 million
for the twelve months ended December 31, 2001.

We recorded a $3.8 million tax benefit during the first quarter of 2002 as a
result of the passage of legislation which permits businesses to carry net
operating losses back to offset taxable income from the previous five years
(compared to two years under prior law). Prior to the passage of this
legislation, we had established valuation allowances for these deferred tax
assets as it was determined to be more likely than not that we would not
generate taxable income in the foreseeable future and that we would not have
the opportunity to benefit from these net operating losses.

As of December 31, 2002, we had
net operating loss carryforwards of $33.0
million. These net operating loss carryforwards include a limitation on net
operating losses that can be carried forward subsequent to our capital and
equity restructuring (completed in February 2002) and net operating losses
generated during the current year. As of December 31, 2002, we have
established a valuation allowance for the full balance of these net operating
loss carryforwards as it has been currently assessed that it is more likely
then not that we will not be able to realize these net operating loss
carryforwards in future periods. See Note 11 within the accompanying
consolidated financial statements.

For the reasons set forth above, our loss from continuing operations for the
year ended December 31, 2002 was $24.4 million, or $0.94 per basic share and
diluted share, compared to a loss of $131.8 million, or $87.81 per basic share
and diluted share, for the year ended December 31, 2001. Weighted average
common and common equivalent shares outstanding (diluted) were 26.0 million for
the year ended December 31, 2002, and 1.5 million for the year ended December
31, 2001.

Income from discontinued operations for the twelve month period ended December
31, 2002 was $4.2 million or $0.16 per basic share and diluted share, compared
to a loss of $9.4 million, or $6.25 per basic share and diluted share for the
twelve month period ended December 31, 2001. Income from discontinued
operations for the year ended December 31, 2002 is primarily comprised of
collections on receivables retained from the sale of our redistribution
operations that had been written-off in 2001 (approximately $1.1 million),
lease of equipment to Kellstrom for a portion of the year ($0.5 million), and a
portion of the gain on the Kellstrom settlement (approximately $0.9 million).

29



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The 2001
fiscal year included $7.7 million of charges to assets whose realization was adversely impacted by the operations of KAV and the financial
condition of Kellstrom.

During the first quarter of 2002, the Company recognized a $27.3 million, or
$1.05 per basic and diluted share, extraordinary gain relating to the Note
Exchange. See discussion above and Note 13 within the accompanying
consolidated financial statements.

Year
Ended December 31, 2000 Compared to Year Ended December 31, 2001

The following tables set forth certain information relating to our operations
for the periods indicated:

|                                                     |                                 |                          |          |          |          |      |       |                |       |    |          |          |          |   |       |       |       |   
|---------------------------------------------------- | ------------------------------- | ------------------------ | -------- | -------- | -------- | ---- | ----- | -------------- | ----- | -- | -------- | -------- | -------- | - | ----- | ----- | ----- | --
|                                                     |                                 |                          |          | 2000     |          | 2001
|                                                     |                                 |                          |          |          |          |     
|                                                     |                                 |                          |          | $        |          | %    |       | $              |       | % 
|                                                     |                                 |                          |          |          |          |      |       |                |       |   
|                                                     |                                 |                          |          |          |          |      |       | (In thousands) |       |    |          |         
|Operating revenues:                                  |                                 |                          |          |          |          |      |       |                |       |    |          |          |          |   |       |      
|                                                     | Sales, net                      |                          | $        | 333,289  |          |      |       | 98.6           | %     |    |          | 262,303  |          |   |       | 99.3  | %    
|                                                     | Other                           |                          |          | 4,788    |          |      |       | 1.4            | %     |    |          | 1,837    |          |   |       | 0.7   | %    
|                                                     |                                 |                          |          |          |          |      |       |                |       |    |          |          |          |   |       |       |      
|                                                     |                                 | Total operating revenues |          |          | 338,077  |      |       |                | 100.0 | %  |          |          | 264,140  |   |       |       | 100.0 | % 
|Cost of sales                                        |                                 |                          | 353,331  |          |          |      | 104.5 | %              |       |    | 259,647  |          |          |   | 98.3  | %    
|                                                     |                                 |                          |          |          |          |      |       |                |       |    |          |          |          |   |       |       |      
|                                                     | Gross (loss) profit             |                          |          | (15,254  | )        |      |       | (4.5           | %)    |    |          | 4,493    |          |   |       | 1.7   | %    
|Operating expenses                                   |                                 |                          | 74,580   |          |          |      | 22.1  | %              |       |    | 64,305   |          |          |   | 24.3  | %    
|                                                     |                                 |                          |          |          |          |      |       |                |       |    |          |          |          |   |       |       |      
|                                                     | Loss from operations            |                          |          | (89,834  | )        |      |       | (26.6          | %)    |    |          | (59,812  | )        |   |       | (22.6 | %)   
|Interest expense                                     |                                 |                          | 20,347   |          |          |      | 6.0   | %              |       |    | 25,778   |          |          |   | 9.8   | %    
|Other expense                                        |                                 |                          | 882      |          |          |      | 0.3   | %              |       |    | 45,638   |          |          |   | 17.3  | %    
|                                                     |                                 |                          |          |          |          |      |       |                |       |    |          |          |          |   |       |       |      
|Loss before income taxes and discontinued operations |                                 |                          | (111,063 | )        |          |      | (32.9 | %)             |       |    | (131,228 | )        |          |   | (49.7 | %)   
|Income tax expense                                   |                                 |                          | 4,810    |          |          |      | 1.4   | %              |       |    | 621      |          |          |   | 0.2   | %    
|                                                     |                                 |                          |          |          |          |      |       |                |       |    |          |          |          |   |       |       |      
|                                                     | Loss from continuing operations |                          |          | (115,873 | )        |      |       | (34.3          | %)    |    |          | (131,849 | )        |   |       | (49.9 | %)   
|Discontinued operations, net of income taxes         |                                 |                          | (95,757  | )        |          |      | (28.3 | %)             |       |    | (9,386   | )        |          |   | (3.6  | %)   
|                                                     |                                 |                          |          |          |          |      |       |                |       |    |          |          |          |   |       |       |      
|                                                     |                                 | Net loss                 |          | $        | (211,630 | )    |       |                | (62.6 | %) |          |          | (141,235 | ) |       |       | (53.5 | %)
|                                                     |                                 |                          |          |          |          |      |       |                |       |    |          |          |          |   |       |       |      

Operating revenues for the year ended December 31, 2001 decreased $73.9 million
or 21.9% to $264.1 million, from $338.1 million for the year ended December 31,
2000. The decrease in revenues is primarily attributable to decreased revenues
from our heavy airframe maintenance operations. This decrease was generally
caused by a reduction in market opportunities due to adverse market conditions,
which caused many of our customers to delay maintenance on their aircraft
or park older aircraft maintained by us due to rising fuel prices and general
economic conditions. Our revenue has also been adversely impacted during 2001
by increased competition that spread outsourced available heavy airframe
maintenance among a larger group of providers. These factors forced us during
fiscal 2000 and 2001 to reduce pricing and take fixed priced work at lower
rates, which severely impacted revenues and gross margins. Further, during this
period, several of our customers experienced severe adverse financial problems
of their own, which further adversely impacted our operating results. In
addition, revenues decreased due to the closure of our Oscoda, Michigan heavy
airframe maintenance facility and the consolidation of our Winston Salem, North
Carolina heavy aircraft maintenance facility into our Greensboro, North
Carolina operations, impacts of reduced pricing and a change in the timing of
revenue recognition in relation to the design and construction of specialized
parts effective December 31, 2000. Also, revenues from our Caribe Aviation
operation declined $13.6 million from period to period, due to the sale of that
business in May 2001.

Gross profit was $4.5 million in fiscal 2001, compared to a gross loss of $15.3
million for the year ended December 31, 2000. Gross profit for the year ended
December 31, 2000 was negatively impacted by a charge of $11.5 million relating
to the disposition of three A-300 aircraft that were sold during August and
September 2000 and the reduction of the carrying value of certain equipment on
lease. We also incurred losses during the beginning of the first quarter of
2001 associated with the start-up of operations at one of our heavy airframe
maintenance facilities for a new program that began at the end of 2000.
Additionally, due to adverse economic conditions as described above, we
recognized inventory valuation write-downs of $2.7 million, which is included
in cost of sales for the year ended December 31, 2001. Our 2001 cost of sales
was also impacted by the reduction in revenue described above relative to our
primarily fixed cost structure and the impact of price competition and fixed
pricing on certain of our heavy airframe maintenance operations. As a result of
reduced revenues and market

30



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opportunities, as described above, during 2001 we closed and consolidated
certain facilities and reduced headcount at each of our operations, resulting
in an aggregate reduction of approximately 28% of our workforce. In addition,
in April 2001 we implemented salary and benefit reductions that affected
virtually all employees. Gross profit (loss) as a percentage of operating
revenues was 1.7% for the year ended December 31, 2001, compared to (4.5%) for
the year ended December 31, 2000.

Operating expenses decreased $10.3 million or 13.8% to $64.3 million for the
year ended December 31, 2001, compared with $74.6 million for the year ended
December 31, 2000. Operating expenses as a percentage of operating revenues
were 24.3% for the year ended December 31, 2001, compared to 22.1% for the year
ended December 31, 2000. Operating expenses in 2000 were affected by a $3.6
million increase in professional fees relating primarily to the completion of
our 1999 audit and the refinancing and amendments to our credit facility, and a
charge of $4.4 million relating to valuation allowances recorded for certain
accounts receivable of a major customer that filed for bankruptcy protection in
2000. Operating expenses for 2000 were also negatively impacted by the costs
associated with the move to new facilities during the third quarter of 2000 of
two of our MR&O operations. Included in operating expenses for the year ended
December 31, 2001 are an aggregate of $25.0 million in non-cash adjustments to
the carrying value of certain of our long-lived assets, including the write-off
of goodwill and certain fixed assets associated with the closure of the Oscoda,
Michigan heavy airframe maintenance facility and an impairment relating to the
Oscoda, Michigan engine overhaul operation, Winston-Salem heavy airframe
maintenance facility and the Company component overhaul facilities. These costs
were partially offset by a reduction in operating expenses resulting from the
closure of two heavy airframe maintenance facilities during 2001 and the
savings associated with the consolidation of the operations of Aircraft
Interior Design.

Interest expense for the year ended December 31, 2001 increased by $5.4 million
or 26.7% to $25.8 million, from $20.3 million for the year ended December 31,
2000. This increase was primarily attributable to increased amortization of
bank fees due to the significant bank fees paid during 2000 and 2001 and the
accelerated amortization of such fees in connection with the sale of Caribe
during the second quarter of 2001.

Other expense, net increased $44.8 million, from $0.9 million for the year
ended December 31, 2000 to $45.6 million for the year ended December 31, 2001.
Other expense, net for the year ended December 31, 2000 includes our recording
a loss of $0.9 million in connection with the disposition of the AvAero joint
venture. Included in other expense for the year ended December 31, 2001 is the
gain on the sale of Caribe and the recognition of income on a lease deposit
taken during the second quarter of 2001 totaling $7.9 million in the aggregate,
offset by a charge to write-off the notes receivable due from KAV in the amount
of $37.9 million, loss from affiliate of $6.6 million, and a charge of $9.0
million relating to our purchase obligation on the property securing our TROL
financing in which the obligation price exceeded the fair market value of the
property. The loss from affiliate of $6.6 million included a charge of $6.4
million to write-off our investment in a limited liability corporation that
designs, manufactures and installs FAA approved Boeing 727 conversion kits.

As a result of the above factors, our loss from continuing operations for the
year ended December 31, 2001 was $131.8 million, or $87.81 per basic share and
diluted share, compared to a loss of $115.9 million, or $77.17 per basic share
and diluted share, for the year ended December 31, 2000. Weighted average
common and common equivalent shares (on a post-reverse split basis) outstanding
(diluted) were 1.5 million during both the years ended December 31, 2001 and
2000.

Our loss from discontinued operations for the year ended December 31, 2001 was
$9.4 million, or $6.25 per basic share and diluted share, compared to a loss of
$95.8 million, or $63.77 per basic share and diluted share, for the year ended
December 31, 2000. The loss for 2000 included a loss from the operation of our
discontinued operations of $23.4 million. All such operations were sold during
2000. The loss from discontinued operations for the year ended December 31,
2001 is primarily comprised of the write-down of certain assets of the
operations to their estimated net realizable values and the provision of
accruals for certain exposures (including $7.7 million of valuation allowances
relating to assets whose realization is impacted by KAV and Kellstrom) offset
by certain recoveries.

31



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Liquidity and capital resources

Liquidity

Below is a table setting forth our contractual payment obligations and other
commercial commitments as of December 31, 2002 which have been aggregated in
order to facilitate an understanding of our liquidity (in thousands):

|                                   |  |       |         |          |  |           |       |                        |  |               |        |  |  |   |         |  |  |   |        | 
|---------------------------------- |  | ----- | ------- | -------- |  | --------- | ----- | ---------------------- |  | ------------- | ------ |  |  | - | ------- |  |  | - | ------ | 
|Contractual                        |  |       |         |          |  | Less than |       | Payments due by period
|Obligations                        |  | Total |         | One Year |  | 1-3 years |       | 4-5 years              |  | After 5 years
|                                   |  |       |         |          |  |           |       |                        |  |              
|Revolving Credit
Facility          |  | $     | 2,179   |          |  | $         | 2,179 |                        |  | $             |       |  |  | $ |        |  |  | $ |       | 
|Long-Term Debt                     |  |       | 144,460 |          |  |           |      |                        |  |               | 9,800  |  |  |   | 118,413 |  |  |   | 16,247 | 
|Capital Leases                     |  |       | 28,835  |          |  |           | 1,101 |                        |  |               | 24,237 |  |  |   | 310     |  |  |   | 3,187  | 
|Operating
Leases                   |  |       | 53,892  |          |  |           | 5,454 |                        |  |               | 9,731  |  |  |   | 9,461   |  |  |   | 29,246 | 
|                                   |  |       |         |          |  |           |       |                        |  |               |        |  |  |   |         |  |  |   |        | 
|Total
contractual
cash
obligations |  | $     | 229,366 |          |  | $         | 8,734 |                        |  | $             | 43,768 |  |  | $ | 128,184 |  |  | $ | 48,680 | 
|                                   |  |       |         |          |  |           |       |                        |  |               |        |  |  |   |         |  |  |   |        | 

|                                   |  |       |        |          |  |           |   |                        |               |   |        |  |  |   |   |  |  |   |   | 
|---------------------------------- |  | ----- | ------ | -------- |  | --------- | - | ---------------------- | ------------- | - | ------ |  |  | - | - |  |  | - | - | 
|Other                              |  |       |        |          |  |           |   |                        |               |   |        | 
|Commercial                         |  |       |        |          |  | Less than |   | Payments due by period
|Commitments                        |  | Total |        | One Year |  | 1-3 years |   | 4-5 years              | After 5 years
|                                   |  |       |        |          |  |           |   |                        |               |  
|Letters of
Credit                  |  | $     | 11,526 |          |  | $         |  |                        |               | $ | 11,526 |  |  | $ |  |  |  | $ |  | 
|                                   |  |       |        |          |  |           |   |                        |               |   |        |  |  |   |   |  |  |   |   | 
|Total Other
Commercial
Commitments |  | $     | 11,526 |          |  | $         |  |                        |               | $ | 11,526 |  |  | $ |  |  |  | $ |  | 
|                                   |  |       |        |          |  |           |   |                        |               |   |        |  |  |   |   |  |  |   |   | 

We are also committed under employment agreements with all of our executive
officers and several of our key employees.

We believe that we will meet our working capital requirements during 2003 from
funds available under our revolving credit agreement, from the funds recently
loaned to us by our principal stockholder, and from our operations. We may
also sell individual assets or our equity securities, or borrow additional
funds, to the extent required and available. While we expect that required
financing will be available to meet our working capital requirements, there can
be no assurance of this fact. Our auditors have placed a going concern
modification in their report on our 2002 financial statements as a result of
our current substantial debt, illiquidity and continued losses from operations.

Cash

Net cash provided by continuing operating activities during the fiscal year
ended December 31, 2002 was $6.6 million, compared to net cash provided by
continuing operating activities during 2001 of $17.6 million. Cash provided by
operating activities for the 2002 fiscal year was primarily the result of
operations, adjusted for non-cash charges, of approximately ($3.6) million and
decreases in accounts receivable, inventories and other assets of $7.8 million,
$9.2 million and $9.4 million, respectively, partially offset by reductions in
trade payables of $11.0 million, accrued liabilities of $6.0 million and
customer deposits of $2.1 million.

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Cash provided by investing activities during the
fiscal year ended December 31, 2002 and 2001 was $6.5 million and $22.0
million, respectively. The cash provided by investing activities for 2002 was
primarily related to the sale of Aerocell Structures and proceeds from the sale leaseback
of the AID facility, partially offset by purchases of fixed assets and the
acquisition of Brice Manufacturing. Cash used in financing activities for the
year ended December 31, 2002 and 2001 was $16.0 million and $39.6 million,
respectively. Cash used in financing activities for 2002 was primarily
comprised of net proceeds from the rights offering of $19.8 million used to
fund the Note Exchange, including $5.1 million for the retirement of Old Notes
and $5.0 million for expenses of the Note Exchange. The remaining proceeds,
along with cash from operations, our income tax refund and the proceeds from
the sale of Aerocell Structures, were used to pay down $9.9 million of the
revolving credit balance, $13.5 million of our senior term loans, $3.1 million
to pay bank and refinancing fees and $0.5 million of capital leases. These
activities were partially offset by borrowings from our principal stockholder
of $1.3 million. Cash of $3.3 million and $0.1 million were provided by our
discontinued operations for the years ended December 31, 2002 and 2001,
respectively.

Senior Credit Facilities

Prior to July 2002, we had a revolving loan and letter of credit facility (the
Credit Facility) of $37.5 million with a group of financial institutions. On
June 28, 2002, in anticipation of amending the Credit Facility, we voluntarily
reduced its revolving loan and letter of credit facility from $37.5 million to
$30.0 million. On July 12, 2002, we entered into an agreement amending and
restating our senior credit facilities with a syndicate of four lenders led by
Citicorp USA Inc. and UPS Capital Corporation pursuant to the terms of a Fifth
Amended and Restated Credit Agreement (the Amended Credit Agreement). Under
the Amended Credit Agreement, we have obtained a $30.0 million senior secured
revolving line of credit (the Amended Revolving Credit Facility) and a $7.0
million senior secured term loan (the Amended Term Loan and collectively with
the Amended Revolving Credit Facility, the Amended Credit Facility).

We utilized the proceeds from the Amended Credit Facility to repay outstanding
borrowings under our previously outstanding revolving credit facility and our
previously outstanding $12.0 million senior secured term loan. See Note 5
within the accompanying consolidated financial statements. As of
May 12,
2003, the outstanding aggregate amount under the Amended Revolving Credit
Facility was $11.4 million, our outstanding Amended Term Loan was $3.5 million,
the amount of letters of credit under the Amended Revolving Credit Facility was
$10.1 million, and availability under the Amended Revolving Credit Facility was
$1.7 million.

The interest rate on the Amended Revolving Credit Facility is, at the Companys
option, (a) prime plus 3% per annum, or (b) LIBOR plus 4.5% per annum. The
Company has currently elected the prime option. The interest rate on the
Amended Term Loan is 12% per annum. The Amended Revolving Credit Facility is
due on January 31, 2004. The Amended Term Loan was due in quarterly
installments of $500,000, commencing September 30, 2002, with the principal
balance due in full on January 31, 2004. However, $3.5 million of the Amended
Term Loan was repaid from the proceeds of the Aerocell Structures sale and has been
applied first against current quarterly installments (current maturities) and
second against long-term maturities. As a result, no principal installments
are currently due and the principal of the Amended Term Loan is due in full on
January 31, 2004.

The Amended Credit Agreement contains certain financial covenants regarding our
financial performance and certain other covenants, including limitations on the
amount of annual capital expenditures and the incurrence of additional debt,
and provides for the termination of the Amended Credit Facility and repayment of
all debt in the event of a material adverse change in the business or a change
in control. Generally, the Amended Credit Agreement requires mandatory
repayments and reduction of the commitments thereunder from proceeds of a sale
of assets or an issuance of equity or debt securities. Mandatory repayments
are also required as a result of insufficient collateral to meet the borrowing
base requirements thereunder or in the event the outstanding obligations under
the Amended Credit Facility exceed the commitments thereunder. As of December 31, 2002,
the Company did not meet certain financial covenants
and thus, was in violation of the Amended Credit Facility. Subsequent to year-end, however,
the Company has obtained a waiver of
non-compliance with all financial covenants and has thereby cured the covenant
violations.
The Company has also entered into agreements that reset financial
covenant requirements for the Amended Credit Facility. Finally, substantially all of our assets are pledged as collateral for the
amounts borrowed under the Amended Credit Facility.

On July 12, 2002, we also restructured our outstanding $10.0 million senior
secured term loan with Bank of America. $5.0 million of this loan (the $5.0
million BofA Term Loan) is now due on January 31, 2004. The $5.0 million BofA
Loan bears interest at the rate of LIBOR plus 2% and is credit supported by two
individuals, one of whom is our principal stockholder. The $5.0 million BofA
loan is secured by a lien on substantially all of our assets.

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After the refinancing, $2.5 million of the original BofA loan
continued to be due on August 14, 2002, and such loan was
repaid from the proceeds of the Aerocell Structures sale in July 2002. The remaining $2.5
million of the original BofA loan (the Quevedo Loan) was restructured as
follows: (i) at the closing of the refinancing, Mr. Quevedo, who is one of our
former directors and executive officers, paid Bank of America $2.5 million,
reducing our obligation under this term loan from $10.0 million to $7.5 million
(which amount was then restructured as set forth above); (ii) we transferred to
Mr. Quevedo a 100,000 square foot warehouse facility in
Pearland, Texas, which
had been previously utilized by our redistribution operation, in
satisfaction of $1.5 million of the Quevedo Loan (which is at least as
favorable a price, based on a third party appraisal, for this property as could
have been obtained from an unaffiliated third party); and (iii) we agreed to
pay Mr. Quevedo the remaining $1.0 million balance of this loan, with interest
at the rate of 12% per annum, on the earlier of the sale of Aerocell
Structures or January
31, 2004. As a result of the completed sale of Aerocell Structures on July 31, 2002, we
repaid the outstanding $1.0 million balance of this loan.

On May 14, 2003, we entered into an agreement with our principal stockholder
pursuant to which he agreed to loan us an additional
$6.0 million ($2.0 million at closing and $2.0 million 30
days and 60 days thereafter), which is to be used for working
capital in our operations. The new note has a three-year maturity, is
secured debt and bears a 16% PIK interest coupon. In connection with the new loan, we
issued a warrant to our majority stockholder to acquire, for nominal
consideration, 30% of our outstanding common stock (on a fully-diluted basis)
as of the day the warrant is exercised. The warrant is exercisable on
or before January 31, 2007. Further, the $1.3 million loan that we received from
our principal stockholder in connection with the October 2002 Brice
Manufacturing acquisition has been combined with this loan, and the keepwell
agreement, which our principal stockholder had issued to our senior lenders in
connection with the Brice Manufacturing acquisition and required
monthly funding of any EBITDA losses of Brice, has been eliminated.

Senior Subordinated Notes

New Notes

On February 28, 2002, in connection with our Note Exchange, we issued $100.0
million face value in aggregate principal amount of our New Notes, which mature
on December 31, 2006. The New Notes bear interest at the rate of 8.0% per
annum from the date of issuance, and are payable at our option either in cash
or paid- in-kind through the issuance of additional New Notes, semiannually on
June 30 and December 31 of each year. We expect to elect to pay interest
in-kind. If we do not pay interest in cash as of an interest payment date, we
will automatically be deemed to have paid such interest in-kind and additional
New Notes in the amount of such interest payment will automatically be deemed
to be outstanding from such date forward.

The New Notes are general unsecured obligations, subordinated in right of
payment to all existing and future senior debt, including indebtedness
outstanding under the Amended Credit Facility, any future credit facility that
may replace the Amended Credit Facility and the $5.0 million BofA Term Loan.
The New Notes are effectively
subordinated to all secured obligations to the extent of the assets securing
such obligations, including the Amended Credit Facility, the $5.0 million BofA
Term Loan, and the new loan from our principal stockholder.

The New Notes are fully and unconditionally guaranteed, on a senior
subordinated basis, by substantially all of our existing subsidiaries and each
subsidiary that we organize in the future, unless such subsidiary is designated
as an unrestricted subsidiary (the Subsidiary Guarantors). Subsidiary
guarantees are joint and several, full and unconditional, general unsecured
obligations of the Subsidiary Guarantors. Additionally, there are no
significant restrictions that would preclude the parent company from obtaining
funds, either through loan or dividend, from each Subsidiary Guarantor.
Subsidiary guarantees are subordinated in right of payment to all existing and
future senior debt of Subsidiary Guarantors, including the Amended Credit
Facility and the $5.0 million BofA Term Loan, and are also effectively subordinated to all secured obligations
of Subsidiary Guarantors to the extent of the assets securing such obligations,
including the Amended Credit Facility, the $5.0 million BofA Term Loan, and the
new loan from our principal stockholder.

The indenture for the New Notes (i) permits us to incur indebtedness equal to
the greater of $95 million or an unlimited amount to the extent that we satisfy
a fixed charge coverage ratio of 2.25 to 1.00, (ii) requires us, upon a change
of control or certain asset sales, to repurchase the New Notes at a price equal
to the redemption price which we would be obligated to pay if we redeemed the
New Notes on the date of the change of control or asset sale; and (iii) does
not contain a provision requiring acceleration of any premium due
upon acceleration

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of the New Notes upon an
event of default by reason of any willful action (or inaction) taken (or not
taken) by us with the intention of avoiding the prohibition on the redemption
of New Notes.

The New Notes are redeemable for cash at our option at the following
percentages of par plus accrued interest on the par value through the date of
redemption: 2002  70.0%, 2003  72.5%, 2004  73.0%,
2005  75.625% and 2006 
77.5%. The New Notes also provide that the holders will receive an aggregate
of 4.5 million shares of common stock if the New Notes are redeemed in 2002 or
2003 and an aggregate of 3.0 million shares of common stock if the New Notes
are redeemed in 2004, 2005 or 2006.

If the New Notes have not already been redeemed or repurchased, the New Notes,
including those New Notes previously issued as paid-in-kind interest and all
accrued but unpaid interest, will automatically convert on December 31, 2006
into an aggregate of 270.3 million shares of our common stock. Holders of New
Notes will not receive any cash payment representing principal or accrued and
unpaid interest upon conversion; instead, holders will receive a fixed number
of shares of common stock and a cash payment to account for any fractional
shares.

Old
Notes

In 1998, we sold $165.0 million of the Old Notes due in 2008 with a coupon rate
of 8.125% at a price of 99.395%. As a result of the Note Exchange, $16.2
million in aggregate principal amount of the Old Notes remain outstanding.
Interest on the Old Notes is payable on February 15 and August 15 of each year.
The Old Notes are general unsecured obligations, subordinated in right of
payment to all existing and future senior debt, including indebtedness
outstanding under the Amended Credit Facility, the $5.0 million BofA Term Loan,
and the new loan from our principal stockholder, and under senior credit
facilities which may replace these facilities in the future, and to the New
Notes. In addition, the Old Notes are effectively subordinated to all secured
obligations to the extent of the assets securing such obligations, including
the Amended Credit Facility, the $5.0 million BofA Term Loan, the new loan from
our principal stockholder, and to the New Notes. As
a result of the Note Exchange, substantially all of the covenant protection
contained in the indenture relating to the Old Notes was extinguished.

The Old Notes are fully and unconditionally guaranteed, on a senior
subordinated basis, by substantially all of our existing subsidiaries and each
subsidiary that we organize in the future, unless such subsidiary is designated
as an unrestricted subsidiary (the Subsidiary Guarantors). Subsidiary
guarantees are joint and several, full and unconditional, general unsecured
obligations of the Subsidiary Guarantors. Additionally, there are no
significant restrictions that would preclude the parent company from obtaining
funds, either through loan or dividend, from each Subsidiary Guarantor.
Subsidiary guarantees are subordinated in right of payment to all existing and
future senior debt of Subsidiary Guarantors, including the Amended Credit
Facility, the $5.0 million BofA Term Loan, and the new loan from our principal
stockholder, and are also effectively subordinated to all secured obligations
of Subsidiary Guarantors to the extent of the assets securing such obligations,
including the Amended Credit Facility, the $5.0 million BofA Term Loan, and the
new loan from our principal stockholder.

Junior Subordinated Notes

As discussed in Notes 6 and 9 within the accompanying consolidated financial
statements, the settlement of our outstanding class action litigation became
effective on September 20, 2002. As part of this settlement agreement, we have
issued $4.0 million face value in aggregate principal amount of the Companys
new junior subordinated convertible PIK notes (Junior Notes). These notes
bear interest at 8% and mature on January 2, 2007. The Junior Notes bear
interest from September 20, 2002 and are payable at the Companys option either
in cash or paid-in-kind through the issuance of additional notes semiannually
on June 30 and December 31 of each year. If we do not pay interest in cash as
of an interest payment date, we will automatically be deemed to have paid such
interest in-kind and additional Junior Notes in the amount of such interest
payment will automatically be deemed to be outstanding from such date forward.
Additionally, the Junior Notes have been recorded as of September 20, 2002 (the
effective date) at the then current redemption value of approximately $2.5
million. The discount is being accreted to the maturity redemption value, due
in January 2007, of approximately $4.4 million. The Junior Notes are general
unsecured obligations and are subordinated in right of payment to all current
and future senior debt, including the Amended Credit Facility, the $5.0 million
BofA Term Loan, the new loan from our principal stockholder, and the
Old and New Subordinated Notes.

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The Junior Notes are redeemable for cash at the Companys option at the
following percentages of par plus accrued interest on the par value through the
date of redemption: 2002  70.0%, 2003  72.5%, 2004  73.0%, 2005  75.625%
and 2006  77.5%.

The Junior Notes also provide that the holders will receive an aggregate of
144,300 shares of common stock if the Junior Notes are redeemed in 2002 or 2003
and an aggregate of 103,550 shares of common stock if the Junior Notes are
redeemed in 2004, 2005 or 2006.

If the Junior Notes have not already been redeemed or repurchased, the Junior
Notes, including those Junior Notes previously issued as paid-in-kind interest
and all accrued but unpaid interest, will automatically convert on January 2,
2007 into an aggregate of 9.3 million shares of common stock. Holders of
Junior Notes will not receive any cash payment representing principal or
accrued and unpaid interest upon conversion; instead, holders will receive a
fixed number of shares of common stock and a cash payment to account for any
fractional shares.

TROL Financing

We have a TROL financing arrangement that was utilized to develop two
facilities: (i) a corporate headquarters and warehouse facility, which has been
subleased to Kellstrom, and (ii) a facility to house our Caribe operation that
was sold in May 2001. The lease contains financial covenants regarding our
financial performance and certain other affirmative and negative covenants,
with which we will be obligated to comply during the term of the lease.

On July 12, 2002, we entered into an agreement amending our TROL financing
arrangement (the Amended TROL Financing Agreement). Under the terms of the
Amended TROL Financing Agreement, the maturity date of the TROL financing was
extended until June 30, 2005 and the base rent under the TROL was increased to
the greater of: (i) the amount being received under our sublease for the
facility, plus, commencing July 1, 2003, an additional monthly payment by us,
or (ii) $210,000. The TROL financing continues to be secured by the real
property and improvements comprising the facilities.

Substantially all of our subsidiaries have guaranteed our obligations under the
lease. Additionally, we have an option to acquire the new facility at the end
of the lease for an option price as determined in the lease. Lease payments are
currently at a rate of Prime plus 3.25% to 4.0% and we are responsible for all
property taxes, insurance and maintenance of the property. The TROL financing
is secured by a lien on the real property and improvements comprising the
facilities and on the fixtures therein.

The TROL financing contains certain financial covenants regarding the Companys
financial performance and certain other covenants, which overall mirror the
covenant requirements under the Amended Credit agreement, and
provides for the termination of the TROL financing agreement and
repayment of all debt in the event of a material adverse change in
the Companys business. At December 31, 2002, the Company did not meet certain financial covenants and
thus, was in violation of the TROL financing agreement. Additionally,
as a result of a cross default provision between the TROL and our
Amended Credit Facility, for which we were in violation with
financial covenants at December 31, 2002, we were also in
violation of the TROL financing agreement. Subsequent to
year-end, however, the Company has obtained a waiver of non-compliance with all
financial covenants and has thereby cured the covenant violations.
The Company has also entered into an agreement that resets financial
covenant requirements for the TROL financing arrangement and the
Amended Credit Facility.

Critical Accounting Policies

Financial Reporting Release No. 60 encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation
of the financial statements. Our consolidated financial statements include a
summary of the significant accounting policies and methods used in the
preparation of our consolidated financial statements.

Revenue
Recognition

Revenues from MR&O services are recognized and unbilled receivables are
recorded based upon the percentage of completion method. Unbilled receivables
are billed on the basis of contract terms (generally upon completion of an
aircraft) and deliveries. Revenues related to engine overhaul services are
recognized upon shipment of the overhauled engine. We regularly review our
progress on percentage-of-completion contracts and review the estimated costs
of fulfilling its obligations. If we do not accurately estimate the scope of
the work to be performed or do not manage these contracts properly within the
planned periods of time or satisfy it obligations under the contracts, then
future revenue and margins may be significantly and negatively affected, or
losses on existing contracts may need to be recognized. Any resulting
reductions in revenues, margins or contract losses could be material to our
results of operations.

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Use of Estimates

Managements discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of our financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities. On an ongoing basis, management evaluates
these estimates, including those related to estimated losses on disposal of
discontinued operations, the provision to reduce inventory to the lower of cost
or fair value, the estimated profit or loss to be recognized as aircraft
maintenance, design and construction services are performed, the allowances for
doubtful accounts and notes receivable, the realizability of its investment in
affiliates, the recovery of long lived assets and goodwill, medical benefit
accruals, the estimated fair values of facilities under capital leases and
allowances for litigation and environmental costs. Management bases their
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions and conditions.

Inventory
Valuation

Inventories, which consist primarily of new, overhauled, serviceable and
repairable aircraft parts, are stated at the lower of cost or market on
primarily a specific identification basis and aircraft parts usage analysis.
Though we believe that we have adequately provided for any such declines in
inventory value, any unanticipated change in technology or customer aircraft
fleet for which our inventory relates could significantly affect the value of
our inventory and thereby adversely affect gross margins and results of
operations. Customer demand, general economic conditions and industry market
factors may also impact the value of our inventory. In instances where bulk
purchases of inventory items are made, cost is determined based upon an
allocation by management of the bulk purchase price to the individual
components. Expenditures required for the recertification of parts are
capitalized as inventory and are expensed as the parts associated with the
recertification are sold.

Accounts
Receivable  Allowance for Doubtful Accounts

Substantially all of our accounts receivable are due primarily from airline and
cargo carriers. During 2001 and 2002, there has been significant change in the
aviation industry, including the filing for bankruptcy protection under Chapter
11 of the United States Bankruptcy Court by certain carriers. This in turn has
affected service providers within the aviation industry and has resulted in us
experiencing higher credit losses. We continuously perform credit evaluations
of our customers, considering numerous inputs including the customers
financial position, past payment history, cash flows, historical loss
experience and economic conditions. While management believes that adequate
allowances for doubtful accounts have been provided in the consolidated
financial statements, it is possible that we could experience additional
unexpected credit losses.

Goodwill
Valuation

As of January 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142
represents a substantial change in how goodwill is accounted for. SFAS No. 142
requires that goodwill no longer be amortized, but that goodwill be tested for
impairment by comparing the reporting units carrying value to its fair value
as of January 1, 2002 and as of an annual assessment date.

In accordance with SFAS No. 142, we have elected July 31st as our annual
impairment assessment date. We have completed our initial impairment
assessment as of January 1, 2002 and our annual impairment as of July 31, 2002,
and have concluded that no impairment charge is required at this time. Any
resulting impairment charges in the future, based on the evaluation
requirements under SFAS No. 142, could be material to the Companys results of
operations.

Long-Lived
Assets

Management reviews long-lived assets, which consists of property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recovered. Recoverability of
long-lived assets to be held and used is evaluated by a comparison of the
carrying amount of the asset to future net undiscounted cash flows expected to be generated by the asset

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group. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized for
the excess of the carrying amount over the fair value of the asset. Assets to
be disposed of are reported at the lower of the carrying value or fair value
less cost to sell when we have committed to a disposal plan.

As discussed below (Recently Issued Accounting Standards), in August 2001, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. We have adopted SFAS No. 144 as of January 1,
2002 with no material impact on our consolidated financial statements.

Recently Issued Accounting Standards

In June 2001, FASB issued SFAS No. 142, Goodwill and Intangible Assets. SFAS
No. 142 eliminates the requirement to amortize goodwill and indefinite-lived
intangible assets, addresses the amortization of intangible assets with defined
lives and addresses the impairment testing and recognition for goodwill and
intangible assets. SFAS No. 142 applies to goodwill and intangible assets
arising from transactions completed before and after the Statements effective
date of January 1, 2002 and requires that goodwill no longer be amortized, but
tested for impairment at least annually. At December 31, 2002, we had
net goodwill of $26,124, which is subject to the new impairment tests
prescribed under the statement. We adopted SFAS No. 142 on January 1,
2002. In accordance with SFAS No. 142, we have elected July 31, 2002
as our annual impairment assessment date. We completed our initial
impairment assessment as of January 1, 2002 and our annual impairment
assessment as of July 31, 2002, and concluded that no impairment charge is
required at this time. Absent a significant change in our operating
environment, our assessment of goodwill impairment will next be
re-evaluated as of July 31, 2003 (the annual assessment date).

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 replaces SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of and the accounting and reporting provisions of Accounting
Principles Board Opinion (APB) No. 30, Reporting the Results Of Operations 
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
SFAS No. 144 also amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS No. 144
establishes a single accounting model for assets to be disposed of by sale
whether previously held and used or newly acquired. SFAS No. 144 retains the
provisions of APB No. 30 for presentation of discontinued operations in the
income statement, but broadens the presentation to include a component of an
entity. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. We adopted SFAS No. 144 effective January 1, 2002 with no
material impact on our consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Under Statement 4, all gains and losses from extinguishment of debt were
required to be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. This Statement eliminates Statement 4
and as a result, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in APB No. 30.
Additionally, this Statement amends SFAS No. 13, Accounting for Leases, such
that lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in a similar manner as a sale-leaseback. This
Statement became effective for us on January 1, 2003. As a result of
adoption, we will reclassify the
$27,279 gain on debt extinguishment to be included with
continuing operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). A
liability for a cost associated with an exit or disposal activity shall be
recognized and measured initially at its fair value in the period in which the
liability is incurred, except for certain qualifying employee termination
benefits. This Statement became effective for exit or disposal activities
initiated by us after December 31, 2002.

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In October 2002, the FASB Emerging Issues Task Force (EITF) issued Summary No.
2, Supplement No. 4 of EITF Issue 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables. The focus of this issue, as related
to us, is
the accounting for service arrangements in which separate units of accounting
is required, and how the consideration should be allocated among these
separate, identifiable units. As we maintain certain customer
service contracts that include multiple aircraft, we have reviewed this
issue as it relates to our revenue recognition policy. As of
December 31, 2002, no material impact or change to our revenue
recognition policy has been identified based upon the release of this
EITF.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statement No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim and annual periods ending after December
15, 2002. We are currently evaluating the impact of this
interpretation on our consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure; an amendment of FASB Statement No.
123. This Statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. Additionally, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements regarding the method of accounting used
for stock-based employee compensation and the effect of the method used on
reported results. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements. We have currently decided to
continue to use the intrinsic value method for accounting for stock-based
employee compensation.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.

We are exposed to market risk for changes in interest rates. We have no
exposure to foreign currency exchange rates or to commodity price risk. We do
not hold or issue any financial instruments for trading or other speculative
purposes.

Our obligations under our Amended
Revolving Credit Facility and our $5.0 million BofA
senior term loan bear interest at floating rates and therefore, we are impacted
by changes in prevailing interest rates. However, our $3.5 million Amended
Term Loan, our new loan from our principal stockholder, and our New Notes, Old
Notes, and Junior Notes all bear fixed interest rates and therefore are not
subject to the risk of interest rate fluctuations. A 10% change in market
interest rates that affect our financial instruments would impact earnings
during 2002 by approximately $45,000 before taxes and would change the fair value
of our financial instruments by approximately $11.2 million.

The table below provides information about our market sensitive financial
instruments and constitutes a forward-looking statement. Our major market
risk exposure is changing interest rates in the United States and fluctuations
in the London Interbank Offered Rate. Our policy is to manage interest rates
through use of a combination of fixed and floating rate debt. The table below
assumes the December 31, 2002 interest rates remain constant (dollars in
thousands).

|                |                        |  |   |       |   |      |   |       |   |      |  |      |  |            |  |         |   |      |  |       |   |  |   |        |   |  |   |         |  |  |   |              |  | 
|--------------- | ---------------------- |  | - | ----- | - | ---- | - | ----- | - | ---- |  | ---- |  | ---------- |  | ------- | - | ---- |  | ----- | - |  | - | ------ | - |  | - | ------- |  |  | - | ------------ |  | 
|                |                        |  |   |       |   |      |   |       |   |      |  |      |  |            |  |         |   |      |  |       |   |  |   |        |   |  |   |         |  |  |   | Fair Value  
|                |                        |  |   |       |   |      |   |       |   |      |  |      |  |            |  |         |   |      |  |       |   |  |   |        |   |  |   |         |  |  |   | December 31,
|                |                        |  |   | 2003  |   | 2004 |   | 2005  |   | 2006 |  | 2007 |  | Thereafter |  | Total   |   | 2002
|                |                        |  |   |       |   |      |   |       |   |      |  |      |  |            |  |         |   |     
|Long term debt: |                        |  |   |       |   |      |   |       |   |      |  |      |  |            |  |         |   |      |  |       |   |  |   |        |   |  |   |         |  |  |   |             
|                | Fixed rate debt        |  |   |       |   |      | $ | 3,500 |   |      |  |      |  |            |  | 115,800 |   |      |  | 2,613 |   |  | $ | 16,247 |   |  | $ | 138,160 |  |  | $ | 131,866      | 
|                | Average interest rate  |  |   |       |   |      |   | 12.00 | % |      |  |      |  |            |  | 8.00    | % |      |  | 8.00  | % |  |   | 8.125  | % |  |   |         |  |  |   |              | 
|                | Variable rate debt     |  | $ | 2,179 |   |      | $ | 6,300 |   |      |  |      |  |            |  |         |   |      |  |       |   |  |   |        |   |  | $ | 8,479   |  |  | $ | 8,479        | 
|                | Average interest rates |  |   | 7.25  | % |      |   | 4.69  | % |      |  |      |  |            |  |         |   |      |  |       |   |  |   |        |   |  |   |         |  |  |   |              | 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial information required by Item 8 is included elsewhere in this
report (see Part IV, Item 15).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

During the current year ended December 31, 2002, we filed a current report on
Form 8-K/A reporting under Item 4 the change of our independent auditors from
Arthur Andersen LLP to KPMG LLP. Additionally, for all periods included within
this filing on Form 10-K, there were no disagreements with our accountants on
accounting principles or practices, financial statement disclosure or auditing
scope or procedures which, if not resolved to our accountants satisfaction,
would have caused them to make reference to such matters in their audit report
on our consolidated financial statements.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by Item 10 is hereby incorporated by reference from
the Registrants Proxy Statement for its 2003 Annual Meeting of Stockholders,
which Proxy Statement will be filed within 120 days after the end of the fiscal
year ended December 31, 2002.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by Item 11 is hereby incorporated by reference from
the Registrants Proxy Statement for its 2003 Annual Meeting of Stockholders,
which Proxy Statement will be filed within 120 days after the end of the fiscal
year ended December 31, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by Item 12 is hereby incorporated by reference from
the Registrants Proxy Statement for its 2003 Annual Meeting of Stockholders,
which Proxy Statement will be filed within 120 days after the end of the fiscal
year ended December 31, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by Item 13 is hereby incorporated by reference from
the Registrants Proxy Statement for its 2003 Annual Meeting of Stockholders,
which Proxy Statement will be filed within 120 days after the end of the fiscal
year ended December 31, 2002.

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ITEM 14. CONTROLS AND PROCEDURES



| | (a) |  | The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
Companys filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the periods specified in the
rules and forms of the Securities and Exchange Commission. Such
information is accumulated and communicated to the Companys management,
including its principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. The Companys management, including the principal executive
officer and the principal financial officer, recognize that any set of
controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Within 90 days prior to the filing date of this annual report on Form
10-K, the Company has carried out an evaluation, under the supervision and
with the participation of the Companys management, including the
Companys principal executive officer and the Companys principal
financial officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures. Based on such evaluation,
the Company principal executive officer and principal financial officer
concluded that the Companys disclosure controls and procedures are
effective.                                                                                                                                                                                                                                                                            
|
| | (b) |  | There have been no significant changes in the Companys internal
controls or in other factors that could significantly affect the
internal controls subsequent to the date of their evaluation in
connection with the preparation of this annual report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

42



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##### 



PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(A)  DOCUMENTS FILED AS PART OF THIS REPORT. The consolidated balance sheets as
of December 31, 2001 and December 31, 2002 and the related consolidated
statements of operations and stockholders equity and cash flows for each of
the three years in the period ended December 31, 2002 are filed as part of this
report:

|                                                                                                                                                            |  |      |      | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                                                            |  | PAGE
|(1)   Financial Statements                                                                                                                                  |  |      |      | 
|Independent Auditors Reports                                                                                                                               |  |      | F-2  | 
|Consolidated Balance Sheets at December 31, 2001 and 2002                                                                                                   |  |      | F-4  | 
|Consolidated Statements of Operations for each of the three years in the period
ended December 31, 2002                                                     |  |      | F-5  | 
|Consolidated Statements of Stockholders
Equity (Deficit) and Comprehensive Income (Loss) for each of the three years in the
period ended December 31, 2002 |  |      | F-6  | 
|Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2002                                                     |  |      | F-7  | 
|Notes to Consolidated Financial Statements                                                                                                                  |  |      | F-9  | 
|(2)   Consolidated Financial Statement Schedules                                                                                                            |  |      |      | 
|Schedule II  Valuation and Qualifying Accounts for the three years ended
December 31, 2002                                                                 |  |      | F-39 | 

|     |  |                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3)  |  | Exhibits                                                                                                                                                                                                       
|    
|3.1  |  | Certificate of Incorporation of Aviation Sales and amendment thereto (2)                                                                                                                                       
|3.2  |  | Second Amendment to Certificate of Incorporation (4)                                                                                                                                                           
|3.3  |  | Third Amendment to Certificate of Incorporation (25)                                                                                                                                                           
|3.4  |  | Bylaws (2)                                                                                                                                                                                                     
|4.1  |  | Indenture, dated as of February 17, 1998, among Aviation Sales, the
Subsidiary Guarantors named therein and SunTrust Bank, Central Florida,
National Association, Trustee (3)                                  
|4.2  |  | Form of Supplemental Indenture among Aviation Sales, the Subsidiary
Guarantors named therein and the Trustee (24)                                                                                              
|4.3  |  | Common Stock Purchase Warrant Certificate issued on February 18, 2000 to
Citicorp USA, Inc.(10)                                                                                                                
|4.4  |  | Amendment to Warrant between Citicorp USA, Inc. and the Company (26)                                                                                                                                           
|4.5  |  | Form of Common Stock Purchase Warrants issued in February 2001 (16)                                                                                                                                            
|4.6  |  | Indenture, dated as of February 28, 2002 among TIMCO Aviation Services,
Inc., the Subsidiary Guarantors named therein and Trustee with respect to
the 8% Senior Subordinated Convertible PIK Notes due 2006(22)
|4.7  |  | Warrant Agreement (22)                                                                                                                                                                                         
|4.8  |  | Common Stock Purchase Warrant issued in the restructuring (22)                                                                                                                                                 
|4.9  |  | Form of Warrants issued to LJH Ltd. and Don A. Sanders in September 2002 (1)                                                                                                                                   
|4.10 |  | Warrant issued to LJH Ltd. on May 14, 2003 (1)                                                                                                                                                                 
|10.1 |  | Fourth Amended and Restated Credit Agreement dated May 31, 2000 by and
among Aviation Sales, certain of our Subsidiaries and Citicorp USA, Inc.,
as Agent (11)                                                 
|10.2 |  | Lease dated July 22, 1998 by and between Ben Quevedo, Ltd. and Caribe (7)                                                                                                                                      

43



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##### 



|      |  |                                                                                                                                                                                                                                                                                                                                                 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3  |  | 1996 Director Stock Option Plan (4)                                                                                                                                                                                                                                                                                                             
|10.4  |  | 1996 Stock Option Plan (4)                                                                                                                                                                                                                                                                                                                      
|10.5  |  | TIMCO Aviation Services, Inc. 2001 Stock Option Plan (30)                                                                                                                                                                                                                                                                                       
|10.6  |  | Special Incentive Compensation Plan (8)                                                                                                                                                                                                                                                                                                         
|10.7  |  | Credit Agreement dated as of December 17, 1998 among First Security Bank,
National Association, as Owner Trustee for the Aviation Sales Trust 1998-
1, as Lessor, NationsBank, National Association, as Administrative Agent,
and the several Lenders thereto (6)                                                                               
|10.8  |  | Lease Agreement dated as of December 17, 1998 between First Security
Bank, National Association, as Owner Trustee under Aviation Sales Trust
1998-1, as Lessor, and Aviation Sales, as Lessee (6)                                                                                                                                               
|10.9  |  | Guaranty Agreement (Series A Obligations) between Aviation Sales,
substantially all of our subsidiaries and NationsBank, National
Association, as Agent for the Series A Lenders, dated as of December 17,
1998(6)                                                                                                                              
|10.10 |  | Guaranty Agreement (Lease Obligations) between substantially all of the
subsidiaries of Aviation Sales and First Security Bank, National
Association, as Owner Trustee for the Aviation Sales Trust 1998-1, dated
as of December 17, 1998 (6 )                                                                                                  
|10.11 |  | Participation Agreement between Aviation Sales as Construction Agent and
Leases, First Security Bank, National Association, as Owner Trustee, the
Various Banks and other lending institutions as the Holders and Lenders,
and NationsBank, National Association, as Administrative Agent, dated as
of December 17, 1998 (6)                    
|10.12 |  | Amendment No. 1 to Participation Agreement between Aviation Sales as
Construction Agent and Leases, First Security Bank, National Association,
as Owner Trustee, the Various Banks and other lending institutions as the
Holders and Lenders, and NationsBank, National Association, as
Administrative Agent, dated as of February 18, 2000 (10)
|10.13 |  | Amendment Agreement No. 2 for Lease Agreement and Certain Other Operative
Agreements, dated May 31, 2000 (11)                                                                                                                                                                                                                                   
|10.14 |  | Amendment No. 1, dated as of August 14, 2000, to the Fourth Amended and
Restated Credit Agreement (12)                                                                                                                                                                                                                                          
|10.15 |  | Amendment Agreement No. 3 for Lease Agreement and Certain Other Operative
Agreements (12)                                                                                                                                                                                                                                                       
|10.16 |  | Asset Purchase Agreement by and among Barnes Group Inc., Aviation Sales,
Aviation Sales Manufacturing Company, AVS/Kratz-Wilde Machine Company and
Apex Manufacturing, Inc. dated as of August 3, 2000(13)                                                                                                                                      
|10.17 |  | Amendment No. 1 dated September 7, 2000 to the Asset Purchase Agreement
by and among Barnes Group Inc., Aviation Sales, Aviation Sales
Manufacturing Company, AVS/Kratz-Wilde Machine Company and Apex
Manufacturing, Inc. dated as of August 3, 2000 (13)                                                                                      
|10.18 |  | Amendment No. 2 dated as of November 14, 2000 to Fourth Amended and
Restated Credit Agreement (14)                                                                                                                                                                                                                                              
|10.19 |  | Amendment Agreement No. 4 for Lease Agreement and Certain Other Operative
Agreements (14)                                                                                                                                                                                                                                                       
|10.20 |  | Asset Purchase Agreement among Aviation Sales, Aviation Sales
Distribution Services Company (ASDC) and Kellstrom, dated September 20,
2000 (15)                                                                                                                                                                                               

44



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##### 



|      |  |                                                                                                                                                           
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|10.21 |  | Letter Agreement to Asset Purchase Agreement, dated November 28, 2000(15)                                                                                 
|10.22 |  | Inventory Purchase Agreement among KAV, Aviation Sales and ASDC, dated
September 30, 2000(15)                                                             
|10.23 |  | Letter Amendment to Inventory Purchase Agreement, dated November 28, 2000(15)                                                                             
|10.24 |  | Form of KAV Senior Subordinated Note (15)                                                                                                                 
|10.25 |  | Form of KAV Junior Subordinated Note (15)                                                                                                                 
|10.26 |  | Operating Agreement of KAV, dated September 20, 2000, between Aviation
Sales and Kellstrom (15)                                                           
|10.27 |  | Letter Agreement between Kellstrom, KAV and Aviation Sales, dated
December 1, 2000, with respect to the payment of KAV Operating Expenses (15)            
|10.28 |  | Consignment Agreement between KAV and Kellstrom, dated December 1, 2000(15)                                                                               
|10.29 |  | Equipment Lease Agreement, dated December 1, 2000, among Aviation Sales,
ASDC and Kellstrom (15)                                                          
|10.30 |  | Lease Agreement, dated December 1, 2000, among ASDC and Kellstrom
(Pearland) (15)                                                                         
|10.31 |  | Lease Agreement, dated December 1, 2000, between Kellstrom and
Aviation Sales (Miramar)(15)                                                               
|10.32 |  | Non-Competition Agreement, dated December 1, 2000, among ASDC, Aviation
Sales and Kellstrom(15)                                                           
|10.33 |  | License Agreement, dated December 1, 2000, among Aviation Sales, ASDC
and Kellstrom (15)                                                                  
|10.34 |  | Cooperation Agreement, dated December 1, 2000, between Kellstrom and
Aviation Sales (15)                                                                  
|10.35 |  | Letter Agreement, dated December 1, 2000, between Kellstrom and Aviation
Sales (Equipment)(15)                                                            
|10.36 |  | Letter Agreement, dated December 1, 2000, between Kellstrom and Aviation
Sales (Pearland)(15)                                                             
|10.37 |  | Consent and Amendment No. 3, dated November 28, 2000, to the Fourth
Amended and Restated Credit Agreement dated as of May 31, 2000, as
amended(15)        
|10.38 |  | Amendment and Consent Agreement No. 5 for Participation Agreement and
Certain Other Operative Agreements, dated as of December 1, 2000(15)                
|10.39 |  | Agreement, dated February 14, 2001, between various subsidiaries of
Aviation Sales and Bank of America, N.A.(16)                                          
|10.40 |  | $10.0 million Term Loan Note, dated February 14, 2001(16)                                                                                                 
|10.41 |  | Form of Limited Guaranty in favor of Bank of America, N.A.(16)                                                                                            
|10.42 |  | Amendment No. 4, Consent and Waiver, dated February 14, 2001, to the
Fourth Amended and Restated Credit Agreement dated as of May 31, 2000, as
amended(16)
|10.43 |  | Amendment and Consent Agreement No. 7 for Lease Agreement and Certain
Other Operative Agreements, dated as of February 14, 2001(16)                       

45



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##### 



|      |  |                                                                                                                                                       
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|10.44 |  | Stock Purchase Agreement, dated December 15, 2000, among Wencor West,
Inc. Aviation Sales and ASDC (15)                                               
|10.45 |  | Amendment No. 5 and Waiver, dated as of April 17, 2001 to Fourth Amended
and Restated Credit Agreement dated as of May 31, 2000, amended (17)         
|10.46 |  | Amendment and Consent Agreement No. 8 for Lease Agreement and Certain
Other Operative Agreements (17)                                                 
|10.47 |  | Asset Purchase Agreement dated May 25, 2001 among Aviation Sales,
Caribe Aviation, Inc. and Hamilton Sundstrand Service Corporation(18)               
|10.48 |  | $13 million Replacement Term Loan Note, dated May 24, 2001(18)                                                                                        
|10.49 |  | Amendment No. 6 and Consent, dated May 21, 2001, to the Fourth Amended
and Restated Credit Agreement dated as of May 31, 2000, as amended(18)         
|10.50 |  | Amendment No. 7, Consent and Waiver, dated May 23, 2001, to the Fourth
Amended and Restated Credit Agreement dated as of May 31, 2000, as
amended (18)
|10.51 |  | Amendment and Consent Agreement No. 9 for Lease Agreement and Certain
Other Operative Agreements, dated as of May 21, 2001 (18)                       
|10.52 |  | Amendment and Consent Agreement No. 10 for Lease Agreement and Certain
Other Operative Agreements, dated as of May 24, 2001 (18)                      
|10.53 |  | Amendment No. 8, Consent and Waiver, dated August 30, 2001 to Fourth
Amended and Restated Credit Agreement (19)                                       
|10.54 |  | Consent, Waiver and Forbearance Agreement No. 11 for Lease Agreement and
Certain Operative Agreements, dated as of September 11, 2001 (19)            
|10.55 |  | Amendment No. 8, Consent and Waiver, dated as of November 27, 2001, to
Fourth Amended and Restated Credit Agreement (21)                              
|10.56 |  | Consent, Waiver and Forbearance Agreement No. 12 for Lease Agreement and
certain other Operation Agreements dated as of November 27, 2001 (21)        
|10.57 |  | Employment Agreement between Aviation Sales and Gil West (22)                                                                                         
|10.58 |  | Form of Waiver and Consent, dated April 18, 2002, to Fourth Amended and
Restated Credit Agreement (25)                                                
|10.59 |  | Form of Amendment and Waiver Agreement No. 13 for Lease Agreement and
certain other Operative Agreements (25)                                         
|10.60 |  | Stipulation of Settlement, dated as of May 6, 2002 (27)                                                                                               
|10.61 |  | Description of Securities to be issued in connection with class action settlement (27)                                                                
|10.62 |  | Fifth Amended and Restated Credit Agreement dated as of July 12, 2002 (26)                                                                            
|10.63 |  | Amendment and Consent Agreement No. 14 for Lease Agreement and Certain Other
Operative Agreements (26)                                                
|10.64 |  | Replacement Term Loan Note in the principal amount of $5.0 million in favor of
Bank of America, N.A. (26)                                             
|10.65 |  | Second Amendment to Limited Guaranty of LJH Ltd. (26)                                                                                                 
|10.66 |  | Second Amendment to Limited Guaranty of Don A. Sanders (26)                                                                                           
|10.67 |  | Replacement Term Loan Note in the principal amount of $2.5 million in favor of
Bank of America, N.A. (26)                                             
|10.68 |  | Second Amendment to Limited Guaranty of James Investments, Inc. (26)                                                                                  

46



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##### 



|      |  |                                                                                                                                                                         
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.69 |  | Loan Parties Agreement, dated as of July 12, 2002, relating to the $5.0 million and
the $2.5 million term loans due to Bank of America, N.A. (26)                       
|10.70 |  | Guaranty by the Company and subsidiaries of the $5.0 million and the $2.5 million
term loans due to Bank of America, N.A. (26)                                          
|10.71 |  | Term Loan Note in principal amount of $1.0 million in favor of Benito and
Martha Quevedo (26)                                                                           
|10.72 |  | Loan Parties Agreement, dated as of July 12, 2002, relating to the $1.0 million in
favor of Benito and Martha Quevedo (26)                                              
|10.73 |  | Guaranty by the Company and subsidiaries of the $1.0 million in favor of Benito
and Martha Quevedo (26)                                                                 
|10.74 |  | Memorandum of Purchase and Sale between ASDC, the Company and Quevedo Family
Limited Partnership, dated as of July 12, 2002 (26)                                        
|10.75 |  | Security Agreement, dated as of July 12, 2002, among the Company, its subsidiaries,
Benito and Martha Quevedo, James Investments, Inc., LJH Ltd. and Don A. Sanders (26)
|10.76 |  | Agreement, dated as of July 12, 2002, among Benito and Martha Quevedo,
James Investments, Inc., LJH Ltd. and Don A. Sanders (26)                                        
|10.77 |  | Amended and Restated Intercreditor Agreement between Citicorp USA, Inc., as Agent,
and Bank of America, N.A. (26)                                                       
|10.78 |  | Intercreditor Agreement among Citicorp USA, Inc., as Agent, Benito and Martha Quevedo,
James Investments, Inc., LJH Ltd. and Don A. Sanders (26)                        
|10.79 |  | Post-Closing Resolution Agreement among the Company, ASDC and Kellstrom, dated
as of June 10, 2002 (26)                                                                 
|10.80 |  | First Amendment to Non-Competition Agreement (26)                                                                                                                       
|10.81 |  | First Amendment to Miramar Lease between the Company and Kellstrom (26)                                                                                                 
|10.82 |  | Assignment of Amended Miramar Lease from Kellstrom to KIAC, Inc. (26)                                                                                                   
|10.83 |  | Assignment of Amended Miramar Lease from KIAC, Inc. to Kellstrom Aerospace, LLC (26)                                                                                    
|10.84 |  | Consignment Agreement between KAV, Kellstrom Commercial Aerospace, Inc. and
Bank of America, N.A. (26)                                                                  
|10.85 |  | Amended and Restated Loan and Security Agreement between Bank of America, N.A.
and KAV (26)                                                                             
|10.86 |  | Proceeds Sharing Agreement (26)                                                                                                                                         
|10.87 |  | AVS Investor Mutual Release (26)                                                                                                                                        
|10.88 |  | KAV Mutual Release (26)                                                                                                                                                 
|10.89 |  | AVS/ASDC Mutual Release (26)                                                                                                                                            
|10.90 |  | Asset Purchase Agreement, dated as of July 31, 2002, by and among Airborne Nacelle
Services, Inc., Aerocell Structures, Inc. and TIMCO Aviation Services, Inc. (28)     
|10.91 |  | Amendment No. 1 and Waiver, dated as of September 27, 2002, to Fifth Amended and
Restated Credit Agreement, dated as of July 12, 2002 (29)                              
|10.92 |  | Amendment No. 2, Consent and Waiver, dated as of October 11, 2002, to Fifth Amended
and Restated Credit Agreement, dated as of July 12, 2002 (29)                       
|10.93 |  | Stock Purchase Agreement between Ducommun Incorporated and TIMCO Aviation
Services, Inc., dated as of October 2, 2002 (29)                                              

47



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##### 



|       |  |                                                                                                                                                                                           
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.94  |  | Purchase and Sale Agreement, dated October 4, 2002, between LJH, Ltd. and AVSRE, L.P.
relating to the purchase of the Companys Dallas, Texas facilities (29)                             
|10.95  |  | Lease between LJH, Ltd., as landlord, and Aircraft Interior Design, Inc., as tenant,
dated October 4, 2002, for the property located at 2659 Nova Drive, Dallas,
Dallas County, Texas (29)
|10.96  |  | Subordinated Term Promissory Note, dated October 11, 2002, made in favor of LJH, Ltd.
in the original amount of $1.3 million (29)                                                         
|10.97  |  | Keepwell Agreement, dated as of October 11, 2002, by LJH, Ltd. in favor of the
Companys senior revolving credit lenders (29)                                                             
|10.98  |  | Amendment No. 4, Consent and Limited Waiver to Fifth Amended
and Restated Credit Agreement (1)                                                                                            
|10.99  |  | Amendment, Consent and Waiver Agreement No. 16 for Lease Agreement and
Certain Other Operative Agreements (1)                                                                             
|10.100 |  | Term Promissory Note in the face amount of $7,350,000 in favor of
LJH, Ltd. (1)                                                                                                           
|10.101 |  | Sublease Agreement between LJH, Ltd. and the Company for the Goodyear
facility (1)                                                                                                        
|10.102 |  | Employment Agreement between the Company and Roy T. Rimmer, Jr. (1)                                                                                                                       
|10.103 |  | Stock Option Agreement between the Company and Roy T. Rimmer, Jr. (1)                                                                                                                     
|10.104 |  | Employment Agreement between the Company and C. Robert Campbell (1)                                                                                                                       
|10.105 |  | Employment Agreement between the Company and Jack Arehart (1)                                                                                                                             
|21.1   |  | Subsidiaries of the Company (1)                                                                                                                                                           
|23.1   |  | Consent of KPMG LLP (1)                                                                                                                                                                   
|25.1   |  | Statement of Eligibility of Trustee on Form T-1 (22)                                                                                                                                      
|99.1   |  | Certifications by CEO and CFO under Section 302 of Sarbanes-Oxley Act of 2002                                                                                                             
|99.2   |  | Certifications of CEO and CFO under Section 906 of Sarbanes-Oxley Act of 2002
(furnished but not filed)                                                                                   

Notes to Exhibits

(1)  Filed herewith

(2)  Incorporated by reference to Aviation Sales Registration Statement on Form
S-1 dated April 15, 1996 (File No. 333-3650)

(3)  Incorporated by referenced to Aviation Sales Registration Statement on
Form S-4 dated March 26, 1998 (File No. 333-48669)

(4)  Incorporated by reference to Amendment No. 1 to Aviation Sales
Registration Statement on Form S-1 dated June 6, 1996 (File No. 333-3650)

(5)  Incorporated by reference to Aviation Sales Annual Report on Form 10-K for
the year ended December 31, 1996

(6)  Incorporated by reference to Aviation Sales Current Report on Form 8-K
dated December 17, 1998

(7)  Incorporated by reference to Aviation Sales Annual Report on Form 10-K for
the year ended December 31, 1998

48



---



##### 



(8)  Incorporated by reference to Aviation Sales Quarterly Report on Form 10-Q
for the quarter and six months ended June 30, 1999

(9)  Incorporated by reference to Aviation Sales Current Report on Form 8-A
filed November 15, 1999

(10)  Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed on March 27, 2000

(11)  Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed on June 13, 2000

(12)  Incorporated by reference to Aviation Sales Quarterly Report on Form 10-Q
for the quarter and six months ended June 30, 2000

(13)  Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed on September 22, 2000

(14)  Incorporated by reference to Aviation Sales Quarterly Report on Form 10-Q
for the quarter and nine months dated September 30, 2000

(15)  Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed on December 18, 2000

(16)  Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed on March 1, 2001

(17)  Incorporated by reference to Aviation Sales Annual Report on Form 10-K
for the year ended December 31, 2000

(18)  Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed May 25, 2001

(19)  Incorporated by reference to Aviation Sales Quarterly Report on Form 10-Q
for the quarter and six months ended June 30, 2001.

(20)  Previously filed with Aviation Sales Registration Statement on Form S-4
filed September 14, 2001.

(21)  Incorporated by reference from Aviation Sales Quarterly Report on Form
10-Q for the quarter and nine months ended September 30, 2001.

(22)  Previously filed with Aviation Sales Amendment No. 2 to Registration
Statement on Form S-4 filed December 13, 2001.

(23)  Incorporated by reference to Aviation Sales Current Report on Form 8-K
filed March 5, 2002

(24)  Previously filed with Aviation Sales Amendment No. 3 to Registration
Statement on Form S-4 filed January 9, 2002.

(25)  Incorporated by reference to Annual Report on Form 10-K for the fiscal
year ended December 31, 2001

(26)  Incorporated by reference to Form 8-K dated July 12, 2002

(27)  Incorporated by reference to Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002

(28)  Incorporated by reference to Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002

(29)  Incorporated by reference to Quarterly Report of Form 10-Q for the quarter
ended September 30, 2002

(30)  Incorporated by reference
to Aviation Sales proxy statement dated January 9, 2002

(B)  REPORTS ON FORM 8-K

The Company did not file a Current Report on Form 8-K during the fourth quarter
of 2002.

(C)  EXHIBITS

For exhibits, see Item 14(A)(3) above.

49



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

TIMCO AVIATION SERVICES, INC.
(Registrant)

|                                                         |  |             
|-------------------------------------------------------- |  | ------------
|BY: /s/ Roy T. Rimmer, Jr.                               |  | May 14, 2003
|                                                         |  |             
|Roy T. Rimmer, Jr., Chairman and Chief Executive
Officer |  |             

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

|                                                                                                                                           |  |             
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------
|SIGNATURE AND TITLE:                                                                                                                       |  | DATE:       
|                                                                                                                                          
|/s/ Roy T. Rimmer, Jr.Roy T. Rimmer, Jr.
Chairman and Chief Executive Officer
(Principal Executive Officer)                                |  | May 14, 2003
|                                                                                                                                          
|/s/ Gil WestGil West
President (Principal Operating Officer)                                                                               |  | May 14, 2003
|                                                                                                                                          
|/s/ C. Robert CampbellC. Robert Campbell
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |  | May 14, 2003

50



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##### 



|                                                  |  |             
|------------------------------------------------- |  | ------------
|                                                 
|/s/ Jack HerschJack Hersch
Director               |  | May 14, 2003
|                                                 
|/s/ Philip B. SchwartzPhilip B. Schwartz
Director |  | May 14, 2003
|                                                 
|/s/ Steven L. GerardSteven L. Gerard
Director     |  | May 14, 2003
|                                                 
|/s/  Stephen E. GormanStephen E. Gorman
Director  |  | May 14, 2003

51



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##### 



CONSOLIDATED FINANCIAL STATEMENTS OF TIMCO AVIATION SERVICES, INC.

AND SUBSIDIARIES


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2000, 2001 and 2002:

|                                                                                          |  |          |      | 
|----------------------------------------------------------------------------------------- |  | -------- | ---- | 
|REPORT TITLE                                                                              |  | PAGE NO.
|                                                                                          |  |         
|Independent Auditors Reports                                                             |  |          | F-2  | 
|Consolidated Balance Sheets                                                               |  |          | F-4  | 
|Consolidated Statements of Operations                                                     |  |          | F-5  | 
|Consolidated
Statements of Stockholders Equity (Deficit) and Comprehensive
Income (Loss) |  |          | F-6  | 
|Consolidated Statements of Cash Flows                                                     |  |          | F-7  | 
|Notes to Consolidated Financial Statements                                                |  |          | F-9  | 
|Schedule II  Valuation and Qualifying Accounts                                           |  |          | F-39 | 

F-1



---



##### 



Independent Auditors Report

The Board of Directors
TIMCO Aviation Services, Inc. and subsidiaries:

We have audited the accompanying consolidated balance sheet of TIMCO Aviation
Services, Inc. and subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, stockholders deficit and comprehensive
income and cash flows for the year then ended. In connection with our audit of
the 2002 consolidated financial statements, we also have audited the
financial statement schedule of valuation and qualifying accounts for the year
ended December 31, 2002. These consolidated financial statements and financial
statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit. The
consolidated balance sheet as of December 31, 2001 and the related consolidated
statements of operations, stockholders equity (deficit) and comprehensive loss
and cash flows and financial statement schedule of valuation and qualifying
accounts for the two years then ended of TIMCO Aviation Services, Inc. and
subsidiaries were audited by other auditors who have ceased operations. Those
auditors report on such consolidated financial statements and financial
statement schedule was dated April 16, 2002, except with respect to the matter
discussed in the first paragraph of the Liquidity section of note 1, as to
which the date was April 19, 2002. Such report was unqualified, before the
revision described in note 16 to the accompanying consolidated financial
statements, and included an explanatory paragraph which raised substantial
doubt about the Companys ability to continue as a going concern.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TIMCO
Aviation Services, Inc. and subsidiaries as of December 31, 2002, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, the related financial statement
schedule for the year ended December 31, 2002, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.

The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in note 1 to the consolidated financial statements, the
Company has suffered recurring losses from operations and has net working
capital and stockholders deficits that raise substantial doubt about its
ability to continue as a going concern. Managements plans in regard to these
matters are also described in note 1. The consolidated financial statements
and financial statement schedule do not include any adjustments that might
result from the outcome of this uncertainty.

As discussed above, the 2001 and 2000 consolidated financial statements of
TIMCO Aviation Services, Inc. and subsidiaries were audited by other auditors
who have ceased operations. As described in note 16, these consolidated
financial statements have been revised to include the transitional disclosures
required by Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, which was adopted by the Company as of January 1,
2002. In our opinion, the disclosures for 2001 and 2000 in note 16 are
appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 and 2000 consolidated financial statements of the TIMCO
Aviation Services, Inc. and subsidiaries other than with respect to such
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 and 2000 consolidated financial statements taken as a
whole.



| | KPMG LLP
| | --------

Greensboro, North Carolina
March 28, 2003, except for note 18,
which is as of May 14, 2003

F-2





---



##### 



The following report is a copy of a previously issued Report of Independent
Public Accountants. This report relates to
prior years financial statements. This report has not been reissued by Arthur
Andersen LLP.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To TIMCO Aviation Services, Inc.:

We have audited the accompanying consolidated balance sheets of TIMCO Aviation
Services, Inc. (a Delaware corporation formerly known as Aviation Sales
Company) and subsidiaries as of December 31, 2000 and 2001, and the related
consolidated statements of operations, stockholders equity (deficit) and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements and the schedule referred to below are the responsibility
of the Companys management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TIMCO Aviation Services, Inc.
and subsidiaries as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted
in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1, 7 and 11,
the Companys senior debt ($59.3 million at December 31, 2001) comes due in
July 2002 and August 2002, and the Company has insufficient liquidity to repay
these loans. This matter raises substantial doubt as to the Companys ability
to continue as a going concern. Managements plans in regard to this matter are
discussed in Notes 1, 7 and 11. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.

Arthur Andersen LLP

Miami, Florida,
April 16, 2002 (except with respect to the matter discussed in the first
paragraph of the Liquidity section of Note 1, as to which the date is April 19,
2002).

F-3



---



##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                            |                                                                                                                                                           |                                   |                                      |          |              |   |         |          |         |  | 
|------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ------------------------------------ | -------- | ------------ | - | ------- | -------- | ------- |  | 
|                                            |                                                                                                                                                           |                                   |                                      |          | December 31,
|                                            |                                                                                                                                                           |                                   |                                      |          |             
|                                            |                                                                                                                                                           |                                   |                                      |          | 2001         |   | 2002   
|                                            |                                                                                                                                                           |                                   |                                      |          |              |   |        
|ASSETS                                      |                                                                                                                                                           | (In thousands, except share data)
|Current Assets:                             |                                                                                                                                                           |                                   |                                      |          |              |   |         |         
|                                            | Cash and cash equivalents                                                                                                                                 |                                   | $                                    |         |              |   | $       | 339      |        
|                                            | Accounts receivable, net of allowance of $11,335 and $9,704 in 2001
and 2002, respectively                                                                |                                   |                                      | 26,936   |              |   |         | 17,762   |        
|                                            | Inventories                                                                                                                                               |                                   |                                      | 41,544   |              |   |         | 21,631   |        
|                                            | Income tax receivable                                                                                                                                     |                                   |                                      | 6,236    |              |   |         |         |        
|                                            | Prepaid insurance                                                                                                                                         |                                   |                                      | 1,670    |              |   |         | 2,316    |        
|                                            | Other current assets                                                                                                                                      |                                   |                                      | 2,293    |              |   |         | 1,272    |        
|                                            |                                                                                                                                                           |                                   |                                      |          |              |   |         |          |        
|                                            | Total current assets                                                                                                                                      |                                   |                                      | 78,679   |              |   |         | 43,320   |        
|Equipment on lease, net                     |                                                                                                                                                           |                                   | 360                                  |          |              |   |        |         
|Fixed assets, net:                          |                                                                                                                                                           |                                   |                                      |          |              |   |         |         
|                                            | Capitalized lease asset previously held for sale                                                                                                          |                                   |                                      |         |              |   |         | 24,794   |        
|                                            | Property and equipment, net                                                                                                                               |                                   |                                      | 38,471   |              |   |         | 33,516   |        
|                                            |                                                                                                                                                           |                                   |                                      |          |              |   |         |          |        
|                                            |                                                                                                                                                           |                                   | 38,471                               |          |              |   | 58,310  |         
|Goodwill, net                               |                                                                                                                                                           |                                   | 26,124                               |          |              |   | 26,124  |         
|Deferred financing costs, net               |                                                                                                                                                           |                                   | 6,637                                |          |              |   | 2,206   |         
|Capitalized lease asset held for sale       |                                                                                                                                                           |                                   | 25,240                               |          |              |   |        |         
|Other                                       |                                                                                                                                                           |                                   | 3,774                                |          |              |   | 1,066   |         
|                                            |                                                                                                                                                           |                                   |                                      |          |              |   |         |          |        
|                                            | Total assets                                                                                                                                              |                                   | $                                    | 179,285  |              |   | $       | 131,026  |        
|                                            |                                                                                                                                                           |                                   |                                      |          |              |   |         |          |        
|                                            |                                                                                                                                                           |                                   | LIABILITIES AND STOCKHOLDERSDEFICIT |          |              |   |         |          |         |  | 
|Current Liabilities:                        |                                                                                                                                                           |                                   |                                      |          |              |   |         |         
|                                            | Accounts payable                                                                                                                                          |                                   | $                                    | 25,969   |              |   | $       | 14,564   |        
|                                            | Accrued expenses                                                                                                                                          |                                   |                                      | 18,242   |              |   |         | 16,460   |        
|                                            | Accrued interest                                                                                                                                          |                                   |                                      | 12,113   |              |   |         | 854      |        
|                                            | Current maturities of notes payable                                                                                                                       |                                   |                                      | 22,000   |              |   |         |         |        
|                                            | Current maturities of capital lease obligations                                                                                                           |                                   |                                      | 25,450   |              |   |         | 1,101    |        
|                                            | Revolving loan                                                                                                                                            |                                   |                                      | 12,074   |              |   |         | 2,179    |        
|                                            | Customer deposits                                                                                                                                         |                                   |                                      | 14,820   |              |   |         | 12,739   |        
|                                            | Net liabilities of discontinued operations                                                                                                                |                                   |                                      | 5,395    |              |   |         | 3,574    |        
|                                            | Other                                                                                                                                                     |                                   |                                      | 5,363    |              |   |         | 2,026    |        
|                                            |                                                                                                                                                           |                                   |                                      |          |              |   |         |          |        
|                                            | Total current liabilities                                                                                                                                 |                                   |                                      | 141,426  |              |   |         | 53,497   |        
|Long-term Liabilities:                      |                                                                                                                                                           |                                   |                                      |          |              |   |         |         
|                                            | Senior subordinated notes, net:                                                                                                                           |                                   |                                      |          |              |   |         |          |        
|                                            |                                                                                                                                                           | Old notes due 2008                |                                      |          | 164,437      |   |         |          | 16,247  | 
|                                            |                                                                                                                                                           | New notes due 2006                |                                      |          |             |   |         |          | 115,800 | 
|                                            | Junior subordinated notes due 2007, net                                                                                                                   |                                   |                                      |         |              |   |         | 2,613    |        
|                                            | Notes payable to financial institutions, net of current portion                                                                                           |                                   |                                      |         |              |   |         | 8,500    |        
|                                            | Notes payable to related party                                                                                                                            |                                   |                                      |         |              |   |         | 1,300    |        
|                                            | Capital lease obligations, net of current portion                                                                                                         |                                   |                                      | 3,890    |              |   |         | 27,734   |        
|                                            | Deferred income                                                                                                                                           |                                   |                                      | 36       |              |   |         | 1,641    |        
|                                            | Other long-term liabilities                                                                                                                               |                                   |                                      | 863      |              |   |         | 456      |        
|                                            |                                                                                                                                                           |                                   |                                      |          |              |   |         |          |        
|                                            | Total long-term liabilities                                                                                                                               |                                   |                                      | 169,226  |              |   |         | 174,291  |        
|Commitments and Contingencies (See notes)   |                                                                                                                                                           |                                   |                                      |          |              |   |         |         
|Stockholders Deficit:                      |                                                                                                                                                           |                                   |                                      |          |              |   |         |         
|                                            | Preferred stock, $.01 par value, 1,000,000 shares authorized, none
outstanding, 15,000 shares designated Series A Junior participating                    |                                   |                                      |         |              |   |         |         |        
|                                            | Common stock, $.001 par value, 500,000,000 shares authorized, 1,501,532 and
31,640,994 issued and outstanding at December 31, 2001 and 2002,
respectively |                                   |                                      | 2        |              |   |         | 32       |        
|                                            | Additional paid-in capital                                                                                                                                |                                   |                                      | 153,277  |              |   |         | 180,830  |        
|                                            | Accumulated deficit                                                                                                                                       |                                   |                                      | (284,646 | )            |   |         | (277,624 | )      
|                                            |                                                                                                                                                           |                                   |                                      |          |              |   |         |          |        
|Total stockholders deficit                 |                                                                                                                                                           |                                   | (131,367                             | )        |              |   | (96,762 | )       
|                                            |                                                                                                                                                           |                                   |                                      |          |              |   |         |          |        
|Total liabilities and stockholders deficit |                                                                                                                                                           | $                                 | 179,285                              |          |              | $ | 131,026 |         
|                                            |                                                                                                                                                           |                                   |                                      |          |              |   |         |          |        

The accompanying notes are an integral part of these consolidated financial statements.

F-4



---



##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |            |       | 
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------- | ------- | --------------------------------- | -------- | ---- | ------- | --------- | -------- | - | ------- | ---------- | ----- | 
|                                                                                |                                                                                       |                   |         | For the Years Ended December 31, 
|                                                                                |                                                                                       |                   |         |                                  
|                                                                                |                                                                                       |                   |         | 2000                              |          | 2001 |         | 2002     
|                                                                                |                                                                                       |                   |         |                                   |          |      |         |          
|                                                                                |                                                                                       |                   |         | (In thousands, except share data)
|Operating Revenues:                                                             |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |           
|                                                                                | Sales, net                                                                            |                   | $       | 333,289                           |          |      | $       | 262,303   |          |   | $       | 181,760    |      
|                                                                                | Other                                                                                 |                   |         | 4,788                             |          |      |         | 1,837     |          |   |         | 213        |      
|                                                                                |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |            |      
|                                                                                | Total operating revenues                                                              |                   |         | 338,077                           |          |      |         | 264,140   |          |   |         | 181,973    |      
|Cost of sales                                                                   |                                                                                       |                   | 353,331 |                                   |          |      | 259,647 |           |          |   | 179,705 |           
|                                                                                |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |            |      
|                                                                                | Gross (loss) profit                                                                   |                   |         | (15,254                           | )        |      |         | 4,493     |          |   |         | 2,268      |      
|Operating expenses                                                              |                                                                                       |                   | 74,580  |                                   |          |      | 64,305  |           |          |   | 16,107  |           
|                                                                                |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |            |      
|                                                                                | Loss from operations                                                                  |                   |         | (89,834                           | )        |      |         | (59,812   | )        |   |         | (13,839    | )    
|Interest expense                                                                |                                                                                       |                   | 20,347  |                                   |          |      | 25,778  |           |          |   | 14,174  |           
|Charge for settlement of class action litigation                                |                                                                                       |                   |        |                                   |          |      |        |           |          |   | 4,410   |           
|Charge for valuation allowance on notes receivable from KAV Inventory, LLC      |                                                                                       |                   |        |                                   |          |      | 37,900  |           |          |   |        |           
|Other expense (income)  net                                                    |                                                                                       |                   | 882     |                                   |          |      | 7,738   |           |          |   | (4,197  | )         
|                                                                                |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |            |      
|                                                                                | Loss before income taxes, discontinued operations, and extraordinary gain             |                   |         | (111,063                          | )        |      |         | (131,228  | )        |   |         | (28,226    | )    
|Income tax expense (benefit)                                                    |                                                                                       |                   | 4,810   |                                   |          |      | 621     |           |          |   | (3,800  | )         
|                                                                                |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |            |      
|                                                                                | Loss from continuing operations before discontinued operations and
extraordinary gain |                   |         | (115,873                          | )        |      |         | (131,849  | )        |   |         | (24,426    | )    
|Discontinued Operations:                                                        |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |           
|                                                                                | Operations, net of income taxes                                                       |                   |         | (23,432                           | )        |      |         |          |          |   |         | 4,169      |      
|                                                                                | Loss on disposal, net of income taxes                                                 |                   |         | (72,325                           | )        |      |         | (9,386    | )        |   |         |           |      
|                                                                                |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |            |      
|                                                                                | Loss before extraordinary gain                                                        |                   |         | (211,630                          | )        |      |         | (141,235  | )        |   |         | (20,257    | )    
|Extraordinary gain resulting from debt restructuring, net of income
taxes of $0 |                                                                                       |                   |        |                                   |          |      |        |           |          |   | 27,279  |           
|                                                                                |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |            |      
|                                                                                |                                                                                       | Net (loss) income |         | $                                 | (211,630 | )    |         | $         | (141,235 | ) |         | $          | 7,022 | 
|                                                                                |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |            |      
|Basic and Diluted (Loss) Income Per Share:                                      |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |           
|                                                                                | Loss from continuing operations                                                       |                   | $       | (77.17                            | )        |      | $       | (87.81    | )        |   | $       | (0.94      | )    
|                                                                                | (Loss) income from discontinued operations                                            |                   |         | (63.77                            | )        |      |         | (6.25     | )        |   |         | 0.16       |      
|                                                                                | Extraordinary gain                                                                    |                   |         |                                  |          |      |         |          |          |   |         | 1.05       |      
|                                                                                |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |            |      
|                                                                                |                                                                                       | Net (loss) income |         | $                                 | (140.94  | )    |         | $         | (94.06   | ) |         | $          | 0.27  | 
|                                                                                |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |            |      
|Weighted average shares outstanding:                                            |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |           
|                                                                                | Basic and Diluted                                                                     |                   |         | 1,501,532                         |          |      |         | 1,501,532 |          |   |         | 26,015,218 |      
|                                                                                |                                                                                       |                   |         |                                   |          |      |         |           |          |   |         |            |      

The accompanying notes are an integral part of these consolidated financial statements.

F-5



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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) and

COMPREHENSIVE INCOME (LOSS)


|                                |                                                                         |                                                                                               |            |                                   |            |         |    |          |               |   |         |            |        |              |          |                   |       |                     |          |          |        | 
|------------------------------- | ----------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------- | --------------------------------- | ---------- | ------- | -- | -------- | ------------- | - | ------- | ---------- | ------ | ------------ | -------- | ----------------- | ----- | ------------------- | -------- | -------- | ------ | 
|                                |                                                                         |                                                                                               |            |                                   |            |         |    |          |               |   |         |            |        |              |          | Retained          |       | Total
Stockholders
|                                |                                                                         |                                                                                               |            |                                   |            |         |    |          |               |   |         | Additional |        | Earnings     |          | Equity
(Deficit) 
|                                |                                                                         |                                                                                               |            |                                   |            |         |    |          |               |   |         | Paid-in    |        | (Accumulated |          | and
Comprehensive
|                                |                                                                         |                                                                                               |            | Common Stock                      |            | Capital |    | Deficit) | Income
(Loss)
|                                |                                                                         |                                                                                               |            |                                   |            |         |    |          |              
|                                |                                                                         |                                                                                               |            | (In thousands, except share data)
|                                |                                                                         |                                                                                               |            |                                   |            |         |    |          |              
|                                |                                                                         |                                                                                               |            | Shares                            |            | Amount  |    |          |               |   |         |           
|                                |                                                                         |                                                                                               |            |                                   |            |         |    |          |               |   |         |           
|Balance as of December 31, 1999 |                                                                         |                                                                                               | 1,501,532  |                                   |            | $       | 2  |          |               | $ | 150,301 |            |        | $            | 68,219   |                   |       | $                   | 218,522  |         
|                                | Net loss and comprehensive loss                                         |                                                                                               |            |                                  |            |         |    |         |               |   |         |           |        |              |          | (211,630          | )     |                     |          | (211,630 | )     
|                                |                                                                         |                                                                                               |            |                                   |            |         |    |          |               |   |         |            |        |              |          |                   |       |                     |          |         
|Balance as of December 31, 2000 |                                                                         |                                                                                               | 1,501,532  |                                   |            |         | 2  |          |               |   | 150,301 |            |        |              | (143,411 | )                 |       |                     | 6,892    |         
|                                | Net loss and comprehensive loss                                         |                                                                                               |            |                                  |            |         |    |         |               |   |         |           |        |              |          | (141,235          | )     |                     |          | (141,235 | )     
|                                | Warrants issued to
stockholders for providing credit support            |                                                                                               |            |                                  |            |         |    |         |               |   |         | 2,892      |        |              |          |                  |       |                     |          | 2,892    |       
|                                | Warrants issued to
stockholders in connection with
the sale of an asset |                                                                                               |            |                                  |            |         |    |         |               |   |         | 46         |        |              |          |                  |       |                     |          | 46       |       
|                                | Warrants issued to third
parties                                        |                                                                                               |            |                                  |            |         |    |         |               |   |         | 38         |        |              |          |                  |       |                     |          | 38       |       
|                                |                                                                         |                                                                                               |            |                                   |            |         |    |          |               |   |         |            |        |              |          |                   |       |                     |          |         
|Balance as of December 31, 2001 |                                                                         |                                                                                               | 1,501,532  |                                   |            |         | 2  |          |               |   | 153,277 |            |        |              | (284,646 | )                 |       |                     | (131,367 | )       
|                                |                                                                         | Net income and comprehensive
income                                                           |            |                                   |           |         |    |          |              |   |         |            |       |              |          |                   | 7,022 |                     |          |          | 7,022  | 
|                                |                                                                         | Net proceeds from issuance of
common stock to stockholders
in connection with rights
offering |            |                                   | 24,024,507 |         |    |          | 24            |   |         |            | 19,782 |              |          |                   |      |                     |          |          | 19,806 | 
|                                |                                                                         | Common stock issued to senior
subordinated noteholders in
connection with note exchange
offer |            |                                   | 4,504,595  |         |    |          | 5             |   |         |            | 3,744  |              |          |                   |      |                     |          |          | 3,749  | 
|                                |                                                                         | Warrants issued to senior
subordinated noteholders in
connection with note exchange
offer     |            |                                   |           |         |    |          |              |   |         |            | 785    |              |          |                   |      |                     |          |          | 785    | 
|                                |                                                                         | Common stock issued to third
party for services                                               |            |                                   | 360,360    |         |    |          |              |   |         |            | 631    |              |          |                   |      |                     |          |          | 631    | 
|                                |                                                                         | Common stock issued in settlement
of class action litigation                                  |            |                                   | 1,250,000  |         |    |          | 1             |   |         |            | 1,149  |              |          |                   |      |                     |          |          | 1,150  | 
|                                |                                                                         | Warrants issued in settlement
of class action litigation                                      |            |                                   |           |         |    |          |              |   |         |            | 760    |              |          |                   |      |                     |          |          | 760    | 
|                                |                                                                         | Warrants issued to shareholders
for credit support                                            |            |                                   |           |         |    |          |              |   |         |            | 702    |              |          |                   |      |                     |          |          | 702    | 
|                                |                                                                         |                                                                                               |            |                                   |            |         |    |          |               |   |         |            |        |              |          |                   |       |                     |          |         
|Balance as of December 31, 2002 |                                                                         |                                                                                               | 31,640,994 |                                   |            | $       | 32 |          |               | $ | 180,830 |            |        | $            | (277,624 | )                 |       | $                   | (96,762  | )       
|                                |                                                                         |                                                                                               |            |                                   |            |         |    |          |               |   |         |            |        |              |          |                   |       |                     |          |         

The
accompanying notes are an integral part of these consolidated financial statements.

F-6



---



##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                         |                                                                          |                                                 |   |                                  |         |      |   |          |        |   |   |         |         |  
|---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ----------------------------------------------- | - | -------------------------------- | ------- | ---- | - | -------- | ------ | - | - | ------- | ------- | -
|                                                                                         |                                                                          |                                                 |   | For the Years Ended December 31,
|                                                                                         |                                                                          |                                                 |   |                                 
|                                                                                         |                                                                          |                                                 |   | 2000                             |         | 2001 |   | 2002    
|                                                                                         |                                                                          |                                                 |   |                                  |         |      |   |         
|                                                                                         |                                                                          |                                                 |   | (In thousands)                  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |                                                                          |                                                 |   |                                  |         |      |   |          |        |   |   |        
|                                                                                         | Net (loss) income                                                        |                                                 | $ | (211,630                         | )       |      | $ | (141,235 | )      |   | $ | 7,022   |        
|Adjustments to reconcile net (loss) income to net cash provided by
operating activities: |                                                                          |                                                 |   |                                  |         |      |   |          |        |   |   |        
|                                                                                         | Loss (income) from discontinued operations                               |                                                 |   | 95,757                           |         |      |   | 9,386    |        |   |   | (4,169  | )      
|                                                                                         | Extraordinary gain on restructuring of debt                              |                                                 |   |                                 |         |      |   |         |        |   |   | (27,279 | )      
|                                                                                         | Charge for class action settlement                                       |                                                 |   |                                 |         |      |   |         |        |   |   | 4,410   |        
|                                                                                         | Gain on Kellstrom settlement, net of cash proceeds                       |                                                 |   |                                 |         |      |   |         |        |   |   | (1,173  | )      
|                                                                                         | Gain on sale leaseback transaction                                       |                                                 |   |                                 |         |      |   |         |        |   |   | (1,811  | )      
|                                                                                         | Gain on sale of subsidiary                                               |                                                 |   |                                 |         |      |   | (5,664   | )      |   |   | (279    | )      
|                                                                                         | Depreciation and amortization                                            |                                                 |   | 11,511                           |         |      |   | 9,106    |        |   |   | 5,530   |        
|                                                                                         | Amortization of deferred financing costs                                 |                                                 |   | 2,622                            |         |      |   | 5,875    |        |   |   | 5,527   |        
|                                                                                         | Provision for inventory obsolescence                                     |                                                 |   | 3,525                            |         |      |   | 2,699    |        |   |   | 7,768   |        
|                                                                                         | Provision for doubtful accounts                                          |                                                 |   | 20,343                           |         |      |   | 9,502    |        |   |   | 846     |        
|                                                                                         | Charge to reserve notes receivable from KAV Inventory, LLC               |                                                 |   |                                 |         |      |   | 37,900   |        |   |   |        |        
|                                                                                         | Write-down of long-lived assets                                          |                                                 |   | 7,808                            |         |      |   | 33,940   |        |   |   |        |        
|                                                                                         | Equity (income) loss of affiliate, net of income taxes                   |                                                 |   | (43                              | )       |      |   | 6,573    |        |   |   |        |        
|                                                                                         | Proceeds from sale of equipment on lease, net of gain                    |                                                 |   | 3,188                            |         |      |   | 3,282    |        |   |   |        |        
|                                                                                         | Income on non-refundable lease deposit                                   |                                                 |   |                                 |         |      |   | (2,204   | )      |   |   |        |        
|                                                                                         | Expense from issuances of warrants                                       |                                                 |   |                                 |         |      |   | 84       |        |   |   |        |        
|                                                                                         | Deferred income taxes                                                    |                                                 |   | 1,492                            |         |      |   |         |        |   |   |        |        
|                                                                                         | Loss on sale of affiliate                                                |                                                 |   | 859                              |         |      |   |         |        |   |   |        |        
|                                                                                         | Write-down of stockholder note                                           |                                                 |   | 200                              |         |      |   |         |        |   |   |        |        
|                                                                                         | Change in working capital:                                               |                                                 |   |                                  |         |      |   |          |        |   |   |         |        
|                                                                                         |                                                                          | Decrease in accounts receivable                 |   |                                  | 4,025   |      |   |          | 28,680 |   |   |         | 7,831   |  
|                                                                                         |                                                                          | Decrease in inventories                         |   |                                  | 35,472  |      |   |          | 2,321  |   |   |         | 9,198   |  
|                                                                                         |                                                                          | Decrease in other current assets                |   |                                  | 26,248  |      |   |          | 1,278  |   |   |         | 6,716   |  
|                                                                                         |                                                                          | (Increase) decrease in other non-current assets |   |                                  | (4,078  | )    |   |          | 5,151  |   |   |         | 2,708   |  
|                                                                                         |                                                                          | Increase (decrease) in accounts payable         |   |                                  | 16,266  |      |   |          | (2,047 | ) |   |         | (10,995 | )
|                                                                                         |                                                                          | Increase (decrease) in accrued expenses         |   |                                  | 4,723   |      |   |          | (1,816 | ) |   |         | (5,971  | )
|                                                                                         |                                                                          | Increase (decrease) in customer deposits        |   |                                  | 6,973   |      |   |          | 7,261  |   |   |         | (2,081  | )
|                                                                                         |                                                                          | (Decrease) increase in deferred income          |   |                                  | (1,077  | )    |   |          |       |   |   |         | 1,605   |  
|                                                                                         |                                                                          | (Decrease) increase in other liabilities        |   |                                  | (3,457  | )    |   |          | 7,504  |   |   |         | 1,197   |  
|                                                                                         |                                                                          |                                                 |   |                                  |         |      |   |          |        |   |   |         |        
|                                                                                         |                                                                          | Net cash provided by operating activities       |   |                                  | 20,727  |      |   |          | 17,576 |   |   |         | 6,600   |  
|                                                                                         |                                                                          |                                                 |   |                                  |         |      |   |          |        |   |   |         |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |                                                                          |                                                 |   |                                  |         |      |   |          |        |   |   |        
|                                                                                         | Proceeds from sale of subsidiary                                         |                                                 |   |                                 |         |      |   | 21,290   |        |   |   | 9,062   |        
|                                                                                         | Proceeds from sale leaseback with related party, net of transaction fees |                                                 |   |                                 |         |      |   |         |        |   |   | 2,246   |        
|                                                                                         | Purchases of fixed assets                                                |                                                 |   | (9,802                           | )       |      |   | (778     | )      |   |   | (3,560  | )      
|                                                                                         | Cash used in acquisitions, net of cash acquired                          |                                                 |   |                                 |         |      |   |         |        |   |   | (1,271  | )      
|                                                                                         | Payments from related parties                                            |                                                 |   | 106                              |         |      |   | 1,792    |        |   |   |        |        
|                                                                                         | Investment in joint venture                                              |                                                 |   | (3,734                           | )       |      |   | (339     | )      |   |   |        |        
|                                                                                         | Proceeds from sale of joint venture                                      |                                                 |   | 1,455                            |         |      |   |         |        |   |   |        |        
|                                                                                         | Net proceeds from the sale of discontinued operations                    |                                                 |   | 175,315                          |         |      |   |         |        |   |   |        |        
|                                                                                         |                                                                          |                                                 |   |                                  |         |      |   |          |        |   |   |         |        
|                                                                                         |                                                                          | Net cash provided by investing activities       |   | $                                | 163,340 |      |   | $        | 21,965 |   |   | $       | 6,477   |  
|                                                                                         |                                                                          |                                                 |   |                                  |         |      |   |          |        |   |   |         |        

The accompanying notes are an integral part of these consolidated financial statements.

F-7



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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS(Continued)

|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |         |       | 
|-------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------------------- | -------------------------------------------- | -------- | -------------------------------- | ------ | ---- | -------- | ------- | -- | --- | -------- | ------- | ----- | 
|                                                                     |                                                                                                       |                                       |                                              |          | For the Years Ended December 31,
|                                                                     |                                                                                                       |                                       |                                              |          |                                 
|                                                                     |                                                                                                       |                                       |                                              |          | 2000                             |        | 2001 |          | 2002   
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |        
|                                                                     |                                                                                                       |                                       |                                              |          | (In thousands)                  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |         
|                                                                     | Borrowings of amounts under senior debt facility                                                      |                                       | $                                            | 460,593  |                                  |        | $    | 314,510  |         |    | $   | 200,910  |        
|                                                                     | Repayment of amounts under senior debt facility                                                       |                                       |                                              | (694,214 | )                                |        |      | (346,825 | )       |    |     | (210,805 | )      
|                                                                     | Issuance of common stock in rights offering                                                           |                                       |                                              |         |                                  |        |      |         |         |    |     | 19,806   |        
|                                                                     | Payment for old notes in note exchange offer                                                          |                                       |                                              |         |                                  |        |      |         |         |    |     | (5,081   | )      
|                                                                     | Payment of expenses related to exchange offer                                                         |                                       |                                              |         |                                  |        |      |         |         |    |     | (5,031   | )      
|                                                                     | Proceeds of term loan with financial institutions                                                     |                                       |                                              | 15,500   |                                  |        |      | 12,000   |         |    |     |         |        
|                                                                     | Payment of term loan with financial institutions                                                      |                                       |                                              |         |                                  |        |      | (5,500   | )       |    |     | (13,500  | )      
|                                                                     | Proceeds of term loan with related party                                                              |                                       |                                              |         |                                  |        |      |         |         |    |     | 1,300    |        
|                                                                     | Payments on equipment loans                                                                           |                                       |                                              | (201     | )                                |        |      | (998     | )       |    |     |         |        
|                                                                     | Payments on capital leases                                                                            |                                       |                                              | (147     | )                                |        |      | (9,000   | )       |    |     | (476     | )      
|                                                                     | Payment of deferred financing costs                                                                   |                                       |                                              | (10,525  | )                                |        |      | (3,794   | )       |    |     | (3,122   | )      
|                                                                     | Payments on other notes payable                                                                       |                                       |                                              | (3,750   | )                                |        |      |         |         |    |     |         |        
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        
|                                                                     |                                                                                                       | Net cash used in financing activities |                                              |          | (232,744                         | )      |      |          | (39,607 | )  |     |          | (15,999 | )    
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        
|                                                                     |                                                                                                       |                                       | Net cash provided by discontinued operations |          |                                  | 27,246 |      |          |         | 66 |     |          |         | 3,261 | 
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                 |                                                                                                       |                                       | (21,431                                      | )        |                                  |        |     |          |         |    | 339 |         
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        
|CASH AND CASH EQUIVALENTS, beginning of period                       |                                                                                                       |                                       | 21,431                                       |          |                                  |        |     |          |         |    |    |         
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        
|CASH AND CASH EQUIVALENTS, end of period                             |                                                                                                       | $                                     |                                             |          |                                  | $      |     |          |         | $  | 339 |         
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                    |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |         
|                                                                     | Interest paid                                                                                         |                                       | $                                            | 39,705   |                                  |        | $    | 12,470   |         |    | $   | 7,362    |        
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        
|                                                                     | Income taxes paid (refunded)                                                                          |                                       | $                                            | 1,028    |                                  |        | $    | 60       |         |    | $   | (11,458  | )      
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        
|SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |         
|                                                                     | Value of common stock and warrants issued in connection with note exchange offer and
loan origination |                                       | $                                            |         |                                  |        | $    |         |         |    | $   | 4,534    |        
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        
|                                                                     | Value of common stock and warrants issued in connection with settlement of class
action litigation    |                                       | $                                            |         |                                  |        | $    |         |         |    | $   | 1,910    |        
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        
|                                                                     | Value of warrants issued to stockholders for providing credit support                                 |                                       | $                                            | 1,079    |                                  |        | $    | 2,892    |         |    | $   | 702      |        
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        
|                                                                     | Value of common stock issued to third party for services                                              |                                       | $                                            |         |                                  |        | $    | 38       |         |    | $   | 631      |        
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        
|                                                                     | Notes received from sale of inventory to KAV Inventory, LLC                                           |                                       | $                                            | 29,400   |                                  |        | $    | 8,500    |         |    | $   |         |        
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        
|                                                                     | Acquisition of capitalized lease asset                                                                |                                       | $                                            |         |                                  |        | $    | 34,240   |         |    | $   |         |        
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        
|                                                                     | Value of warrants issued to stockholders in connection with the sale of an asset                      |                                       | $                                            |         |                                  |        | $    | 46       |         |    | $   |         |        
|                                                                     |                                                                                                       |                                       |                                              |          |                                  |        |      |          |         |    |     |          |        

The accompanying notes are an integral part of these consolidated financial statements.

F-8



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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Per Share Data)


NOTE 1  DESCRIPTION OF
BUSINESS, LIQUIDITY, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

TIMCO Aviation Services, Inc. (TAS or the Company), formerly known as
Aviation Sales Company, is a Delaware corporation, which through its
subsidiaries, provides aircraft maintenance, repair and overhaul (MR&O)
services to commercial passenger airlines, air cargo carriers, aircraft leasing
companies, maintenance and repair facilities and aircraft parts redistributors
throughout the world. In July 2002, the Company sold its flight surface repair
operation based in Hot Springs, Arkansas. Additionally, in May 2001 the
Company sold its component repair operation based in Miramar, Florida. The
results of these two businesses are included in the accompanying consolidated
results from continuing operations. Also, in December 2000, the Company sold
substantially all of the assets of its parts redistribution operation, new
parts distribution operation and manufacturing operations. The results of
operations for these businesses are included in the accompanying consolidated
statements of operations as discontinued operations. See Note 3 for further
discussion.

On February 28, 2002, the Company completed a significant restructuring of its
capital and equity, including a note exchange and rights offering. See Note 13
for further discussion. Concurrent with the completion of the note exchange
and rights offering, the Company changed its capitalization by increasing the
number of its authorized shares of common stock from 30,000 shares to 500,000
shares and by reducing the number of its issued and outstanding shares of
common stock by converting every ten shares of its issued and outstanding
common stock into one share. Additionally, the Company changed its corporate
name from Aviation Sales Company to TIMCO Aviation Services, Inc. All share
and per share data contained herein reflects completion of the
one-share-for-ten-shares reverse stock split.

LIQUIDITY

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. On several occasions during 2001
and 2002, the Company has been out of compliance with certain of the covenants
contained in the Companys credit agreement with its senior lenders and under
its tax retention operating lease (TROL) financing arrangement (which
facility is recorded as a capitalized lease asset previously held for sale).
The Companys senior lenders and the TROL financing lender waived all of the
covenant violations, which included non-payment defaults under their respective
facilities that were waived on April 19, 2002, that have occurred during 2001
and 2002 and the Company was in compliance, as waived and amended, with its
senior credit agreements at December 31, 2001 and 2002. Finally, since May 31, 2000,
the Company has amended and restated its senior credit facility and
amended its senior credit facility and its TROL financing
lease on several occasions. See Notes 5 and 7 for amendments agreed to during
fiscal 2002.

For the year ended December 31,
2002, the Company incurred losses from continuing
operations of $24,426, had net working capital and
stockholders deficits as of December 31, 2002, and
continued to require additional cash flow above
amounts currently being provided from operations to meet its working
requirements. Additionally, as a result of current year operating activities,
the Company was not in compliance at December 31, 2002 with debt covenant requirements
under its Amended Credit Facility and Tax Retention Operating Lease (TROL).
Subsequent to year-end, the Company
obtained a waiver of non-compliance with all financial covenants and have
thereby cured these covenant violations. The Company has also entered
into agreements that reset financial covenant requirements for the
Amended Credit Agreement and TROL financing arrangements (see Note 18). Also, as a result of the state of the general
economy, the rising price of jet fuel, a significant decline, from calendar
year 2000, in passenger airline travel, the currently on-going war in Iraq, and
a greater than 15% competitive reduction in airfare prices, the airline
industry, and thus the Companys customer base, has been significantly impacted. The result for some carriers has been the filing for protection under Chapter 11 of
the United States Bankruptcy Code. These factors have also resulted in some of
the Companys competitors exiting the maintenance, repair, and overhaul business.

The Companys ability to service
the debt and
note obligations, as they come due, including maintaining compliance
with the covenants and provisions under the Amended Credit Facility,
TROL Financing Agreement, $5.0 million BofA Term Loan, New Notes, Old Notes, and Junior Notes
and the new financing described in Note 18, is dependent upon the
Companys future
financial and operating performance. This performance, in turn, is
subject to various factors, including certain factors beyond the
Companys
control, such as changes in conditions affecting the airline industry
and changes in the overall economy. The high leverage position of the
Company could
have a material impact on the Companys liquidity and this leverage position
makes the Company vulnerable to economic downturns.

F-9



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##### 



Cash flow from operations service
payments of the Companys debt and note obligations, thereby reducing funds
available for other purposes. Even if the Company is able to
meet the debt service and other obligations when due, the Company may not be able to
comply with the covenants and other provisions under the debt and
note obligations. A failure to comply, unless waived by the
lenders and noteholders, would be an event of default and would
permit the lenders and noteholders to accelerate the maturity of
these debt and note obligations. It would also permit them to
terminate their commitments to extend credit under the financing
agreements. The Amended Credit Facility and the TROL financing
agreement also provide for the termination of the financing
agreements and repayment of all obligations in the event of a
material adverse change in the Companys business or a change in
control, as defined. These actions would have an immediate material adverse
effect on the Companys liquidity. If the Company was unable to
repay the debt to the
lenders or obligations to the noteholders, or otherwise obtain a
waiver, the lenders and holders could proceed against the collateral
securing the financing obligations and notes, and exercise all other
rights available to them. While management does not believe it is
probable that the Company will fail to comply with the quarterly
financial covenants in fiscal 2003, such a scenario is reasonably
possible.

Even in light of the extenuating situation that faces the Company, the overall
economy, and the state of the airline industry, the Company has made
significant efforts in addressing liquidity constraints. The efforts of the
Company have focused on implementing debt reduction initiatives and focusing
the Companys operations on its overhaul, repair, and maintenance businesses.
As a result of this operational strategic focus, in July 2002, the Company
completed the sale of substantially all of the assets and business of its
Aerocell Structures, Inc. (Aerocell) flight surfaces operation. The net
sales price was $9,600 (subject to post closing adjustments), of which $9,062
was received in cash at the closing. The Company used the proceeds from the
sale to repay $7,000 of term loans. The remainder, net of expenses, has been
used for working capital (see Note 3). Additionally, in May 2001, the Company
completed the sale of the assets of its Caribe Aviation (Caribe) component
repair operation. The sales price was $22,500, of which $21,290 was received
in cash at the closing, and the balance of which was received in 2002. The
Company used $10,000 of the proceeds from the sale to repay the revolving
credit debt and $5,500 to repay borrowings under outstanding term loans. The
balance, net of expenses, was used for working capital (see Note 3). Also, the
purchaser of Caribe acquired the real estate and facility on which the Caribe
operation was located for an aggregate purchase price of $8,500. The proceeds
from the sale of the real estate and facility were used to reduce the
outstanding TROL financing (see Note 7). Finally, as discussed in Note 3,
during 2000 and 2001 the Company sold substantially all of the assets of its
parts redistribution operation, new parts distribution operation, manufacturing
operations, and one of its MR&O operations. The proceeds from all of these
sales, which exceeded $195,000, were used to repay senior indebtedness.

In addition to the sales of these businesses, in October 2002, the Company sold
its real estate and fixtures located at the Companys Aircraft Interior Design,
Inc. (AID) operation in Dallas, Texas, to the Companys principal stockholder.
The gross selling price for these assets was approximately $2,400. Concurrent
with this sale, the Company entered into a ten-year lease agreement with the
principal stockholder for a majority of these assets. See Note 8 for further
discussion of this sale-leaseback activity.

A second component to the Companys strategic focus has been the reduction in
the levels of outstanding debt. In July 2002, the Company completed a
refinancing of all of its senior debt. In the refinancing, the Company
obtained a $30,000 senior revolving credit facility and new a $7,000
senior term loan, both
due January 31, 2004, and used the proceeds from these new
senior credit facilities to
repay amounts outstanding under its previous revolving credit agreement and
under a previously outstanding $12,000 senior term loan (see Note 5). In
addition to refinancing the Companys senior revolving credit facility and senior term
loan, in July 2002 the Company also restructured its $10,000 senior secured
term loan with Bank of America. In this restructuring, $2,500 of the original
$10,000 was satisfied by a related party. The consideration given to this related party was a transfer of real property, which based on a third party
appraisal had a fair market value of $1,500, and a $1,000 cash payment,
which was paid with the proceeds from the sale of Aerocell. Additionally,
$2,500 of the original $10,000 was satisfied from the proceeds of the Aerocell
sale. The residual $5,000 has been extended until January 31, 2004 (see Note
5). In summary, the Company used the proceeds from the Aerocell sale to reduce
the outstanding term debt as follows: (i) $3,500 was used to reduce term debt
due to the Companys revolving credit and term lenders, (ii) $2,500 was used to
repay term debt due August 14, 2002, and (iii) $1,000 was used to repay term
debt due in January 2004. Finally, in July 2002, the Company restructured its
TROL financing arrangement to a three year, $25,200 capital lease liability
(see Note 7).

In addition to the financing transactions discussed above, subsequent to
year-end, the Company closed on a new financing arrangement with the principal
stockholder of the Company, as well as, revised portions of the Companys
current Amended Credit Facility. See Note 18 for a description of these transactions.

In addition to the sale of non-core business segments and debt refinancing
activities, other liquidity initiatives of the Company have included the
closure of two of the Companys airframe heavy maintenance MR&O facilities,
consolidation of the operations of one of its component overhaul MR&O
operations from two facilities to one, reduction of headcount at all
of the MR&O facilities and implementation of

F-10



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##### 



salary and benefit reductions that
affected virtually all employees all for the purpose of lowering operating
expenses. Further, although the Company expects to be able to meet its working
capital requirements in 2003 from
its available resources and from other sources, including funds available under
its revolving credit facility, from operations, from sales of assets and
further equity and/or debt infusions, there can be no assurance that the
Company will have sufficient working capital or that such other sources of
funding will be available to the Company to meet its obligations.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Investments in joint ventures are
accounted for under the equity method of accounting. All significant
intercompany transactions and balances have been eliminated.

ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Principal estimates made by the Company include the estimated losses on
disposal of discontinued operations, provisions to reduce inventory to the
lower of cost or fair value, the estimated profit or loss to be recognized as
aircraft maintenance, design and construction services are
performed, the allowances for doubtful accounts and notes receivable, the
realizability of its investment in affiliates, the recoverability of its
long-lived assets and goodwill, medical benefit accruals, the estimated fair
value of the facilities under
capital leases, and the accruals for litigation and environmental costs. A
principal assumption made by the Company is that inventory will be utilized and
realized in the normal course of business and may be held for a number of
years.

RECLASSIFICATIONS

For comparative purposes, certain amounts in the 2000 and 2001 financial
statements have been reclassified to conform with the 2002 presentation.

CASH AND CASH EQUIVALENTS

The Company considers all deposits with an original maturity of three months or
less to be cash equivalents.

REVENUE RECOGNITION

Revenues from aircraft maintenance service are recognized and unbilled
receivables are recorded based upon the percentage of completion method.
Unbilled receivables are billed on the basis of contract terms (which are
generally on completion of an aircraft) and deliveries. The Company changed
its method of accounting for revenue at its engine overhaul facility in the
second quarter of 2001, whereby such revenues are recognized upon shipment of
the overhauled engine. Prior to this change, revenue was recognized as
services were performed based upon a percentage of completion method. The
change in the method of accounting for revenue at the Companys engine overhaul
facility did not have a material impact on the Companys financial position or
current or prior period results of operations. Also, the Company exchanges
rotable parts in need of service or overhaul for new, overhauled or serviceable
parts in its inventory for a fee. Fees on exchanges are recorded as sales at
the time the unit is shipped. In addition, gain on sales of equipment on lease
is included in other operating revenue in the accompanying consolidated
statements of operations.

With respect to discontinued operations, all of which were sold during 2000,
repairs and sales of aircraft parts were recognized as revenue when a unit was
shipped and title had passed to the customer or when a repaired unit was
returned to the customer. Transfers of inventory to customers, which included a
related acquisition of inventory from the same third party for a similar
amount, were not recognized as revenue. Certain of the discontinued operations
also warehoused and sold inventories on behalf of others under consignment
arrangements. Sales of aircraft parts from consignment inventories were
recorded as revenue upon shipment of the unit, since pursuant to the terms of
these consignment arrangements the Company acquired title to the consigned
inventory immediately prior to sale. As such, these sales were reflected on a
gross basis. The Company also performed inventory repair management and
warehouse management services for customers on a contractual basis.

F-11



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##### 



ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK

The Company provides MR&O services to commercial airlines, air cargo carriers,
distributors, maintenance facilities, corporate aircraft operators and other
companies. The Company performs periodic credit evaluations of its customers
financial conditions and provides allowances for doubtful accounts as required.
Accrued sales not billed for aircraft maintenance services are billed on the
basis of contract terms (which are generally on completion of an aircraft) and
deliveries. Accrued sales not billed amounted to $8,534 and $9,320 at December
31, 2001 and 2002, respectively, and are included in accounts receivable in the
accompanying consolidated balance sheets. Additionally, billings in excess of
costs approximated $5,363 and $2,026 at December 31, 2001 and 2002,
respectively, and are included in other current liabilities in the accompanying
consolidated balance sheets.

The Companys top ten customers accounted for approximately 56.2%, 76.4%, and
81.6% of operating revenues, respectively, for the years ended December 31,
2000, 2001 and 2002. One customer accounted for 14.0%, 31.8%, and 23.9% (and is
currently in a Chapter 11 proceeding), a second customer accounted for 0%,
10.2%, and 18.3%, a third customer accounted for 8.5%, 9.1%, and 11.9%, and a
fourth customer accounted for 7.8%, 6.6%, and 10.5% of operating revenues for
the years ended December 31, 2000, 2001 and 2002, respectively. No other
customer accounted for more than 10% of operating revenues during 2000, 2001
and 2002. One customer accounted for 30.3% and a second customer accounted for
23.6% of accounts receivable as of December 31, 2001. While the relative
significance of customers varies from period to period, the loss of, or
significant curtailments of purchases of our services by, one or more of our
significant customers at any time would adversely affect our revenue and cash
flow. As of December 31, 2002, one customer accounted for 17.4%, a second
customer accounted
for 15.3%, and a third customer accounted for 12.6% of accounts receivable. In
each case, the largest customer is an airline currently in a Chapter 11
proceeding. As a result of these and other credit exposures identified within
our customer base (including exposures relating to the Companys largest
customer, which is currently in a Chapter 11 proceeding), during the fourth
quarter of 2002 the Company recorded additional bad debt provision of
approximately $1,300.

INVENTORIES

Inventories, which consist primarily of new, overhauled, serviceable and
repairable aircraft parts, are stated at the lower of cost or fair value on
primarily a specific identification basis. In instances where bulk purchases of
inventory items are made, cost is determined based upon an allocation by
management of the bulk purchase price to the individual components.
Expenditures required for the recertification of parts are capitalized as
inventory and are expensed as the parts associated with the recertification are
sold. Cost of inventory includes raw materials, labor and overhead. The Company
maintains raw materials, work in progress and finished goods inventories in
support of its operations. At December 31, 2001 and 2002, inventories consisted
of the following:

|                 |  |      |        |      |  |   |        | 
|---------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                 |  | 2001 |        | 2002
|                 |  |      |        |     
|Finished goods   |  | $    | 24,289 |      |  | $ | 11,083 | 
|Work in progress |  |      | 16,812 |      |  |   | 9,739  | 
|Raw materials    |  |      | 26     |      |  |   | 715    | 
|A-300 aircraft   |  |      | 417    |      |  |   | 94     | 
|                 |  |      |        |      |  |   |        | 
|                 |  | $    | 41,544 |      |  | $ | 21,631 | 
|                 |  |      |        |      |  |   |        | 

The Company recognizes a write-down to inventory to reduce the carrying value
to the lower of cost or market value. In determining fair value, the Company
assumes that its inventory will be utilized in the normal course of business
and not on a liquidation basis. Such inventory may be held for periods beyond
one year. Write-downs of inventory during 2000, 2001, and 2002 were $3,525,
$2,699, and $7,768, respectively.

INVESTMENTS

During May 2000, the Company liquidated its investment in a joint venture. In
connection with the disposition of the joint venture, the Company recorded a
charge of $859, which is included in other expense (income) in the accompanying
consolidated statement of operations.

F-12



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##### 



In August 1999, the Company obtained a 50% interest in a limited liability
corporation that designs, manufactures and installs an FAA approved conversion
kit that converts certain Boeing 727 aircraft from passenger configuration to
cargo configuration. The initial investment was $2,500. During 2000 and 2001,
the Company invested an additional $3,734 and $339, respectively, in the form
of cash advances and services. The Company accounts for this investment under
the equity method. Sales to date have been minimal and the Company has incurred
losses to date in fulfilling these sales. Realizability of this investment is
dependent on the ability of the limited liability corporation to attract new
business during future periods at rates sufficient to cover its costs including
the investment made by the Company. As a result of economic and industry
conditions, the Company wrote down the full carrying value of this investment
(approximately $6,400) in the third quarter of 2001. Such write-down was
reflected in operating expenses within the accompanying consolidated statement
of operations. The Company has no additional funding obligations or guarantees
of liabilities for this limited liability corporation.

The total carrying value of equity investments at December 31, 2001 and 2002
was $-0-. Summarized results of operations for equity investments for the
years ended December 31, 2000, 2001 and 2002 are as follows:

|                  |  |      |     |      |  |      |       |   |  |   |   | 
|----------------- |  | ---- | --- | ---- |  | ---- | ----- | - |  | - | - | 
|                  |  | 2000 |     | 2001 |  | 2002
|                  |  |      |     |      |  |     
|Net sales         |  | $    | 725 |      |  | $    | 1,450 |   |  | $ |  | 
|Gross profit      |  |      | (75 | )    |  |      | (215  | ) |  |   |  | 
|Net income (loss) |  |      | (75 | )    |  |      | (215  | ) |  |   |  | 

NOTES RECEIVABLE FROM KAV INVENTORY, LLC

Notes receivable is comprised of notes due from KAV Inventory, LLC (KAV), a
50% owned limited liability company which acquired all of the aircraft and
engine spare parts inventory and the engine inventory of the Companys
redistribution operation as discussed in Note 3. These notes bear interest at
14% and are subordinated in all respects to certain institutional financing of
KAV. Because of the contingencies related to collectibility, recognition of
interest income under the notes has been deferred and such interest will be
recognized as collected, which will follow collection of all outstanding
principal amounts. During 2001, for the reasons discussed in Note 3, the
Company recorded a valuation allowance for the full value of these notes.
Overall sales activities for this entity in 2002 have been minimal.

EQUIPMENT ON LEASE

The Company leases engines and spare parts inventories to customers in the
airline industry on a worldwide basis through noncancellable operating leases
ranging from one to ten year terms. Operating lease income is recognized on a
straight-line basis over the term of the underlying leases and is included in
other operating revenue in the accompanying consolidated statements of
operations. The cost of equipment on lease is amortized, principally on a
straight-line basis, to the estimated remaining net realizable value over the
shorter of the lease term or the economic life of the equipment. The Company
has been actively liquidating its leased assets portfolio and as of December
31, 2002, all equipment leases have expired and the Company is no longer in the
equipment leasing business. The cost and accumulated amortization of equipment
on lease are as follows:

|                            |  |              |       |      |  |   |        |  
|--------------------------- |  | ------------ | ----- | ---- |  | - | ------ | -
|                            |  | December 31,
|                            |  |             
|                            |  | 2001         |       | 2002
|                            |  |              |       |     
|Equipment on lease, at cost |  | $            | 1,034 |      |  | $ | 1,034  |  
|Accumulated amortization    |  |              | (674  | )    |  |   | (1,034 | )
|                            |  |              |       |      |  |   |        |  
|                            |  | $            | 360   |      |  | $ | 0      |  
|                            |  |              |       |      |  |   |        |  

Deposits of $36 as of December 31, 2001 received on outstanding leases are
recorded as deferred income in the accompanying consolidated balance sheet and
have been applied in connection with the final settlement of these leases.
Amortization expense on equipment on lease amounted to $1,035, $244, and $360,
respectively, for the years ended December 31, 2000, 2001 and 2002.

F-13



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##### 



FIXED ASSETS, NET

Fixed assets are stated at cost, and at December 31, 2001 and 2002, consisted
of the following:

|                                                 |  |                     |  |      |        |      |         |   |        |   |         |  
|------------------------------------------------ |  | ------------------- |  | ---- | ------ | ---- | ------- | - | ------ | - | ------- | -
|                                                 |  | Depreciable Life    |  | 2001 |        | 2002
|                                                 |  |                     |  |      |        |     
|Land                                             |  |                     |  |      |        | $    | 114     |   |        | $ |        |  
|Buildings                                        |  | 29 years            |  |      | 5,366  |      |         |   |       |  
|Capitalized lease asset previously held for sale |  | 40 years            |  |      |       |      |         |   | 25,327 |  
|Machinery and equipment                          |  | 3 to 7 years        |  |      | 33,091 |      |         |   | 35,502 |  
|Furniture and fixtures                           |  | 3 to 5 years        |  |      | 2,483  |      |         |   | 2,441  |  
|Leasehold improvements                           |  | Shorter of lease    |  |      |        |      |         |   |        |  
|                                                 |  | term or useful life |  |      | 31,065 |      |         |   | 34,134 |  
|                                                 |  |                     |  |      |        |      |         |   |        |   |         |  
|                                                 |  |                     |  |      |        |      | 72,119  |   |        |   | 97,404  |  
|Accumulated depreciation                         |  |                     |  |      |        |      | (33,648 | ) |        |   | (39,094 | )
|                                                 |  |                     |  |      |        |      |         |   |        |   |         |  
|                                                 |  |                     |  |      |        | $    | 38,471  |   |        | $ | 58,310  |  
|                                                 |  |                     |  |      |        |      |         |   |        |   |         |  

For financial reporting purposes, the Company provides for depreciation of
fixed assets using the straight-line method at annual rates sufficient to
amortize the cost of the assets less estimated salvage values over the assets
estimated useful lives. Maintenance and repair expenditures are charged to
expense as incurred, and expenditures for improvements and major renewals are
capitalized. The carrying amounts of assets which are sold or retired and the
related accumulated depreciation are removed from the accounts in the year of
disposal, and any resulting gain or loss is reflected in the statement of
operations. Depreciation expense amounted to $8,815, $6,768, and $5,170
respectively, for the years ended December 31, 2000, 2001 and 2002.

Impairments of long-lived assets are recognized when events or changes in
circumstances indicate that the carrying amount of the asset, or related groups
of assets, may not be recoverable and the Companys estimate of undiscounted
cash flows over the assets remaining estimated useful life are less than the
assets carrying value. Measurement of the amount of impairment may be based
upon appraisals, market values of similar assets or estimated discounted future
cash flows resulting from the use and ultimate disposition of the asset. Due to
the economic environment and the depressed status of the aviation industry,
including the market for overhaul services relating to JT8D engines and
components, heavy airframe maintenance relating to earlier generation aircraft
and refurbishment of interiors, and based upon the results of operations of the
Company, during the year ended December 31, 2001 the Company
recognized charges totaling $15,690 relating to an impairment of leasehold
improvements and fixed assets related to these operations, which is included in
operating expenses in the consolidated statement of operations. Additionally,
the Company recognized in 2001 a charge of $2,853 relating to impairment of leasehold
improvements at another facility. Throughout 2002 and for the year ended
December 31, 2002, the Company has reviewed the carrying value of long-term
fixed assets for impairment and has concluded that the estimated future
operating cash flows anticipated to be generated during the remaining life of
these assets support the current net carrying value of these assets, thus, no
impairment charges have been recorded for the year ended December 31, 2002.

In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 replaces SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of and the accounting and reporting provisions of
Accounting Principles Board Opinion (APB) No. 30, Reporting the Results Of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
SFAS No. 144 also amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS No. 144
establishes a single accounting model for assets to be disposed of by sale
whether previously held and used or newly acquired. SFAS No. 144 retains the
provisions of APB No. 30 for presentation of discontinued operations in the
income statement, but broadens the presentation to include a component of an
entity. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The Company adopted SFAS No. 144 effective January 1, 2002 with no
material impact on its consolidated financial statements.

F-14



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##### 



INTANGIBLE ASSETS

Costs associated with obtaining financing are included in the accompanying
consolidated balance sheets as deferred financing costs and are being amortized
over the terms of the loans to which such costs relate. Amortization of
deferred financing costs included in continuing operations for the years ended
December 31, 2000, 2001 and 2002 was $2,622, $5,875, and $5,527, respectively,
and is included in interest expense in the accompanying consolidated statements
of operations. Amortization of deferred financing costs included in
discontinued operations for the year ended December 31, 2000 was $11,039.
During 2000, the Company completed sales of certain of its operations and
assets and the liquidation of a joint venture, and used the proceeds to repay
senior indebtedness outstanding under the Credit Facility. See Notes 3 and 5.
As a result of these dispositions, during 2000 the Companys commitment under
its Credit Facility was reduced and the Company wrote off the deferred
financing costs of $5,407 that related to that reduction, of which $1,074 was
included in amortization of deferred financing costs in continuing operations
and $4,333 was included in amortization of deferred financing costs in
discontinued operations. Additionally, during 2002, in conjunction with the
Companys capital and equity restructuring (see Note 13), deferred financing
costs of $2,728 were written off. In accordance with SFAS No. 15, this charge
was included as a reduction to the extraordinary gain that was recorded and
included within the accompanying consolidated statement of operations for the
year ended December 31, 2002. The cost and accumulated amortization of
deferred financing costs as of December 31, 2001 and 2002 is as follows:

|                         |  |      |         |      |  |   |         |  
|------------------------ |  | ---- | ------- | ---- |  | - | ------- | -
|                         |  | 2001 |         | 2002
|                         |  |      |         |     
|Original basis           |  | $    | 23,764  |      |  | $ | 24,860  |  
|Accumulated amortization |  |      | (17,127 | )    |  |   | (22,654 | )
|                         |  |      |         |      |  |   |         |  
|                         |  | $    | 6,637   |      |  | $ | 2,206   |  
|                         |  |      |         |      |  |   |         |  

Goodwill amortization expense for the years ended December 31, 2000, 2001 and
2002 was $2,490, $1,900, and $0, respectively. Goodwill and accumulated
amortization at December 31, 2001 and 2002 are as follows:

|                         |  |      |        |      |  |   |        |  
|------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                         |  | 2001 |        | 2002
|                         |  |      |        |     
|Original basis           |  | $    | 31,135 |      |  | $ | 31,135 |  
|Accumulated amortization |  |      | (5,011 | )    |  |   | (5,011 | )
|                         |  |      |        |      |  |   |        |  
|                         |  | $    | 26,124 |      |  | $ | 26,124 |  
|                         |  |      |        |      |  |   |        |  

In April 2000, a customer which represented a significant portion of the
operations at one of the Companys heavy airframe maintenance facilities filed
for protection under the U.S. bankruptcy code. As a result of this event, the
Company temporarily closed this facility in 2000 and has determined that the
goodwill relating to this operating entity and certain capitalized contract
costs associated with the customer were impaired. Additionally, as previously
discussed, the economic environment and depressed status of the aviation
industry, including the market for JT8D engine overhaul services, has caused
the Company to determine that the goodwill relating to its engine overhaul facility was
impaired. Accordingly, during the years ended December 31, 2000 and 2001, the
Company recorded charges of $7,808 and $6,397, respectively, to write off the
carrying value of the goodwill and contract costs, which is included in
operating expenses in the accompanying consolidated statement of operations for
the years ended December 31, 2000 and 2001.

F-15



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##### 



In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Intangible Assets. SFAS No. 142 eliminates the requirement to amortize
goodwill and indefinite-lived intangible assets, addresses the amortization of
intangible assets with defined lives and addresses the impairment testing and
recognition for goodwill and intangible assets. SFAS No. 142 applies to
goodwill and intangible assets
arising from transactions completed before and after the Statements effective
date of January 1, 2002 and requires that goodwill no longer be amortized, but
tested for impairment at least annually. The Company recorded goodwill
amortization of $2,490, 1,900, and $0 for the years ended December 31, 2000,
2001, and 2002, respectively. At December 31, 2002, the Company had net
goodwill of $26,124, which is subject to the new impairment tests prescribed
under the statement. The
Company adopted SFAS No. 142 on January 1, 2002. In accordance with SFAS No.
142, the Company has elected July 31, 2002 as it annual impairment assessment
date. The Company has completed its initial impairment assessment as of
January 1, 2002 and its annual impairment assessment as of July 31, 2002, and
has concluded that no impairment charge is required at this time. Absent a
significant change in the Companys operating environment, the Companys
assessment of goodwill impairment will next be re-evaluated as of July 31, 2003
(the annual assessment date).

CUSTOMER DEPOSITS

In the normal course of its business, the Company may receive payments from
customers in excess of costs that it has expensed on contracts. These deposits
do not extend beyond a short-term period.

DEFERRED INCOME

Advance payments and deposits received on operating leases are initially
deferred and subsequently recognized as the Companys obligations under the
lease agreements are fulfilled. As previously discussed, as of December 31,
2002 all lease agreements have expired and the Company is no longer in the
equipment leasing business.

As discussed in Note 8, during the fourth quarter of 2002 the Company sold its
real estate and fixtures located at one of the Companys subsidiaries to the
Companys principal stockholder. Simultaneous with this sale, the Company
entered into a lease agreement with the principal stockholder for significantly
all of these assets. As the lease agreement qualifies for
sale-leaseback accounting,
the Company has deferred the gain on sale of approximately $1,700 and will
amortize this gain to income over the term of the lease agreement. The
unamortized deferred income as of December 31, 2002, which approximated $1,641,
is reflected as deferred income within the accompanying consolidated balance
sheet and will be amortized over the 10-year term of the lease.

ENVIRONMENTAL COSTS

Environmental expenditures that relate to current operations are expensed as
incurred. Remediation costs that relate to existing conditions caused by past
operations are accrued when it is probable that these costs will be incurred
and can be reasonably estimated. Environmental expenses are included in
operating expenses in the accompanying consolidated statements of operations.

STOCK COMPENSATION PLANS

As permissible under SFAS No. 123, Accounting For Stock-Based Compensation,
the Company accounts for all stock-based compensation arrangements using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, Accounting For Stock Issued To Employees, as interpreted by Financial
Accounting Standards Board (FASB) Interpretation No. 44, Accounting For
Certain Transactions Involving Stock Compensation. Accordingly, no
compensation cost is recognized for stock option awards granted to employees at
or above fair market value.

F-16



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##### 



The following table illustrates the effects on net income and earnings per
share if the Company had applied the fair value recognition of FASB Statement
No. 123 to stock-based employee compensation:

|                                                             |  |                          |          |      |  |      |          |   |  |   |        |  
|------------------------------------------------------------ |  | ------------------------ | -------- | ---- |  | ---- | -------- | - |  | - | ------ | -
|                                                             |  | Years Ended December 31,
|                                                             |  |                         
|                                                             |  | 2000                     |          | 2001 |  | 2002
|                                                             |  |                          |          |      |  |     
|Net (loss) income  as reported                              |  | $                        | (211,630 | )    |  | $    | (141,235 | ) |  | $ | 7,022  |  
|Additional expense                                           |  |                          | (1,055   | )    |  |      | (2,170   | ) |  |   | (2,391 | )
|Net (loss) income  pro forma                                |  |                          | (212,685 | )    |  |      | (143,405 | ) |  |   | 4,631  |  
|Net (loss) income per share, basic and diluted  as reported |  |                          | (140.94  | )    |  |      | (94.06   | ) |  |   | 0.27   |  
|Net (loss) income per share, basic and diluted  pro forma   |  |                          | (141.65  | )    |  |      | (95.51   | ) |  |   | 0.18   |  

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS 109, deferred tax assets or
liabilities are computed based upon the difference between the financial
statement and income tax bases of assets and liabilities using the enacted
marginal tax rate applicable when the related asset or liability is expected to
be realized or settled. Deferred income tax expenses or benefits are based on
the changes in the asset or liability from period to period. If available
evidence suggests that it is more likely than not that some portion or all of
the deferred tax assets will not be realized, a valuation allowance is required
to reduce the deferred tax assets to the amount that is more likely than not to
be realized. Future changes in such valuation allowance would be included in
the provision for deferred income taxes in the period of change. See Note 11.

FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, customer deposits, and liabilities of discontinued operations
approximate fair value due to the short maturity of the instruments and the
provision for what management believes to be adequate reserves for potential
losses. Management believes the fair values of the revolving loan,
BofA Term Loan, capital leases, and related party loans approximate the carrying amounts
of the obligations in the accompanying
consolidated balance sheets because management believes the interest rate of
those obligations to be fair market interest rates. At
December 31, 2002, the aggregate carrying value of the New
Notes, Old Notes, Junior Notes, and Amended Term Loan approximated
$138,160, while the fair value of these obligations approximated
$131,866.

COMPREHENSIVE INCOME (LOSS)

For all periods presented, comprehensive income (loss) is equal to net income
or loss.

SEGMENT REPORTING

The Company operates its businesses as a single segment: airline MR&O services.

RECENTLY ISSUED ACCOUNTING STANDARDS

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Under Statement 4, all gains and losses from extinguishment of debt were
required to be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. This Statement eliminates Statement 4
and as a result, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in APB No. 30.
Additionally, this Statement amends SFAS No. 13, Accounting for Leases, such
that lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in a similar manner as a sale-leaseback. This
Statement became effective for the Company on January 1, 2003. As a result of
adoption, the Company will reclassify the
$27,279 gain on debt extinguishment to be included with
continuing operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). A
liability for a cost associated with an exit or disposal activity shall be
recognized and measured initially at its fair value in the period in which the
liability is incurred, except for certain qualifying employee termination
benefits. This Statement became effective for exit or disposal activities
initiated by the Company after December 31, 2002.

F-17



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##### 



In October 2002, the FASB Emerging Issues Task Force (EITF) issued Summary No.
2, Supplement No. 4 of EITF Issue 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables. The focus of this issue, as related to the
Company, is the accounting for service arrangements in which separate units of
accounting is required, and how the consideration should be allocated among
these separate, identifiable units. As the Company maintains certain customer
service contracts that include multiple aircraft, the Company has reviewed this
issue as it relates to the Companys revenue recognition policy. As of
December 31, 2002, no material impact or change to the Companys revenue
recognition policy has been identified based upon the release of this
EITF.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statement No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or
modified after December 31, 2002. The disclosure requirements are
effective for financial statements of interim and annual periods ending after
December 15, 2002. The Company is currently evaluating the impact
of this interpretation on the Company's consolidated financial
statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure; an amendment of FASB Statement No.
123. This Statement provides alternative methods of transition for a
voluntary change
to the fair value based method of accounting for stock-based employee
compensation. Additionally, this Statement amends the disclosure requirements
of Statement No. 123 to require prominent disclosures in both annual and
interim financial statement
regarding the method of accounting used for stock-based employee compensation
and the effect of the method used on reported results. Certain of the
disclosure modifications are required for fiscal years ending after December
15, 2002 and are included within these notes to the consolidated financial
statements. The Company has currently decided to continue to use the intrinsic
value method for accounting for stock-based employee compensation.

NOTE 2BUSINESS COMBINATIONS

In October 2002, the Company completed the purchase of the outstanding stock of
Brice Manufacturing Company (Brice) for a purchase price of $1,272 and the
assumption of approximately $1,385 of liabilities. Brice, located in Pacoima,
California, manufactures and markets an extensive range of aircraft seats, seat
related products and services to airlines, leasing companies, airframe
manufacturers, and overhaul facilities throughout the world. Brice also
maintains over four thousand parts manufacturing authorizations (PMAs) which encompass all
seat types. The acquisition has been accounted for under the purchase method
of accounting and accordingly, the purchase price has been fully allocated to
the assets purchased and liabilities assumed based upon the fair values at the
date of acquisition. The result of operations for Brice have been included in
the accompanying consolidated statement of operations from the date of
acquisition.

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition:

|                            |              |          |       |   |       |                  |                   |         |       |   |       |  |  | 
|--------------------------- | ------------ | -------- | ----- | - | ----- | ---------------- | ----------------- | ------- | ----- | - | ----- |  |  | 
|Accounts receivable         |              | $        | 779   |   |       |                  |                   |         |       |   |       | 
|Inventory                   |              |          | 1,366 |   |       |                  |                   |         |       |   |       | 
|Property and equipment, net |              |          | 405   |   |       | Accounts Payable |                   | $       | 324   |  
|Other assets                |              |          | 107   |   |       | Accrued Expenses |                   |         | 1,061 |  
|                            |              |          |       |   |       |                  |                   |         |       |   |       | 
|                            | Total assets |          |       |   |       |                  | Total liabilities |         |       |   |      
|                            |              | acquired |       | $ | 2,657 |                  |                   | assumed |       | $ | 1,385 | 
|                            |              |          |       |   |       |                  |                   |         |       |   |       | 

The Company financed its purchase of Brice through a loan from the Companys
principal stockholder. In conjunction with the closing, the Company borrowed
$1,300. The principal stockholder has also agreed to loan the Company
additional amounts equal to the Companys costs relating to the Brice
acquisition and amounts required to fund any monthly shortfalls of earnings
before interest, taxes, depreciation and amortization (EBITDA) from Brices
operations (the Keepwell agreement). From the date of acquisition
through December 31, 2002, there has been approximately $60 of
funding requirements. The Companys note to its principal stockholder is
unsecured, bears interest at LIBOR plus 5.5% and is due on the earlier of
January 31, 2004 or the termination of the revolving credit facility. The
terms of this loan were modified subsequent to year-end. See Note 18.

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NOTE 3SALE OF OPERATING ENTITIES

In July 2002, the Company completed the sale of substantially all of the assets
and business of its Aerocell Structures operations. The net sales price was
$9,600 (subject to post-closing adjustments described below), of
which $9,062
was received in cash at the closing. The Company used the proceeds from the
sale to repay $3,500 of its new $7,000 term loan due to its senior
lenders, and $3,500 to repay the $2,500
BofA Loan due August 14, 2002 and a $1,000 related party loan. The remainder,
net of expenses, was used for working capital. For the year ended December 31,
2002, the Company has recorded a $300 gain as a result of this sale. The
results of operations for Aerocell are included within income from
continuing operations through the date of this sale.

Pursuant to the asset purchase agreement relating to the sale, the Company has
represented to the buyer that the value of the Aerocell assets at the closing
date was at least $11,700. The agreement provides procedures relating to the
determination of the closing date value of the Aerocell assets and requires a
post-closing payment to the purchaser (on a dollar-for-dollar basis) if it is
ultimately determined that the closing date value of the Aerocell assets was
lower than the targeted amount. The Company and the purchaser are in the
process of reconciling the closing date value of the Aerocell assets.

The Agreement also provides that certain funds held in escrow ($500) will be
held to support certain indemnification rights provided in the Agreement, and,
provided that no claims for indemnity have been asserted, $250 of the funds
being held in escrow will be released six months after the Closing Date and the
balance of the funds being held in escrow will be released one year after the
Closing Date. As a result of unresolved purchase price issues, the escrow
balance that was due at the end of January 2003 has not yet been released. Upon
resolution of these items, any residual balance, after an offset of purchase
price adjustments, will be released. The Agreement also provides that the
Company will receive certain rebates in the future for work which the Company
helps procure for the Purchaser. However, before any such amounts are payable
under this rebate, the Purchaser will receive a credit to the extent that
certain specified inventory of Aerocell is not sold within one year following
the Closing Date. There is also additional inventory of Aerocell as to which
the Company will have to pay up to
$200 in cash one year from the Closing Date if that inventory has not been sold or
consumed by that date. For all contingency exposures relating to the sale of
Aerocell, which include working capital adjustments and potential inventory repurchases,
the Company has established certain accruals as of December 31, 2002 in the
aggregate amount of $450.

In May 2001, the Company completed the sale of the assets of its Caribe
Aviation (Caribe) component repair MR&O operation. The purchase price was
$22,500, of which $21,750 was received in cash at the closing and the balance
was received in 2002. The Company used $10,000 of the proceeds from the sale of
Caribe to repay the Credit Facility (defined below) and $5,500 to repay
borrowings under the Companys outstanding term loans. The balance, net of expenses of
$460, was used for working capital. In addition, the purchaser acquired the
real estate and facility on which the Caribe operation was located for an
aggregate purchase price of $8,500. The proceeds from the sale of the real
estate and facility were used to reduce the principal balance of the Companys outstanding tax retention
operating lease (TROL) financing. See Note 7.

During 2001, the Company recognized a gain on the sale of Caribe Aviation and
income on a non-refundable lease deposit that had previously been recorded as a
long-term liability totaling $7,868 in the aggregate. These amounts are
recorded in other expense (income) in the accompanying consolidated statements
of operations. In addition, during 2001 the Company received settlements on
accounts receivable of its former redistribution operation that had previously
been fully reserved. These collections, totaling $2,645, are recorded as an
offset to the loss from discontinued operations in the accompanying
consolidated statements of operations.

In September 2000, the Company completed the sale of substantially all of the
assets of its manufacturing operations for $40,299, after post-closing
adjustments and excluding transaction expenses. The cash proceeds of the sale
were used to repay senior indebtedness.

In December 2000, the Company completed the sale of substantially all of the
assets and business of its redistribution operation in a series of transactions
intended to constitute a single transaction (the Transaction). The aggregate
purchase price received in the Transaction was $156,400, approximately $127,000 of which was paid in
cash ($122,000 after payment of transaction expenses). The net proceeds of the
Transaction were used to repay senior indebtedness. As part of the Transaction,
the Company acquired a 50% interest in a limited liability company, KAV
Inventory, LLC (KAV). KAV was organized by the Company and Kellstrom
Industries, Inc. (Kellstrom). Substantially all of the aircraft and engine
spare parts inventory and the engine inventory of the Companys redistribution
operation, as well as certain rotable parts inventories from two of
the Companys MR&O operations, were sold to KAV for 89% of the closing date book
value of such inventory

F-19



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($148,600, subject to post-closing adjustments).
Consideration for the sale of inventory was comprised of cash of approximately
$105,500 (borrowed by KAV from a financial institution without recourse to the
Company other than the letter of credit referred to below) two senior
subordinated notes, each in the principal amount of $13,700 (one of which was
sold to Kellstrom in the second component of the Transaction for $13,700 in
cash), and one junior subordinated note in the principal amount of $15,700. The
notes bear interest at 14% per annum and are subordinated in all respects to
KAVs institutional financing. In addition, the Company issued an $8,500 letter
of credit to secure, in part, KAVs institutional financing (see discussion
below). Further, the Company and Kellstrom each advanced $2,300 to KAV to allow
it to pay fees and costs relating to its institutional financing. The Company
and Kellstrom are entitled to receive reimbursement of these advances after
payment of the institutional financing and prior to repayment of the senior
subordinated notes.

KAVs sole business is the liquidation of the inventory it acquired from the
Company. As part of the Transaction, KAV entered into an agreement to consign
all of its inventories to Kellstrom. The consignment agreement specifies that
all of the proceeds from sales of the inventory, less a consignment commission
to Kellstrom of 20%, will be used to pay interest and principal on KAVs
institutional debt. After the institutional debt is paid in full, proceeds from
the sale of inventory would be used to reimburse the Company and Kellstrom for
advances made to KAV to allow it to pay fees and costs relating to its
institutional
financing, to pay adjustment notes, if any, resulting from post closing
adjustments to the closing date book value of the
inventory or notes arising from a draw on the letter of credit and thereafter
to pay interest and principal on the two $13,700 senior notes. Interest and
principal on the $15,700 junior note would be paid from the remaining proceeds
from the sale of inventory, less a 35% consignment commission to Kellstrom.
Under the consignment agreement, the Company has approval rights relating to
the sale price of certain inventory. Because of the uncertainty regarding the
collection of the notes, interest
income on the notes is not being recognized and the Company has
established valuation allowances for
the principal balance of the notes. The projections of cash distributions to
the Company are highly dependent upon the timing of the sales and the sale
prices obtained by the Purchaser for KAVs inventory.

The second component of the Transaction consisted of a sale of certain non-
inventory assets of the redistribution operation to Kellstrom including one of
the $13,700 senior subordinated notes described above, net of certain payables
assumed by Kellstrom, for approximately $21,500, all of which was paid in cash.
Under the terms of the Transaction, Kellstrom had the right after one year from
the date of the Transaction to require the Company to repurchase receivables
sold in accordance with the Transaction to the extent they remain uncollected.
As of December 31, 2001, $5,238 of receivables sold pursuant to the
Transaction had not been collected by Kellstrom and Kellstrom sought to put
such receivables back to the Company. In addition, the purchase price for the
sale of inventory and non-inventory assets was subject to post-closing
adjustments as set forth in the Transaction agreements. See discussion below
regarding the Post-Closing Resolution Agreement that globally settled
outstanding issues with Kellstrom, including receivables that were sold
pursuant to the Transaction and purchase price adjustments for inventory and
non-inventory assets.

In addition, as part of the sale of the redistribution operation as described
above, Kellstrom leased from the Company its 545,000 square foot facility in
Miramar, Florida and, for a one-year period, certain furniture, fixtures and
equipment used in the redistribution operation. Kellstrom had an option to
acquire the furniture, fixtures and equipment during the term of the lease and
after one year the Company had an option to require Kellstrom to acquire the
assets, which could be extended by Kellstrom for six months under certain
circumstances. Kellstrom had also entered into a sublease agreement relating to
the redistribution operations warehouse and corporate headquarters facility
for a five-year period, with the right to renew for five consecutive five-year
periods at a market rental rate. The Company also entered into a non-competition
agreement whereby the Company was restricted from engaging in the
redistribution business for a period of up to five years. In addition, the
Company entered into a cooperation agreement under which it agreed to provide
repair services for the KAV parts inventory and Kellstroms parts inventory and
Kellstrom agreed to supply parts to the Companys MR&O operations. Similar to
items described above in the second component of the Transaction, most items
described herein have been modified by the Post-Closing Resolution Agreement
established during fiscal 2002. See discussion below regarding this global
settlement.

In July 2001, KAVs institutional lender advised KAV that it was in default
under its loan agreement and on October 5, 2001, the lender exercised its
rights to call the outstanding institutional financing. Additionally, on
October 18, 2001, the lender drew against the Companys $8,500 letter of credit which immediately reduced
KAVs institutional financing by $8,500 and increased the Companys notes
receivable from KAV by $8,500. Kellstrom filed for bankruptcy in February 2002.
As a result of these matters, and due to poor economic conditions in the
redistribution industry and the aviation industry as a whole and lower than
projected sales levels by KAV, during the quarter ended June 30, 2001 the
Company recorded a valuation allowance against both the $13,700 senior note and the
$15,700 junior note due from KAV which it holds. Additionally, the Company
reserved $8,500 during the quarter ended September 30, 2001 for the additional note
receivable from KAV

F-20



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that arose on October 18, 2001 when the Companys letter of
credit was drawn against. For the same reasons, during the 2001 second and
third quarters, the Company recorded reserves totaling $5,081 and $2,600,
respectively, relating to net assets of discontinued operations whose
realizability is impacted by the operations and financial conditions of
Kellstrom and KAV. In total, aggregate charges relating to these matters were
$45,581 for the year ended December 31, 2001.

In July 2002, the Company closed on the transactions contemplated by the
Post-Closing Resolution Agreement, dated as of June 10, 2002 (the PCRA)
between the Company and Kellstrom. This
settlement resolves and settles globally outstanding disputes between the
Company and Kellstrom (the Settlement) relating to matters arising out of the
Companys December 2000 sale of substantially all of the assets of its
redistribution operation to Kellstrom and which are discussed within the
Transaction above.

As part of the Settlement:



|a. |  | Kellstrom purchased certain furniture, fixtures and equipment (FF&E),
approximately $7,700, net, from Aviation Sales
Distribution Services Company (ASDC), a subsidiary of the Company,
which equipment is being used by Kellstrom in
the operation of its business;                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|b. |  | Kellstrom put certain uncollected, fully reserved accounts receivable,
which were sold by ASDC to Kellstrom as part of
the sale of the assets of the redistribution operation to the Company in
accordance with the terms of the Asset Purchase
Agreement, dated December 1, 2000, among Kellstrom, the Company and ASDC
(the APA);                                                                                                                                                                                                                                                                                                  
|  
|c. |  | Kellstrom and the Company resolved outstanding purchase price adjustment
disputes under the APA;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|d. |  | The Company and Kellstrom settled and setoff amounts (approximately
$1,200) due and owing in the ordinary course
between Kellstrom and the Company, including certain rental amounts owed by
Kellstrom under the Miramar Lease (defined
below);                                                                                                                                                                                                                                                                                                                                                                                          
|  
|e. |  | Kellstroms sub-lease (the Miramar Lease) of the Companys 525,000
square foot Miramar, Florida warehouse and
office facility (the Miramar Facility) was amended (the Amended
Kellstrom Lease) to provide for a term of twenty
(20) years with an annual minimum rental of $2.75 million for the first
five years, $3.0 million for years six through ten
and at fair market value thereafter (all subject to CPI increases).
Further, the Amended Kellstrom Lease provides
Kellstrom with a one-time right to terminate the Amended Kellstrom Lease
upon the completion of the 7th lease year after
the closing of the Settlement;
|  
|f. |  | The Non-Competition Agreement between the Company and Kellstrom was
amended to, among other things, allow the
Companys Aerocell Structures flight surfaces MR&O operation to exchange
flight surfaces with its customers and to
allow the Company, during the six months following the completion of the
Settlement, to sell up to $4.0 million of aircraft
parts in the open market; and                                                                                                                                                                                                                                               
|  
|g. |  | The Cooperation Agreement between Kellstrom and the Company, which
obligated the Company to purchase aircraft
parts from Kellstrom, was terminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

The closing of the Settlement resulted in a net cash payment to the Company of
approximately $400. For the year ended December 31, 2002, the Company has
recorded a gain of $1,600 for the Settlement transactions described above.
This gain has been included within other income, net ($700) and income from
discontinued operations ($900) within the accompanying consolidated
statement of operations.

The closing of the Settlement occurred in connection with the sale of
Kellstroms business to an entity, Kellstrom Aerospace, LLC, organized by
Inverness Management LLC. As part of that sale, the Amended Kellstrom Lease
was assigned to Kellstrom Aerospace LLC. Such sale, and the terms of the
Settlement, were approved by the Bankruptcy Court in Kellstroms Chapter 11
bankruptcy proceeding.

F-21



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In addition, simultaneous with the Settlement, the Company resolved certain
purchase price adjustment issues with KAV under the Inventory Purchase
Agreement, dated December 1, 2000, among the Company, ASDC and KAV. Further,
the consignment agreement between KAV and Kellstrom (which has been assigned to
Kellstrom Aerospace, LLC) and the loan arrangement between KAV and Bank of
America were simultaneously amended.

Finally, simultaneous with the Settlement, the four parties (one of which is an
entity controlled by the Companys principal stockholder) that had provided
credit support to Kellstrom in December 2000 at the time of the Companys sale
of its redistribution operations to Kellstrom, entered into an agreement with
Kellstroms senior lenders to share proceeds from a sale of an office and
warehouse facility owned by Kellstrom and regarding certain other matters.
Additionally, as part of the same agreement, the Company entered into a release
agreement with Kellstroms senior lenders with respect to certain matters.

In December 2000, the Company completed the sale of the stock of its
subsidiary, Aviation Sales Bearings Company. In the transaction, the Company
received net aggregate consideration of $17,700 inclusive of debt assumed by
the purchaser. The net cash proceeds from the sale, which approximated $13,500,
were used to reduce outstanding senior indebtedness. Also, as part of the
transaction, the Company retained certain accounts receivable and inventories.
Such retained assets are being sold and collected pursuant to consignment and
collection agreements executed with the purchaser. Due to the age of these
receivables and inventory, the Company recorded a charge of $2,800 during the
quarter ended December 31, 2001 to provide a full reserve against any
uncollected receivables and inventory still on hand. Collection of these
receivables and sales of these inventories are included within income (loss) of
discontinued operations within the accompanying consolidated statements of
operations.

The net income (loss) of these operations (collectively the Companys parts
redistribution operations, new parts distribution operations, and manufacturing
operations) prior to their respective disposal dates (net of income taxes) is
included in the accompanying consolidated statements of operations under
discontinued operations. Previously issued financial statements
have been changed to reflect those operations as discontinued operations.
Revenues from such operations through the disposal dates were $222,299 for the
year ended December 31, 2000. The aggregate results of operations of the
discontinued operations through the disposal dates, net of income tax provision
of $624, was ($23,432) for the year ended December 31, 2000.

The provision for loss on disposal of discontinued operations reflected in the
accompanying consolidated statement of operations for 2000 and 2001 of $72,325
and $9,386, respectively, includes the write-down of the assets of the
operations to estimated net realizable values and accruals for certain
liabilities offset by certain recoveries. No expected tax benefit has been
recorded relating to the provision for loss on disposition as all loss
carrybacks relating to the discontinued operations have been utilized and the
Company has provided a full valuation allowance on its deferred tax assets (see
Note 11).

A summary of the assets and liabilities of the discontinued operations as of
December 31, 2001 and 2002 is as follows:

|                                           |                                        |   |        |        |      |   |       |       | 
|------------------------------------------ | -------------------------------------- | - | ------ | ------ | ---- | - | ----- | ----- | 
|                                           |                                        |   | 2001   |        | 2002
|                                           |                                        |   |        |        |     
|Accounts receivable, net                   |                                        | $ | 170    |        |      | $ |      |      
|Inventories, net                           |                                        |   | 3,057  |        |      |   |      |      
|Other current assets                       |                                        |   |       |        |      |   |      |      
|Fixed assets, net                          |                                        |   | 9,434  |        |      |   |      |      
|                                           |                                        |   |        |        |      |   |       |      
|                                           | Assets of discontinued operations      |   |        | 12,661 |      |   |       |      | 
|Accounts payable and accrued expenses      |                                        |   | 17,206 |        |      |   | 3,524 |      
|Notes payable                              |                                        |   | 850    |        |      |   | 50    |      
|                                           |                                        |   |        |        |      |   |       |      
|                                           | Liabilities of discontinued operations |   | $      | 18,056 |      |   | $     | 3,574 | 
|Net liabilities of discontinued operations |                                        | $ | 5,395  |        |      | $ | 3,574 |      

The above amounts are net of valuation
allowances of $32,507 and $9,466 as of December 31,
2001 and 2002, respectively.

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NOTE 4ADJUSTMENTS TO CARRYING VALUE OF CERTAIN ASSETS AND OTHER CHARGES

During the year ended December 31, 2000, the Company recorded charges totaling
$6,638 relating to the disposal of three A-300 aircraft that it owned and an
adjustment of $4,871 to the carrying value of leased assets. These charges are
included in cost of sales in the accompanying consolidated statement of
operations for the year ended December 31, 2000. In addition, during 2000, the
Company recorded charges totaling $30,016 relating to the closure of its Oscoda
heavy airframe maintenance facilities and bad debt allowances relating
primarily to a customer who filed for bankruptcy in 2000 and a customer who
ceased operations. These charges are included in operating expenses in the
accompanying consolidated statement of operations for the year ended December
31, 2000.

During the year ended December 31, 2001, the Company recorded charges totaling
$14,862 relating to costs associated with a closed facility, environmental
accruals, long-lived asset impairments (see Note 1), severance for certain
employees and reserves for customer specific inventory. Of these charges, $643
is included in cost of sales and $14,219 is included in operating expense in
the accompanying consolidated statements of operations for the year ended
December 31, 2001. As of December 31, 2001 and 2002, $2,017 and
$841, respectively, are included within accrued liabilities for the
above identified exposures.

NOTE 5NOTES PAYABLE AND REVOLVING LOAN

Prior to July 2002, the Company had a revolving loan and letter of credit
facility (the Credit Facility) of $37,500 with a group of financial
institutions. On June 28, 2002, in anticipation of amending the Credit
Facility, the Company voluntarily reduced its revolving loan and letter of
credit facility from $37,500 to $30,000. On July 12, 2002, the Company entered
into an agreement amending and restating its senior credit facilities with a
syndicate of four lenders led by Citicorp USA Inc. and UPS Capital Corporation
pursuant to the terms of a Fifth Amended and Restated Credit Agreement (the
Amended Credit Agreement). Under the Amended Credit Agreement, the Company
has obtained a $30,000 senior secured revolving line of credit (the Amended
Revolving Credit Facility) and a $7,000 senior secured term loan (the Amended
Term Loan and
collectively with the Amended Revolving Credit Facility, the Amended Credit
Facility). Borrowings under the Amended
Credit Facility are secured by a lien on substantially all of the Companys
assets and the borrowing base consists primarily of certain of the Companys
account receivables and inventory.

The Company utilized the proceeds from the Amended Credit Facility to repay
outstanding borrowings under its previously outstanding revolving credit
facility and its previously outstanding $12,000 senior secured term loan.

The interest rate on the Amended Revolving Credit Facility is, at the Companys
option, (a) prime plus 3% per annum, or (b) LIBOR plus 4.5% per annum. The
Company has currently elected the prime option. The interest rate on the
Amended Term Loan is 12% per annum. The Amended Revolving Credit Facility is
due on January 31, 2004. The Amended Term Loan is due in quarterly
installments of $500, commencing September 30, 2002, with the principal balance
due in full on January 31, 2004. $3,500 of the Amended Term Loan was repaid
from the proceeds of the Aerocell sale and has been applied first against
current quarterly installments (current maturities) and second against
long-term maturities. As a result, the Company does not reflect current
obligations for the Amended Term Loan in the accompanying consolidated balance
sheet.

The Amended Credit Agreement contains certain financial covenants regarding the
Companys financial performance and certain other covenants, including
limitations on the amount of annual capital expenditures and the incurrence of
additional debt, and provides for the termination of the Amended Credit Facility
and repayment of all debt in the event of a material adverse change in the
business or a change in control, as defined. A default under the Amended
Credit Facility could result in a default under other agreements to
which the Company is a party, including the TROL financing agreement.
Generally, the Amended Credit Agreement requires mandatory repayments and
reduction of the commitments thereunder from proceeds of a sale of assets or an
issuance of equity or debt securities. Mandatory repayments are also required
as a result of insufficient collateral to meet the borrowing base requirements
thereunder or in the event the outstanding obligations under the Amended Credit
Facility exceed the commitments thereunder. At December 31, 2002, the Company
did not meet certain financial covenants and thus, was in violation of the
Amended Credit Agreement. Subsequent to year-end,
however, the Company has obtained a waiver of non-compliance with all
financial covenants and has thereby cured the covenant violations. The
Company has also entered into agreements that reset financial covenant
requirements for the Amended Credit Agreement (see Note 18). As of December
31, 2002, $1,608 was available for borrowing under the Amended Credit Facility
and outstanding letters of credit aggregated $11,526.

F-23



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##### 



At June 30, 2002 the Company had a $12,000 (originally $15,500) term loan from
the financial institution that was the agent under the Credit Facility. The
term loan was senior secured debt, bore interest at 12% per annum and contained
financial and other covenants that were consistent with the Credit Facility. As
discussed in Note 1, the Company repaid $3,500 of this term
loan from the proceeds of the sale of Caribe, and the remaining principal
balance was to come due in July 2002. Proceeds from the Amended Credit
Facility, established on July 12, 2002, were used to fully repay this $12,000
term loan. Additionally, under the original term loan agreement the Company
granted the lender common stock purchase warrants to purchase 13 shares of the
Companys common stock exercisable for par value at any time until December 31,
2005. The put-right associated with these warrants was extended in connection
with the July 2002 refinancing of the Companys senior debt, thus, if the
Amended Term Loan is not repaid in full, the warrants entitle the holder to
require the Company to repurchase the warrants or common shares issued upon
prior exercise of the warrants at $85.00 per share. As of
December 31, 2002, the
lender has not required the Company to repurchase any warrants. The Company
has recorded the value of these warrants as additional deferred financing costs
and accrued expenses and has amortized the deferred financing cost to interest
expense over the original term of the loan (August 2002).

On July 12, 2002, the Company also restructured its outstanding $10,000
senior secured term loan with Bank of America. $5,000 of this loan (the $5,000 BofA
Term Loan) is now due on January 31, 2004. The $5,000 BofA
Term Loan continues to
bear interest at the rate of LIBOR plus 2% and continues to be credit supported
by two individuals, one of whom is the Companys principal stockholder.
Further, $2,500 of the original $10,000 BofA Term Loan, due August 14, 2002, was repaid from
proceeds of the Aerocell sale.

The $2,500 balance of the original Bank of America term loan has also been
repaid. At the closing of the term debt refinancing, one of the
parties, who had provided credit support for this loan and who is a former
executive officer and director of the Company, paid Bank of America $2,500, reducing the Companys
obligation under its term loan arrangements with Bank of America from $10,000
to $7,500 (which amount was then restructured as set forth above). The Company
transferred to this party a 100,000 square foot warehouse facility in Pearland,
Texas, which had previously been utilized by the Companys redistribution
operation, in satisfaction of $1,500 of the loan (which is at least as
favorable a price, based on a third party appraisal, for this property as could
have been obtained from an unaffiliated third party). In addition, the Company
agreed to pay the remaining
$1,000 balance of this loan, with interest at the rate of 12% per annum, on the
earlier of the Companys sale of Aerocell or January 31, 2004. As a result of
the completed sale of Aerocell on July 31, 2002, the Company repaid the
outstanding $1,000 of this loan.

For providing credit support for the $5,000 BofA Term Loan, the Company issued
five-year warrants (exercisable upon grant) to purchase 750 shares of its unissued common stock at an
exercise price of $1.05 per share to each of two individuals (warrants to
purchase 1,500 shares
of common stock in the aggregate), one of whom is the Companys principal
stockholder. Additionally, the Company paid
approximately $50 in cash to both of these individuals. The Company has
recorded the value of these warrants (approximately $700) and cash payment as
deferred financing costs and is amortizing this amount to expense over the term
of the $5,000 BofA Term Loan.

In connection with the original BofA Term Loan, the Company issued warrants to
purchase 25 shares of its unissued common stock at an exercise price of $40.00
per share to each of four individuals, one of whom is the Companys principal
stockholder, one of whom is a former director and principal stockholder, and
one of whom is a former executive officer and director of the Company. Each of these individuals provided
credit support to the financial institution that advanced the loan proceeds.
The Company recorded the
value of these warrants ($2,536) as deferred financing costs and amortized
this amount to expense over the term of the loan (through August 2002). In May
2001, the Company obtained a short-term increase in the term loan and
thereafter repaid the additional borrowing from the proceeds of the Caribe
sale. The Companys principal stockholder provided credit support for the
increased amount of the term loan and, in return, received a cash fee of $67
and warrants to purchase 33 shares of the Companys common stock at an exercise
price of $14.00 per share. The value of these warrants ($254) and the cash fee
were charged to results of operations during the year ended December 31, 2001.
The credit support provided by each of the related parties was in the form of a
full and unconditional guaranty to the financial institution, up to a
percentage amount, of any amounts required to be repaid to the financial
institution.

The remaining Amended Revolving Credit Facility, as well as the remaining
$8,500 in senior secured term loans (consisting of the remaining $3,500 balance
of the Amended Term Loan and the $5,000 BofA Term Loan), are secured by a lien
on substantially all of the assets of the Company.

F-24



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Long-term debt at December 31, 2001 and 2002 consisted of the following:

|                                                                                           |                      |   |         |         |      |   |         |         | 
|------------------------------------------------------------------------------------------ | -------------------- | - | ------- | ------- | ---- | - | ------- | ------- | 
|                                                                                           |                      |   | 2001    |         | 2002
|                                                                                           |                      |   |         |         |     
|New
Senior Subordinated Notes, due in 2006
interest (paid-in-kind) at 8.000% (New Notes) |                      | $ |        |         |      | $ | 115,800 |        
|Old
Senior Subordinated Notes, due in 2008
interest at 8.125% (Old Notes)                |                      |   | 164,437 |         |      |   | 16,247  |        
|Junior
Subordinated Notes, due in 2007
interest (paid-in-kind) at 8.000% (Junior Notes)  |                      |   |        |         |      |   | 2,613   |        
|Amended
BofA Term Loan, due in
2004, interest at LIBOR plus 2.000% (3.380%)                |                      |   |        |         |      |   | 5,000   |        
|Amended
senior term loan with a financial institution, due in
2004, interest at 12%        |                      |   |        |         |      |   | 3,500   |        
|Amended
Revolving Credit Facility, due in 2004
interest at Prime plus 3.000% (7.250%)      |                      |   |        |         |      |   | 2,179   |        
|Term loan with a related party, due in 2004
interest at LIBOR plus 5.500% (6.880%)         |                      |   |        |         |      |   | 1,300   |        
|Term loan with a financial institution, due in 2002
interest at 12%                        |                      |   | 12,000  |         |      |   |        |        
|Term loan with a financial institution, due in 2002
interest at LIBOR plus 2.000% (3.840%) |                      |   | 10,000  |         |      |   |        |        
|Revolving credit facility, due in 2002
interest at Prime plus 3.000% (7.750%)              |                      |   | 12,074  |         |      |   |        |        
|                                                                                           |                      |   |         |         |      |   |         |        
|Less  Current maturities                                                                  |                      |   | 34,074  |         |      |   | 2,179   |        
|                                                                                           |                      |   |         |         |      |   |         |        
|                                                                                           | Total long-term debt |   | $       | 164,437 |      |   | $       | 144,460 | 
|                                                                                           |                      |   |         |         |      |   |         |        

The aggregate maturities of long-term debt for the five years subsequent to
December 31, 2002 are $2,179, $9,800, $0, $115,800, $2,613, and $16,247
thereafter. Amounts outstanding under the Amended Revolving Credit
Facility have been classified as current maturities in accordance with
EITF 95-22.

Also, see Note 18 for a description of the financing transactions that occurred
subsequent to year-end.

NOTE 6  SUBORDINATED NOTES

NEW SENIOR SUBORDINATED NOTES DUE 2006

On February 28, 2002, in connection with the note exchange portion of the
restructuring (see Note 13), the Company issued $100,000 face value in
aggregate principal amount of 8.0% senior subordinated convertible paid-in-kind
(PIK) notes (New Notes), which mature on December 31, 2006. The New Notes
bear interest from the date of issuance and are payable at the Companys option
either in cash or paid-in-kind through the issuance of additional New Notes
semiannually on June 30 and December 31 of each year. If the Company does not
pay interest in cash as of an interest payment date, the Company will
automatically be deemed to have paid such interest in-kind and additional New
Notes in the amount of such interest payment will automatically be deemed to be
outstanding from such date forward.

The New Notes are general unsecured obligations and are subordinated in right
of payment to all current and future senior debt. The New Notes are fully and
unconditionally guaranteed by substantially all of the Companys existing
subsidiaries and each subsidiary that will be organized in the future by the
Company, unless such subsidiary is designated as an unrestricted subsidiary.
The indenture provides that under certain circumstances, the Company may be
able to designate current or future subsidiaries as unrestricted subsidiaries.
Unrestricted subsidiaries will not be subject to many of the restrictive
covenants set forth in the indenture. Subsidiary guarantees are joint and
several, full and unconditional, general unsecured obligations of the
subsidiary guarantors. Additionally, there are no significant restrictions
that would preclude the parent company from obtaining funds, either through
loan or dividend, from the subsidiary guarantor. Subsidiary guaranties are
subordinated in right of payment to all existing and future senior debt of
subsidiary guarantors, including the Amended Credit Facility, the $5,000 BofA
Term Loan, and the TROL
financing, and are also effectively subordinated to all secured
obligations of
subsidiary guarantors to the extent of the assets securing their obligations,
including the Amended Credit Facility, the $5,000 BofA Term Loan, the new loan
which was recently obtained from the Companys principal
stockholder (see Note 18), and the TROL financing.

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The indenture for the New Notes (i) permits the Company to incur indebtedness
equal to the greater of $95,000 or an amount that satisfies a fixed charge
coverage ratio of 2.25 to 1.00, (ii) requires the Company, upon a change of
control or certain asset sales, to repurchase the New Notes at a price equal to
the redemption price which the Company would be obligated to pay if it redeemed
the New Notes on the date of the change of control or asset sale; and (iii)
does not contain a provision requiring acceleration of any premium due upon
acceleration of the New Notes upon an event of default by reason of any willful
action (or inaction) taken (or not taken) by the Company with the intention of
avoiding the prohibition on the redemption of New Notes.

The New Notes are redeemable for cash at the Companys option at the following
percentages of par plus accrued interest on the par value through the date of
redemption: 2002  70.0%, 2003  72.5%, 2004  73.0%, 2005  75.625% and 2006 -
77.5%. The New Notes also provide that the holders will receive an aggregate
of 4,500 shares of common stock if the New Notes are redeemed in 2002 or 2003
and an aggregate of 3,000 shares of common stock if the New Notes are redeemed
in 2004, 2005 or 2006.

If the New Notes have not already been redeemed or repurchased, the New Notes,
including those New Notes previously issued as paid-in-kind interest and all
accrued but unpaid interest, will automatically convert on December 31, 2006
into an aggregate of 270,300 shares of common stock. Holders of New Notes will
not receive any cash payment representing principal or accrued and unpaid
interest upon conversion; instead, holders will receive a fixed number of
shares of common stock and a cash payment to account for any fractional shares.

OLD SUBORDINATED NOTES DUE 2008

In 1998, the Company sold $165,000 of senior subordinated notes (Old Notes)
with a coupon rate of 8.125% at a price of 99.395%, which mature on February
15, 2008. On February 28, 2002, $149,000 face value of these notes were
cancelled as part of the note exchange in exchange for cash and securities, and
substantially all of the covenant protection contained in the indenture
relating to the remaining Old Notes was extinguished. As a result of the
exchange offer and consent solicitation, $16,247 in aggregate principal amount,
net of discount, of Old Notes remain outstanding at December 31,
2002. See Note 13 for a description of the note exchange. Interest on the Old
Notes is payable on February 15 and August 15 of each year. The Old Notes are
general unsecured obligations of the Company, subordinated in right of payment
to all existing and future senior debt, including indebtedness outstanding
under the Amended Credit Facility, the $5,000 BofA Term Loan, the
TROL financing arrangement, the
new loan from the Companys principal stockholder (see
Note 18) and under facilities that may
replace such facilities in the future, and to the New Notes. In addition, the
Old Notes are effectively subordinated to all secured obligations to the extent
of the assets securing such obligations, including the Amended Credit Facility,
the $5,000 BofA Term Loan, the new loan from the Companys principal
stockholder and the TROL financing. As part of the Note Exchange,
substantially all of the covenant protections contained in the
indentures for the Old Notes was removed.

The Old Notes are fully and unconditionally guaranteed, on a senior
subordinated basis, by substantially all of the Companys existing subsidiaries
and each subsidiary that will be organized in the future by the Company, unless
such subsidiary is designated as an unrestricted subsidiary. Subsidiary
guarantees are joint and several, full and unconditional, general unsecured
obligations of the subsidiary guarantors. Additionally, there are no
significant restrictions that would preclude the parent company from obtaining
funds, either through loan or dividend, from the subsidiary guarantors.
Subsidiary guarantees are subordinated in right of payment to all existing and
future senior debt of subsidiary guarantors, including the Amended
Credit Facility, the $5,000 BofA Term Loan, the new loan from the Companys principal
stockholder (see Note 18), and the New Notes, and are also effectively subordinated to all secured obligations
of subsidiary guarantors to the extent of the assets securing their
obligations, including the Amended Credit Facility, the $5,000 BofA Term Loan,
and the new loan from the Companys principal stockholder.

The senior subordinated notes are redeemable, at the Companys option, in whole
or in part, at any time after February 15, 2003, at the following redemption
prices, plus accrued and unpaid interest and liquidated damages, if any, to the
redemption date: (i) 2003104.063%; (ii) 2004102.708%; (iii) 2005101.354%;
and (iv) 2006 and thereafter100%. Upon the occurrence of a change in control,
the Company will be required to make an offer to repurchase all or any part of
each holders senior subordinated notes at a repurchase price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, thereon to the repurchase date. There can be no assurance that
the Company will have the financial resources necessary to purchase the senior
subordinated notes upon a change in control or that such repurchase will then
be permitted under the Amended Credit Facility.

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JUNIOR SUBORDINATED NOTES DUE 2007

As discussed in Note 9, the Companys settlement of its outstanding class action
litigation became effective on September 20, 2002. As part of this settlement
agreement, the Company issued $4,000 face value in aggregate principal
amount of the Companys new junior subordinated convertible PIK notes (Junior
Notes). These notes bear interest at 8% and mature on January 2, 2007. The
Junior Notes bear interest from September 20, 2002 and are payable at the
Companys option either in cash or paid-in-kind through the issuance of
additional notes semiannually on June 30 and December 31 of each year. If the
Company does not pay interest in cash as of an interest payment date, the
Company will automatically be deemed to have paid such interest in-kind and
additional Junior Notes in the amount of such interest payment will
automatically be deemed to be outstanding from such date forward. The Junior Notes have been recorded as of September 20, 2002 (the effective
date) at the then current redemption value of $2,500. The discount is being
accreted to the maturity redemption value, due in January 2007, of approximately
$4,400. The Junior Notes are general unsecured obligations and are subordinated
in right of payment to all current and future senior debt, including the
Companys Amended Credit Facility, the $5,000 BofA Term Loan, the new loan from
the Companys principal stockholder (see Note 18), the TROL financing, and the New Notes
and Old Notes.

The Junior Notes are redeemable for cash at the Companys option at the
following percentages of par plus accrued interest on the par value through the
date of redemption: 2002  70.0%, 2003  72.5%, 2004  73.0%, 2005  75.625%
and 2006  77.5%. The Junior Notes also provide that the holders will receive
an aggregate of 144 shares of common stock if the Junior Notes are redeemed in
2002 or 2003 and an aggregate of 104 shares of common stock if the Junior Notes
are redeemed in 2004, 2005 or 2006.

If the Junior Notes have not already been redeemed or repurchased, the Junior
Notes, including those Junior Notes previously issued as paid-in-kind interest
and all accrued but unpaid interest, will automatically convert on January 2,
2007 into an aggregate of 9,300 shares of common stock. Holders of Junior Notes
will not receive any cash payment representing principal or accrued and unpaid
interest upon conversion; instead, holders will receive a fixed number of shares
of common stock and a cash payment to account for any fractional shares.

NOTE 7TAX RETENTION OPERATING LEASE (TROL) FINANCING

In July 2002, the Company entered into an agreement amending its TROL financing
arrangement (the Amended TROL Financing Agreement) initially established in
December 1998 and, as amended, scheduled to mature in July 2002. Under the terms
of the Amended TROL Financing Agreement, the maturity date of the TROL financing
was extended until June 30, 2005 and the base monthly rental under the TROL was
increased to the greater of: (i) the amount being received by the Company under
its sublease for the Companys Miramar facility plus, commencing July 1, 2003,
an additional monthly payment by the Company, or (ii) $210.

The TROL financing arrangement was utilized to develop two facilities: (i) a
corporate headquarters and warehouse facility, which is currently subleased to
Kellstrom Aerospace, LLC, and (ii) a facility to house the Companys Caribe
operations, which was sold in May 2001. The lease contains financial covenants
regarding the Companys financial performance and certain other affirmative and
negative covenants, with which the Company will be obligated to comply during
the term of the lease.

Substantially all of the Companys subsidiaries have guaranteed the Companys
obligations under the lease. Additionally, the Company has an option to acquire
the facility at the end of the lease for an option price as determined in the
lease. Lease payments are currently at a rate of Prime plus 3.25% to 4.0% and
the Company is responsible for all property taxes, insurance and maintenance of
the property.

The TROL financing contains certain financial covenants regarding the Companys
financial performance and certain other covenants, which overall mirror the
covenant requirements under the Amended Credit Agreement, and
provides for the termination of the TROL financing agreement and repayment of
all debt in the event of a material adverse change in the
Companys business. At December 31, 2002,
the Company did not meet certain financial covenants and thus, was in violation
of the TROL financing agreement. Additionally, as a result of a cross
default provision between the TROL and the Amended Credit Facility,
for which the Company was in violation with financial covenants at
December 31, 2002, the Company was also in violation of the TROL
financing agreement. Subsequent to year-end, however, the Company
has obtained a waiver of non-compliance with all financial covenants and has
thereby cured the covenant violations (see Note 18). The Company has also entered
into an agreement that resets financial covenant requirements for the
TROL financing arrangement and the Amended Credit Facility.

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The original TROL financing was a $43,000 loan facility provided by a financial
institution. As discussed in Note 1, in conjunction with the sale of the Caribe
operation, the purchaser of that business also acquired the real estate and
facility used by the Caribe business for $8,500. These proceeds were used to repay a portion
of the TROL financing. Additionally the Company had posted, as security for the
benefit of the TROL lender, a $9,000 letter of credit, and in November 2001 the
TROL lender drew down in full the $9,000 letter of credit. As a result of the
lender drawing down on this letter of credit and other modifications made to the
required lease payments, the Company determined that the lease qualified as a
capital lease and the Company recorded a capitalized lease asset and a related
capital lease liability in the amount of $34,200 for the quarter ended September
30, 2001. The capital lease liability was then reduced by the application of the
proceeds of the $9,000 letter of credit. At that time, management estimated that
the recorded value of the capitalized asset exceeded its fair market value by
approximately $9,000 and recorded an impairment charge (included in operating
expense) for that amount. Also during the third quarter of 2001, the Company
made the decision to sell this facility. As a result, this lease has been
presented within the accompanying consolidated financial statements as of
December 31, 2001 as a capitalized lease asset held for sale. Additionally, as a
result of this decision, no amortization expense has been recorded through the
period ended March 31, 2002.

As of April 1, 2002, this capitalized lease asset held for sale no longer
qualified for held for sale treatment, in accordance with SFAS No. 144, since
the Company had then ceased its active marketing of this facility, and as of
April 1, 2002, this asset was reclassified to an asset held for use. As certain
criteria of SFAS No. 144 remain unachieved, this capitalized lease asset has
remained within fixed assets, net within the accompanying
consolidated balance sheet at December 31, 2002. Depreciation expense of
approximately $340 was recognized for the nine-month period ended December
31, 2002. Finally, the Company and substantially all of its subsidiaries have
guaranteed the repayment of the remaining $24,859 principal balance of the TROL
financing. The TROL financing is secured by a lien on the real property and
improvements comprising the facilities and on the fixtures therein.

The lease agreement has been amended on several occasions. Under the terms of an
April 2001 amendment, two stockholders of the Company, one of whom is the
Companys principal stockholder, provided a guarantee in an amount up to $1,000.
In exchange for providing their guarantee, the stockholders each received
warrants to purchase 5 shares of the Companys common stock at an exercise price
of $17.50 per share, the value of which ($102) was charged to results of
operations during 2001. Such guarantee was released in conjunction with the sale
of Caribe and repayment of proceeds relating to the sale of the real estate and
facility as discussed above. As part of the April 2001 amendment, the lessor
also agreed to waive non-compliance with financial covenants, if any, through
the period ended December 31, 2001. At certain times during 2001 and 2002, the
Company was not in compliance with certain covenants contained in the lease
agreement. However, the lessor has waived all such events of non-compliance.

NOTE 8RELATED PARTY TRANSACTIONS

During December 2002, an entity controlled by the Companys principal
stockholder acquired the operating assets of Aviation Management Systems, Inc.
(AMS) located in Phoenix, Arizona. Additionally, this entity assumed a lease
with the City of Phoenix for facilities previously leased by AMS at Goodyear
Airport. Just subsequent to year-end, the Company has entered into an operating sublease agreement with the
principal stockholder to operate the business in the facilities that were
previously leased to AMS. The term of the sublease is for three years with
rental payments of $432 annually. Under the sublease agreement, the Company is
also responsible for insurance, taxes and charges leaved by the City of Phoenix
under the new lease. The leased facilities provide approximately 370 square feet
at which MR&O services will be provided.

During October 2002, the Company sold its real estate and fixtures located at
the Companys Aircraft Interior Design, Inc. (AID) operation in Dallas, Texas,
to the Companys principal stockholder. The gross sale price for these assets
was approximately $2,400, which was the estimated fair market value, based on a
third party appraisal, on the sale date. Simultaneous with this sale, the
Company entered into a lease agreement with the principal stockholder for
substantially all of these assets. The term of this lease is ten years. Annual
rental payments are approximately $300 per year, with the Company being
responsible for, among other things, taxes, insurance and utilities. The sale
and resulting leaseback qualify for sale leaseback accounting pursuant to SFAS
No. 98, Accounting for Leases. The lease agreement qualifies as an operating
lease and the Company has deferred the gain on sale of approximately $1,700 and
will amortize this gain to income over the term of the lease agreement, as an
offset to rent expense. Additionally, for the portion of the real estate that
was not included within the subsequent lease agreement, the Company recorded a
gain of approximately $100 for the year ended December 31, 2002.

As discussed in Note 2, the Company financed its purchase of Brice Manufacturing
through a loan from the Companys principal stockholder. In conjunction with the
closing, the Company borrowed $1,300. The principal stockholder has also agreed
to loan the Company additional amounts equal to the Companys costs relating to
the Brice acquisition and amounts required to fund any monthly shortfalls of earnings

F-28



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before interest, taxes,
depreciation and amortization (EBITDA) from Brices operations. From the date of
acquisition through December 31, 2002, there has been
approximately $60 of funding requirements. The Companys note to its principal
stockholder is unsecured, bears interest at LIBOR plus 5.5% and is due on the
earlier of January 31, 2004 or the termination of the revolving credit facility.
This note was recently restructured. See Note 18.

The Company leased its former corporate headquarters and warehouse in Miami,
Florida (the Miami Property) from an entity controlled by a former director
and principal stockholder of the Company. The lease on the Miami Property
called for annual payments in the amount of $893 expiring on December 2, 2014.
In connection with the purchase of the Miami Property by the related party, the
Company made an unsecured $2,466 loan to the related party, which bears interest
at 8% per annum. The loan was being repaid in monthly installments with any
remaining outstanding principal and interest due on December 2, 2004. In January
2001, the loan was sold to the current principal stockholder of the Company for
90% of the then outstanding principal balance of $2,006. In conjunction with the
transaction, the Company granted to the current principal stockholder warrants
to purchase 3 shares of common stock at an exercise price of $36.30 per share.
The value of the warrants of $46 was charged to operating results and credited
to additional paid-in capital. In March 2001, the Miami Property was sold and
the Company was relieved of its remaining obligations under the lease agreement.

The Company also leases two facilities and periodically utilizes aircraft owned
by a former director of the Company. Total expense incurred in relation to these
items was $2,707, $407, and $300 in 2000, 2001, and 2002, respectively. This
same former director sold Caribe and AIDI to the Company in 1998.

During 2002, the Company utilized an
aircraft owned by its Chief Executive Officer. Expense
associated with this use was $272, net of services provided on the
aircraft totaling $39. All usage fees were no greater than would be
charged by unaffiliated third parties and TIMCOs fees for
services on the aircraft were at our normal hourly rates. The Company
did not utilize this aircraft during 2000 or 2001.

Four parties (one of which is an entity controlled by the Companys principal
stockholder) provided credit support to Kellstrom in the aggregate amount of
$8,000 for the benefit of Bank of America, as agent under the Kellstrom
Industries, Inc. senior credit facility, at the time of the closing of the
Transaction (December 1, 2000). See Note 3 for particulars of the Transaction.

See Note 5 for a description of debt guarantees by certain directors and
principal stockholders in connection with the original $10,000 term loan and the
$5,000 Amended Term Loan to the Company. See Note 7 for a description of credit
support provided by certain stockholders in connection with an amendment to the
TROL financing lease.

NOTE 9COMMITMENTS AND CONTINGENCIES

LITIGATION AND CLAIMS

Several lawsuits had been filed against the Company and certain of its former
officers and directors, and its former auditors, in the United States District
Court for the Southern District of Florida, which had been consolidated into a
single lawsuit. The consolidated complaint, as amended in March 2000, September
2000 and September 2001, alleged violations of Sections 11 and 15 of the
Securities Act of 1933 (Securities Act) and Sections 10(b) and 20(a) of, and
Rule 10b-5 under, the Securities Exchange Act of 1934 (Exchange Act). Among
other matters, the complaint alleged that the Companys reported financial
results in 1997, 1998 and 1999 were materially misleading and violated generally
accepted accounting principles. The amended consolidated complaint sought
damages and certification of two classes, one consisting of purchasers of the
Companys common stock in the Companys June 1999 public offering and one
consisting of purchasers of the Companys common stock during the period between
April 30, 1997 and April 14, 2000.

In May 2002, the Company entered into an agreement to settle these claims with
all allegations against the Company and the other defendants being dismissed
without any admission of liability or wrongdoing. Under the settlement
agreement, the fairness of which was approved by the District Court, the Company
has paid $11,500 in cash, all of which has been paid by the Companys directors
and officers liability insurance carrier, and has issued certain securities, as
described, in full settlement of the claims. The securities issued are: (i)
1,250 shares of the Companys authorized but unissued common stock, (ii) $4,000
of the Companys new 8% Junior Subordinated Convertible PIK Notes due 2007 (with
terms similar to, but structurally subordinated to, the New Notes), and (iii)
five-year warrants to purchase 4,150 shares of the Companys common stock at an
exercise price of $5.16 per share, which are exercisable upon grant. The
settlement became effective on September 20, 2002.

F-29



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Since the settlement has now become effective, all securities to be issued as
part of the settlement have been presented within the accompanying consolidated
financial statements as issued and outstanding as of September 20, 2002.
For the quarter ended March 31, 2002, the Company recorded the
initial liability of $8,000 related to the value of the securities to be issued
in this settlement. For the quarter ended June 30, 2002, the Company
marked-to-market the securities to be issued in this settlement as a result of
this revaluation, the Company recorded a gain of $1,875 for the quarter ended
June 30, 2002. For the quarter ended September 30, 2002, the Company performed
the final revaluation of the securities to be issued in this
settlement and as a
result of this second revaluation, with a measurement and effective
date of
September 20, 2002, the Company recorded a gain of $1,715 for the quarter ended
September 30, 2002. Since the settlement has now become effective, no
revaluations will be required in future periods. The cost recognized in fiscal
2002 related to this settlement totaled $4,410.

In November 2001, the Company had been sued by several former employees of its
Oscoda, Michigan heavy airframe maintenance operation, on behalf of themselves
and purportedly on behalf of a class of similarly situated employees, for
alleged violations of the Worker Adjustment and Retraining Notification Act in
connection with its spring 2001 temporary closure of that operation. The suit,
which was filed in the U.S. District Court for the Eastern District of Michigan,
sought back pay (including salary and accrued vacations) and other benefits for
each of the affected employees for a sixty day period after such employees were
terminated. In November 2002, without admitting liability, the Company entered into a settlement agreement
relating to this suit, for which the fairness of this settlement has been
approved by the U.S. District Court and is pending a vote of acceptance by the
former employees. As part of the settlement, the Company has agreed to pay these
former employees $1,150. As of December 31, 2002, this balance is included
within accrued expenses on the accompanying consolidated balance sheet. Once
this settlement has been accepted through the pending vote by the class of
former Oscoda employees and is fully funded, all outstanding claims against the
Company will be dismissed without any admission of liability or wrongdoing.
While the settlement is expect to be accepted by the class of former employees,
there can be no assurance of this expectation. If the settlement is not
approved, the Company intends to vigorously contest this matter.

During the first quarter of 2000, the U.S. Securities and Exchange Commission
initiated an inquiry into the Companys accounting for certain transactions
occurring prior to 2000. The Company has cooperated with the SEC in its inquiry.

The Company is also involved in various other lawsuits and contingencies arising
out of its operations in the normal course of business.

In the opinion of management, the ultimate resolution of these claims and
lawsuits will not have a material adverse effect upon the financial condition or
results of operations of the Company.

SETTLEMENT WITH KELLSTROM

In July 2002, the Company closed on the transactions contemplated by the
Post-Closing Resolution Agreement, dated as of June 10, 2002 (the PCRA)
between the Company and Kellstrom Industries, Inc. (Kellstrom). The settlement
resolves and settles globally outstanding disputes between the Company and
Kellstrom (the Settlement) relating to matters arising out of the Companys
December 2000 sale of substantially all of the assets of its redistribution
operation to Kellstrom. See Note 3.

ENVIRONMENTAL MATTERS

The Company is taking remedial action pursuant to Environmental Protection
Agency and Florida Department of Environmental Protection (FDEP) regulations
at TIMCO-Lake City. Ongoing testing is being performed and new information is
being gathered to continually assess the impact and magnitude of the required
remediation efforts on the Company. Based upon initial cost estimates provided
by environmental consultants as of December 31, 2002, it was estimated that the
total remaining testing, remediation and compliance costs for this facility
would be approximately $1,400. To comply with the financial assurances required
by the FDEP, we had issued a $1,400 standby letter of credit in favor of the
FDEP. Subsequent to December 31, 2002, engineers of the FDEP presented updated
information regarding the exposure at TIMCO-Lake City. The result of this
updated information has concluded that the revised environmental liability
approximates $1,200. As a result of this updated evaluation, the Company has
lowered the environmental liability by $200 and has included this adjustment in
operating expenses within the accompanying consolidated statement of operations
for the year ended December 31, 2002. Additionally, the FDEP has allowed the
Company to lower the standby letter of credit in favor of the FDEP to
approximately $300. While this reduction may only be temporary, the Company is
evaluating alternative means, outside of standby letter of credits, for meeting
the financial assurance requirements established by the FDEP. In addition,
testing and evaluation for all known sites on TIMCO-Lake Citys property is substantially

F-30



---



##### 



complete and the Company has commenced a remediation program. The Company is
currently monitoring the remediation, which will extend into the future. Based
on current testing, technology, environmental law and clean-up experience to
date, the Company believes that it has established an accrual for a reasonable
estimate of the costs associated with its current remediation strategies.

Additionally, there are other areas adjacent to TIMCO-Lake Citys facility that
could also require remediation. The Company does not believe that it is
responsible for these areas; however, it may be asserted that the Company and
other parties are jointly and severally liable and are responsible for the
remediation of those properties.

Accrued expenses in the accompanying December 31, 2001 and 2002 consolidated
balance sheets includes $1,961 and $1,474 related to obligations to remediate
the environmental matters described above. Future information and developments
will require the Company to continually reassess the expected impact of the
environmental matters discussed above. Actual costs to be incurred in future
periods may vary from the estimates, given the inherent uncertainties in
evaluating environmental exposures. These uncertainties include the extent of
required remediation based on testing and evaluation not yet completed and the
varying costs and effectiveness of remediation methods. In the opinion of
management, the ultimate resolution of these environmental exposures will not
have a material adverse effect upon the financial condition or results of
operations of the Company.

OTHER MATTERS

The Company has employment agreements with its executive officers and certain
key employees. The employment agreements provide that such officers and key
employees may earn bonuses, based upon a sliding percentage scale of their base
salaries, provided the Company achieves certain financial operating results, as
defined. Further, certain of these employment agreements provide for certain
severance benefits in the event of a change of control.

The Company leases certain buildings and office equipment under operating lease
agreements. For the years ended December 31, 2000, 2001 and 2002, rent expense
under all leases amounted to $8,090, $6,398, and $4,721, respectively.

Minimum rental commitments under all
leases with remaining non-cancellable lease terms of one year or more as of
December 31, 2002 are as follows:

|                          |          |                  |        |                |       |   |        |        |        | 
|------------------------- | -------- | ---------------- | ------ | -------------- | ----- | - | ------ | ------ | ------ | 
|                          |          | Operating Leases |        | Capital Leases
|                          |          |                  |        |               
|Years Ending December 31, |          |                  |        |                |       |   |        |       
|                          |          |                  |        |                |       |   |        |       
|                          |          | 2003             |        | $              | 5,454 |   |        | $      | 2,966  | 
|                          |          | 2004             |        |                | 5,040 |   |        |        | 3,182  | 
|                          |          | 2005             |        |                | 4,691 |   |        |        | 24,389 | 
|                          |          | 2006             |        |                | 4,742 |   |        |        | 432    | 
|                          |          | 2007             |        |                | 4,719 |   |        |        | 432    | 
|Thereafter                |          |                  | 29,246 |                |       |   | 4,930  |       
|                          | Interest |                  |        |               |       |   |        | (7,496 | )     
|                          |          |                  |        |                |       |   |        |       
|                          |          | $                | 53,892 |                |       | $ | 28,835 |       
|                          |          |                  |        |                |       |   |        |       

Included within the above operating lease commitments are obligations to related
parties of $286 for each year 2003 through 2007 and $1,426 thereafter.
Additionally, while not reflected as reductions to the rental commitments above,
the Company has sublease income (as related to the non-cancellable
lease term) related to a property financed by a capital lease of $2,750 for
each year 2003 through 2006, $2,854 for 2007, and $7,750
thereafter.

NOTE 10PREFERRED SHARE PURCHASE RIGHTS

On November 2, 1999, the Company declared a dividend distribution of one
Preferred Share Purchase Right (a Right) on each outstanding share of its
common stock. Each Right will entitle stockholders to buy one one-thousandth of
a share of newly created Series A Junior Participating Preferred Stock of the
Company at an initial exercise price of $90.00. In general, the Rights become
exercisable if a person or group hereafter acquires 15% or more of the
outstanding common stock of the Company or announces a tender offer for 15% or
more of the common stock. The Board of Directors will in general be entitled to
redeem the Rights at one percent per Right at any time before any such person
hereafter acquires 15% or more of the outstanding common stock.

F-31



---



##### 



In March 2000, the Company amended the rights agreement to allow one of its
stockholders to acquire beneficial ownership of up to 25% of the outstanding
shares of the Company. Simultaneously, the stockholder agreed not to engage in
certain activities without the prior approval of a majority of the Companys
disinterested board members. In December 2000, the rights agreement was further
amended to allow the same stockholder to increase its beneficial ownership to up
to 30% of the outstanding shares of the Company. The rights agreement was
further amended in August 2001 to allow the same stockholder to enter into the
lock-up agreement and the rights were cancelled in February 2002 in connection
with the closing of the Companys rights offering.

NOTE 11INCOME TAXES

Income tax expense (benefit) relating to continuing operations for the years
ended December 31, 2000, 2001 and 2002 consists of the following:

|                                                              |         |   |       |       |      |   |      |     |  |   |        |        |  
|------------------------------------------------------------- | ------- | - | ----- | ----- | ---- | - | ---- | --- |  | - | ------ | ------ | -
|                                                              |         |   | 2000  |       | 2001 |   | 2002
|                                                              |         |   |       |       |      |   |     
|Current                                                       |         |   |       |       |      |   |      |     |  |   |        |       
|                                                              | Federal |   | $     | 2,328 |      |   | $    | 621 |  |   | $      | (3,800 | )
|                                                              | State   |   |       | 1,020 |      |   |      |    |  |   |        |       |  
|                                                              |         |   |       |       |      |   |      |     |  |   |        |       
|                                                              |         |   | 3,348 |       |      |   | 621  |     |  |   | (3,800 | )     
|                                                              |         |   |       |       |      |   |      |     |  |   |        |       
|Deferred                                                      |         |   |       |       |      |   |      |     |  |   |        |       
|                                                              | Federal |   |       | 1,515 |      |   |      |    |  |   |        |       |  
|                                                              | State   |   |       | (53   | )    |   |      |    |  |   |        |       |  
|                                                              |         |   |       |       |      |   |      |     |  |   |        |       
|                                                              |         |   | 1,462 |       |      |   |     |     |  |   |       |       
|                                                              |         |   |       |       |      |   |      |     |  |   |        |       
|Income tax expense (benefit) related to continuing operations |         | $ | 4,810 |       |      | $ | 621  |     |  | $ | (3,800 | )     
|                                                              |         |   |       |       |      |   |      |     |  |   |        |       

Income tax expense (benefit) relating to continuing and discontinued operations
for the years ended December 31, 2000, 2001 and 2002 consists of the following:

|                                                                               |         |   |       |       |      |   |      |     |  |   |        |        |  
|------------------------------------------------------------------------------ | ------- | - | ----- | ----- | ---- | - | ---- | --- |  | - | ------ | ------ | -
|                                                                               |         |   | 2000  |       | 2001 |   | 2002
|                                                                               |         |   |       |       |      |   |     
|Current                                                                        |         |   |       |       |      |   |      |     |  |   |        |       
|                                                                               | Federal |   | $     | 2,370 |      |   | $    | 621 |  |   | $      | (3,800 | )
|                                                                               | State   |   |       | 1,260 |      |   |      |    |  |   |        |       |  
|                                                                               |         |   |       |       |      |   |      |     |  |   |        |       
|                                                                               |         |   | 3,630 |       |      |   | 621  |     |  |   | (3,800 | )     
|                                                                               |         |   |       |       |      |   |      |     |  |   |        |       
|Deferred                                                                       |         |   |       |       |      |   |      |     |  |   |        |       
|                                                                               | Federal |   |       | 1,804 |      |   |      |    |  |   |        |       |  
|                                                                               | State   |   |       |      |      |   |      |    |  |   |        |       |  
|                                                                               |         |   |       |       |      |   |      |     |  |   |        |       
|                                                                               |         |   | 1,804 |       |      |   |     |     |  |   |       |       
|                                                                               |         |   |       |       |      |   |      |     |  |   |        |       
|Income tax expense (benefit) related to continuing and
discontinued
operations |         | $ | 5,434 |       |      | $ | 621  |     |  | $ | (3,800 | )     
|                                                                               |         |   |       |       |      |   |      |     |  |   |        |       

F-32



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##### 



The tax effects of temporary differences that give rise to significant portions
of net deferred tax assets as of December 31, 2001 and 2002 are as follows:

|                          |                                          |  |              |          |      |  |        |         |  
|------------------------- | ---------------------------------------- |  | ------------ | -------- | ---- |  | ------ | ------- | -
|                          |                                          |  | December 31,
|                          |                                          |  |             
|                          |                                          |  | 2001         |          | 2002
|                          |                                          |  |              |          |     
|Deferred tax assets, net: |                                          |  |              |          |      |  |        |        
|                          | Allowance for doubtful accounts          |  | $            | 13,865   |      |  | $      | 13,881  |  
|                          | Accruals                                 |  |              | 9,132    |      |  |        | 4,129   |  
|                          | Write down of investment                 |  |              | 4,748    |      |  |        | 4,748   |  
|                          | Inventories                              |  |              | 3,905    |      |  |        | 8,187   |  
|                          | Property and equipment                   |  |              | 8,499    |      |  |        | 4,428   |  
|                          | Spare parts on lease                     |  |              | (104     | )    |  |        | 14      |  
|                          | Net operating loss/credit carry forwards |  |              | 101,389  |      |  |        | 13,207  |  
|                          | Other                                    |  |              | (7,372   | )    |  |        | (929    | )
|                          |                                          |  |              |          |      |  |        |        
|                          |                                          |  | 134,062      |          |      |  | 47,665 |        
|                          | Less valuation allowance                 |  |              | (134,062 | )    |  |        | (47,665 | )
|                          |                                          |  |              |          |      |  |        |        
|                          | Net deferred tax assets                  |  | $            | -0-      |      |  | $      | -0-     |  
|                          |                                          |  |              |          |      |  |        |        

As of December 31, 2002, the Company had federal net operating loss
carryforwards of $33,049, $1,806 relating to pre-restructuring activities and
$31,243 relating to post-restructuring activities. After the carryback of net
operating losses to prior years and the completion of the note exchange and
rights offering (see note 13), the amount of pre-restructuring net operating
loss carryforwards available for use by the Company after February 28, 2002 is
limited to $1,806, which may be utilized at a rate of approximately $90 per
year, plus current year generated net operating losses. The balance may be
carried forward for 20 years. The Company has established a valuation allowance
to offset net deferred tax assets until it is more likely than not that these
net deferred tax assets will be realized.

The reconciliation of the federal statutory rate and the Companys effective tax
rate on continuing operations is as follows for the years ended December 31,
2000, 2001 and 2002:

|                                                   |                                                |  |       |      |      |  |       |      |  |  |       |       |  
|-------------------------------------------------- | ---------------------------------------------- |  | ----- | ---- | ---- |  | ----- | ---- |  |  | ----- | ----- | -
|                                                   |                                                |  | 2000  |      | 2001 |  | 2002 
|                                                   |                                                |  |       |      |      |  |      
|Federal income tax (benefit) at the statutory rate |                                                |  | (35.0 | )%   |      |  | (35.0 | )%   |  |  | (35.0 | )%   
|Increase in tax rate resulting from:               |                                                |  |       |      |      |  |       |      |  |  |       |      
|                                                   | Losses not currently utilized                  |  |       | 33.5 |      |  |       | 35.0 |  |  |       | 35.0  |  
|                                                   | Change in net deferred tax asset               |  |       | 1.3  |      |  |       |     |  |  |       |      |  
|                                                   | State income taxes, net of federal tax benefit |  |       | 0.6  |      |  |       |     |  |  |       |      |  
|                                                   | Temporary change in tax legislation            |  |       |     |      |  |       |     |  |  |       | (13.5 | )
|                                                   | Other                                          |  |       | 3.9  |      |  |       | 0.4  |  |  |       |      |  
|                                                   |                                                |  |       |      |      |  |       |      |  |  |       |      
|Effective income tax rate                          |                                                |  | 4.3   | %    |      |  | 0.4   | %    |  |  | (13.5 | )%   
|                                                   |                                                |  |       |      |      |  |       |      |  |  |       |      

Additionally, the Company applied for and received $11,061 of federal income tax
refunds during the year ended December 31, 2002, as a result of carrying back
net operating losses to offset taxable income from prior years. Of this amount,
$3,800 has been recognized as an income tax benefit during 2002 and has resulted
from favorable tax legislation passed by the U.S. Congress that temporarily
extended the number of years that net operating losses could be carried back to
offset taxable income. Prior to the passage of this legislation, these net
operating losses were fully reserved, as it was determined to be more likely
than not that the Company would not generate taxable income in the near future
and the Company would not have the opportunity to benefit from these net
operating losses.

NOTE 12WEIGHTED AVERAGE SHARES

The Company utilizes provisions under Statement of Financial Accounting
Standards No. 128 (SFAS 128), Earnings Per Share for computing and
presenting basic and diluted earnings per share. Basic earnings per share is
computed by dividing net income by the weighted average common shares
outstanding during the year. Diluted earnings per share is based on the combined
weighted average number of common shares and common share equivalents
outstanding which include, where appropriate, the assumed exercise of options
and warrants. In computing diluted earnings per share, the Company has utilized
the treasury stock method.

F-33



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##### 



The computation of weighted average common and common equivalent shares used in
the calculation of basic and diluted earnings per share is as follows:

|                                                                                                                              |                 |  |                          |     |      |  |       |     |  |  |        |         | 
|----------------------------------------------------------------------------------------------------------------------------- | --------------- |  | ------------------------ | --- | ---- |  | ----- | --- |  |  | ------ | ------- | 
|                                                                                                                              |                 |  | Years Ended December 31,
|                                                                                                                              |                 |  |                         
|                                                                                                                              |                 |  | 2000                     |     | 2001 |  | 2002 
|                                                                                                                              |                 |  |                          |     |      |  |      
|Weight average shares outstanding used in calculating basic
earnings per share                                                |                 |  | 1,502                    |     |      |  | 1,502 |     |  |  | 26,015 |        
|Effect of dilutive options and warrants                                                                                       |                 |  |                         |     |      |  |      |     |  |  |       |        
|                                                                                                                              |                 |  |                          |     |      |  |       |     |  |  |        |        
|Weighted average common and common equivalent shares                                                                          |                 |  | 1,502                    |     |      |  | 1,502 |     |  |  | 26,015 |        
|                                                                                                                              |                 |  |                          |     |      |  |       |     |  |  |        |        
|Options and warrants outstanding which are not included in
the calculation of
diluted earnings per share because their impact |                 |  |                          |     |      |  |       |     |  |  |        |        
|                                                                                                                              | is antidilutive |  |                          | 225 |      |  |       | 437 |  |  |        | 240,045 | 
|                                                                                                                              |                 |  |                          |     |      |  |       |     |  |  |        |        

NOTE 13NOTE EXCHANGE AND RIGHTS OFFERING

In February 2002, the Company completed a significant restructuring of its
capital and equity. The restructuring consisted of four parts. The first part
was a reverse split (on a one-share-for-ten-shares basis) of the Companys
outstanding common stock, reducing its outstanding common shares from 15,000
shares to 1,500 shares (5% of the restructured entity) and an increase in the
Companys authorized shares from 30,000 shares to 500,000 shares. The second
part was an offer to the holders of the Companys Old Notes to exchange their
Old Notes for up to $10,000 in cash, $100,000 of the New Notes, 4,500 shares of
the Companys common stock (15% of the restructured entity) and five-year
warrants to purchase an additional 3,000 shares of common stock at an exercise
price of $5.16 per share, which are exercisable upon grant, (collectively, the
Note Exchange). A condition to the closing of the Note Exchange offer was that
the holders of 80% or more of the outstanding Old Notes tender their Old Notes
in the Note Exchange. The third part was a rights offering to the existing
stockholders to raise funds to pay the cash portion of the Note Exchange offer
and the expenses of the restructuring, and to provide the Company with working
capital for ongoing business operations. In the rights offering, the Company
offered 24,000 shares of common stock (80% of the restructured entity) to raise
$20,000. In connection with the rights offering, Lacy J. Harber, the Companys
principal stockholder, agreed to purchase unsold allotments. The last part
consisted of the issuance to the pre-restructuring holders of the Companys
common stock of five-year warrants to purchase an additional 3,000 shares of
common stock at an exercise price of $5.16 per share, which are exercisable upon
grant.

In the rights offering, the Company sold 12,000 shares of common stock to the
existing stockholders (including Mr. Harber), and Mr. Harber purchased the
balance of the shares (12,000 shares) pursuant to his obligation to purchase
unsold allotments. In the Note Exchange, the Company exchanged approximately
$149,000 face value of Old Notes (approximately 90% of the Old Notes) for $5,100
in cash, and all of the New Notes, shares and warrants described above. The
Company used the net proceeds of the rights offering, approximating $10,000
after payment of the cash proceeds of the Note Exchange, accrued interest on the
Old Notes not tendered, and expenses of the restructuring, to reduce trade
payables and to provide working capital for the Companys ongoing business
operations. The restructuring has been recorded in accordance with SFAS No. 15,
Accounting by Debtors and Creditors for Troubled Debt Restructurings. As a
result of the restructuring, the Company recognized an extraordinary gain of
$27,300, net of $0 tax expense, in the first quarter of 2002. Additionally, due
to the application of SFAS No. 15, the Company will no longer record interest
expense on the New Notes, as the New Notes are carried at their maximum
potential cash redemption value (including interest) through their maturity.
This maximum potential cash redemption value equates to the present value,
through 2006, of the $100,000 notes plus the value of stock to be issued upon
redemption of these notes in 2006. For a description of the terms of the New
Notes, see Note 6.

Additionally, $16,247 in aggregate principal amount, net of unamortized
discount, of the Old Notes remain outstanding. As part of the Note Exchange,
substantially all of the covenant protections contained in the indenture for the
Old Notes was removed.

The Company paid cash and issued 360 shares of common stock as consideration for
services provided by a third party in connection with the restructuring.

F-34



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##### 



NOTE 14STOCK OPTION PLANS

Effective on February 28, 2002, the Company adopted the 2001 Stock Option Plan
pursuant to which officers, directors, key employees and independent contractors
or consultants can receive options to purchase up to 2,400 shares of the
Companys common stock. No further options will be granted under the Companys
1996 Stock Option Plan or the Companys 1996 Director Stock Option Plan. Any
shares of common stock reserved for issuance upon the exercise of options that
were not issued under such plans were cancelled. The terms of any option issued
under the 1996 Stock Option Plan and the 1996 Director stock option plan,
however, will continue to be governed by such plans and by the option agreements
currently in effect for such options.

Pursuant to the 2001 Stock Option Plan, an aggregate of 2,400 shares of the
Companys common stock are reserved for issuance upon exercise of options
granted. Pursuant to the 1996 Director Stock Option Plan, options to acquire a
maximum of the greater of 15 shares or 2% of the number of shares of Common
Stock then outstanding could have been granted to directors of the Company.
Pursuant to the 1996 Stock Option Plan, options to acquire a maximum of the
greater of 225 shares of Common Stock or 15% of the number of shares of Common
Stock then outstanding could have been granted to executive officers, employees
(including employees who are directors), independent contractors and consultants
of the Company. Pursuant to the 2001 Stock Option Plan, the 1996 Director Stock
Option Plan, and the 1996 Stock Option Plan (collectively the Plans), the
price at which the Companys common stock may be purchased upon the exercise of
options granted under the Plans will be required to be at least equal to the per
share fair value of the Common Stock on the date the particular options are
granted. Options granted under the Plans may have maximum terms of not more than
ten years. Generally, options granted under the Plans may be exercised at any
time up to three months after the person to whom such options were granted is no
longer employed or retained by the Company or serving on the Companys Board of
Directors.

Pursuant to the Plans, unless otherwise determined by the Compensation Committee
of the Companys Board of Directors, one-third of the options granted under the
Plans are exercisable upon grant, one-third are exercisable on the first
anniversary of such grant and the final one-third are exercisable on the second
anniversary of such grant. However, options granted under the Plans shall become
immediately exercisable if the holder of such options is terminated by the
Company or is no longer a director of the Company, as the case may be,
subsequent to certain events which are deemed to be a change in control of the
Company.

On January 1, 1999, the Company entered into employment agreements with certain
executive officers. The employment agreements provided for option grants to
purchase 70 shares of common stock (granted outside of any plan) at $406.25 per
share, with one-third of the options granted vesting on January 1, 2000,
one-third of the options granted vesting on January 1, 2001, and one-third of
the options granted vesting on January 1, 2002.

On November 11, 2000, the Company granted certain executive officers the option
to purchase 38 shares of common stock (granted outside of any plan) at $33.125
per share, with one-third of the options vesting upon grant, one-third of the
options granted vesting on November 11, 2001 and one-third of the options
granted vesting on November 11, 2002.

On February 28, 2002, in conjunction with the completion of the Companys
capital restructuring (see Note 13), the Company granted certain executive
officers the option to purchase 1,700 shares of common stock at $0.83 per share,
with one-third of the options vesting upon grant, one-third of the options
granted vesting on February 28, 2003, and one-third of the options granted
vesting on February 28, 2004. Also, on March 20, 2002,
after completion of the Companys capital restructuring, the Company granted certain
members of management the option to purchase 488 shares of common stock at $1.02
per share, with one-third of the options vesting upon grant, one-third of the
options granted vesting on March 20, 2003, and one-third of the options granted
vesting on March 20, 2004. Both the grant to the Companys executive officers
and to members of the Companys management were made under the 2001 Stock Option
Plan.

In addition to the options granted
under the 2001 Stock Option Plan, on March 20,
2002, the Company granted an executive officer the option to purchase 800 shares
of common stock at $1.02 per share, with one-third of the options vesting upon
grant, one-third of the options granted vesting on March 20, 2003, and one-third
of the options granted vesting on March 20, 2004. These options were granted
outside of any plan.

F-35



---



##### 



The following summarizes outstanding stock options:

|                                                    |           |  |       |       |                |   |          |        | 
|--------------------------------------------------- | --------- |  | ----- | ----- | -------------- | - | -------- | ------ | 
|                                                    |           |  |       |       |                |   | Weighted
|                                                    |           |  |       |       |                |   | Average 
|                                                    |           |  | Total |       | Exercise Price
|                                                    |           |  |       |       |               
|Outstanding at December 31, 1999                    |           |  | 194   |       |                |   | 306.50   |       
|                                                    | Granted   |  |       | 61    |                |   |          | 42.00  | 
|                                                    | Cancelled |  |       | (43   | )              |   |          | 325.80 | 
|                                                    |           |  |       |       |                |   |          |       
|Outstanding at December 31, 2000                    |           |  | 212   |       |                |   | 226.30   |       
|                                                    | Granted   |  |       | 61    |                |   |          | 41.50  | 
|                                                    | Cancelled |  |       |      |                |   |          |       | 
|                                                    |           |  |       |       |                |   |          |       
|Outstanding at December 31, 2001                    |           |  | 273   |       |                | $ | 184.74   |       
|                                                    | Granted   |  |       | 3,163 |                |   |          | 0.92   | 
|                                                    | Cancelled |  |       |      |                |   |          |       | 
|                                                    |           |  |       |       |                |   |          |       
|Outstanding at December 31, 2002                    |           |  | 3,436 |       |                |   | 15.54    |       
|                                                    |           |  |       |       |                |   |          |       
|Options exercisable                                 |           |  |       |       |                |   |          |       
|At December 31, 2002                                |           |  | 1,307 |       |                |   | 39.11    |       
|Available to grant under Plans at December 31, 2002 |           |  | 38    |       |                |   |          |       

The following table summarizes information about outstanding and exercisable
stock options at December 31, 2002:

|                  |  |                              |  |                              |        |                       |  |                |       |  |  |  |     |  |  |  |       |  |  |   |        | 
|----------------- |  | ---------------------------- |  | ---------------------------- | ------ | --------------------- |  | -------------- | ----- |  |  |  | --- |  |  |  | ----- |  |  | - | ------ | 
|                  |  | Outstanding Weighted Average |  | Exercisable Weighted Average
|                  |  |                              |  |                             
|Range of Exercise |  |                              |  |                              |        | Remaining Contractual |  |                |       |  |  |  |     | 
|Prices            |  | Shares                       |  | Life (in years)              |        | Shares                |  | Exercise Price
|                  |  |                              |  |                              |        |                       |  |               
|$    0.70         |  |                             |  | $                            | 130.00 |                       |  |                | 3,296 |  |  |  | 4.4 |  |  |  | 1,167 |  |  |   | 5.53   | 
|130.01            |  |                             |  |                              | 230.00 |                       |  |                | 26    |  |  |  | 3.9 |  |  |  | 26    |  |  |   | 190.80 | 
|230.01            |  |                             |  |                              | 330.00 |                       |  |                | 39    |  |  |  | 5.3 |  |  |  | 39    |  |  |   | 261.17 | 
|330.01            |  |                             |  |                              | 420.00 |                       |  |                | 75    |  |  |  | 6.3 |  |  |  | 75    |  |  |   | 394.34 | 
|                  |  |                              |  |                              |        |                       |  |                |       |  |  |  |     |  |  |  |       |  |  |   |        | 
|$    0.70         |  |                             |  | $                            | 420.00 |                       |  |                | 3,436 |  |  |  | 4.4 |  |  |  | 1,307 |  |  | $ | 39.11  | 
|                  |  |                              |  |                              |        |                       |  |                |       |  |  |  |     |  |  |  |       |  |  |   |        | 

The Company accounts for the fair value of its option grants in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees whereby no compensation cost related to stock options is deducted in
determining net income (loss). Had compensation cost for the Companys stock
option plans been determined pursuant to Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), the
Companys net income (loss) and earnings (loss) per share would have decreased
(increased) accordingly. Using the Black-Scholes option pricing model, the
Companys pro forma net income (loss), pro forma earnings (loss) per share and
pro forma weighted average fair value of options granted, with related
assumptions, are as follows:

|                                            |  |                          |          |            |  |            |          |   |  |   |       |  
|------------------------------------------- |  | ------------------------ | -------- | ---------- |  | ---------- | -------- | - |  | - | ----- | -
|                                            |  | Years Ended December 31,
|                                            |  |                         
|                                            |  | 2000                     |          | 2001       |  | 2002      
|                                            |  |                          |          |            |  |           
|Pro forma net (loss) income                 |  | $                        | (212,685 | )          |  | $          | (143,405 | ) |  | $ | 4,631 |  
|Pro forma basic (loss) earnings per share   |  |                          | (141.65  | )          |  |            | (95.51   | ) |  |   | 0.18  |  
|Pro forma diluted (loss) earnings per share |  |                          | (141.65  | )          |  |            | (95.51   | ) |  |   | 0.18  |  
|Risk free interest rates                    |  |                          | 6        | %          |  |            | 5        | % |  |   | 4     | %
|Expected lives                              |  | 7-10 years               |          | 7-10 years |  | 4-10 years
|Expected volatility                         |  |                          | 117      | %          |  |            | 79       | % |  |   | 70    | %
|Weighted average grant date fair value      |  | $                        | 40.00    |            |  | $          | 34.82    |   |  | $ | 0.57  |  
|Expected dividend yield                     |  |                          | 0        | %          |  |            | 0        | % |  |   | 0     | %

In addition to the stock options
discussed above, the Company has an aggregate of 11,820 of stock
warrants outstanding at December 31, 2002.

F-36



---



##### 



NOTE 15401(K) SAVINGS PLAN

Effective January 1, 1995, the Company established a qualified defined
contribution plan (the Plan) for eligible employees. The Plan provides that
employees may contribute up to the maximum percent of pretax earnings as allowed
by the U.S. tax code and the Company may elect, at its discretion, to make
contributions to the Plan in any year. The Company contributed approximately
$3,662, $-0-, and $-0- to the Plan in 2000, 2001, and 2002, respectively. The
Company does not provide retired employees with health or life insurance
benefits.

NOTE 16-IMPACT OF ADOPTING SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS

As noted in Note 1, effective January 1, 2002, the Company has adopted SFAS No.
142. The impact of adopting this Statement and the discontinuance of recording
goodwill amortization expense is as follows:

|                                                 |                                                  |                       |          |                                   |      |      |          |         |      |   |         |       |   | 
|------------------------------------------------ | ------------------------------------------------ | --------------------- | -------- | --------------------------------- | ---- | ---- | -------- | ------- | ---- | - | ------- | ----- | - | 
|                                                 |                                                  |                       |          | 2000                              |      | 2001 |          | 2002   
|                                                 |                                                  |                       |          |                                   |      |      |          |        
|                                                 |                                                  |                       |          | (In thousands, Except Share Data)
|Reported (loss) income before
extraordinary gain |                                                  | $                     | (211,630 | )                                 |      | $    | (141,235 | )       |      | $ | (20,257 | )    
|Reported net (loss) income                       |                                                  |                       | (211,630 | )                                 |      |      | (141,235 | )       |      |   | 7,022   |      
|Add back: goodwill amortization                  |                                                  |                       | 2,490    |                                   |      |      | 1,900    |         |      |   |        |      
|                                                 |                                                  |                       |          |                                   |      |      |          |         |      |   |         |      
|Adjusted (loss) income before
extraordinary gain |                                                  |                       | (209,140 | )                                 |      |      | (139,335 | )       |      |   | (20,257 | )    
|Adjusted net (loss) income                       |                                                  |                       | (209,140 | )                                 |      |      | (139,335 | )       |      |   | 7,022   |      
|                                                 |                                                  |                       |          |                                   |      |      |          |         |      |   |         |      
|Basic and diluted earnings per share:            |                                                  |                       |          |                                   |      |      |          |         |      |   |         |      
|                                                 | Reported (loss) income before
extraordinary gain |                       | $        | (140.94                           | )    |      | $        | ( 94.06 | )    |   | $       | (0.78 | )
|                                                 | Reported net (loss) income                       |                       | $        | (140.94                           | )    |      | $        | (94.06  | )    |   | $       | 0.27  |  
|                                                 |                                                  | Goodwill amortization |          | $                                 | 1.66 |      |          | $       | 1.27 |   |         | $     |  | 
|                                                 |                                                  |                       |          |                                   |      |      |          |         |      |   |         |      
|                                                 | Adjusted (loss) income before
extraordinary gain |                       | $        | (139.28                           | )    |      | $        | (92.79  | )    |   | $       | (0.78 | )
|                                                 | Adjusted net (loss) income                       |                       | $        | (139.28                           | )    |      | $        | (92.79  | )    |   | $       | 0.27  |  
|                                                 |                                                  |                       |          |                                   |      |      |          |         |      |   |         |      

NOTE 17QUARTERLY FINANCIAL DATA (UNAUDITED)

Results for the quarterly periods in the years ended December 31, 2000, 2001 and
2002 are as follows:

|                                                           |  |                                                  |         |         |  |         |         |         |  |   |         |   |  |   |         |  
|---------------------------------------------------------- |  | ------------------------------------------------ | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | - |  | - | ------- | -
|                                                           |  | First                                            |         | Second  |  | Third   |         | Fourth 
|                                                           |  | Quarter                                          |         | Quarter |  | Quarter |         | Quarter
|                                                           |  |                                                  |         |         |  |         |         |        
|                                                           |  | (In thousands, except earnings (loss) per share)
|2000                                                       |  |                                                  |         |         |  |         |         |         |  |   |         |   |  |   |         |  
|Operating revenues                                         |  | $                                                | 101,876 |         |  | $       | 95,159  |         |  | $ | 81,252  |   |  | $ | 59,790  |  
|Gross profit (loss)                                        |  |                                                  | 18,338  |         |  |         | 2,031   |         |  |   | (462    | ) |  |   | (35,161 | )
|Income
(loss) from continuing operations                   |  |                                                  | 1,141   |         |  |         | (17,883 | )       |  |   | (27,720 | ) |  |   | (71,411 | )
|Loss from discontinued operations                          |  |                                                  | (2,847  | )       |  |         | (13,392 | )       |  |   | (54,548 | ) |  |   | (24,970 | )
|Net loss                                                   |  |                                                  | (1,606  | )       |  |         | (31,275 | )       |  |   | (82,268 | ) |  |   | (96,481 | )
|Diluted
income (loss) per share from continuing operations |  |                                                  | 0.76    |         |  |         | (11.91  | )       |  |   | (18.46  | ) |  |   | (47.56  | )
|Diluted loss per share from discontinued operations        |  |                                                  | (1.83   | )       |  |         | (8.92   | )       |  |   | (36.33  | ) |  |   | (16.70  | )
|Diluted net loss per share                                 |  |                                                  | (1.07   | )       |  |         | (20.83  | )       |  |   | (54.79  | ) |  |   | (64.26  | )

F-37



---



##### 



|                                                    |  |                                                  |         |         |  |         |         |         |  |   |         |   |  |   |         |  
|--------------------------------------------------- |  | ------------------------------------------------ | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | - |  | - | ------- | -
|                                                    |  | First                                            |         | Second  |  | Third   |         | Fourth 
|                                                    |  | Quarter                                          |         | Quarter |  | Quarter |         | Quarter
|                                                    |  |                                                  |         |         |  |         |         |        
|                                                    |  | (In thousands, except earnings (loss) per share)
|2001                                                |  |                                                  |         |         |  |         |         |         |  |   |         |   |  |   |         |  
|Operating revenues                                  |  | $                                                | 81,587  |         |  | $       | 70,875  |         |  | $ | 61,274  |   |  | $ | 50,404  |  
|Gross profit (loss)                                 |  |                                                  | (578    | )       |  |         | 498     |         |  |   | (545    | ) |  |   | 5,118   |  
|Loss from continuing operations                     |  |                                                  | (15,513 | )       |  |         | (49,430 | )       |  |   | (38,109 | ) |  |   | (28,797 | )
|Income (loss) from discontinued operations          |  |                                                  | 296     |         |  |         | (4,638  | )       |  |   | (2,303  | ) |  |   | (2,741  | )
|Net loss                                            |  |                                                  | (15,217 | )       |  |         | (54,068 | )       |  |   | (40,412 | ) |  |   | (31,538 | )
|Diluted loss per share from continuing operations   |  |                                                  | (10.33  | )       |  |         | (32.92  | )       |  |   | (25.38  | ) |  |   | (19.18  | )
|Diluted loss per share from discontinued operations |  |                                                  | 0.20    |         |  |         | (3.09   | )       |  |   | (1.53   | ) |  |   | (1.82   | )
|Diluted net loss per share                          |  |                                                  | (10.13  | )       |  |         | (36.01  | )       |  |   | (26.91  | ) |  |   | (21.00  | )

|                                                      |  |                                                  |        |         |  |         |        |         |  |   |        |   |  |   |         |  
|----------------------------------------------------- |  | ------------------------------------------------ | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | - |  | - | ------- | -
|                                                      |  | First                                            |        | Second  |  | Third   |        | Fourth 
|                                                      |  | Quarter                                          |        | Quarter |  | Quarter |        | Quarter
|                                                      |  |                                                  |        |         |  |         |        |        
|                                                      |  | (In thousands, except earnings (loss) per share)
|2002                                                  |  |                                                  |        |         |  |         |        |         |  |   |        |   |  |   |         |  
|Operating revenues                                    |  | $                                                | 57,534 |         |  | $       | 48,300 |         |  | $ | 33,852 |   |  | $ | 42,287  |  
|Gross profit (loss)                                   |  |                                                  | 6,246  |         |  |         | 5,106  |         |  |   | (1,419 | ) |  |   | (7,665  | )
|Loss from continuing operations                       |  |                                                  | (6,660 | )       |  |         | (456   | )       |  |   | (1,198 | ) |  |   | (16,112 | )
|Income from discontinued operations                   |  |                                                  | 232    |         |  |         | 691    |         |  |   | 2,545  |   |  |   | 701     |  
|Extraordinary gain on extinguishment of debt          |  |                                                  | 27,279 |         |  |         |       |         |  |   |       |   |  |   |        |  
|Net income (loss)                                     |  |                                                  | 20,851 |         |  |         | 235    |         |  |   | 1,347  |   |  |   | (15,411 | )
|Diluted loss per share from continuing operations     |  |                                                  | (0.06  | )       |  |         | (0.01  | )       |  |   | (0.04  | ) |  |   | (0.51   | )
|Diluted income per share from discontinued operations |  |                                                  |       |         |  |         | 0.02   |         |  |   | 0.08   |   |  |   | 0.02    |  
|Diluted income per share from extraordinary gain      |  |                                                  | 0.26   |         |  |         |       |         |  |   |       |   |  |   |        |  
|Diluted net income (loss) per share                   |  |                                                  | 0.20   |         |  |         | 0.01   |         |  |   | 0.04   |   |  |   | (0.49   | )

NOTE 18SUBSEQUENT EVENTS

On May 14, 2003, the Company entered into an agreement with its principal
stockholder pursuant to which the principal stockholder agreed to loan the
Company $6,000, which will be used for working capital. The new note has a
three-year maturity, is secured debt, bears a
16% PIK interest coupon, and maintains a cross default provision
between this loan and the Companys Amended Credit Facility. In
connection with the new loan, the Company issued a warrant to its majority
stockholder to acquire, for nominal consideration, 30% of the Companys
outstanding common stock (on a fully-diluted basis) as of the day the warrant is
exercised. The warrant is exercisable on or before January 31,
2007. Further,
the $1,300 loan received from the principal stockholder in connection with the
Brice Manufacturing acquisition has been added to this $6,000 new loan, and the Keepwell
agreement, which, among other matters, the Companys principal stockholder had
issued to its senior lenders in connection with the Brice Manufacturing
acquisition and required monthly funding of any EBITDA losses, was eliminated.

At December 31, 2002, the Company was
not in compliance with debt covenant requirements under the Amended
Credit Agreement and the Tax Retention Operating Lease (TROL).
Subsequent to year-end, the Company obtained a waiver of
non-compliance with all financial covenants and have thereby cured
these covenant violations. The Company has also entered into
agreements that reset financial covenant requirements for the Amended
Credit Agreement and TROL financing agreement.

F-38



---



##### 



SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

Three Years Ended December 31, 2002
(In thousands)

|                                                          |      |         |            |          |            |       |           |            |  |      |  |     |     |  |            |        |     |  |   |        | 
|--------------------------------------------------------- | ---- | ------- | ---------- | -------- | ---------- | ----- | --------- | ---------- |  | ---- |  | --- | --- |  | ---------- | ------ | --- |  | - | ------ | 
|                                                          |      |         |            |          |            |       | Additions |            |  |      |  |     |     |  |            |        |     |  |  
|                                                          |      |         | Balance at |          | Charged to |       |           |            |  |      |  |     |     |  | Balance at
|                                                          |      |         | Beginning  |          | Cost and   |       |           |            |  |      |  |     |     |  | End of    
|Description                                               |      | of Year |            | Expenses |            | Other |           | Deductions |  | Year
|                                                          |      |         |            |          |            |       |           |            |  |     
|Allowances for doubtful accounts
receivable:              |      |         |            |          |            |       |           |            |  |      |  |     |     |  |            |        |     |  |   |       
|Year ended December 31,                                   |      |         |            |          |            |       |           |            |  |      |  |     |     |  |            |        |     |  |   |       
|                                                          | 2000 |         | $          | 9,593    |            |       |           | 20,343     |  |      |  |    |     |  |            | 22,482 | (A) |  | $ | 7,454  | 
|                                                          | 2001 |         |            | 7,454    |            |       |           | 9,502      |  |      |  | 252 | (C) |  |            | 5,369  | (A) |  |   | 11,335 | 
|                                                          | 2002 |         |            | 11,335   |            |       |           | 846        |  |      |  |     |     |  |            | 2,477  | (A) |  |   | 9,704  | 
|Valuation
allowances relating to discontinued operations: |      |         |            |          |            |       |           |            |  |      |  |     |     |  |            |        |     |  |   |       
|                                                          | 2000 |         |            | 28,185   |            |       |           | 18,868     |  |      |  |    |     |  |            | 19,005 | (B) |  |   | 28,048 | 
|                                                          | 2001 |         |            | 28,048   |            |       |           | 9,386      |  |      |  |    |     |  |            | 4,927  | (B) |  |   | 32,507 | 
|                                                          | 2002 |         |            | 32,507   |            |       |           |           |  |      |  |    |     |  |            | 23,041 | (B) |  |   | 9,466  | 



|(A) |  | Represents accounts receivable written-off.                                              
|--- |  | -----------------------------------------------------------------------------------------
|   
|(B) |  | Utilization of reserve upon
disposition of business.                                     
|   
|(C) |  | Represents allowance for doubtful accounts of Caribe Aviation which was sold
in May 2001.

F-39



---



##### 



Exhibit Index to 2002 Form 10-K

|        |  |                                                                                                                                                
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  | DESCRIPTION                                                                                                                                    
|        |  |                                                                                                                                                
|4.1     |  | Form of Warrants issued to LJH Ltd. and Don A. Sanders in September 2002                                                                       
|        |  |                                                                                                                                                
|4.2     |  | Common Stock Warrant Certificate dated May 13, 2003 in favor of LJH,
Ltd.                                                                      
|        |  |                                                                                                                                                
|10.1    |  | Amendment No. 4, Consent and Limited Waiver to Fifth Amended
and Restated Credit Agreement                                                     
|        |  |                                                                                                                                                
|10.2    |  | Amendment, Consent and Waiver Agreement No. 16 for Lease Agreement
and Certain Other Operative Agreements                                      
|        |  |                                                                                                                                                
|10.3    |  | Term Promissory Note in the face amount of $7,350,000 in favor of
LJH, Ltd.                                                                    
|        |  |                                                                                                                                                
|10.4    |  | Sublease Agreement between LJH, Ltd. and the Company for the Goodyear
facility                                                                 
|        |  |                                                                                                                                                
|10.5    |  | Employment Agreement between the Company and Roy T. Rimmer, Jr.                                                                                
|        |  |                                                                                                                                                
|10.6    |  | Stock Option Agreement between the Company and Roy T. Rimmer, Jr.                                                                              
|        |  |                                                                                                                                                
|10.7    |  | Employment Agreement between the Company and C. Robert Campbell                                                                                
|        |  |                                                                                                                                                
|10.8    |  | Employment Agreement between the Company and Jack Arehart                                                                                      
|        |  |                                                                                                                                                
|21.1    |  | Subsidiaries of the Company                                                                                                                    
|        |  |                                                                                                                                                
|23.1    |  | Consent of KPMG LLP                                                                                                                            
|        |  |                                                                                                                                                
|99.1    |  | Certifications of Chief Executive Officer and Chief Financial Officer
under Section 302 of Sarbanes-Oxley Act of 2002                          
|        |  |                                                                                                                                                
|99.2    |  | Certifications of Chief Executive Officer and Chief Financial Officer
under Section 906 of Sarbanes-Oxley Act of 2002 (furnished but not
filed)