##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[Mark one]

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

For the Quarterly Period Ended September 30, 2002

OR

[   ]   
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the transition period from to

Commission File No. 1-11775

TIMCO AVIATION SERVICES, INC.

(Exact name of registrant as specified in its charter)

|                                                                        |  |                                             
|----------------------------------------------------------------------- |  | --------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 65-0665658
(IRS Employer
Identification No.)
|                                                                        |  |                                             
|623 Radar Road                                                          |  | 27410                                       
|Greensboro, North Carolina
(Address of principal executive offices)     |  | (Zip Code)                                  

Registrants telephone number, including area code: (336) 668-4410 (x3016)

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

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

Indicate the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 31,640,994 shares of common
stock, $.001 par value per share, were outstanding as of November 14, 2002.





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##### 



TIMCO AVIATION SERVICES, INC.

INDEX

Part I. Financial Information

|                                                                                 |                                                                                                                                    |  |      |     | 
|-------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                 |                                                                                                                                    |  | Page
|                                                                                 |                                                                                                                                    |  |     
|Item 1. FINANCIAL STATEMENTS                                                     |                                                                                                                                    |  |      |    
|                                                                                 | Condensed Consolidated Balance Sheets at December 31, 2001
and September 30, 2002 (unaudited)                                      |  |      | 3-4 | 
|                                                                                 | Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 2002 and
2001 (unaudited) |  |      | 5-6 | 
|                                                                                 | Condensed Consolidated Statements of Stockholders Deficit
for the nine months ended September 30, 2002 (unaudited)                |  |      | 7   | 
|                                                                                 | Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001 (unaudited)                  |  |      | 8-9 | 
|                                                                                 | Notes to Condensed Consolidated Financial Statements                                                                               |  |      | 10  | 
|                                                                                
|Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS AND RESULTS OF           OPERATIONS |                                                                                                                                    |  | 27   |    
|                                                                                
|Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                |                                                                                                                                    |  | 42   |    
|                                                                                
|Item 4. CONTROLS AND PROCEDURES                                                  |                                                                                                                                    |  | 42   |    
|                                                                                
|Part II. Other Information                                                      
|                                                                                
|Item 1. LEGAL PROCEEDINGS                                                        |                                                                                                                                    |  | 43   |    
|Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                |                                                                                                                                    |  | 43   |    
|Item 3. DEFAULTS UPON SENIOR SECURITIES                                          |                                                                                                                                    |  | 43   |    
|Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS                        |                                                                                                                                    |  | 43   |    
|Item 5. OTHER INFORMATION                                                        |                                                                                                                                    |  | 43   |    
|Item 6. EXHIBITS AND REPORTS ON FORM 8-K                                         |                                                                                                                                    |  | 43   |    

2



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##### 



TIMCO AVIATION SERVICES, INC. AND
SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)


|                                                |                                                   |                    |        |              |         |               |        |         |         | 
|----------------------------------------------- | ------------------------------------------------- | ------------------ | ------ | ------------ | ------- | ------------- | ------ | ------- | ------- | 
|                                                |                                                   |                    |        | December 31, |         | September 30,
|                                                |                                                   |                    |        | 2001         |         | 2002         
|                                                |                                                   |                    |        |              |         |              
|ASSETS                                         
|Current Assets:                                 |                                                   |                    |        |              |         |               |        |        
|                                                | Cash and cash equivalents                         |                    | $      |             |         |               | $      |        |        
|                                                | Accounts receivable, net                          |                    |        | 26,936       |         |               |        | 16,309  |        
|                                                | Inventories                                       |                    |        | 42,926       |         |               |        | 29,959  |        
|                                                | Income tax receivable                             |                    |        | 6,236        |         |               |        |        |        
|                                                | Capitalized lease asset held for sale             |                    |        | 25,240       |         |               |        |        |        
|                                                | Other current assets                              |                    |        | 4,002        |         |               |        | 4,809   |        
|                                                |                                                   |                    |        |              |         |               |        |        
|                                                | Total current assets                              |                    |        | 105,340      |         |               |        | 51,077  |        
|                                               
|Equipment on lease, net                         |                                                   |                    | 360    |              |         |               |       |        
|                                               
|Fixed assets, net:                              |                                                   |                    |        |              |         |               |        |        
|                                                | Capitalized
lease asset previously held for sale  |                    |        |             |         |               |        | 24,821  |        
|                                                | Property
and equipment, net                       |                    |        | 38,471       |         |               |        | 32,935  |        
|                                                |                                                   |                    |        |              |         |               |        |        
|                                                |                                                   |                    | 38,471 |              |         |               | 57,756 |        
|                                               
|Goodwill, net                                   |                                                   |                    | 26,124 |              |         |               | 26,124 |        
|Assets of discontinued operations held for sale |                                                   |                    | 1,618  |              |         |               |       |        
|Deferred financing costs, net                   |                                                   |                    | 6,637  |              |         |               | 2,608  |        
|Other                                           |                                                   |                    | 4,242  |              |         |               | 1,512  |        
|                                                |                                                   |                    |        |              |         |               |        |        
|                                                | Total assets                                      |                    | $      | 182,792      |         |               | $      | 139,077 |        
|                                                |                                                   |                    |        |              |         |               |        |        
|LIABILITIES & STOCKHOLDERS DEFICIT            
|Current Liabilities:                            |                                                   |                    |        |              |         |               |        |        
|                                                | Accounts payable                                  |                    | $      | 25,969       |         |               | $      | 10,848  |        
|                                                | Accrued expenses                                  |                    |        | 26,357       |         |               |        | 16,252  |        
|                                                | Customer deposits                                 |                    |        | 14,820       |         |               |        | 13,004  |        
|                                                | Current maturities of notes payable               |                    |        | 22,000       |         |               |        |        |        
|                                                | Liabilities of discontinued operations            |                    |        | 7,013        |         |               |        | 3,955   |        
|                                                | Revolving loan                                    |                    |        | 12,074       |         |               |        | 3,770   |        
|                                                | Current
maturities of capital lease obligations   |                    |        | 25,450       |         |               |        | 919     |        
|                                                | Accrued interest                                  |                    |        | 12,113       |         |               |        | 493     |        
|                                                |                                                   |                    |        |              |         |               |        |        
|                                                | Total current liabilities                         |                    |        | 145,796      |         |               |        | 49,241  |        
|                                               
|                                                | Senior subordinated notes, net:                   |                    |        |              |         |               |        |         |        
|                                                |                                                   | Old notes due 2008 |        |              | 164,437 |               |        |         | 16,246  | 
|                                                |                                                   | New notes due 2006 |        |              |        |               |        |         | 115,800 | 
|                                                | Junior subordinated notes due 2007, net           |                    |        |             |         |               |        | 2,500   |        
|                                                | Capital lease obligations, net of current portion |                    |        | 3,890        |         |               |        | 28,104  |        
|                                                | Long-term notes payable                           |                    |        |             |         |               |        | 8,500   |        
|                                                | Other long-term liabilities                       |                    |        | 36           |         |               |        | 36      |        
|                                                |                                                   |                    |        |              |         |               |        |        
|                                                | Total long-term liabilities                       |                    |        | 168,363      |         |               |        | 171,186 |        

3



---



##### 



|                                              |                                                                                                                                                                                |  |   |          |   |  |   |          |   | 
|--------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | - | -------- | - |  | - | -------- | - | 
|Commitments and Contingencies (see footnotes) |                                                                                                                                                                                |  |   |          |   |  |   |         
|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 shares
Issued and outstanding at September 30, 2002
and December 31, 2001, respectively |  |   | 2        |   |  |   | 32       |  
|                                              | Additional paid-in capital                                                                                                                                                     |  |   | 153,277  |   |  |   | 180,830  |  
|                                              | Accumulated deficit                                                                                                                                                            |  |   | (284,646 | ) |  |   | (262,212 | )
|                                              |                                                                                                                                                                                |  |   |          |   |  |   |         
|                                              | Total stockholders deficit                                                                                                                                                    |  |   | (131,367 | ) |  |   | (81,350  | )
|                                              |                                                                                                                                                                                |  |   |          |   |  |   |         
|                                              | Total liabilities and stockholders deficit                                                                                                                                    |  | $ | 182,792  |   |  | $ | 139,077  |  
|                                              |                                                                                                                                                                                |  |   |          |   |  |   |         

The accompanying notes are an integral part of these condensed consolidated
balance sheets.

4



---



##### 



TIMCO AVIATION SERVICES, INC. AND
SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited)


|                                                                                |                   |                                                                                       |         |                     |          |      |         |            |         |  
|------------------------------------------------------------------------------- | ----------------- | ------------------------------------------------------------------------------------- | ------- | ------------------- | -------- | ---- | ------- | ---------- | ------- | -
|                                                                                |                   |                                                                                       |         | For the Nine Months
|                                                                                |                   |                                                                                       |         | Ended September 30,
|                                                                                |                   |                                                                                       |         |                    
|                                                                                |                   |                                                                                       |         | 2001                |          | 2002
|                                                                                |                   |                                                                                       |         |                     |          |     
|Operating revenue:                                                              |                   |                                                                                       |         |                     |          |      |         |           
|                                                                                |                   | Sales, net                                                                            |         | $                   | 211,953  |      |         | $          | 139,514 |  
|                                                                                |                   | Other                                                                                 |         |                     | 1,783    |      |         |            | 160     |  
|                                                                                |                   |                                                                                       |         |                     |          |      |         |           
|                                                                                |                   |                                                                                       | 213,736 |                     |          |      | 139,674 |           
|Cost of sales                                                                   |                   |                                                                                       | 214,361 |                     |          |      | 129,737 |           
|                                                                                |                   |                                                                                       |         |                     |          |      |         |           
|Gross (loss) profit                                                             |                   |                                                                                       | (625    | )                   |          |      | 9,937   |           
|Operating expenses                                                              |                   |                                                                                       | 37,653  |                     |          |      | 8,777   |           
|                                                                                |                   |                                                                                       |         |                     |          |      |         |           
|                                                                                |                   | (Loss) income from operations                                                         |         |                     | (38,278  | )    |         |            | 1,160   |  
|                                                                               
|Interest expense                                                                |                   |                                                                                       | 18,876  |                     |          |      | 11,973  |           
|Charge for settlement of class action litigation                                |                   |                                                                                       |        |                     |          |      | 4,410   |           
|Charge to reserve notes receivable from KAV Inventory, LLC                      |                   |                                                                                       | 37,900  |                     |          |      |        |           
|Other expense (income)  net                                                    |                   |                                                                                       | 8,139   |                     |          |      | (2,961  | )         
|                                                                                |                   |                                                                                       |         |                     |          |      |         |           
|                                                                                |                   | Loss before income taxes, discontinued
operations and extraordinary gain              |         |                     | (103,193 | )    |         |            | (12,262 | )
|Income tax benefit                                                              |                   |                                                                                       | (141    | )                   |          |      | (3,800  | )         
|                                                                                |                   |                                                                                       |         |                     |          |      |         |           
|                                                                                |                   | Loss from continuing operations before
discontinued operations and extraordinary gain |         |                     | (103,052 | )    |         |            | (8,462  | )
|(Loss) income from discontinued operations, net of income
taxes                 |                   |                                                                                       | (6,645  | )                   |          |      | 3,617   |           
|                                                                                |                   |                                                                                       |         |                     |          |      |         |           
|                                                                                |                   | Loss before extraordinary gain                                                        |         |                     | (109,697 | )    |         |            | (4,845  | )
|Extraordinary gain resulting from debt restructuring,
net of income taxes of $0 |                   |                                                                                       |        |                     |          |      | 27,279  |           
|                                                                                |                   |                                                                                       |         |                     |          |      |         |           
|                                                                                |                   | Net (loss) income                                                                     |         | $                   | (109,697 | )    |         | $          | 22,434  |  
|                                                                                |                   |                                                                                       |         |                     |          |      |         |           
|Basic and diluted (loss) income per share:                                      |                   |                                                                                       |         |                     |          |      |         |           
|                                                                                |                   | Loss from continuing operations                                                       |         | $                   | (68.63   | )    |         | $          | (0.35   | )
|                                                                                |                   | (Loss) income from discontinued operations                                            |         |                     | (4.43    | )    |         |            | 0.15    |  
|                                                                                |                   | Extraordinary gain                                                                    |         |                     |         |      |         |            | 1.13    |  
|                                                                                |                   |                                                                                       |         |                     |          |      |         |           
|                                                                                |                   | Net (loss) income                                                                     |         | $                   | (73.06   | )    |         | $          | 0.93    |  
|                                                                                |                   |                                                                                       |         |                     |          |      |         |           
|Weighted average shares outstanding:                                            |                   |                                                                                       |         |                     |          |      |         |           
|                                                                                | Basic and diluted |                                                                                       |         | 1,501,532           |          |      |         | 24,119,351 |        
|                                                                                |                   |                                                                                       |         |                     |          |      |         |           

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

5



---



##### 



TIMCO AVIATION SERVICES, INC. AND
SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited)


|                                                                |                   |                                                                |        |                      |         |      |        |            |        |  
|--------------------------------------------------------------- | ----------------- | -------------------------------------------------------------- | ------ | -------------------- | ------- | ---- | ------ | ---------- | ------ | -
|                                                                |                   |                                                                |        | For the Three Months
|                                                                |                   |                                                                |        | Ended September 30, 
|                                                                |                   |                                                                |        |                     
|                                                                |                   |                                                                |        | 2001                 |         | 2002
|                                                                |                   |                                                                |        |                      |         |     
|Operating revenue:                                              |                   |                                                                |        |                      |         |      |        |           
|                                                                |                   | Sales, net                                                     |        | $                    | 61,219  |      |        | $          | 33,799 |  
|                                                                |                   | Other                                                          |        |                      | 55      |      |        |            | 53     |  
|                                                                |                   |                                                                |        |                      |         |      |        |           
|                                                                |                   |                                                                | 61,274 |                      |         |      | 33,852 |           
|Cost of sales                                                   |                   |                                                                | 61,819 |                      |         |      | 35,271 |           
|                                                                |                   |                                                                |        |                      |         |      |        |           
|Gross loss                                                      |                   |                                                                | (545   | )                    |         |      | (1,419 | )         
|Operating expenses                                              |                   |                                                                | 8,748  |                      |         |      | 903    |           
|                                                                |                   |                                                                |        |                      |         |      |        |           
|                                                                |                   | Loss from operations                                           |        |                      | (9,293  | )    |        |            | (2,322 | )
|                                                               
|Interest expense                                                |                   |                                                                | 5,765  |                      |         |      | 2,268  |           
|Gain on revaluation of class action litigation                  |                   |                                                                |       |                      |         |      | (1,715 | )         
|Charge to reserve notes receivable from KAV Inventory, LLC      |                   |                                                                | 8,500  |                      |         |      |       |           
|Other expense (income)  net                                    |                   |                                                                | 14,740 |                      |         |      | (1,677 | )         
|                                                                |                   |                                                                |        |                      |         |      |        |           
|                                                                |                   | Loss before income taxes and discontinued
operations           |        |                      | (38,298 | )    |        |            | (1,198 | )
|Income tax benefit                                              |                   |                                                                | (189   | )                    |         |      |       |           
|                                                                |                   |                                                                |        |                      |         |      |        |           
|                                                                |                   | Loss from continuing operations before
discontinued operations |        |                      | (38,109 | )    |        |            | (1,198 | )
|(Loss) income from discontinued operations, net of income
taxes |                   |                                                                | (2,303 | )                    |         |      | 2,545  |           
|                                                                |                   |                                                                |        |                      |         |      |        |           
|                                                                |                   | Net (loss) income                                              |        | $                    | (40,412 | )    |        | $          | 1,347  |  
|                                                                |                   |                                                                |        |                      |         |      |        |           
|Basic and diluted (loss) income per share:                      |                   |                                                                |        |                      |         |      |        |           
|                                                                |                   | Loss from continuing operations                                |        | $                    | (25.38  | )    |        | $          | (0.04  | )
|                                                                |                   | (Loss) income from discontinued operations                     |        |                      | (1.53   | )    |        |            | 0.08   |  
|                                                                |                   |                                                                |        |                      |         |      |        |           
|                                                                |                   | Net (loss) income                                              |        | $                    | (26.91  | )    |        | $          | 0.04   |  
|                                                                |                   |                                                                |        |                      |         |      |        |           
|Weighted average shares outstanding:                            |                   |                                                                |        |                      |         |      |        |           
|                                                                | Basic and diluted |                                                                |        | 1,501,532            |         |      |        | 30,526,864 |       
|                                                                |                   |                                                                |        |                      |         |      |        |           

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

6



---



##### 



TIMCO AVIATION SERVICES, INC. AND
SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
(In Thousands, Except Share Data)
(Unaudited)


|                                 |                                                                                               |  |              |            |            |   |             |    |               |   |         |        |  |   |          |        |  |   |          |        | 
|-------------------------------- | --------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---------- | - | ----------- | -- | ------------- | - | ------- | ------ |  | - | -------- | ------ |  | - | -------- | ------ | 
|                                 |                                                                                               |  | Common Stock |            | Additional |   |             |    |               |   | Total  
|                                 |                                                                                               |  |              |            | Paid-in    |   | Accumulated |    | Stockholders'
|                                 |                                                                                               |  | Shares       |            | Amount     |   | Capital     |    | Deficit       |   | Deficit
|                                 |                                                                                               |  |              |            |            |   |             |    |               |   |        
|Balance as of
December 31, 2001  |                                                                                               |  | 1,501,532    |            |            | $ | 2           |    |               | $ | 153,277 |        |  | $ | (284,646 | )      |  | $ | (131,367 | )     
|                                 | Net income                                                                                    |  |              |           |            |   |             |   |               |   |         |       |  |   |          | 22,434 |  |   |          | 22,434 | 
|                                 | 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
September 30, 2002 |                                                                                               |  | 31,640,994   |            |            | $ | 32          |    |               | $ | 180,830 |        |  | $ | (262,212 | )      |  | $ | (81,350  | )     
|                                 |                                                                                               |  |              |            |            |   |             |    |               |   |         |        |  |   |          |        |  |   |          |       

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

7



---



##### 



TIMCO AVIATION SERVICES, INC. AND
SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)


|                                               |                                                                                      |                                           |       |          |               |   |      |          |       |  | 
|---------------------------------------------- | ------------------------------------------------------------------------------------ | ----------------------------------------- | ----- | -------- | ------------- | - | ---- | -------- | ----- |  | 
|                                               |                                                                                      |                                           |       |          | For the Nine 
|                                               |                                                                                      |                                           |       |          | Months Ended 
|                                               |                                                                                      |                                           |       |          | September 30,
|                                               |                                                                                      |                                           |       |          |              
|                                               |                                                                                      |                                           |       |          | 2001          |   | 2002
|                                               |                                                                                      |                                           |       |          |               |   |     
|CASH FLOW FROM OPERATING ACTIVITIES:           |                                                                                      |                                           |       |          |               |   |      |         
|                                               | Net (loss) income                                                                    |                                           | $     | (109,697 | )             |   | $    | 22,434   |      
|                                               | Adjustments to reconcile net (loss) income to cash
provided by operating activities: |                                           |       |          |               |   |      |          |      
|                                               | Loss (income) from discontinued operations                                           |                                           |       | 6,645    |               |   |      | (3,617   | )    
|                                               | 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 of subsidiary                                                           |                                           |       | (5,664   | )             |   |      | (279     | )    
|                                               | Depreciation and amortization                                                        |                                           |       | 7,912    |               |   |      | 4,135    |      
|                                               | Amortization of deferred financing costs                                             |                                           |       | 4,196    |               |   |      | 4,991    |      
|                                               | Provision for (recovery of) doubtful accounts                                        |                                           |       | 4,804    |               |   |      | (1,127   | )    
|                                               | Charge to reserve notes from KAV Inventory, LLC                                      |                                           |       | 37,900   |               |   |      |         |      
|                                               | Write down of long lived assets                                                      |                                           |       | 21,738   |               |   |      |         |      
|                                               | Equity in loss of affiliate, net of taxes                                            |                                           |       | 6,573    |               |   |      |         |      
|                                               | Proceeds from sale of equipment on lease, net of gain                                |                                           |       | 3,282    |               |   |      |         |      
|                                               | Income on non-refundable lease deposit                                               |                                           |       | (2,204   | )             |   |      |         |      
|                                               | Expense from warrants issued to third parties                                        |                                           |       | 440      |               |   |      |         |      
|                                               | Decrease in accounts receivable                                                      |                                           |       | 24,291   |               |   |      | 10,478   |      
|                                               | (Increase) decrease in inventories                                                   |                                           |       | (759     | )             |   |      | 8,654    |      
|                                               | Decrease in other assets                                                             |                                           |       | 5,312    |               |   |      | 8,159    |      
|                                               | Decrease in accounts payable                                                         |                                           |       | (5,016   | )             |   |      | (14,387  | )    
|                                               | Increase (decrease) in customer deposits                                             |                                           |       | 6,127    |               |   |      | (1,816   | )    
|                                               | Increase (decrease) in other liabilities                                             |                                           |       | 8,344    |               |   |      | (8,835   | )    
|                                               |                                                                                      |                                           |       |          |               |   |      |         
|                                               |                                                                                      | Net cash provided by operating activities |       |          | 14,224        |   |      |          | 4,748 | 
|                                              
|CASH FLOW FROM INVESTING ACTIVITIES:           |                                                                                      |                                           |       |          |               |   |      |         
|                                               | Proceeds from sale of subsidiary                                                     |                                           |       | 21,290   |               |   |      | 9,062    |      
|                                               | Purchases of fixed assets                                                            |                                           |       | (1,393   | )             |   |      | (1,513   | )    
|                                               | Payments from related parties                                                        |                                           |       | 1,793    |               |   |      |         |      
|                                               |                                                                                      |                                           |       |          |               |   |      |         
|                                               |                                                                                      | Net cash provided by investing activities |       |          | 21,690        |   |      |          | 7,549 | 
|                                              
|CASH FLOW FROM FINANCING ACTIVITIES:           |                                                                                      |                                           |       |          |               |   |      |         
|                                               | Borrowings under senior debt facilities                                              |                                           |       | 255,456  |               |   |      | 155,660  |      
|                                               | Payments under senior debt facilities                                                |                                           |       | (289,675 | )             |   |      | (163,964 | )    
|                                               | 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   | )    
|                                               | Payments of deferred financing costs                                                 |                                           |       | (2,662   | )             |   |      | (2,988   | )    
|                                               | Payments on equipment loans and capital leases                                       |                                           |       | (1,097   | )             |   |      | (289     | )    
|                                               | Payments on term loan                                                                |                                           |       | (5,500   | )             |   |      | (13,500  | )    
|                                               | Proceeds of term loan                                                                |                                           |       | 12,000   |               |   |      |         |      
|                                               |                                                                                      |                                           |       |          |               |   |      |         
|                                               | Net cash used in financing activities                                                |                                           |       | (31,478  | )             |   |      | (15,387  | )    
|                                               |                                                                                      |                                           |       |          |               |   |      |         
|                                               | Net cash (used in) provided by discontinued operations                               |                                           |       | (1,813   | )             |   |      | 3,090    |      
|                                               |                                                                                      |                                           |       |          |               |   |      |         
|Net increase in cash and cash equivalents      |                                                                                      |                                           | 2,623 |          |               |   |     |         
|Cash and cash equivalents, beginning of period |                                                                                      |                                           |      |          |               |   |     |         
|                                               |                                                                                      |                                           |       |          |               |   |      |         
|Cash and cash equivalents, end of period       |                                                                                      | $                                         | 2,623 |          |               | $ |     |         
|                                               |                                                                                      |                                           |       |          |               |   |      |         

8



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##### 



|                                                                      |                              |  |                                                                                                       |         |   |        |   |        |   |       | 
|--------------------------------------------------------------------- | ---------------------------- |  | ----------------------------------------------------------------------------------------------------- | ------- | - | ------ | - | ------ | - | ----- | 
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                     |                              |  |                                                                                                       |         |   |        |   |       
|                                                                      | Interest paid                |  | $                                                                                                     | (11,330 | ) |        | $ | (6,057 | )
|                                                                      |                              |  |                                                                                                       |         |   |        |   |       
|                                                                      | Income taxes (paid) refunded |  | $                                                                                                     | (60     | ) |        | $ | 11,458 |  
|                                                                      |                              |  |                                                                                                       |         |   |        |   |       
|SUPPLEMENTAL SCHEDULE OF NON CASH 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 shareholders for credit support                                           |         | $ |       |   |        | $ | 702   | 
|                                                                      |                              |  |                                                                                                       |         |   |        |   |       
|                                                                      |                              |  | Value
of common stock issued to third party for services                                              |         | $ |       |   |        | $ | 631   | 
|                                                                      |                              |  |                                                                                                       |         |   |        |   |       
|                                                                      |                              |  | Acquisition of property through capital lease                                                         |         | $ | 34,240 |   |        | $ |      | 
|                                                                      |                              |  |                                                                                                       |         |   |        |   |       

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

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TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2002
(Unaudited)

1. BASIS OF PRESENTATION

Interim Condensed Consolidated Financial Statements

TIMCO Aviation Services, Inc. (the Company), formerly known as Aviation Sales
Company, is a Delaware corporation that, 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 one of its MR&O
operations based in Miramar, Florida. The results of these businesses are
included in the accompanying condensed consolidated results of operations
through the respective periods of their sale.

On February 28, 2002, the Company completed a significant restructuring of its
capital and equity, including a note exchange and rights offering. See Note 7
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 30.0 million shares to 500.0 million 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 has been restated for the one-share-for-ten-shares reverse
stock split.

On May 6, 2002, the Company entered into an agreement to settle a securities
class action lawsuit previously filed against it and certain of its former
directors and officers in the United States District Court for the Southern
District of Florida. On August 21, 2002, the U.S. District Court approved this
settlement, which has become final after a 30-day appeal period expired. See
Note 5 for further discussion.

The accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted. The
accompanying unaudited interim condensed consolidated financial statements
should be read in conjunction with the Companys consolidated financial
statements and the notes thereto included in the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2001, File No. 001- 11775 (the
Form 10-K).

In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements of the Company contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of September 30, 2002, the results of
its operations for the three and nine month periods ended September 30, 2001
and 2002 and its cash flows for the nine month periods ended September 30, 2001
and 2002. The results of operations and cash flows for the nine month period
ended September 30, 2002 are not necessarily indicative of the results of
operations or cash flows which may be reported for the year ending December 31,
2002.

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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 revenue 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, the allowance to reduce
inventory to the lower of cost or market 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, future cash flows in support of
its long-lived assets, medical benefit accruals, the estimated fair value of
the facilities under capital lease, and the allowances 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.

Recently Issued Accounting Standards

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 $0.4 million and $1.5 million in
the three and nine month periods ended September 30, 2001. At September 30,
2002, the Company had net goodwill of $26.1 million, 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 not be re-evaluated until 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. The Company adopted SFAS No. 144 effective January 1, 2002 with no
material impact on its consolidated financial statements.

11



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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 will become effective for the Company on January 1, 2003.

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 will be effective for exit or disposal activities
initiated by the Company after December 31, 2002.

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, this issue requires review by
the Company as it relates to the Companys revenue recognition policy. As of
September 30, 2002, no material impact or change to the Companys revenue
recognition policy has been identified based upon the release of this
supplement.

Comprehensive Income (Loss)

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

Revenue Recognition

Revenues from aircraft maintenance service are generally 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. Revenues related to
engine overhaul services are now 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 condensed consolidated
statements of operations.

12



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Liquidity

The accompanying condensed 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 its 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 events
of default arising from the covenant violations which occurred during 2001 and
2002, and the Company was in compliance with its senior credit agreements at
September 30, 2002. Debt classification will remain contingent upon the
continued compliance or waiver of violations of these covenant requirements.

On July 31, 2002, the Company completed the sale of substantially all of the
assets and business of its Aerocell Structures, Inc. (Aerocell) flight
surfaces MR&O operation. The net sales 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 and will be
received, 50% after six months and the remainder after 12 months, subject to
certain indemnity obligations. The Company used the proceeds from the sale to
repay $7.0 million of term loans. The remainder, net of expenses, has been
used for working capital (see Note 4). During the third quarter ended
September 30, 2002, the Company recorded a $0.3 million gain as a result of
this sale (see Note 2).

On July 12, 2002, the Company completed a refinancing of all of its senior
debt. In the refinancing, the Company obtained a $30.0 million revolving
credit facility and new a $7.0 million term loan, both due January 31, 2004,
and used the proceeds from these new credit facilities to repay amounts
outstanding under its previous revolving credit agreement and under a
previously outstanding $12.0 million senior term loan. In addition, the
Company restructured its TROL financing to a three-year, $25.2 million capital
lease liability. The Company also satisfied $1.5 million of a $10.0 million
term loan through a transfer of real estate and extended $6.0 million of such
term debt to a January 31, 2004 maturity, with the remaining balance of $2.5
million due on August 14, 2002 (see Note 4). The Company used the proceeds
from the Aerocell sale to reduce the outstanding term debt as follows: (i) $3.5
million was used to reduce term debt due to the Companys revolving credit and
term lenders, (ii) $2.5 million was used to repay term debt due August 14,
2002, and (iii) $1.0 million was used to repay term debt due in January 2004.
As of November 8, 2002, the Company had $8.5 million of term loans, $1.1
million of revolving loans, $11.5 million of letters of credit outstanding and
$3.4 million was available for borrowing under its amended revolving credit
facility.

Subsequent to the end of the third quarter, on October 11, 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 $2.4
million, which was the 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 a majority of these assets. The
term of this lease is ten years. Annual rental payments are approximately $0.3
million 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 $1.7 million 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 will record a gain
of approximately $0.1 million during the fourth quarter of 2002.

13



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In May 2001, the Company completed the sale of the assets of its Caribe
Aviation (Caribe) component repair operation. The sales price was $22.5
million, of which $21.8 million was received in cash at the closing, and the
balance of which was received in 2002. The Company used $10.0 million of the
proceeds from the sale to repay the revolving credit debt and $5.5 million to
repay borrowings under outstanding term loans (see Note 4). The balance, net
of expenses, 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 $8.5 million. The proceeds from the sale of the
real estate and facility were used to reduce the outstanding TROL financing
(see Note 5).

During 2001 the Company closed two of its airframe heavy maintenance facilities
(one of which has been closed on a temporary basis), consolidated the
operations of one of its component overhaul MR&O operations from two facilities
to one, reduced its headcount at all of its MR&O facilities and implemented
salary and benefit reductions that affected virtually all employees in order to
lower its operating expenses. Further, although the Company expects to be able
to meet its working capital requirements from its available resources and from
other sources, including funds available under its amended revolving credit
facility, from operations, from sales of assets and from 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.

2. SALE OF OPERATING ENTITIES

On July 31, 2002, the Company completed the sale of substantially all of the
assets and business of its Aerocell Structures operations. The net
sales
price was $9.6 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. The Company 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 due August 14, 2002 and a $1.0 million related party loan. The remainder,
net of expenses, was used for working capital. For the third quarter ended
September 30, 2002, the Company has recorded a $0.3 million gain as a result of
this sale. The results of operations for Aerocell for both the current year
and comparative prior periods have not been reclassified to discontinued
operations within the accompanying condensed consolidated financial
statements as the effect of any restatement for prior year results has been deemed to be
immaterial to the consolidated Company.

Pursuant to the asset purchase agreement relating to the sale, the Company has
agreed that the value of the Aerocell assets at the closing date was 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. The Company and the purchaser are in the process of
reconciling the closing date value of the Aerocell assets.

The Agreement also provides that the funds in escrow will be held to support
certain indemnification rights provided in the Agreement, and, provided that 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. 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

14



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##### 



Closing Date. There is also additional inventory of Aerocell as to which the
Company will have to pay up to $200,000 in cash one year from the closing 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 inventory repurchases, the Company has
established certain reserves as of September 30, 2002.

Additionally, in December 2000, the Company completed the sale of its
redistribution operations, its new parts distribution operations and its parts
manufacturing operations, all of which are treated as discontinued operations
in these condensed consolidated financial statements. See the Form 10-K for
particulars.

3. INVESTMENTS

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 $2.5 million, and prior to
2002 the Company invested an additional $4.1 million 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 unamortized carrying value of this
investment (approximately $6.3 million) in the third quarter of
2001. The Company has no additional funding obligations or guarantees
of liabilities for this limited liability corporation.

4. NOTES PAYABLE AND REVOLVING LOAN

Amended Senior Revolving Credit and Term Debt

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 $30.0 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). 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 $12.0 million 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 $500,000, commencing September 30, 2002, with the principal
balance due in full on January 31, 2004. $3.5 million of the Amended Term Loan
was repaid from the proceeds of the Aerocell sale and has been applied first
against current quarterly installments (current

15



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##### 



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 condensed consolidated balance sheets.

Under a previous term loan agreement with one of the lenders, the Company
granted the lender common stock purchase warrants to purchase 12,900 shares of
the Companys common stock exercisable for par value at any time until December
31, 2005. 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. The lender has
not required the Company to repurchase any warrants through November 8, 2002
and the put-right under these warrants was amended to extend until August 15,
2004 in connection with the July 2002 refinancing of the Companys senior debt.
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).

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 suspension 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 potentially 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. As of September 30, 2002, less
than $0.1 million was available for borrowing under the Amended Credit Facility
and outstanding letters of credit aggregated $11.5 million.

On July 12, 2002, the Company also restructured its outstanding $10.0 million
senior secured term loan with Bank of America. $5.0 million of this loan (the
$5.0 million BofA Loan) is now due on January 31, 2004. The $5.0 million
BofA 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, $2.5 million of the original BofA loan, due
August 14, 2002, was repaid from the proceeds of the Aerocell sale.

The $2.5 million balance of the original Bank of America term loan has also
been repaid. At the closing of the senior term debt refinancing, one of the
parties, who had provided credit support for this loan and who is a director of
the Company, paid Bank of America $2.5 million, reducing the Companys
obligation under its term loan arrangements with Bank of America from $10.0
million to $7.5 million (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 $1.5 million 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 $1.0 million 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 $1.0
million of this loan.

16



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For providing credit support for the $5.0 million BofA Term Loan, the Company
issued five-year warrants to purchase 750,000 shares of its unissued common
stock at an exercise price of $1.05 per share to each of two individuals
(warrants to purchase 1.5 million shares of common stock in the aggregate), one
of whom is the Companys principal stockholder. Additionally, the Company paid
approximately $50,000 in cash to both of these individuals. The Company has
recorded the value of these warrants (approximately $0.7 million) as deferred
financing costs and is amortizing this amount to expense over the term of the
$5.0 million BofA Term Loan.

In connection with the original BofA term loan, the Company issued warrants to
purchase 25,000 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 and one of whom is a director of the Company. Each of
these individuals provided credit support to the financial institution that
advanced the loan proceeds. The Company has recorded the value of these
warrants as deferred financing costs and has 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 $67,000 and warrants to
purchase 33,333 shares of the Companys common stock at an exercise price of
$14.00 per share. The value of these warrants and the cash fee were charged to
results of operations during the quarter ended June 30, 2001.

The remaining Amended Revolving Credit Facility, as well as the remaining $8.5
million in senior secured term loans (consisting of the remaining $3.5 million
balance of the Amended Term Loan and the $5.0 million BofA Term Loan), are
secured by a lien on substantially all of the assets of the Company.

Senior Subordinated Notes

On February 28, 2002, in connection with the note exchange portion of the
restructuring (see Note 7), the Company issued $100.0 million 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 and the $5.0
million BofA Term Loan, and are also effectively subordinated to all secured
obligations or subsidiary guarantors to the extent of the assets securing their
obligations, including the Amended Credit Facility and the $5.0 million BofA
Term Loan.

17



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The indenture for the New Notes (i) permits the Company to incur indebtedness
equal to the greater of $95.0 million 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 4.5 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 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, the Company sold $165.0 million 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, $149.0 million 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 note exchange, $16.2 million in aggregate
principal amount, net of unamortized discount, of Old Notes remain outstanding.
See Note 7 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 and the $5.0 million BofA Term Loan 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 and the $5.0 million BofA Term Loan.

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 and the $5.0 million BofA Term Loan, and are also effectively
subordinated to all secured obligations of subsidiary guarantors to

18



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the extent of the assets securing their obligations, including the Amended
Credit Facility and the $5.0 million BofA Term Loan.

Junior Subordinated Notes

As discussed in Note 5, the Companys settlement of its outstanding class
action litigation became effective on September 20, 2002. As part of this
settlement agreement, the Company has issued (or is obligated to issue) $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 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 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 $5.0 million BofA Term
Loan, the New Notes and the 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 144,300 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.

5. COMMITMENTS AND CONTINGENCIES

Litigation And Claims

Several lawsuits had been filed against the Company and certain of its officers
and directors, and its former auditors, in the United States District Court for
the Southern District of Florida, which have 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.

On May 6, 2002, the Company entered into an agreement to settle these claims.
Under the settlement agreement, the fairness of which has been approved by the
District Court, the Company has paid $11.5 million in cash, all of which has
been paid by the

19



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Companys directors and officers liability insurance carrier, and the Company
is issuing certain securities, as described, in full settlement of the claims.
The securities to be issued are: (i) 1.25 million shares of the Companys
authorized but unissued common stock, (ii) $4.0 million 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 4.15 million shares of the Companys common stock at an exercise price
of $5.16 per share. The settlement became effective on September 20, 2002.

Since the settlement has now become effective, all securities to be issued as
part of the settlement have been presented within the accompanying condensed
consolidated financial statements as issued and outstanding as of September 20,
2002. Additionally, for the quarter ended March 31, 2002, the Company recorded
the initial liability of $8.0 million 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 million for the
period ended June 30, 2002. For the quarter ended September 30, 2002, the
Company has performed the final revaluation of the securities to be issued in
this settlement. 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
million for the period ended September 30, 2002. Since the settlement has
become effective, no revaluations will be required in future periods.

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.

In November 2001, the Company was 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, seeks 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. The Company believes that it has valid defenses to
this suit and is vigorously defending this suit, which is presently in
discovery. Nevertheless, unfavorable resolution of this suit could have a
material adverse effect on the Companys financial condition and results of
operations.

The Company is also involved in various lawsuits and other 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

On July 17, 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.

As part of the Settlement:



|a. |  | Kellstrom purchased certain furniture, fixtures and equipment (FF&E),
for approximately $7.7 million, net, from Aviation Sales Distribution Services
Company
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

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|   |  | (ASDC), a subsidiary of the Company, which equipment is being used by
Kellstrom in the operation of its business;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|b. |  | Kellstrom put certain uncollected 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 $1.2
million) due and owing in the ordinary course between Kellstrom and AVS,
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 $0.4 million. For the quarter ended September 30, 2002, the
Company has recorded a gain of $1.6 million for the settlement transactions
described above. This gain has been included within other income, net ($0.7
million) and income from discontinued operations ($0.9 million) within the
accompanying condensed consolidated financial statements.

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, the Company resolved certain
purchase price adjustment issues with KAV Inventory, LLC (KAV), an entity
owned 50% by the Company and 50% by Kellstrom, 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

21



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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.

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 the most recent cost estimates
provided by environmental consultants, the Company believes that the total
testing, remediation and compliance costs for this facility will be
approximately $1.4 million. Testing and evaluation for all known sites on
TIMCO-Lake Citys property is substantially 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. To comply with the
financial assurances required by the FDEP, the Company has issued a $1.4
million standby letter of credit in favor of the FDEP.

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 September 30, 2002 condensed consolidated
balance sheet includes $1.7 million 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.

Tax Retention Operating Lease (TROL) Financing

On July 12, 2002, the Company entered into an agreement amending its 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 by the Company under
its sublease for the facility plus, commencing July 1, 2003, an additional
monthly payment by the Company, or (ii) $210,000.

The TROL financing arrangement was utilized to develop two facilities: (i) a
corporate headquarters and warehouse facility, which has been subleased to
Kellstrom Industries, Inc., and (ii) a facility to house the Companys Caribe
operations, which were 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. Alternatively, if the Company does not purchase the facility at
the end of the lease,

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it will be obligated to pay certain amounts as provided 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 original TROL financing was a $43.0 million 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 $8.5 million. These
proceeds were used to repay the portion of the TROL financing. Additionally
the Company had posted, as security for the benefit of the TROL lender, a $9.0
million letter of credit, and in November 2001 the TROL lender drew down in
full the $9.0 million 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 $34.2 million for the quarter ended September 30,
2001. The capital lease liability was then reduced by the application of the
proceeds of the $9.0 million letter of credit. At that time, management
estimated that the recorded value of the capitalized asset exceeded its fair
market value by approximately $9.0 million and recorded an impairment charge
(included in other 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 condensed 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. This
capitalized lease asset was included within fixed assets, net for the second
quarter ended June 30, 2002. As certain criteria of SFAS No. 144
remain unachieved, this capitalized lease asset has remained within
fixed assets, net within the accompanying condensed consolidated
financial statements for the quarter ended September 30, 2002.
Amortization expense of approximately $0.2 million and $0.4
million has been recognized for the three and nine month periods ended
September 30, 2002.
The Company and
substantially all of its subsidiaries have guaranteed the repayment of the
remaining $24.8 million principal balance of the TROL financing
and 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 $1.0
million. In exchange for providing their guarantee, the stockholders each
received warrants to purchase 5,000 shares of the Companys common stock at an
exercise price of $17.50 per share, the value of which ($102,000) 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.

23



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Other Matters

The Company applied for and received $11.1 million of federal income tax
refunds during the quarter ended June 30, 2002, as a result of carrying back
net operating losses to offset taxable income from prior years. Of this
amount, $3.8 million 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.

The Company has employment agreements with its executive officers and certain
of its 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 severance benefits in the event of a change of control.

In January 2001, the Company sold a loan relating to its former corporate
headquarters to its principal stockholder for 90% of the then outstanding
principal balance of $2.0 million. In conjunction with the transaction, the
Company granted to the stockholder warrants to purchase 2,500 shares of common
stock at an exercise price of $36.25 per share. The value of the warrants
($46,000) was charged to operating results and credited to additional paid-in
capital.

6. Weighted Average Shares

|                                                                                                                                                  |                               |  |               |           |               |  |             |            |      |  |         |           |  |  |             |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- |  | ------------- | --------- | ------------- |  | ----------- | ---------- | ---- |  | ------- | --------- |  |  | ----------- | ---------- | 
|                                                                                                                                                  |                               |  | For the Three |           | For the Nine 
|                                                                                                                                                  |                               |  | Months Ended  |           | Months Ended 
|                                                                                                                                                  |                               |  | September 30, |           | September 30,
|                                                                                                                                                  |                               |  |               |           |              
|                                                                                                                                                  |                               |  | 2001          |           | 2002          |  | 2001        |            | 2002
|                                                                                                                                                  |                               |  |               |           |               |  |             |            |     
|Weighted average common and common
equivalent shares outstanding:                                                                                 |                               |  |               |           |               |  |             |            |      |  |         |           |  |  |             |           
|                                                                                                                                                  | Basic                         |  |               | 1,501,532 |               |  |             | 30,526,864 |      |  |         | 1,501,532 |  |  |             | 24,119,351 | 
|                                                                                                                                                  | Effect of dilutive securities |  |               |          |               |  |             |           |      |  |         |          |  |  |             |           | 
|                                                                                                                                                  |                               |  |               |           |               |  |             |            |      |  |         |           |  |  |             |           
|                                                                                                                                                  | Diluted                       |  |               | 1,501,532 |               |  |             | 30,526,864 |      |  |         | 1,501,532 |  |  |             | 24,119,351 | 
|                                                                                                                                                  |                               |  |               |           |               |  |             |            |      |  |         |           |  |  |             |           
|Common stock equivalents outstanding
which are not included in the
calculation of diluted earnings
per share because their impact
is antidilutive |                               |  | 433,500       |           |               |  | 281,330,970 |            |      |  | 433,500 |           |  |  | 223,091,990 |           
|                                                                                                                                                  |                               |  |               |           |               |  |             |            |      |  |         |           |  |  |             |           

7. NOTE EXCHANGE AND RIGHTS OFFERING

On February 28, 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 15.0
million shares to 1.5 million

24



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##### 



shares (5% of the restructured entity) and an increase in the Companys
authorized shares from 30.0 million shares to 500.0 million shares. The second
part was an offer to the holders of the Companys Old Notes to exchange their
Old Notes for up to $10.0 million in cash, $100.0 million of the New Notes, 4.5
million shares of the Companys 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 (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 24.0 million shares of common stock (80% of the restructured entity) to
raise $20.0 million. 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 3.0
million shares of common stock at an exercise price of $5.16 per share.

In the rights offering, the Company sold 12.0 million shares of common stock to
the 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, the Company exchanged
approximately $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. The Company 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 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 $27.3 million, 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 $100.0
million 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 4.

$16.2 million 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 360,360 shares of common stock as
consideration for services provided by a third party in connection with the
restructuring.

25



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##### 



8. 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:

|                                      |                                                  |                                 |   |                                   |      |               |   |       |   |      |   |          |       |  |   |        |   | 
|------------------------------------- | ------------------------------------------------ | ------------------------------- | - | --------------------------------- | ---- | ------------- | - | ----- | - | ---- | - | -------- | ----- |  | - | ------ | - | 
|                                      |                                                  |                                 |   | For the Three                     |      | For the Nine 
|                                      |                                                  |                                 |   | Months Ended                      |      | Months Ended 
|                                      |                                                  |                                 |   | September 30,                     |      | September 30,
|                                      |                                                  |                                 |   |                                   |      |              
|                                      |                                                  |                                 |   | 2001                              |      | 2002          |   | 2001  |   | 2002
|                                      |                                                  |                                 |   |                                   |      |               |   |       |   |     
|                                      |                                                  |                                 |   | (In thousands, Except Share Data)
|                                      |                                                  |                                 |   | (Unaudited)                      
|                                      | Reported (loss) income before
extraordinary gain |                                 | $ | (40,412                           | )    |               | $ | 1,347 |   |      | $ | (109,697 | )     |  | $ | (4,845 | )
|                                      | Reported net (loss) income                       |                                 | $ | (40,412                           | )    |               | $ | 1,347 |   |      | $ | (109,697 | )     |  | $ | 22,434 |  
|                                      |                                                  | Add back: goodwill amortization |   |                                   | 390  |               |   |       |  |      |   |          | 1,517 |  |   |        |  | 
|                                      |                                                  |                                 |   |                                   |      |               |   |       |   |      |   |          |       |  |   |       
|                                      | Adjusted (loss) income before
extraordinary gain |                                 | $ | (40,022                           | )    |               | $ | 1,347 |   |      | $ | (108,180 | )     |  | $ | (4,845 | )
|                                      | Adjusted net (loss) income                       |                                 | $ | (40,022                           | )    |               | $ | 1,347 |   |      | $ | (108,180 | )     |  | $ | 22,434 |  
|                                      |                                                  |                                 |   |                                   |      |               |   |       |   |      |   |          |       |  |   |       
|Basic and diluted earnings per share: |                                                  |                                 |   |                                   |      |               |   |       |   |      |   |          |       |  |   |       
|                                      | Reported (loss) income before
extraordinary gain |                                 | $ | (26.91                            | )    |               | $ | 0.04  |   |      | $ | (73.06   | )     |  | $ | (0.20  | )
|                                      | Reported net (loss) income                       |                                 | $ | (26.91                            | )    |               | $ | 0.04  |   |      | $ | (73.06   | )     |  | $ | 0.93   |  
|                                      |                                                  | Goodwill amortization           |   |                                   | 0.26 |               |   |       |  |      |   |          | 1.01  |  |   |        |  | 
|                                      |                                                  |                                 |   |                                   |      |               |   |       |   |      |   |          |       |  |   |       
|                                      | Adjusted (loss) income before
extraordinary gain |                                 | $ | (26.65                            | )    |               | $ | 0.04  |   |      | $ | (72.05   | )     |  | $ | (0.20  | )
|                                      | Adjusted net (loss) income                       |                                 | $ | (26.65                            | )    |               | $ | 0.04  |   |      | $ | (72.05   | )     |  | $ | 0.93   |  
|                                      |                                                  |                                 |   |                                   |      |               |   |       |   |      |   |          |       |  |   |       

9. SUBSEQUENT EVENTS

Brice Manufacturing Company

On October 11, 2002, the Company completed the purchase of the outstanding
capital stock of Brice Manufacturing Company (Brice) for a purchase price of $1.3
million and the assumption of approximately $1.1 million of liabilities. The
total purchase price will be adjusted post-closing based on a closing date
balance sheet. Brice, located in Pacoima, California, manufactures and markets
an extensive range of aircraft seats and related products and services to
airlines, leasing companies, airframe manufacturers, and overhaul facilities
throughout the world. Brice also maintains over 4,000 parts manufacturing
authorizations (PMAs) which encompass all seat types. The acquisition will be
accounted for under the purchase method of accounting.

The Company financed its purchase of Brice through
a loan from the Companys principal stockholder. In conjunction
with the closing, the Company borrowed $1.3 million. 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 from Brices
operations. 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.

Sale-Leaseback of Aircraft Interior Design, Inc. Facility and Manufacturing Assets

On October 11, 2002, the Company sold to its
principal stockholder and leased back certain of its real
estate and fixtures located at its Aircraft Interior Design operations in
Dallas, Texas. See Note 1 for particulars.

26



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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO TIMCO, WE, OUR AND
US IN THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES TIMCO AVIATION SERVICES,
INC. (FORMERLY KNOWN AS AVIATION SALES COMPANY) AND ITS SUBSIDIARIES. THIS
QUARTERLY REPORT ON FORM 10-Q 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 QUARTERLY REPORT ON FORM 10-Q AND IN OUR ANNUAL REPORT ON FORM 10-K FOR
2001 (THE 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 AT A FIXED PRICE BASIS, INCREASED 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, 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, 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 QUARTERLY
REPORT ON FORM 10-Q. WE DO NOT UNDERTAKE ANY OBLIGATION TO REVISE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT FUTURE EVENTS OR CIRCUMSTANCES.

The following discussion and analysis should be read in conjunction with the
information set forth under Managements Discussion and Analysis of Financial
Condition and Results of Operations in the Form 10-K.

NOTE EXCHANGE OFFER AND RIGHTS OFFERING

On February 28, 2002, we completed a significant 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 to exchange their Old Notes (the 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 (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.

27



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##### 



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 have
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 an additional 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 an additional
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 an
additional 270.3 million shares of our common stock.

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

AGREEMENT TO SETTLE SECURITIES CLASS ACTION LITIGATION

On May 6, 2002, we entered into an agreement to settle the securities class
action litigation previously filed against us and certain of our former
directors and officers, and our former auditors, in the United States District
Court for the Southern District of Florida. Under the settlement agreement,
the fairness of which was approved by the District Court on August 21, 2002,
the Company has paid $11.5 million in cash, all of which has been paid by the
Companys directors and officers liability insurance carrier, and is issuing
certain securities, as described below, in full settlement of the claims. The
securities to be issued are: (i) 1.25 million shares of the Companys
authorized but unissued common stock, (ii) $4.0 million 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 4.15 million shares of the Companys common stock at an exercise price
of $5.16 per share.

The settlement became effective on September 20,
2002 and is now final. As a result, all claims against the
Company and the other defendants have been dismissed without any admission of
liability or wrongdoing. As such, all securities to be issued as part of this
settlement have been presented within the accompanying condensed consolidated
financial statements as issued and outstanding as of September 30,
2002.

28



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Additionally, for the quarter ended March 31, 2002, we recorded the initial
liability of $8.0 million related to the value of the securities to be issued
in this settlement. For the quarter ended June 30, 2002, we marked-to-market
the securities to be issued in this settlement. As a result of this
revaluation, we recorded a gain of $1.875 million for the
three-month period ended June 30,
2002. For the quarter ended September 30, 2002, we have performed the final
revaluation of the securities to be issued in this settlement. As a result of
this second revaluation, with a measurement and effective date of September 20,
2002, we have recorded a gain of $1.715 million for the period ended September
30, 2002. Since the settlement has become final, no further
adjustments in the value of
these securities will be required in future periods.

SETTLEMENT WITH KELLSTROM

On July 17, 2002, we 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 us and
Kellstrom (the Settlement) relating to matters arising out of the our
December 2000 sale of substantially all of the assets of our redistribution
operation to Kellstrom.

As part of the Settlement:



|a. |  | Kellstrom purchased certain furniture, fixtures and equipment (FF&E),
for 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 accounts receivable, which were 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);                                                                                                                                                                                                                                                                                                                                                                                            
|  
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

29



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The closing of the Settlement resulted in a net cash payment to us of
approximately $0.4 million. For the quarter ended September 30, 2002, we
recorded a gain of $1.6 million for the settlement transactions described
above. This gain has been included within other income, net (approximately
$0.7 million) and income from discontinued operations (approximately $0.9
million) within the accompanying condensed consolidated financial statements.

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.

Additionally, simultaneous with the Settlement, we resolved certain purchase
price adjustment issues with KAV Inventory, LLC, (KAV) an entity owned 50% by
us and 50% by Kellstrom, 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 Kellstroms office
and warehouse facility in Sunrise, Florida, 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.

SALE OF AEROCELL ASSETS

On July 31, 2002, we completed the sale of substantially all of the assets and
business of our Aerocell Structures MR&O 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.
The Company 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 due
August 14, 2002 and a $1.0 million related party loan. The remainder, net of
expenses, was used for working capital. For the third quarter ended September
30, 2002, the Company has recorded a $0.3 million gain, which is included in
other income, net in the accompanying condensed consolidated financial
statements, as a result of this sale. The results of operations for Aerocell
for both the current year and comparative prior periods have not been
reclassified to discontinued operations within the accompanying condensed
consolidated financial statements based on the overall insignificance of these
results to the consolidated Company.

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 also provides procedures relating to the determination of the
closing date value of the Aerocell assets and requires payment, on a
dollar-for-dollar basis, if the closing date value of the Aerocell assets is
determined to be lower than the targeted amount. We are in the process of
reconciling the closing date value of the Aerocell assets with the
purchaser.

The agreement further provides that the funds in escrow will be held to support
certain indemnification rights provided to the purchaser in the agreement, and,
provided that no claims for indemnity have been asserted, $250,000 of the funds
being

30



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##### 



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. 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 $200,000 in cash
one year from the closing if that inventory has not been sold or consumed by
that date.

BRICE MANUFACTURING COMPANY ACQUISITION

On October 11, 2002, we completed the purchase
of the outstanding capital stock of
Brice Manufacturing Company (Brice) for a purchase price of $1.3 million and
the assumption of approximately $1.1 million of liabilities. The total selling
price will be adjusted post-closing based on a closing date balance sheet.
Brice, located in Pacoima, California, manufactures and markets an extensive
range of aircraft seats and related products and services to airlines, leasing
companies, airframe manufacturers, and overhaul facilities throughout the
world. Brice also maintains over 4,000 parts manufacturing authorizations
(PMAs) which encompass all seat types. We will account for this acquisition
under the purchase method of accounting.

We financed our purchase of Brice through a loan from our principal
stockholder. Our principal stockholder has already loaned us $1.3 million to
complete the purchase and has agreed to loan us additional amounts equal to our
costs relating to the Brice acquisition. Our principal stockholder has also
agreed that he will loan us additional amounts to fund any monthly shortfalls
of earnings before interest, taxes, depreciation, and amortization from Brices
operations. Our note to our 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.

SALE-LEASEBACK OF AIRCRAFT INTERIOR DESIGN, INC. FACILITY AND MANUFACTURING
ASSETS

On October 11, 2002, we sold our real estate and fixtures used by our Aircraft
Interior Design, Inc. (AID) operations in Dallas, Texas, to our principal
stockholder. The gross selling price for these assets was approximately $2.4
million, which was the fair market value, based on a third party appraisal, on
the sale date. Simultaneous with this sale, we 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 $0.3 million
per year with the Company being responsible for, among other things, taxes,
insurance and utilities. The sale and resulting leaseback qualifies for sale
leaseback accounting pursuant to SFAS No. 98, Accounting for Leases. The
lease agreement qualifies as an operating lease and we have deferred the gain
on sale, approximately $1.7 million, and will amortize this gain to income over
the term of the lease agreement as an offset to rent expense. Additionally,
for that small portion of the real estate that was not included within the
subsequent lease agreement, we will record a gain of approximately $0.1 million
during the fourth quarter of 2002.

RECENT DEVELOPMENTS CONCERNING OUR OPERATIONS

The September 11, 2001 terrorist attacks against the United States of America
have had a severe impact on the aviation industry. As a result of these
attacks and their related aftermath, 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
caused by the September 11, 2001 events caused the airline industry to incur
significant losses in 2001 and lessened
the aircraft maintenance required by such airlines (and thereby the amount of
maintenance being outsourced to companies like TIMCO). The impact of these
attacks

31



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##### 



and the overall state of the economy has resulted in continued losses
during 2002 for some airlines and with the filing for bankruptcy protection
under Chapter 11 of the United States Bankruptcy Court by certain carriers.
The most notable of late has been the filing for protection from creditors
under Chapter 11 by U.S. Airways on August 11. 2002. In addition to U.S.
Airways, other carriers, including United Airlines, which is one of our major
customers, 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 is being
continuously evaluated and monitored. 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.

While recently airlines are reporting increases in their passenger volumes and
it appears that passenger levels will in the future return to pre-September
11th levels, the effect of the terrorist acts and the state of the economy in
general will continue to have a negative impact on our business. In response,
during 2001 and the first three quarters of 2002 we have taken steps, including
head count reductions, to reduce our costs. These terrorist attacks have also
impacted our competition, with some of our competitors exiting the MR&O
business.

While we believe that we will meet our working capital requirements during 2002
from funds available under our revolving credit facility, from our operations,
from sales of assets or our equity securities, from debt infusions and from
other sources, there can be no assurance that we will have sufficient working
capital to meet our financial obligations. Further, our ability to
continue to borrow under our revolving credit
facility is conditional upon, among other matters, continued
compliance with the financial and other covenants contained therein.

RESULTS OF OPERATIONS

General

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 and the state of the airline industry
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 and efficiently 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,

32



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| |  | our ability to attract and retain a sufficient number of mechanics to perform
the MR&O 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.

Operating revenue for the nine months ended September 30, 2002 decreased $74.1
million or 34.7% to $139.7 million, from $213.7 million for the same period in
2001. Operating revenue for the first three quarters of 2001 included $33.2
million from facilities and operations that were closed or sold in 2001.
Without the revenue from these facilities and operations, comparative 2001
nine-month revenues would have been $180.5 million. Additionally, year-to-date
revenues from the operations of Aerocell Structures of $3.9 million through
September 30, 2002 and $13.6 million through September 30, 2001 are included
within operating revenues. Operating revenue for the three months ended
September 30, 2002 decreased $27.4 million or 44.8% to $33.9 million, from
$61.3 million for the same period in 2001. Comparative 2001 three-month
revenues without the revenue from operations which were closed or sold during
2001 would have been $60.3 million. Finally, third quarter revenues for
Aerocell of $0.5 million for the third quarter of 2002 and $4.9 million for the
third quarter of 2001, have been included in operating revenues.

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 and general economic
conditions. 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 operations.
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.

Gross profit increased to $9.9 million for the nine months ended September 30,
2002, compared with a gross loss of $0.6 million for the nine months ended
September 30, 2001. The gross loss for the three months ended September 30,
2002 was $1.4 million, an increase of $0.9 million over the gross loss of $0.5
million for the 2001 third quarter. The significant improvement year-to-date
over prior year-to-date results is due primarily to enhanced 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 April 2001 have
favorably impacted our gross margin. Gross profit results for the third
quarter ended September 30, 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 the impact of 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. Gross profit as a
percentage of revenues increased to 7.1% and (4.2)% for the nine and three-month periods ended September 30, 2002,
respectively, from (0.3%) and (0.9%) for the same respective periods in 2001.

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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 profit could be impacted in the future by considerations as to the value
of our inventory. While we believe that we have appropriate reserves for
inventory obsolescence, the size of our inventory reserves may need to increase
in the future, depending on the market for aircraft parts in the future and the
fleet types of the parts in our inventory compared to the types of aircraft for
which we are performing maintenance procedures. As a result of market
conditions in the aircraft parts market, during the second quarter ended June
30, 2002, we increased our reserve for inventory obsolescence by $1.6 million.
We will continue to evaluate all market and industry exposures in connection
with the establishment of appropriate inventory obsolescence reserve levels.

Operating expenses decreased $28.9 million or 76.7% to $8.8 million for the
nine months ended September 30, 2002, compared with $37.7 million for the nine
months ended September 30, 2001. Operating expenses for the three months ended
September 30, 2002 decreased $7.8 million or 89.7% to $0.9 million from the
same period in 2001. Operating expenses for the first half of 2002 were $8.1
million. Operating expenses as a percentage of revenues were 6.3% and 2.7% for
the nine and three-month periods ended September 30, 2002, respectively,
compared to 17.6% and 14.3% for the same respective periods in 2001. Operating
expenses as a percentage of revenues were 7.7% for the first half of 2002.

Operating expenses for the nine months ended September 30, 2001 included a
charge of approximately $14.9 million relating to the closure of the Oscoda,
Michigan heavy airframe maintenance facility, impairment of assets at the
Oscoda, Michigan engine overhaul operation, allowance for a receivable from an
airframe customer experiencing significant financial difficulties and costs
associated with the consolidation of Aircraft Interior Design into a single
facility. The remaining reduction of operating expenses is mainly due to the
lower sales volumes noted above, the closing of our Miramar headquarters and
moving our corporate headquarters to our Greensboro location, the sale of Caribe and
Aerocell, and the salary and benefit reductions noted above.

Operating expenses for the third quarter of 2002 have been favorably impacted
by reversal of various accruals, aggregating approximately $2.8 million,
including an accrual of anticipated 2002 bonuses to executive employees which
are not expected to be paid based on current operating results ($1.5 million),
the collection on various customer accounts for which most if not all of the
outstanding balance was fully reserved ($0.9 million), a gain on the settlement
of certain matters relating to the disposition of certain assets of ASDC ($0.2)
and the impact of only one month of general and administrative expenses for
Aerocell during the quarter.

As a result of these factors, income from operations was $1.2 million for the
first three quarters of 2002, compared to a loss from operations of $38.3
million for the first three quarters of 2001, and a loss from operations for
the third quarter of 2002 was $2.3 million, compared to a loss of $9.3 million
for the third quarter of 2001.

Interest expense for the nine months ended
September 30, 2002 decreased by $6.9
million or 36.6% to $12.0 million, from $18.9 million for the nine months ended
September 30, 2001. Interest expense for the quarter ended September 30, 2002
decreased by $3.5 million or 60.7% to $2.3 million, from
$5.8 million for same
period in 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 7 of the Notes to the Condensed
Consolidated Financial Statements for an explanation as to why interest is not
recorded on the New

34



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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.

Included within interest expense is amortization of
deferred financing costs,
which was $5.0 million and $0.7 million for
the nine and three months ended September 30, 2002, respectively, compared to
$4.2 million and $1.4 for the same periods of 2001.

We recorded a charge of $8.0 million during the first quarter of 2002 related
to an agreement to settle the class action securities litigation. For the
quarter 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 have again
revalued the securities to be issued in this settlement and have recorded a
gain of $1.715. As a result of this settlement becoming final, this gain will
establish the final valuation of the securities being issued. See Note 5 of
Notes to Condensed Consolidated Financial Statements.

Other income  net was $3.0 million for the nine month period ended September
30, 2002 and $1.7 million for the third quarter ended September 30, 2002.
Income for these periods is mainly comprised of rent of the Companys Miramar
facility located in Miami, Florida (approximately $1.8 million), a portion of
the gain on the Kellstrom settlement (approximately $0.7 million), and gain on
sale of Aerocell (approximately $0.3 million). Other expense  net was $8.1
million for the nine month period ended September 30, 2002 and $14.7 million
for the third quarter ended September 30, 2001. Other expense  net through
September 30, 2001 included a gain on the sale of Caribe and income on a lease
deposit totaling $7.9 million, offset by a $9.0 million charge to reduce the
recorded value (to fair market value) of our capital lease asset held for sale
and equity method losses of affiliates of $6.6 million. 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 continuing operations loss before income
taxes, discontinued operations and extraordinary gain for the nine months ended
September 30, 2002 was $12.3 million, compared to $103.2 million for the nine
months ended September 30, 2001. Our continuing operations loss before income
taxes and discontinued operations for the quarter ended September 30, 2002 was
$1.2 million, compared to a loss of $38.3 million for the quarter ended
September 30, 2001. Without the non-cash charge relating to the settlement of
the class action, we would have reported a loss from continuing operations
before income taxes, discontinued operations and extraordinary gain of $7.9
million and $2.9 million for the nine and three month periods ended September
30, 2002.

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, these net operating losses were fully reserved as it was
determined to be more likely than not that we would not generate taxable income
in the near future and that we would not have the opportunity to benefit from
these net operating losses.

For the reasons set forth above, loss from continuing operations for the nine
months ended September 30, 2002 was $8.5 million or $0.35 per basic share and
diluted share compared to a loss of $103.1 million or $68.63 per basic share
and diluted share for the nine months ended September 30, 2001. The loss from continuing operations
for the three months ended September 30, 2002 was $1.2 million or $0.04 per
basic share

35



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and diluted share, compared to a loss of $38.1 million or $25.38
per basic share and diluted share for the three months ended September 30,
2001. Weighted average common and common equivalent shares outstanding
(diluted) were 24.1 million and 30.5 million for the nine and three months
ended September 30, 2002, respectively, and 1.5 million for the nine and three
months ended September 30, 2001.

Income from discontinued operations for the nine month and three month periods
ended September 30, 2002 was $3.6 million and $2.5 million, respectively, or
$0.15 and $0.08 per basic share and diluted share, respectively, compared to a
loss of $6.6 million and $2.3 million, or $4.43 and $1.53 per basic share and
diluted share for the same respective periods of 2001. Income from
discontinued operations for the three and nine months ended September 30, 2002,
is primarily comprised of collections on receivables retained from the sale of
our redistribution operations that had been fully reserved and a portion of the
gain on the Kellstrom settlement. The nine and three month periods ended
September 30, 2001 included $7.7 million and $2.6 million, respectively, of
charges for reserves relating to assets whose realization was impacted by the
operations of KAV and the financial condition of Kellstrom.

During the first quarter of 2002, we recognized a $27.3 million
extraordinary gain relating to the Note Exchange. See discussion above and
Note 7 of Notes to Condensed Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

As of September 30, 2002, we had outstanding indebtedness of approximately
$175.8 million (excluding outstanding letters of credit of $11.5 million), of
which $41.3 million is senior debt, including amounts due under the TROL
financing which is now characterized as a capital lease, and the
remainder of which is other indebtedness, including the New Notes, the Old
Notes, and the Junior Notes. Our ability to make payments of principal and
interest on outstanding debt will depend upon our future operating performance,
which will be subject to economic, financial, competitive and other factors,
some of which are beyond our control. The level of our indebtedness is also
important due to:



| |  | our vulnerability to adverse general economic and industry conditions,                                                                                                                                                          
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | our ability to obtain additional financing for future working capital
expenditures, general corporate and other purposes, and                                                                                                   
| 
| |  | the dedication of a substantial portion of our future cash flow from
operations to the payment of principal and interest on indebtedness,
thereby reducing the funds available for operations and future business
opportunities.

During 2001 and 2002 to date, we have relied upon borrowings under our
revolving credit facility, proceeds from term loans, sales of assets, tax
refunds and the rights offering, along with cash provided by operations during
2002, to meet our working capital requirements. We cannot assure you that
financing alternatives will be available to us in the future to support our
working capital requirements.

As of November 8, 2002, the Company had $8.5 million of term loans, $1.1
million of revolving loans, $11.5 million of letters of credit outstanding and
$3.4 million was available for borrowing under its amended revolving credit
facility.

During the quarter ended June 30, 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. Of this amount, $3.8 million has been
recognized as an income tax benefit during 2002, and has resulted through
favorable

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tax legislation passed by the U.S. Congress that increased 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 that we would
not have the opportunity to benefit from these net operating losses.

While we had a negative stockholders equity of $81.4 million at September 30,
2002, the condensed consolidated financial statements include, as a liability,
$115.8 million of the New Notes and $2.5 million of the Junior Notes. While we
have the right, but not the obligation to redeem the New Notes and Junior Notes
for cash and equity, other than in connection with a change in control, we will
never be obligated to make any cash payments to the holders of these Notes. As
such, had our New Notes and Junior Notes been converted into common stock as of
September 30, 2002, our pro-forma stockholders equity would have been $36.9
million.

Cash

Net cash provided by continuing operating activities during the nine months
ended September 30, 2002 was $4.7 million, compared to $14.2 million for the
same period in 2001. Cash provided by operating activities was primarily the
result of earnings, adjusted for non-cash charges, of approximately $2.5
million and decreases in accounts receivable, inventories and other current
assets of $10.5 million, $8.7 million and $8.2 million, respectively, partially
offset by reductions in trade payables of $14.4 million, customer deposits of
$1.8 million, and other liabilities of $8.8 million. Cash of $7.5 million was
provided by investing activities during the first three quarters of 2002 from
the sale of Aerocell, partially offset by purchases of fixed assets. Cash used
in financing activities during the period was $15.4 million. Net proceeds from
the rights offering of $19.8 million were used to fund the exchange offer,
including $5.1 million for the retirement of Old Notes and $5.0 million for
expenses of the Exchange Offer. The remaining proceeds, along with cash from
operations, were used to pay down $8.3 million of the revolving credit balance,
to pay $3.0 million of bank and refinancing fees and to pay $0.3 of capital
leases. Cash of $3.1 million was provided by our discontinued operations.

Senior Credit Facilities

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 4 of the Notes to the Condensed Consolidated Financial Statements.
As of November 8, 2002, the outstanding aggregate amount of letter of credit
under the Amended Revolving Credit Facility was $11.5 million and availability
under the Amended Revolving Credit Facility was $3.4 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 is due in quarterly installments of $500,000,
commencing

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September 30, 2002, with the principal balance due in full on
January 31, 2004. $3.5 million 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 within the accompanying condensed consolidated financial
statements.

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 suspension 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. Substantially
all of our assets are pledged as collateral for amounts borrowed.

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 Loan) is now due on January 31, 2004. The $5.0 million BofA 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 our principal stockholder.
After the refinancing, $2.5 million of the original BofA loan (the $2.5
million BofA loan) continued to be due on August 14, 2002,
and such amount was
repaid from the proceeds of the Aerocell 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, a
director of the Company, 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 been 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 or January 31, 2004. As a
result of the completed sale of Aerocell on July 31, 2002, the Company repaid
the outstanding $1.0 million of this loan.

The remaining $8.5 million in senior secured term loans continues to be secured
by a lien on substantially all of our assets.

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.

38



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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 and the $5.0 million BofA Term Loan. The New Notes are also
effectively subordinated in right of payment to all existing and future
liabilities of any of our subsidiaries that do not guarantee the New Notes.

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 the 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
and the $5.0 million BofA Term Loan.

The indenture for the New Notes (i) permits us to incur indebtedness equal to
the greater of $95 million or an amount that satisfies 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 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 and the $5.0 million BofA Term Loan and under senior
credit facilities which may replace these facilities in the future, and to the
New Notes. In addition, the

39



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Old Notes are effectively subordinated to all
secured obligations to the extent of the assets securing such obligations,
including the Amended Credit Facility and the $5.0 million BofA Term Loan, and
to the New Notes. The Old Notes are also effectively subordinated in right of
payment to all existing and future liabilities of any of our subsidiaries that
do not guarantee the Old 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 the 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 and the $5.0 million BofA Term Loan.

Junior Subordinated Notes

As discussed in Note 5 to the Condensed 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 (or are
obligated to issue) $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.
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 and the $5.0 million BofA Term Loan, and the Senior Subordinated 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 144,300 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.

40



---



##### 



Lease for Miramar facilities

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. Alternatively, if
we do not purchase the new facility at the end of the lease, we will be
obligated to pay certain amounts as provided 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.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Financial Reporting Release No. 60, which was recently released by the U.S.
Securities and Exchange Commission, encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation
of the financial statements. Our condensed consolidated financial statements
include a summary of the significant accounting policies and methods used in
the preparation of our condensed 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.

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. 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.

41



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Use of Estimates

Managements discussion and analysis of financial condition and results of
operations is based upon our condensed 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 allowances to reduce
inventory to the lower of cost or market value, the estimated profit or loss to
be recognized as aircraft maintenance, design and construction services are
performed, the allowance for doubtful accounts and notes receivable, the
realizability of its investment in affiliates, future cash flows in support of
long lived assets, 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.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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 revolving credit facility bear interest at floating
rates and therefore, we are impacted by changes in prevailing interest rates.
However, our $3.5 million term loan, $5.0 million BofA loan, 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 $48,000 before taxes and would change the fair
value of our financial instruments by approximately $9.2 million.

ITEM 4: CONTROLS AND PROCEDURES



|(a) |  | Within 90 days of filing this report on Form 10-Q (the Evaluation
Date), our Chief Financial Officer and Chief Executive Officer evaluated
our disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act)). Based on that evaluation, these officers
have concluded that as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to material information
relating to our company (including our consolidated subsidiaries) required
to be included in our reports filed or submitted by us under the Exchange
Act.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

42



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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 5 to the Companys Unaudited Condensed Consolidated Financial
Statements included in this filing.

ITEM 2. CHANGES IN SECURITIES AND
USE OF PROCEEDS

See Note 7 to the Companys Unaudited Condensed Consolidated Financial
Statements included in this filing. In September 2002, in connection
with the settlement of the class action lawsuits described in Note 5
to the Companys Unaudited Condensed Consolidated Financial
Statements included in this filing, the Company issued (or committed
to issue) to class action members pursuant to an exemption under
Section 3(a)(10) of the Securities Act of 1933, as amended, 1,250,000
shares of its common stock and warrants to purchase 4,150,000 shares
of its common stock. The warrants have an exercise price of $5.16 per
share.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

No matters were presented to the Companys stockholders during the third
quarter of 2002.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K

(a)  Exhibits

|     |  |                                                                                                                                                                                      
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Amendment No. 1 and Waiver, dated as of September 27, 2002, to Fifth
Amended and Restated Credit Agreement, dated as of July 12, 2002                                                
|10.2 |  | 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                                         
|10.3 |  | Stock Purchase Agreement between Ducommun Incorporated and TIMCO
Aviation Services, Inc., dated as of October 2, 2002                                                                
|10.4 |  | 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                             
|10.5 |  | 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
|10.6 |  | Subordinated Term Promissory Note, dated October 11, 2002, made in
favor of LJH, Ltd. in the original amount of $1.3 million;                                                        
|10.7 |  | Keepwell Agreement, dated as of October 11, 2002, by LJH, Ltd. in favor
of the Companys senior revolving credit lenders                                                             
|99.1 |  | Certification of Chief Executive Officer                                                                                                                                             
|99.2 |  | Certification of Chief Financial Officer                                                                                                                                             

43



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##### 



(b)  Reports on Form 8-K

During the quarter ended September 30, 2002,
the Company filed a Current Report on Form 8-K reporting under
Item 5 the amendment to its senior credit facilities and a Current Report
on Form 8-K reporting under Item 2 the sale of substantially all of the assets
of Aerocell Structure, Inc. Additionally, the Company filed a Current Report
on Form 8-K/A reporting under Item 4 the election to change its independent
auditors from Arthur Andersen LLP to KPMG LLP.

44



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##### 



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

TIMCO Aviation Services, Inc.

|                         |  |     |  |                                                                                   
|------------------------ |  | --- |  | ----------------------------------------------------------------------------------
|                         |  | By: |  | /s/ C. Robert Campbell                                                            
|                         |  |     |  |                                                                                   
|                         |  |     |  | Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
|                         |  |     |  |                                                                                   
|Dated: November 14, 2002 |  |     |  |                                                                                   

45



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##### 



Certification of Chief Executive Officer

I, Roy T. Rimmer, Jr., certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of
TIMCO Aviation Services, Inc.;                                                                                                                                                                                                                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
|  
|3. |  | Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:                                                                                                     



| | a) |  | designed such disclosure controls and
procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the
registrants disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of registrants
board of directors (or persons performing the equivalent
function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that
involves management or other employees who have a
significant role in the registrants internal controls; and                                                                                                                                        

46



---



##### 





|6. |  | The registrants other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                           
|----------------------- |  | ------------------------------------------
|Date: November 14, 2002 |  |                                           
|                        |  |                                           
|                        |  | /s/ Roy T. Rimmer, Jr.                    
|                        |  |                                           
|                        |  | Roy T. Rimmer, Jr.
Chief Executive Officer

47



---



##### 



Certification of Chief Financial Officer

I, C. Robert Campbell, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of
TIMCO Aviation Services, Inc.;                                                                                                                                                                                                                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
|  
|3. |  | Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:                                                                                                     



| | a) |  | designed such disclosure controls and
procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the
registrants disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of registrants
board of directors (or persons performing the equivalent
function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | e) |  | any fraud, whether or not material, that
involves management or other employees who have a
significant role in the registrants internal controls; and                                                                                                                                        

48



---



##### 





|6. |  | The registrants other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                           
|----------------------- |  | ------------------------------------------
|Date: November 14, 2002 |  |                                           
|                        |  |                                           
|                        |  | /s/ C. Robert Campbell                    
|                        |  |                                           
|                        |  | C. Robert Campbell
Chief Financial Officer

49



---



##### 



Exhibit Index

|        |  |                                                                                                                                                                                      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                      
|Number  |  | Description                                                                                                                                                                          
|        |  |                                                                                                                                                                                      
|10.1    |  | Amendment No. 1 and Waiver, dated as of September 27, 2002, to Fifth
Amended and Restated Credit Agreement, dated as of July 12, 2002                                                
|10.2    |  | 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                                         
|10.3    |  | Stock Purchase Agreement between Ducommun Incorporated and TIMCO
Aviation Services, Inc., dated as of October 2, 2002                                                                
|10.4    |  | 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                             
|10.5    |  | 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
|10.6    |  | Subordinated Term Promissory Note, dated October 11, 2002, made in
favor of LJH, Ltd. in the original amount of $1.3 million;                                                        
|10.7    |  | Keepwell Agreement, dated as of October 11, 2002, by LJH, Ltd. in favor
of the Companys senior revolving credit lenders                                                             
|99.1    |  | Certification of Chief Executive Officer                                                                                                                                             
|99.2    |  | Certification of Chief Financial Officer                                                                                                                                             

50