##### 



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 March 31, 2003

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

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

Indicate by checkmark 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 [  ] No [X]

Indicate by checkmark 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 May 30, 2003.





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##### 



TIMCO AVIATION SERVICES, INC.

INDEX

Part I. Financial Information

|       |  |                                                             |  |  |     |      |  | 
|------ |  | ----------------------------------------------------------- |  |  | --- | ---- |  | 
|       |  |                                                             |  |  |     | Page
|       |  |                                                             |  |  |     |     
|Item 1 |  | FINANCIAL STATEMENTS                                        |  |  |     |     
|      
|       |  | Condensed Consolidated Balance Sheets at March 31, 2003 and |  |  |     |     
|       |  | December 31, 2002 (unaudited)                               |  |  | 3-4 |     
|      
|       |  | Condensed Consolidated Statements of Operations for the     |  |  |     |     
|       |  | three months ended March 31, 2003 and 2002 (unaudited)      |  |  | 5   |     
|      
|       |  | Condensed
Consolidated Statements of Stockholders Deficit  |  |  |     |     
|       |  | and Comprehensive Income for the three months ended March   |  |  |     |     
|       |  | 31, 2003 (unaudited)                                        |  |  | 6   |     
|      
|       |  | Condensed Consolidated Statements of Cash Flows for the     |  |  |     |     
|       |  | three months ended March 31, 2003 and 2002 (unaudited)      |  |  | 7-8 |     
|      
|       |  | Notes to Condensed Consolidated Financial Statements        |  |  | 9   |     
|      
|Item 2 |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION |  |  | 20  |     
|       |  | AND RESULTS OF OPERATIONS                                   |  |  |     |     
|      
|Item 3 |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK   |  |  | 31  |     
|      
|Item 4 |  | CONTROLS AND PROCEDURES                                     |  |  | 31  |     
|       |  |                                                             |  |  |     |      |  | 
|       |  | Part II. Other Information                                  |  |  |     |     
|      
|Item 1 |  | LEGAL PROCEEDINGS                                           |  |  | 32  |     
|      
|Item 2 |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                   |  |  | 32  |     
|      
|Item 3 |  | DEFAULTS UPON SENIOR SECURITIES                             |  |  | 32  |     
|      
|Item 4 |  | SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS           |  |  | 32  |     
|      
|Item 5 |  | OTHER INFORMATION                                           |  |  | 32  |     
|      
|Item 6 |  | EXHIBITS AND REPORTS ON FORM 8-K                            |  |  | 32  |     

2



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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)
(Unaudited)


|                                          |                                                                 |                    |                                     |         |         |           |        |              |         |  |  | 
|----------------------------------------- | --------------------------------------------------------------- | ------------------ | ----------------------------------- | ------- | ------- | --------- | ------ | ------------ | ------- |  |  | 
|                                          |                                                                 |                    |                                     |         |         | March 31, |        | December 31,
|                                          |                                                                 |                    |                                     |         |         | 2003      |        | 2002        
|                                          |                                                                 |                    |                                     |         |         |           |        |             
|                                          |                                                                 |                    |                                     | ASSETS  |         |           |        |              |         |  |  | 
|Current Assets:                           |                                                                 |                    |                                     |         |         |           |        |             
|                                          | Cash and cash equivalents                                       |                    | $                                   | 233     |         |           | $      | 339          |        
|                                          | Accounts receivable, net                                        |                    |                                     | 27,735  |         |           |        | 17,762       |        
|                                          | Inventories                                                     |                    |                                     | 22,587  |         |           |        | 21,631       |        
|                                          | Other current assets                                            |                    |                                     | 4,380   |         |           |        | 3,588        |        
|                                          |                                                                 |                    |                                     |         |         |           |        |             
|                                          | Total current assets                                            |                    |                                     | 54,935  |         |           |        | 43,320       |        
|Fixed assets, net                         |                                                                 |                    |                                     |         |         |           |        |             
|Capitalized lease asset                   |                                                                 |                    | 24,671                              |         |         |           | 24,794 |             
|Property and equipment, net               |                                                                 |                    | 32,421                              |         |         |           | 33,516 |             
|                                          |                                                                 |                    |                                     |         |         |           |        |             
|                                          |                                                                 |                    | 57,092                              |         |         |           | 58,310 |             
|Goodwill, net                             |                                                                 |                    | 26,124                              |         |         |           | 26,124 |             
|Deferred financing costs, net             |                                                                 |                    | 1,898                               |         |         |           | 2,206  |             
|Other                                     |                                                                 |                    | 663                                 |         |         |           | 1,066  |             
|                                          |                                                                 |                    |                                     |         |         |           |        |             
|                                          | Total assets                                                    |                    | $                                   | 140,712 |         |           | $      | 131,026      |        
|                                          |                                                                 |                    |                                     |         |         |           |        |             
|                                          |                                                                 |                    | LIABILITIES & STOCKHOLDERS DEFICIT |         |         |           |        |              |         |  | 
|Current Liabilities:                      |                                                                 |                    |                                     |         |         |           |        |             
|                                          | Accounts payable                                                |                    | $                                   | 20,288  |         |           | $      | 14,564       |        
|                                          | Accrued expenses                                                |                    |                                     | 16,757  |         |           |        | 18,486       |        
|                                          | Customer deposits                                               |                    |                                     | 12,524  |         |           |        | 12,739       |        
|                                          | Revolving loan                                                  |                    |                                     | 8,806   |         |           |        | 2,179        |        
|                                          | Current maturities of notes payable                             |                    |                                     | 8,500   |         |           |        |             |        
|                                          | Liabilities of discontinued operations                          |                    |                                     | 3,529   |         |           |        | 3,574        |        
|                                          | Current maturities of capital lease obligations                 |                    |                                     | 962     |         |           |        | 1,101        |        
|                                          | Accrued interest                                                |                    |                                     | 567     |         |           |        | 854          |        
|                                          |                                                                 |                    |                                     |         |         |           |        |             
|                                          | Total current liabilities                                       |                    |                                     | 71,933  |         |           |        | 53,497       |        
|                                          | Senior subordinated notes, net:                                 |                    |                                     |         |         |           |        |              |        
|                                          |                                                                 | New notes due 2006 |                                     |         | 115,800 |           |        |              | 115,800 | 
|                                          |                                                                 | Old notes due 2008 |                                     |         | 16,247  |           |        |              | 16,247  | 
|                                          | Capital lease obligations, net of current portion               |                    |                                     | 27,469  |         |           |        | 27,734       |        
|                                          | Junior subordinated notes due 2007, net                         |                    |                                     | 2,725   |         |           |        | 2,613        |        
|                                          | Deferred income                                                 |                    |                                     | 1,599   |         |           |        | 1,641        |        
|                                          | Notes payable to related party                                  |                    |                                     | 1,300   |         |           |        | 1,300        |        
|                                          | Notes payable to financial institutions, net of
current portion |                    |                                     |        |         |           |        | 8,500        |        
|                                          | Other long-term liabilities                                     |                    |                                     | 82      |         |           |        | 456          |        
|                                          |                                                                 |                    |                                     |         |         |           |        |             
|                                          | Total long-term liabilities                                     |                    |                                     | 165,222 |         |           |        | 174,291      |        
|Commitments and Contingencies (see notes) |                                                                 |                    |                                     |         |         |           |        |             

3



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##### 



|                       |                                                                                                                                                |  |   |          |   |  |   |          |  
|---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -------- | - |  | - | -------- | -
|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, 31,640,994 shares issued and
outstanding at March 31, 2003 and
December 31, 2002 |  |   | 32       |   |  |   | 32       |  
|                       | Additional paid-in capital                                                                                                                     |  |   | 180,830  |   |  |   | 180,830  |  
|                       | Accumulated deficit                                                                                                                            |  |   | (277,305 | ) |  |   | (277,624 | )
|                       |                                                                                                                                                |  |   |          |   |  |   |         
|                       | Total stockholders deficit                                                                                                                    |  |   | (96,443  | ) |  |   | (96,762  | )
|                       |                                                                                                                                                |  |   |          |   |  |   |         
|                       | Total liabilities and stockholders deficit                                                                                                    |  | $ | 140,712  |   |  | $ | 131,026  |  
|                       |                                                                                                                                                |  |   |          |   |  |   |         

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

4



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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Share Data)
(Unaudited)


|                                                         |         |                                                                  |        |                      |        |      |         |             |        | 
|-------------------------------------------------------- | ------- | ---------------------------------------------------------------- | ------ | -------------------- | ------ | ---- | ------- | ----------- | ------ | 
|                                                         |         |                                                                  |        | For the Three Months
|                                                         |         |                                                                  |        | Ended March 31,     
|                                                         |         |                                                                  |        |                     
|                                                         |         |                                                                  |        | 2003                 |        | 2002
|                                                         |         |                                                                  |        |                      |        |     
|Operating revenue:                                       |         |                                                                  |        |                      |        |      |         |            
|                                                         |         | Sales, net                                                       |        | $                    | 51,266 |      |         | $           | 57,481 | 
|                                                         |         | Other                                                            |        |                      | 18     |      |         |             | 53     | 
|                                                         |         |                                                                  |        |                      |        |      |         |            
|                                                         |         |                                                                  | 51,284 |                      |        |      | 57,534  |            
|Cost of sales                                            |         |                                                                  | 47,765 |                      |        |      | 51,288  |            
|                                                         |         |                                                                  |        |                      |        |      |         |            
|Gross profit                                             |         |                                                                  | 3,519  |                      |        |      | 6,246   |            
|Operating expenses                                       |         |                                                                  | 3,064  |                      |        |      | 3,551   |            
|                                                         |         |                                                                  |        |                      |        |      |         |            
|                                                         |         | Income from operations                                           |        |                      | 455    |      |         |             | 2,695  | 
|Interest expense                                         |         |                                                                  | 2,075  |                      |        |      | 5,830   |            
|Charge for settlement of class action litigation         |         |                                                                  |       |                      |        |      | 8,000   |            
|Gain resulting from debt extinguishment                  |         |                                                                  |       |                      |        |      | (27,279 | )          
|Other income  net                                       |         |                                                                  | (1,514 | )                    |        |      | (675    | )          
|                                                         |         |                                                                  |        |                      |        |      |         |            
|                                                         |         | (Loss) income before income taxes and discontinued
operations    |        |                      | (106   | )    |         |             | 16,819 | 
|Income tax benefit                                       |         |                                                                  | (174   | )                    |        |      | (3,800  | )          
|                                                         |         |                                                                  |        |                      |        |      |         |            
|                                                         |         | Income from continuing operations before discontinued
operations |        |                      | 68     |      |         |             | 20,619 | 
|Income from discontinued operations, net of income taxes |         |                                                                  | 251    |                      |        |      | 232     |            
|                                                         |         |                                                                  |        |                      |        |      |         |            
|                                                         |         | Net income                                                       |        | $                    | 319    |      |         | $           | 20,851 | 
|                                                         |         |                                                                  |        |                      |        |      |         |            
|Basic income per share:                                  |         |                                                                  |        |                      |        |      |         |            
|                                                         |         | Income from continuing operations                                |        | $                    |       |      |         | $           | 1.82   | 
|                                                         |         | Income from discontinued operations                              |        |                      | 0.01   |      |         |             | 0.02   | 
|                                                         |         |                                                                  |        |                      |        |      |         |            
|                                                         |         | Net income                                                       |        | $                    | 0.01   |      |         | $           | 1.84   | 
|                                                         |         |                                                                  |        |                      |        |      |         |            
|Diluted income per share:                                |         |                                                                  |        |                      |        |      |         |            
|                                                         |         | Income from continuing operations                                |        | $                    |       |      |         | $           | 0.20   | 
|                                                         |         | Income from discontinued operations                              |        |                      |       |      |         |             |       | 
|                                                         |         |                                                                  |        |                      |        |      |         |            
|                                                         |         | Net income                                                       |        | $                    |       |      |         | $           | 0.20   | 
|                                                         |         |                                                                  |        |                      |        |      |         |            
|Weighted average shares outstanding:                     |         |                                                                  |        |                      |        |      |         |            
|                                                         | Basic   |                                                                  |        | 31,640,994           |        |      |         | 11,328,223  |       
|                                                         |         |                                                                  |        |                      |        |      |         |            
|                                                         | Diluted |                                                                  |        | 311,249,431          |        |      |         | 104,761,830 |       
|                                                         |         |                                                                  |        |                      |        |      |         |            

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

5



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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT AND
COMPREHENSIVE INCOME

(In Thousands, Except Share Data)
(Unaudited)


|                                |  |                                     |            |              |   |            |    |             |   |               |         |               |   |   |          |   |     |   |         |   |     | 
|------------------------------- |  | ----------------------------------- | ---------- | ------------ | - | ---------- | -- | ----------- | - | ------------- | ------- | ------------- | - | - | -------- | - | --- | - | ------- | - | --- | 
|                                |  |                                     |            |              |   |            |    |             |   |               |         | Total        
|                                |  |                                     |            |              |   |            |    |             |   |               |         | Stockholders
|                                |  |                                     |            | Common Stock |   | Additional |    |             |   |               |         | Deficit
and  
|                                |  |                                     |            |              |   | Paid-in    |    | Accumulated |   | Comprehensive
|                                |  |                                     |            | Shares       |   | Amount     |    | Capital     |   | Deficit       |         | Income       
|                                |  |                                     |            |              |   |            |    |             |   |               |         |              
|Balance as of December 31, 2002 |  |                                     | 31,640,994 |              |   | $          | 32 |             |   | $             | 180,830 |               |   | $ | (277,624 | ) |     | $ | (96,762 | )
|                                |  | Net income and comprehensive
income |            |              |  |            |    |             |  |               |         |               |  |   |          |   | 319 |   |         |   | 319 | 
|                                |  |                                     |            |              |   |            |    |             |   |               |         |               |   |   |          |   |     |   |         |  
|Balance as of March 31, 2003    |  |                                     | 31,640,994 |              |   | $          | 32 |             |   | $             | 180,830 |               |   | $ | (277,305 | ) |     | $ | (96,443 | )
|                                |  |                                     |            |              |   |            |    |             |   |               |         |               |   |   |          |   |     |   |         |  

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

6



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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)
(Unaudited)


|                                               |                                                                                         |                                                     |      |               |        |      |   |         |       |  
|---------------------------------------------- | --------------------------------------------------------------------------------------- | --------------------------------------------------- | ---- | ------------- | ------ | ---- | - | ------- | ----- | -
|                                               |                                                                                         |                                                     |      | For the Three
|                                               |                                                                                         |                                                     |      | Months Ended 
|                                               |                                                                                         |                                                     |      | March 31,    
|                                               |                                                                                         |                                                     |      |              
|                                               |                                                                                         |                                                     |      | 2003          |        | 2002
|                                               |                                                                                         |                                                     |      |               |        |     
|CASH FLOWS FROM OPERATING ACTIVITIES:          |                                                                                         |                                                     |      |               |        |      |   |        
|                                               | Net income                                                                              |                                                     | $    | 319           |        |      | $ | 20,851  |      
|                                               | Adjustments to reconcile net income to cash (used in)
provided by operating activities: |                                                     |      |               |        |      |   |         |      
|                                               | Income from discontinued operations                                                     |                                                     |      | (251          | )      |      |   | (232    | )    
|                                               | Gain on Aerocell settlement, net of cash received                                       |                                                     |      | (455          | )      |      |   |        |      
|                                               | Gain on restructuring of debt                                                           |                                                     |      |              |        |      |   | (27,279 | )    
|                                               | Charge for class action settlement                                                      |                                                     |      |              |        |      |   | 8,000   |      
|                                               | Depreciation and amortization                                                           |                                                     |      | 1,400         |        |      |   | 1,151   |      
|                                               | Amortization of deferred financing costs                                                |                                                     |      | 558           |        |      |   | 2,267   |      
|                                               | (Recovery of) provision for doubtful accounts                                           |                                                     |      | (56           | )      |      |   | 21      |      
|                                               | (Increase) decrease in accounts receivable                                              |                                                     |      | (9,917        | )      |      |   | 7,662   |      
|                                               | (Increase) decrease in inventories                                                      |                                                     |      | (955          | )      |      |   | 8,533   |      
|                                               | Increase in other assets                                                                |                                                     |      | (388          | )      |      |   | (2,380  | )    
|                                               | Increase (decrease) in accounts payable                                                 |                                                     |      | 5,724         |        |      |   | (8,470  | )    
|                                               | Decrease in customer deposits                                                           |                                                     |      | (215          | )      |      |   | (3,624  | )    
|                                               | Decrease in other liabilities                                                           |                                                     |      | (1,866        | )      |      |   | (2,839  | )    
|                                               |                                                                                         |                                                     |      |               |        |      |   |        
|                                               |                                                                                         | Net cash (used in) provided by operating activities |      |               | (6,102 | )    |   |         | 3,661 |  
|CASH FLOWS FROM INVESTING ACTIVITIES:          |                                                                                         |                                                     |      |               |        |      |   |        
|                                               | Purchases of fixed assets                                                               |                                                     |      | (182          | )      |      |   | (276    | )    
|                                               |                                                                                         |                                                     |      |               |        |      |   |        
|                                               |                                                                                         | Net cash used in investing activities               |      |               | (182   | )    |   |         | (276  | )
|CASH FLOWS FROM FINANCING ACTIVITIES:          |                                                                                         |                                                     |      |               |        |      |   |        
|                                               | Borrowings under senior debt facilities                                                 |                                                     |      | 47,935        |        |      |   | 56,800  |      
|                                               | Payments under senior debt facilities                                                   |                                                     |      | (41,308       | )      |      |   | (68,874 | )    
|                                               | 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 on capital leases                                                              |                                                     |      | (405          | )      |      |   |        |      
|                                               | Payments of deferred financing costs                                                    |                                                     |      | (250          | )      |      |   | (750    | )    
|                                               |                                                                                         |                                                     |      |               |        |      |   |        
|                                               | Net cash provided by (used in) financing activities                                     |                                                     |      | 5,972         |        |      |   | (3,130  | )    
|                                               |                                                                                         |                                                     |      |               |        |      |   |        
|                                               | Net cash provided by (used in) discontinued operations                                  |                                                     |      | 206           |        |      |   | (255    | )    
|                                               |                                                                                         |                                                     |      |               |        |      |   |        
|Net decrease in cash and cash equivalents      |                                                                                         |                                                     | (106 | )             |        |      |  |        
|Cash and cash equivalents, beginning of period |                                                                                         |                                                     | 339  |               |        |      |  |        
|                                               |                                                                                         |                                                     |      |               |        |      |   |        
|Cash and cash equivalents, end of period       |                                                                                         | $                                                   | 233  |               |        | $    |  |        
|                                               |                                                                                         |                                                     |      |               |        |      |   |        

7



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##### 



|                                                        |                       |                                                                                                       |   |        |   |  |   |        |       | 
|------------------------------------------------------- | --------------------- | ----------------------------------------------------------------------------------------------------- | - | ------ | - |  | - | ------ | ----- | 
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:       |                       |                                                                                                       |   |        |   |  |   |       
|                                                        | Interest paid         |                                                                                                       | $ | (1,804 | ) |  | $ | (2,713 | )    
|                                                        |                       |                                                                                                       |   |        |   |  |   |       
|                                                        | Income taxes refunded |                                                                                                       | $ | 174    |   |  | $ | 363    |      
|                                                        |                       |                                                                                                       |   |        |   |  |   |       
|SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES: |                       |                                                                                                       |   |        |   |  |   |       
|                                                        |                       | Value of common stock and warrants issued in
connection with note exchange offer and loan
origination |   | $      |  |  |   | $      | 4,534 | 
|                                                        |                       |                                                                                                       |   |        |   |  |   |       

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

8



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##### 



TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003

(Unaudited)

(Dollar Amounts in Thousands, Except Share and Per Share Data)


1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION and LIQUIDITY

DESCRIPTION OF BUSINESS

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, Aerocell
Structures, Inc., based in Hot Springs, Arkansas. The results of this business
are included in the accompanying condensed consolidated results of operations
through the period of its 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 8
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. All share and per share data
contained herein has been restated for the one-share-for-ten-shares reverse
stock split.

BASIS OF PRESENTATION

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, 2002, 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 March 31, 2003, the results of its
operations for the three month periods ended March 31, 2002 and 2003 and its
cash flows for the three month periods ended March 31, 2002 and 2003. The
results of operations and cash flows for the three month period ended March 31,
2003 are not necessarily indicative of the results of operations or cash flows
which may be reported for the year ending December 31, 2003.

LIQUIDITY

The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. On several occasions
during fiscal 2002 the Company was 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). 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 fiscal 2002 and the Company was in
compliance, as waived and amended, with its credit agreement and TROL financing
arrangement at December 31, 2002. As of March 31, 2003, after receiving a
waiver of several covenant violations and establishing new covenant
requirements effective for the quarter ending March 31, 2003,
(see Note 10), the
Company was in compliance with all financial covenant requirements under
these agreements.

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For the year ended December 31, 2002, the Company incurred losses from
continuing operations of $24,426. Additionally, as of December 31, 2002 and
March 31, 2003, the Company had net working capital and stockholders deficits
and continued to require additional cash flow above amounts currently being
provided from operations to meet its working capital requirements. Also, as a
result of the state of the domestic economy, the rising price of jet fuel, a
continuing decline in passenger airline travel, the
currently on-going war on terrorism, and a greater than 15% reduction in airfare prices, the airline industry, and thus the Companys
customer base, has been significantly impacted. The result for some carriers
has been the filing for protection under Chapter 11 of the United States
Bankruptcy Code. These factors have also resulted in some of the Companys
competitors exiting the maintenance, repair, and overhaul business.

The Companys ability to service its debt and note obligations, as they come
due, is dependent upon the Companys future financial and operating
performance. This performance, in turn, is subject to various factors,
including certain factors beyond the Companys control, such as changes in
conditions affecting the airline industry and changes in the overall economy.
Additionally, failure to comply with the covenants and provisions under the
Companys debt and note obligations, unless waived by the lenders and
noteholders, would be an event of default and would permit the lenders and
noteholders to accelerate the maturity of these debts and note obligations. It
would also permit them to terminate their commitments to extend credit under
the
financing agreements. The Amended Credit Facility and the TROL financing
agreement also provide for the termination of the financing agreements and
repayment of all obligations in the event of a material adverse change in the
Companys business or change in control, as defined. These actions would have
an immediate material adverse effect on the Companys liquidity. Further,
although the Company expects to be able to meet its working capital
requirements during 2003 from its available resources and from other sources,
including funds available under its revolving credit facility, from operations,
from sale of assets and further equity and/or debt infusions (including the
new loan from its principal stockholder described below and in Note 10), 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.

On May 14, 2003, the Company entered into an agreement with its principal
stockholder pursuant to which the principal stockholder agreed to loan the
Company $6,000 ($2,000 at closing and $2,000 within 30 days and
within 60 days thereafter),
which will be used for working capital. Further, the $1,300 loan which was
obtained from the Companys principal stockholder in connection with the
October 2002 Brice Manufacturing acquisition (see Note 2) has been combined
with this new $6,000 loan (aggregate obligation of $7,300). The aggregate
obligation of $7,300 will come due in May 2006. See Note 10.

In July 2002, the Company completed a refinancing of all of its senior debt.
In the refinancing, the Company obtained a $30,000 revolving credit facility
and a $7,000 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 $12,000 senior
term loan. Further, $3,500 of the new $7,000 term loan was repaid from the
proceeds of the sale of Aerocell. In addition to refinancing the Companys revolving credit facility and senior
term loan, in July 2002 the Company also restructured its $10,000 senior
secured term loan with Bank of America. In this restructuring, $2,500 of the
original $10,000 was satisfied by a related party. This related party was made
whole by the Company through a transfer of real property, which based on a
third party appraisal had a fair market value of $1,500, and through a $1,000
payment, which was paid with the proceeds from the sale of Aerocell.
Additionally, $2,500 of the original $10,000 was satisfied from the proceeds of
the Aerocell sale. The residual $5,000 was extended until January 31, 2004.
Finally, in July 2002, the Company restructured its TROL financing arrangement
to a three year, $25,200 capital lease liability.

2. BUSINESS COMBINATIONS

In October 2002, the Company completed the purchase of the outstanding stock of
Brice Manufacturing Company (Brice) for a purchase price of $1,272 and the
assumption of approximately $1,385 of liabilities. The acquisition has been
accounted for under the purchase method of accounting and accordingly, the
purchase price has been fully allocated to the assets purchased and liabilities
assumed based upon the fair values at the date of acquisition. The result of
operations for Brice have been included in the accompanying condensed
consolidated statement of operations from the date of acquisition.

The Company financed its purchase of Brice through a loan from the Companys
principal stockholder. In conjunction with the closing, the Company borrowed
$1,300. The principal stockholder also agreed to loan the Company additional
amounts equal to the Companys costs relating to the Brice acquisition and
amount required to fund any monthly shortfalls of earnings before interest,
taxes, depreciation and amortization (EBITDA) from Brices operations (the
Keepwell agreement). From the date of acquisition through March 31, 2003,
there has been approximately $60 of funding requirements. The Companys note
to its principal stockholder was unsecured, bore interest at LIBOR plus 5.5%
and was due on the earlier of January 31, 2004 or the termination of the
revolving credit facility. The terms of this loan were modified in May 2003.
See Note 10.

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3. SALE OF OPERATING ENTITIES

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

Pursuant to the asset purchase agreement relating to the sale, the Company had
represented to the buyer that the value of the Aerocell assets at the closing
date were at least $11,700. The agreement provided procedures relating to the
determination of the closing date value of the Aerocell assets and required a
post-closing payment to the purchaser (on a dollar-for-dollar basis) if it was
ultimately determined that the closing date value of the Aerocell
assets were
lower than the targeted amount. The Agreement also provided that certain funds held in escrow ($500) were to be
held to support certain indemnification rights provided in the Agreement, and,
provided that no claims for indemnity had been asserted, $250 of the funds
being held in escrow were to be released six months after the Closing Date and
the balance of the funds being held in escrow were to be released one year
after the Closing Date. The Agreement also provided that the Company would
receive certain rebates in the future for work which the Company helped procure
for the purchaser. However, before any such amounts were to be paid under this
rebate, the purchaser was to receive a credit to the extent that certain
specified inventory of Aerocell was not sold within one year following the
Closing Date. There was also additional inventory of Aerocell as to which the
Company would have to pay up to $200 in cash one year from the closing if that
inventory was not sold or consumed by that date.

For all contingency exposures relating to the sale of Aerocell, which includes
working capital adjustments and inventory repurchases, the Company had
certain accruals as of March 31, 2003 in the aggregate amount of
$455. Subsequent to March 31, 2003, however, the Company entered into an
agreement that globally settled all unresolved purchase price issues and
inventory repurchase obligations. As part of this settlement, the
Company will in the near future release approximately $350 of the
funds held in escrow to the purchaser. Further, as a result of the
settlement, the Company has been released from all contingencies for working capital adjustments and
inventory repurchases. In light of the settlement, the Company has,
as of March 31, 2003, reversed all accruals for contingency exposures and established a
receivable for the net amount of the escrow funds (approximately $115)
which it expects to receive in the near future. The total
gain resulting from the settlement of $570 has been reflected within other income  net in the
accompanying condensed consolidated statement of operations for the
quarter ended March 31, 2003.

4. NOTES PAYABLE AND REVOLVING LOAN

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

The interest rate on the Amended Revolving Credit Facility is, at the Companys
option, (a) prime plus 3% per annum, or (b) LIBOR plus 4.5% per annum. The
Company has currently elected the prime option. The interest rate on the
Amended Term Loan is 12% per annum. The Amended Revolving Credit Facility is
due on January 31, 2004. The Amended Term Loan was due in quarterly
installments of $500, commencing September 30, 2002, with the principal balance
due in full on January 31, 2004. $3,500 of the Amended Term Loan was repaid
from the proceeds of the Aerocell sale, which has resulted in the full residual
balance of $3,500 being due in full on January 31, 2004.

The Amended Credit Agreement contains certain financial covenants regarding the
Companys financial performance and certain other covenants, including
limitations on the amount of annual capital expenditures and the incurrence of
additional debt, and provides for the termination of the Amended Credit
Facility and repayment of all debt in the event of a material adverse change in
the Companys 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

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borrowing base requirements thereunder or in the event the outstanding obligations under the
Amended Credit Facility exceed the commitments thereunder. At certain times
during fiscal 2002 and during the first quarter of 2003, the Company was not in
compliance with certain covenants contained in the Amended Credit Facility
agreement. The senior lenders, however, have waived, and in some instances,
amended all such events of non-compliance and as of December 31, 2002 and March
31, 2003, the Company was in compliance with all covenant requirements. As of
March 31, 2003, $1,396 was available for borrowing under the Amended Credit
Facility and outstanding letters of credit aggregated $10,107.

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

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

For providing credit support for the $5,000 BofA Term Loan, the Company issued
five-year warrants 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 in cash to both of these individuals. The Company has
recorded the value of these warrants (approximately $700) and cash payment as
deferred financing costs and is amortizing this amount to expense over the term
of the $5,000 BofA Term Loan.

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

Also, see Note 10 for a description of the financing transaction with the
Companys principal stockholder that occurred subsequent to March 31, 2003.

5. SUBORDINATED NOTES

NEW SENIOR NOTES

On February 28, 2002, in connection with the note exchange portion of the
restructuring (see Note 8), the Company issued $100,000 face value in aggregate
principal amount of 8.0% senior subordinated convertible paid-in-kind (PIK)
notes (New Notes), which mature on December 31, 2006. The New Notes bear
interest from the date of issuance and are payable at the Companys option
either in cash or paid-in-kind through the issuance of additional New Notes
semiannually on June 30 and December 31 of each year. If the Company does not
pay interest in cash as of an interest payment date, the Company will
automatically be deemed to have paid such interest in-kind and additional New
Notes in the amount of such interest payment will automatically be deemed to be
outstanding from such date forward.

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The New Notes are general unsecured obligations and are subordinated in right
of payment to all current and future senior debt, including indebtedness under
the Amended Credit Facility and any future credit facility that may replace
the Amended Credit Facility, and the $5,000 BofA Term Loan. The New Notes are
effectively subordinated to all secured obligations to the extent of the assets
securing such obligations, including the Amended Credit Facility, the $5,000
BofA Term Loan and the new loan which was recently obtained from the Company
principal stockholder.

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 $5,000 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, the $5,000
BofA Term Loan and the new loan from the Companys principal stockholder.

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

The New Notes are redeemable for cash at the Companys option at the following
percentages of par plus accrued interest on the par value through the date of
redemption: 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 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 SENIOR NOTES

In 1998, the Company sold $165,000 of senior subordinated notes (Old Notes)
with a coupon rate of 8.125% at a price of 99.395%, which mature on February
15, 2008. On February 28, 2002, $149,000 face value of these notes were
cancelled as part of the note exchange in exchange for cash and securities, and
substantially all of the covenant protection contained in the indenture
relating to the remaining Old Notes was extinguished. As a result of the
exchange offer and consent solicitation, $16,247 in aggregate principal amount,
net of unamortized discount, of Old Notes remain outstanding at March 31, 2003.
See Note 8 for a description of the note exchange. Interest on the Old Notes
is payable on February 15 and August 15 of each year.

The Old Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior debt, including indebtedness
outstanding under the Amended Credit Facility, the $5,000 BofA Term Loan, and
under facilities that replace such facilities in the future, and to the
new loan from the Companys principal stockholder and the New Notes. In addition, the
Old Notes are effectively subordinated to all secured obligations to the extent
of the assets securing such obligations, including the Amended Credit Facility,
the $5,000 BofA Term Loan, and the new loan from the Companys principal
stockholder.

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

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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 $5,000 BofA Term Loan, and to the new loan from the
Companys principal stockholder and the New Notes, and are also effectively subordinated to all secured
obligations of subsidiary guarantors to the extent of the assets securing their
obligations, including the Amended Credit Facility, the $5,000 BofA Term Loan
and the new loan from the Companys principal stockholder.

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

JUNIOR SUBORDINATED NOTES

As discussed in Note 6, the Companys settlement of its outstanding class
action securities litigation became effective on September 20, 2002. As part of
this settlement, the Company has issued $4,000 face value in aggregate
principal amount of the Companys new junior subordinated convertible PIK notes
(Junior Notes). These notes bear interest at 8% and mature on January 2,
2007. The Junior Notes bear interest from September 20, 2002 and are payable
at the Companys option either in cash or paid-in-kind through the issuance of
additional notes semiannually on June 30 and December 31 of each year. If the
Company does not pay interest in cash as of an interest payment date, the
Company will automatically be deemed to have paid such interest in-kind and
additional Junior Notes in the amount of such interest payment will
automatically be deemed to be outstanding from such date forward.
Additionally, the Junior Notes have been recorded as of September 20, 2002 (the
effective date) at the then current redemption value of $2,500. The discount
is being accreted to the maturity redemption value, due in January 2007, of
approximately $4,400. The Junior Notes are general unsecured obligations and
are subordinated in right of payment to all current and future senior debt,
including the Companys Amended Credit Facility and the $5,000
BofA Term Loan, and to the
new loan from the Companys principal stockholder and the New Notes and Old
Notes.

The Junior Notes are redeemable for cash at the Companys option at the
following percentages of par plus accrued interest on the par value through the
date of redemption: 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 144,000 shares of common stock if the Junior Notes are redeemed in
2003 and an aggregate of 104,000 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.

6. COMMITMENTS AND CONTINGENCIES

LITIGATION AND CLAIMS

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

In May 2002, the Company entered into an agreement to settle these claims with
all allegations against the Company and the other defendants being dismissed
without any admission of liability or wrongdoing. Under the settlement
agreement, the Company has paid $11,500 in cash, all

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of which has been paid by
the Companys directors and officers liability insurance
carrier, and has issued certain securities, as described, in full settlement of
the claims. The securities issued are: (i) 1.25 million shares of the Companys
authorized but unissued common stock, (ii) $4,000 of the Companys new 8%
Junior Subordinated Convertible PIK Notes due 2007 (with terms similar to, but
structurally subordinated to, the New Notes and the Old 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, which are exercisable upon grant. The settlement became
effective on September 20, 2002.

For the quarter ended March 31, 2002, the Company recorded the initial
liability of $8,000 related to the value of the securities to be issued in this
settlement. For the second and third quarters of fiscal 2002, the Company
marked-to-market the securities to be issued in this settlement. The charge
recognized in fiscal 2002 relating to this settlement, adjusted for gains that
resulted through the revaluations, totaled $4,410.

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 the Companys spring 2001 temporary closure of that operation.
The suit, which was filed in the U.S. District Court for the Eastern District
of Michigan, sought back pay (including salary and accrued vacations) and other
benefits for each of the affected employees for a sixty day period after such
employees were terminated. In November 2002, without admitting liability, the
Company entered into a settlement agreement relating to this suit, for which
the fairness of this settlement has been approved by the U.S. District Court
and the former employees. As part of the
settlement, the Company has agreed to pay these former employees $1,150. As of
March 31, 2003 and December 31, 2002, $867 and $1,150, respectively, is
included within accrued expenses within the accompanying condensed consolidated
balance sheets. Once this settlement has been fully funded, all
outstanding claims against the Company will be dismissed without any admission
of liability or wrongdoing.

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

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

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

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
remaining testing, remediation and compliance costs for this facility will be
approximately $1,200. 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. Also, to comply with the financial
assurances required by the FDEP, the Company has issued a $300 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 March 31, 2003 and December 31, 2002
condensed consolidated balance sheets includes $1,474 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

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

LEASE COMMITMENTS WITH RELATED PARTIES

During October 2002, the Company sold its real estate and fixtures located at
the Companys Aircraft Interior Design, Inc. (AID) operation in Dallas, Texas,
to the Companys principal stockholder. The gross sale price for these assets
was approximately $2,400, which was the estimated fair market value, based on a
third party appraisal, on the sale date. Simultaneous with this sale, the
Company entered into a lease agreement with the principal stockholder for
substantially all of these assets. The term of this lease is ten years.
Annual rental payments are approximately $300 per year, with the Company being
responsible for, among other things, taxes, insurance and utilities. The sale
and resulting leaseback qualify for sale leaseback accounting pursuant to SFAS
No. 98, Accounting for Leases. The Company has deferred the gain on sale of
approximately $1,700 and is amortizing this gain to income over the term of the
lease agreement as an offset to rent expense. Deferred income within the
accompanying March 31, 2003 and December 31, 2002 condensed consolidated
balance sheets includes $1,599 and $1,641, respectively, related to this sale
leaseback transaction.

During December 2002, an entity controlled by the Companys principal
stockholder acquired the operating assets of Aviation Management Systems, Inc.
(AMS) located in Phoenix, Arizona. Additionally, this entity assumed a lease
with the City of Phoenix for facilities previously leased by AMS at Goodyear
Airport. Subsequent to the end of the first quarter, effective April 1, 2003 the
Company entered into an operating sublease agreement with the principal
stockholder for the facilities that were previously
leased to AMS. The term of the sublease is for approximately three years with
rental payments of $430 annually. Under the sublease agreement, the Company is
also responsible for insurance, taxes and charges levied by the City of Phoenix
under the new lease. The leased facilities provide approximately 370,000
square feet in which MR&O services will be provided.

TAX RETENTION OPERATING LEASE (TROL) FINANCING

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

The TROL financing arrangement was utilized to develop two facilities: (i) a
corporate headquarters and warehouse facility, which is currently subleased to
Kellstrom Aerospace, LLC, and (ii) a facility to house the Companys Caribe
operations, which was sold in May 2001. Substantially all of the Companys
subsidiaries have guaranteed the Companys obligations under the lease.
Additionally, the Company has an option to acquire the facility at the end of
the lease for an option price as determined in the lease. Lease payments are
currently at a rate of Prime plus 3.25% to 4.0% and the Company is responsible
for all property taxes, insurance and maintenance of the property.

The TROL financing contains certain financial covenants regarding the Companys
financial performance and certain other covenants, which overall substantially
mirror the covenant requirements under the Amended Credit Agreement, and
provides for the termination of the TROL financing agreement and repayment of
all debt in the event of a material adverse change in the Companys business.
At certain times during fiscal 2002 and the first quarter of 2003, the Company
was not in compliance with certain of the covenants contained in the TROL
financing agreement. Additionally, as a result of a cross default provision
between the TROL financing agreement and the Amended Credit Agreement, for
which the Company was also in violation of covenant requirements during fiscal
2002 and the first quarter of 2003, the Company was also in default of the TROL financing agreement. The
lessor under the TROL financing agreement and senior lenders of the Amended
Credit Facility, however, waived, and in certain instances amended, all such
events of non-compliance and as of December 31, 2002 and March 31, 2003, the
Company was in compliance with all covenant requirements.

The original TROL financing was a $43,000 loan
facility which qualified for operating lease treatment under
generally accepted accounting principles. As a result of particular transactions that occurred during the
third quarter of 2001, 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. Also during the third quarter of 2001, the Company
made the decision to sell this facility. As a result of this decision, this
lease was presented within the Companys consolidated financial statements as
of December 31, 2001 as a capitalized lease asset held for sale. See
particulars of these transactions within the Form 10-K.

16



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As of April 1, 2002, this capitalized lease asset held for sale no longer
qualified for held for sale treatment, in accordance with SFAS No. 144, since
the Company had then ceased its active marketing of this facility, and as of
April 1, 2002, this asset was reclassified to an asset held for use. As
certain criteria of SFAS No. 144 have not been met, this capitalized lease
asset has remained within fixed assets, net within the accompanying condensed
consolidated financial statements for the quarter ended March 31, 2003. The
Company and substantially all of its subsidiaries have guaranteed the repayment
of the remaining $24,722 principal balance of the TROL financing. The TROL
financing is secured by a lien on the real property and improvements comprising
the facilities and on the fixtures therein.

SETTLEMENT WITH KELLSTROM

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

OTHER MATTERS

In connection with a previously outstanding term
loan, the Company granted one of its lenders 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. The warrants entitle the holder to
require the Company to repurchase the warrants or common shares issued upon
prior exercise of the warrants at $85.00 per share. As of May 30, 2003, the
lender has not required the Company to repurchase any warrants. The Company
recorded the value of these warrants as additional deferred financing costs and
accrued expenses and amortized the deferred financing cost to interest expense
over the original term of the loan (August 2002). If the repurchase
right relating to these warrants were to be exercised in full, the
Company would be obligated to pay its lender an aggregate of $1,097.

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.

7. WEIGHTED AVERAGE SHARES

Basic income per share is computed using the weighted-average number of
shares outstanding during the period. Diluted income per share uses the
weighted-average number of shares outstanding during the period plus the
dilutive effect of stock options calculated using the treasury stock method.
Weighted average shares used in the computation of basic and diluted income
per share is as follows:

|                                                                                                                                                  |                               |  |               |             |      |  |           |             | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- |  | ------------- | ----------- | ---- |  | --------- | ----------- | 
|                                                                                                                                                  |                               |  | For the Three
|                                                                                                                                                  |                               |  | Months Ended 
|                                                                                                                                                  |                               |  | March 31,    
|                                                                                                                                                  |                               |  |              
|                                                                                                                                                  |                               |  | 2003          |             | 2002
|                                                                                                                                                  |                               |  |               |             |     
|Weighted average common and common
equivalent shares outstanding:                                                                                 |                               |  |               |             |      |  |           |            
|                                                                                                                                                  | Basic                         |  |               | 31,640,994  |      |  |           | 11,328,223  | 
|                                                                                                                                                  | Effect of dilutive securities |  |               | 279,608,437 |      |  |           | 93,433,607  | 
|                                                                                                                                                  |                               |  |               |             |      |  |           |            
|                                                                                                                                                  | Diluted                       |  |               | 311,249,431 |      |  |           | 104,761,830 | 
|                                                                                                                                                  |                               |  |               |             |      |  |           |            
|Common stock equivalents outstanding
which are not included in the
calculation of diluted earnings
per share because their impact
is antidilutive |                               |  | 14,143,612    |             |      |  | 6,430,195 |            
|                                                                                                                                                  |                               |  |               |             |      |  |           |            

8. NOTE EXCHANGE AND RIGHTS OFFERING

In February 2002, the Company completed a significant restructuring of its
capital and equity. The restructuring consisted of four parts. The first part
was a reverse split (on a one-share-for-ten-shares basis) of the Companys
outstanding common stock, reducing its outstanding common shares from 15.0
million shares to 1.5 million 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 $10,000 in cash, $100,000 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,

17



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which
are exercisable upon grant (collectively, 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 $20,000. In connection with the rights offering,
Lacy J. Harber, the Companys principal stockholder, agreed to purchase unsold
allotments. The last part consisted of the issuance to the pre-restructuring
holders of the Companys common stock of five-year warrants to purchase an
additional 3.0 million shares of common stock at an exercise price of $5.16 per
share, which are exercisable upon grant.

In the rights offering, the Company sold 12.0 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 $149,000 face value of Old Notes (approximately 90% of the Old
Notes) for $5,100 in cash, and all of the New Notes, shares and warrants
described above. The Company used the net proceeds of the rights offering,
approximating $10,000 after payment of the cash proceeds of the Note Exchange,
accrued interest on the Old Notes not tendered, and expenses of the
restructuring, to reduce trade payables and to provide working capital for the
Companys ongoing business operations.

The restructuring was recorded in accordance with SFAS No. 15, Accounting by
Debtors and Creditors for Troubled Debt Restructurings. As a result of the
restructuring, during fiscal 2002 the Company recognized an extraordinary gain
of $27,279, net of $0 tax expense, in the first quarter of 2002. Additionally,
due to the application of SFAS No. 15, the Company will no longer record
interest expense on the New Notes, as the New Notes are carried at their
maximum potential cash redemption value (including interest) through their
maturity. This maximum potential cash redemption value equates to the present
value, through 2006, of the $100,000 notes plus the value of stock to be issued
upon redemption of these notes in 2006. For a description of the terms of the
New Notes, see Note 5.

Also, effective January 1, 2003, the Company has adopted SFAS No. 145,
Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. As a result of adoption, the Company has
reclassified the fiscal 2002 $27,279 gain on debt extinguishment to be included
within continuing operations.

9. STOCK COMPENSATION PLANS

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

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

|                                            |  |                         |      |      |  |   |        |  
|------------------------------------------- |  | ----------------------- | ---- | ---- |  | - | ------ | -
|                                            |  | Quarter Ended March 31,
|                                            |  |                        
|                                            |  | 2003                    |      | 2002
|                                            |  |                         |      |     
|Net income  as reported                    |  | $                       | 319  |      |  | $ | 20,851 |  
|Additional expense                          |  |                         | (233 | )    |  |   | (922   | )
|Net income  pro forma                      |  |                         | 86   |      |  |   | 19,929 |  
|Net income per share, basic  as reported   |  |                         | 0.01 |      |  |   | 1.84   |  
|Net income per share, diluted  as reported |  |                         | 0.00 |      |  |   | 0.20   |  
|Net income per share, basic  pro forma     |  |                         | 0.00 |      |  |   | 1.76   |  
|Net income per share, diluted  pro forma   |  |                         | 0.00 |      |  |   | 0.19   |  

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

18



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10. SUBSEQUENT EVENT

On May 14 2003, the Company entered into an agreement with its principal
stockholder pursuant to which the principal stockholder agreed to loan the
Company $6,000 ($2,000 at closing and $2,000 within 30 days and
within 60 days thereafter),
which will be used for working capital. The new note has a three-year
maturity, is secured debt and bears a 16% PIK interest coupon. In connection
with the new loan, the Company issued a warrant to its principal stockholder to
acquire, for nominal consideration, 30% of the Companys outstanding common
stock (on a fully-diluted basis) as of the day the warrant is exercised. The
warrant is exercisable on or before January 31, 2007. Further, the $1,300 loan
received from the principal stockholder in connection with the acquisition of
Brice Manufacturing in October 2002 has been added to this $6,000 loan, and the
Keepwell agreement, which among other matters, the Companys principal
stockholder had issued to its senior lenders in connection with the Brice
Manufacturing acquisition and required monthly funding of any EBITDA losses,
was eliminated.

At December 31, 2002, the Company was not in compliance with the debt covenant
requirements under the Amended Credit Agreement and the TROL. In May 2003, in
connection with the new loan from the Companys principal stockholder, the
Company obtained a waiver of non-compliance with all financial covenants. The
Company also reset the covenants for future periods, including the covenants to
be met at March 31, 2003, and the Company has met those amended requirements
effective as of that date.

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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
2002 (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, 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 AND RESULTING WAR ON TERRORISM, THE
STATE OF THE DOMESTIC PASSENGER AIRLINE INDUSTRY AND THE FINANCIAL CONDITION OF
OUR AIRLINE CUSTOMERS, OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL IN
OUR BUSINESSES, UTILIZATION RATES FOR OUR MR&O FACILITIES, OUR ABILITY TO
EFFECTIVELY INTEGRATE FUTURE ACQUISITIONS, OUR ABILITY TO EFFECTIVELY MANAGE
OUR BUSINESS, ECONOMIC FACTORS WHICH AFFECT THE AIRLINE INDUSTRY, GENERALLY
INCLUDING THE AMOUNT OF AIRCRAFT MAINTENANCE OUTSOURCED BY VARIOUS AIRLINES,
AND CHANGES IN GOVERNMENT REGULATIONS. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM RESULTS EXPRESSED OR
IMPLIED IN ANY FORWARD-LOOKING STATEMENTS MADE BY US IN THIS 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.

GENERAL

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

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

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

20



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

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

Three Months Ended March 31, 2003 and 2002

Operating revenue for the three months ended March, 31 2003 decreased $6.3
million or 10.9% to $51.3 million, from $57.5 million for the three months
ended March 31, 2002. Operating revenue for the first quarter of 2002 included
$1.8 million in revenues from the operation of Aerocell, which was sold in July
2002. Without the revenue from this facility, comparative 2002 three-month
revenues would have been $55.7 million (we are providing this
information in order to compare the revenues derived from facilities open in
both the first quarter of 2002 and the first quarter of 2003).

The decrease in revenue is primarily attributable to decreased revenues from
our heavy airframe maintenance operations. This decrease was generally caused
by a reduction in market opportunities due to adverse market conditions, which
have caused many of our customers to delay maintenance on their aircraft or
park older aircraft maintained by us due to rising fuel prices, reduced
passenger levels, and general economic conditions. Our revenue was also
adversely impacted during the first quarter of 2003 by increased price
competition and downward pricing pressures from airline customers. These
factors forced us during fiscal 2002 and the first quarter of 2003 to reduce
pricing and take fixed priced work at lower rates, which adversely impacted
revenues and gross margins. Further, during this period, several of our
customers, including one of our largest customers (which is currently in a Chapter 11
bankruptcy proceeding), experienced severe adverse financial problems of their
own, and in some cases substantially delayed their on-going maintenance due to
their situation, which further adversely impacted our operating results for the
period. Finally, instability in the Middle East, including the currently
on-going war on terrorism, and the outbreak of the SARS virus in Asia have
severally reduced airline passenger levels during the first quarter of 2003.
This reduction has equated to a further delay by our customers of maintenance
services.

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Gross profit decreased to $3.5 million for the three months ended March 31,
2003, a 43.7% drop, compared with a gross profit of $6.2 million for the three
months ended March 31, 2002. The deterioration of the gross margin results for
the first quarter of 2003 compared to the first quarter of 2002 resulted from
continued pricing competition and downward pricing pressures from airline
customers, start-up expenses recognized by our Goodyear maintenance facility as
it ramps up for maintenance servicing, and an overall decline in revenues.
Additionally, the first quarter of fiscal 2002 was favorably impacted by long
duration customer maintenance programs (where greater efficiencies
were
achieved) that extended into the beginning of the third quarter of 2002.
Subsequent to these programs and particularly during the first quarter of 2003, the
Company has worked on short duration maintenance programs and single
visit customers. While the receipt of single visit customers presents significant
opportunities to TIMCO, the short-term impact is a lower revenue realization
per labor hour. Gross profit as a percentage of revenues decreased to 6.9% for
the three month period ended March 31, 2003, from 10.9% for the same period in
2002.

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 write-downs for
inventory obsolescence, the size of our inventory write-downs 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. We continue to
evaluate all market and industry exposures in connection with the establishment
of appropriate inventory valuation levels.

Operating expenses for the first quarter ended March 31, 2003 were $3.1 million
compared to $3.6 million for the first quarter ended March 31, 2002. Operating
expenses as a percentage of revenues were 6.0% and 6.2%, respectively, for the
three month periods ended March 31, 2003 and 2002. For the most part,
reductions in operating expenses achieved through the sale of Aerocell in July
2002 were offset by operating expenses recognized through the acquisition of
Brice Manufacturing Company in October 2002 and start-up operations at the
Goodyear facility. Additionally, during the first quarter of fiscal
2003 we were able to extend a sublease agreement with a third
party for a facility that we are currently leasing
in Opa-locka, Florida. As a result of this sublease extension, we eliminated
an accrual that was
previously established for the shortfall in the operating lease
commitment and the amount of the original sublease income. The reversal of this
accrual resulted in a $0.3 million benefit during the
quarter and is reflected as a reduction to operating expenses for the
quarter ended March 31, 2003. Also, as a result of a revised
estimate of workers compensation insurance claims, we reduced our
accrual for workers compensation insurance by $0.4 million during the
first quarter of 2003. This reduction is also reflected as an offset
to operating expenses for the quarter ended March 31, 2003.

As a result of these factors, income from operations was $0.5 million for the
first quarter of 2003, compared to income from operations of $2.7 million for
the first quarter of 2002.

Interest expense (excluding amortization of deferred financing fees) for the
three months ended March 31, 2003 decreased by $2.0 million or 57.4% to $1.5
million, from $3.5 million for the three months ended March 31, 2002. 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 8 of the Notes to the Condensed
Consolidated Financial Statements for an explanation as to why interest is not
recorded on the New Notes), lower outstanding debt balances as a result of
selling Aerocell and using a substantial portion of the proceeds to
reduce our debt, completion of our senior debt restructuring and slightly
lower interest rates from period to period.

Amortization of deferred financing costs was $0.6 million and $2.3 million for
the three months ended March 31, 2003 and 2002, respectively. The decrease is
primarily attributable to the completion of our senior debt refinancing that
was closed in July 2002 and that represented the completion of amortization of
fees paid on our previous credit facility. Additionally, deferred financing
fees incurred for the establishment of the Amended Credit Facility were
significantly less then those of the previous credit facility.

During the first quarter of 2002, we recorded a charge of $8.0 million related
to an agreement to settle a then-outstanding class action securities lawsuit.
For the quarters subsequent to the first quarter of 2002, the Company
marked-to-market the securities to be issued in this settlement. Upon this
settlement becoming effective on September 20, 2002, the Company performed the
final revaluation. The charge recognized in fiscal 2002 related to this
settlement, adjusted for gains that resulted through the
revaluations, totalled
$4.4 million. See Note 6 of the Notes to the Condensed Consolidated Financial
Statements.

During the first quarter of 2002, we recognized a $27.3 million extraordinary
gain relating to the Note Exchange. On January 1, 2003, we adopted SFAS No.
145, Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. As a result of adoption, we have
reclassified the $27.3 million gain on debt extinguishment to be included
within continuing operations.

Other income  net was $1.5 million for the three month period ended March 31,
2003 and $0.7 million for the three month period ended March 31, 2002. Other
income  net for the first quarter of fiscal 2003 was primarily comprised of
rent from the Companys Miramar facility (approximately
$0.7 million) and a gain on the settlement of outstanding purchase price
adjustments and other obligations and funds held in escrow related to the sale
of Aerocell (approximately $0.6 million). See Note 3 of the
Notes to the Condensed

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Consolidated Financial Statements. Other income 
net for the first quarter of fiscal 2002 was mainly comprised of rent
from the
Companys Miramar facility.

As a result of the above factors, our loss from continuing operations before
income taxes and discontinued operations for the three months ended March 31,
2003 was $0.1 million, compared to income from continuing operations before
income taxes and discontinued operations of $16.8 million for the three months
ended March 31, 2002. Without the non-cash charge relating to the settlement
of the class action litigation and the gain on debt extinguishment,
both of which we believe are one-time and non-recurring items, we would
have reported a net loss from continuing operations before income taxes and
discontinued operations for the quarter ended March 31, 2002 of
$2.5 million.
Management believes that comparison of its first quarter
2003 net income from continuing operations to its
first quarter 2002 net loss from continuing operations
without the effect of the above described one-time,
non-recurring items provides a useful measure for
investors to compare our period to period results.

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 first quarter of 2003, we have recognized
a tax benefit of $0.2 million for the receipt of miscellaneous state carryback
refunds.

For the reasons set forth above, income from continuing operations for the
three months ended March 31, 2003 was $0.1 million, or $0.00 per basic share
and diluted share, compared to income of $20.6 million, or $1.82 per basic
share and $0.20 per diluted share, for the three months ended March 31, 2002.

Income from discontinued operations for the first quarter ended March 31, 2003
was $0.3 million, or $0.01 per basic share and $0.00 per diluted share,
compared to income of $0.2 million, or $0.02 per basic share and $0.00 per
diluted share, for the first quarter ended March 31, 2002. Income from
discontinued operations for the first quarter of 2003 and 2002 is primarily
comprised of collections on receivables retained from the sale of our
redistribution operations that had been fully reserved and the sale of residual
inventory that remains from the sale of our redistribution operation and new
parts bearings operation.

LIQUIDITY AND CAPITAL RESOURCES

Developments Concerning the Aviation Industry and Our Operations

The September 11, 2001 terrorist attacks against the United States of America
and the resulting increase in airline insurance costs, additional government
mandated passenger taxes and fees, and increased airport security costs, have
had a severe impact on the aviation industry. These factors, in conjunction
with an overall slowdown in the U.S. economy, a greater then 9% reduction in
passenger levels from fiscal 2001 to fiscal 2002, and the overall instability
in the Middle East (including the currently on-going war on terrorism) have
resulted in operating losses for U.S. airline carriers in excess of $7.7
billion for 2001 and an estimated $9.5 billion for 2002. In addition to
these adverse factors, the first quarter of 2003 has been further impacted by
the outbreak of the SARS virus in Asia. As a result of these factors, many
commercial passenger airlines and air cargo carriers reported significant
reductions in their capacity and have taken out of service upwards of 20% of
their aircraft. This reduction in capacity has lessened the aircraft maintenance required by such airlines (and thereby the
amount of maintenance being outsourced to companies like TIMCO). The impact of
these factors has resulted with the filing for bankruptcy protection under
Chapter 11 of the United States Bankruptcy Court by several carriers. The most
notable have been the filings for protection from creditors under Chapter 11 by
U.S. Airways on August 11, 2002 and United Airlines on December 9, 2002 (our
largest customer during the prior two fiscal years). In addition to U.S.
Airways and United Airlines, other carriers, including American Airlines, have
publicly discussed the potential of seeking protection from creditors through a
voluntary bankruptcy filing. As related to us, current exposures to carriers
that are at risk of filing for protection are being continuously evaluated and
monitored, though we have in the past, and may in the future, experience losses
relating to these credit exposures. Additionally, the Company is positioning
itself for potential favorable implications of these Chapter 11 filings and
resurgence of the airlines as it is anticipated that additional maintenance
outsourcing opportunities could result as these airlines look for cost
reduction alternatives to internal labor sources.

We believe that all of the above factors will continue to have a negative
impact on our business in the foreseeable future. In response, during 2001,
2002 and the first quarter of 2003, we have taken steps to reduce our costs.
These terrorist attacks and related aftermath events and the overall slowdown
in the U.S. economy have also impacted our competition, with several of our
competitors exiting the MR&O business.

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Liquidity

As of March 31, 2003 we had outstanding indebtedness of $181.8 million, of
which $42.0 million was senior indebtedness, including amounts due under the
TROL Financing of $24.7 million, which is characterized as a capital lease,
$5.0 million BofA Term Loan, $3.5 million Amended Term Loan and $8.8 million
under our Amended Revolving Credit Facility. In addition, at that date we had
$10.1 million of letters of credit outstanding under our senior revolving
credit facility and $1.4 million was available for borrowing under our Amended
Revolving Credit Facility. As of May 16, 2003, we had outstanding $8.5 million
of senior term loans with financial institutions, $24.6 million under the TROL
Financing Agreement, $9.1 million under the senior revolving credit facility,
$10.1 million of outstanding letters of credit, $16.2 million of our Old Notes,
$100.0 million of our New Notes (recorded in accordance with
GAAP on our financial statements at $115.8
million), and $2.8 million of our Junior Notes. Additionally, as of May 16,
2003 we had $3.3 million available for borrowing under our Amended Revolving
Credit Facility. 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. Additionally, the degree to which we are leveraged
could have important consequences to us, including:



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

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

Our senior credit facilities and TROL financing arrangement contain certain
financial covenants regarding the Companys financial performance and certain
other covenants, including limitations on the amount of annual capital
expenditures and the incurrence of additional debt. We did not meet certain
financial covenants at December 31, 2002, and thus, were in violation of the
Amended Credit Agreement and TROL financing arrangement. On May 14, 2003, we
obtained waivers of non-compliance with all financial covenants and have
thereby cured the covenant violations. We also entered into agreements that
reset financial covenants requirements for the Amended Credit Agreement and
TROL financing arrangement, including the covenants required to be met at March
31, 2003. As of March 31, 2003, based on the changes agreed to in May 2003, we
were in compliance with all financial covenants under our senior credit
facilities and TROL financing arrangement. Going forward, debt classification
will remain contingent upon the continued compliance or waiver of violations of
these covenant requirements, of which there can be no assurance.

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

Cash

Net cash used in continuing operating activities during the three months ended
March 31, 2003 was $6.1 million, compared to net cash provided by continuing
operating activities of $3.7 million for the same period in 2002. Cash used in
operating activities was primarily the result of earnings, adjusted for
non-cash charges, of approximately $1.5 million, increases in accounts
receivable, inventories, and other current assets of $9.9
million, $1.0 million, and $0.4 million, respectively, and
reductions in customer deposits of $0.2 million and other liabilities
of $1.9 million, partially
offset by increases in accounts payable of $5.7 million. Cash of $0.2 million was used in investing activities during
the first quarter of 2003 for the purchase of fixed assets. Cash provided by
financing activities during the period was $6.0 million. Net proceeds from
borrowings under our senior revolving credit facilities ($6.6 million) were
used for operations, to pay $0.3 million of bank and refinancing fees and to
pay $0.4 of capital leases. Cash of $0.2 million was provided by our
discontinued operations.

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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
within the accompanying condensed consolidated financial statements.

The interest rate on the Amended Revolving Credit Facility is, at our option,
(a) prime plus 3% per annum, or (b) LIBOR plus 4.5% per annum. We have
currently elected the prime option. The interest rate on the Amended Term Loan
is 12% per annum. The Amended Revolving Credit Facility is due on January 31,
2004. The Amended Term Loan was due in quarterly installments of $0.5 million,
commencing September 30, 2002, with the principal balance due in full on
January 31, 2004. However, $3.5 million of the Amended Term Loan was repaid
from the proceeds of the Aerocell sale and the remaining $3.5 million principal
is due in full on January 31, 2004. Finally, substantially all of our assets
are pledged as collateral for the amounts borrowed under the Amended Credit
Facility.

The Amended Credit Agreement contains certain financial covenants regarding our
financial performance and certain other covenants, including limitations on the
amount of annual capital expenditures and the incurrence of additional debt,
and provides for the termination of the Amended Credit Facility and repayment
of all debt in the event of a material adverse change in the business or a
change in control. Generally, the Amended Credit Agreement requires mandatory
repayments and reduction of the commitments thereunder from proceeds of a sale
of assets or an issuance of equity or debt securities. Mandatory repayments
are also required as a result of insufficient collateral to meet the borrowing
base requirements thereunder or in the event the outstanding obligations under
the Amended Credit Facility exceed the commitments thereunder. As of December
31, 2002 and March 31, 2003, we did not meet certain financial covenants and thus, were in
violation of the Amended Credit agreement. Subsequent to year-end, however, we
have obtained a waiver of non-compliance with all financial covenants and have
thereby cured the covenant violations. We also entered into agreements that
reset financial covenant requirements for the Amended Credit Facility. We are also in compliance, as of March 31, 2003, with all
financial covenants, as amended on May 14, 2003, under the Amended Credit Facility and TROL
financing agreement.

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

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 loan was
repaid from the proceeds of the Aerocell sale in July 2002. The remaining $2.5
million of the original BofA loan, which was credit supported by a former
director and executive officer, was restructured as follows: (i) at the closing
of the refinancing, the former director and executive officer 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 the former director and executive officer 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 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 the former director and
executive officer 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, we repaid the outstanding $1.0 million of this loan.

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

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agreement, which our principal stockholder had issued to our senior lenders in connection with the Brice
Manufacturing acquisition and that required monthly funding of any EBITDA
losses of Brice, has been eliminated.

Subordinated Notes

New Senior 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. If we do not pay interest in cash as of
an interest payment date, we will automatically be deemed to have paid such
interest in-kind and additional New Notes in the amount of such interest
payment will automatically be deemed to be outstanding from such date forward.

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

The New Notes are fully and unconditionally guaranteed by substantially all of
our existing subsidiaries and each subsidiary that will be organized in the
future by us, unless such subsidiary is designated as an unrestricted
subsidiary. The indenture provides that under certain circumstances, we 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 guarantees are
subordinated in right of payment to all existing and future senior debt of
subsidiary guarantors, including the Amended Credit Facility and the $5.0
million BofA Term Loan, and are also effectively subordinated to all secured
obligations of subsidiary guarantors to the extent of the assets securing such
obligations, including the Amended Credit Facility, the $5.0 million BofA Term
Loan, and the new loan which was recently obtained from our principal
stockholder.

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

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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, the $5.0 million BofA
Term Loan and the new
loan from our principal stockholder. As part of the Note
Exchange, substantially all of the covenant protection contained in the
indenture relating to the Old Notes was removed.

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. 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 to the new loan from our principal stockholder
and the New Notes, and are also
effectively subordinated to all secured obligations of subsidiary guarantors to
the extent of the assets securing such obligations, including the Amended
Credit Facility, the $5.0 million BofA Term Loan and the new loan from our
principal stockholder.

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

Junior Notes

As discussed in Note 6 within the accompanying 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 $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 our 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 have been recorded as of September 20, 2002 (the effective
date) at the then current redemption value of $2.5 million. The discount is
being accreted to the maturity redemption value, due in January 2007, of
approximately $4.4 million. The Junior Notes are general unsecured obligations
and are subordinated in right of payment to all current and future senior debt,
including the Amended Credit Facility and the $5.0 million BofA
Term Loan, and to the new
loan from our principal stockholder and the New Notes and Old Notes.

The Junior 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: 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 2003 and an
aggregate of 103,550 shares of common stock if the Junior Notes are redeemed in
2004, 2005 or 2006.

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

TROL Financing

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.

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The TROL financing arrangement was utilized to develop two facilities: (i) a
corporate headquarters and warehouse facility, which has been subleased to
Kellstrom Aerospace, LLC, and (ii) a facility to house our Caribe operation
that was sold in May 2001. Substantially all of our subsidiaries have
guaranteed our obligations under the lease. Additionally, we have an option to
acquire the new facility at the end of the lease for an option price as
determined in the lease. Lease payments are currently at a rate of Prime plus
3.25% to 4.0% and we are responsible for all property taxes, insurance and
maintenance of the property.

The TROL financing contains certain financial covenants regarding our financial
performance and certain other covenants, which overall substantially mirror the
covenant requirements under the Amended Credit Agreement, and provide for
termination of the TROL financing agreement and repayment of all debt in the
event of a material adverse change in the Companys business. At December 31,
2002 and March 31, 2003, we did not meet certain financial covenants and thus, were in violation
of the TROL financing agreement. Additionally, as a result of a cross default
provision between the TROL and the Amended Credit Facility, for which we were
in violation with financial covenants at December 31, 2002 and
March 31, 2003, we were also in
violation of the TROL financing agreement. Subsequent to year-end, however, we
obtained a waiver of non-compliance with all financial covenants and has
thereby cured the covenant violations. We also entered into an agreement that
resets financial covenant requirements for the TROL financing arrangement and
the Amended Credit Facility. At March 31, 2003, we were in compliance with all
financial covenant requirements, as amended on May 14, 2003, under the TROL financing
arrangement and the Amended Credit Facility.

Note Exchange Offer and Rights Offering

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

On February 28, 2002, we completed all four parts of our restructuring. In the
Note Exchange, we exchanged $148.8 million of our Old Notes (approximately 90%
of the Old Notes) for $5.1 million in cash, and all of the New Notes, shares
and warrants described above. We used the net proceeds of the rights offering,
approximating $10.0 million after payment of the cash proceeds of the Note
Exchange and expenses of the restructuring, to reduce trade payables and to
provide working capital for our ongoing business operations.

CONTINGENCIES

We are involved in various litigation and environmental matters arising in the
ordinary course of business. These are discussed in Note 6 under Item 1
(Condensed Consolidated Financial Statements) of this document. We maintain
insurance coverage against certain potential claims in amounts that we believe
to be adequate. Although the final outcome of these legal and environmental
matters cannot be determined, based on the facts presently known, it is
managements opinion that the final resolution of these matters will not have a
material adverse effect on our financial position or future results of
operations.

Claims and Litigations

Several lawsuits had been filed against us and certain of our former officers
and directors, and our former auditors, in the United States District Court for
the Southern District of Florida, which had been consolidated into a single
lawsuit. The consolidated complaint, as amended in March 2000, September 2000
and September 2001, alleged violations of Sections 11 and 15 of the Securities
Act of 1933 (Securities Act) and Sections 10(b) and 20(a) of, and Rule 10b-5
under, the Securities Exchange Act of 1934 (Exchange Act). Among other
matters, the 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

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common stock during the period between April 30, 1997 and April 14, 2000.

In May 2002, we entered into an agreement to settle these claims with all
allegations against us and the other defendants being dismissed without any
admission of liability or wrongdoing. Under the settlement agreement, we have
paid $11.5 million in cash, all of which has been paid by our directors and
officers liability insurance carrier, and have issued certain securities, as
described, in full settlement of the claims. The securities 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 the Old 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, which are
exercisable upon grant. The settlement became effective on September 20, 2002.

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 quarters subsequent to the first quarter of fiscal 2002, we
marked-to-market the securities to be issued in this settlement. Upon this
settlement becoming effective on September 20, 2002, we performed the final
revaluation. The charge recognized in fiscal 2002 related to this settlement,
adjusted for gains that resulted through the revaluations, totaled $4.4
million.

In November 2001, we had been sued by several former employees of our Oscoda,
Michigan heavy airframe maintenance operation, on behalf of themselves and
purportedly on behalf of a class of similarly situated employees, for alleged
violations of the Worker Adjustment and Retraining Notification Act in
connection with its spring 2001 temporary closure of that operation. The suit,
which was filed in the U.S. District Court for the Eastern District of
Michigan, sought back pay (including salary and accrued vacations) and other
benefits for each of the affected employees for a sixty day period after such
employees were terminated. In November 2002, without admitting liability, we
entered into a settlement agreement relating to this suit, for which the
fairness of this settlement has been approved by the U.S. District
Court and by the former employees. As part of the
settlement, we have agreed to pay these former employees $1.15 million. Once
this settlement is fully funded, all outstanding claims against us
will be dismissed without any admission of liability or wrongdoing.

Settlement With Kellstrom

In July 2002, we closed on the transactions contemplated by the Post-Closing
Resolution Agreement, dated as of June 10, 2002 between us and
Kellstrom Industries, Inc. (Kellstrom). The settlement resolved and settled
globally outstanding disputes between us and Kellstrom (the Settlement)
relating to matters arising out of our December 2000 sale of substantially all
of the assets of its redistribution operation to Kellstrom. See the 2002 Form
10-K for a discussion of the terms of the settlement.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

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

Revenue Recognition

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

Use of Estimates

Managements discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of

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America. The preparation of our financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates these
estimates, including those related to estimated losses on disposal of
discontinued operations, the provision to reduce inventory to the lower of cost
or 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, the recovery of long lived assets and goodwill, medical benefit
accruals, the estimated fair values of facilities under capital leases and
allowances for litigation and environmental costs. Management bases their
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions and conditions.

Inventory Valuation

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

Accounts Receivable  Allowance for Doubtful Accounts

Substantially all of our accounts receivable are due primarily from airline and
cargo carriers. During 2002 and 2003 to date, there has been significant
change in the aviation industry, including the filing for bankruptcy protection
under Chapter 11 of the United States Bankruptcy Court by certain carriers.
This in turn has affected service providers within the aviation industry and
has resulted in us experiencing higher credit losses. We continuously perform
credit evaluations of our customers, considering numerous inputs including the
customers financial position, past payment history, cash flows, historical
loss experience and economic conditions. While management believes that
adequate allowances for doubtful accounts have been provided in the
consolidated financial statements, it is possible that we could experience
additional unexpected credit losses.

Goodwill Valuation

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

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

Long-Lived Assets

Management reviews long-lived assets, which consists of property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recovered. Recoverability of
long-lived assets to be held and used is evaluated by a comparison of the
carrying amount of the asset to future net undiscounted cash flows expected to
be generated by the asset group. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is recognized for the
excess of the carrying amount over the fair value of the asset. Assets to be
disposed of are reported at the lower of the carrying value or fair value less
cost to sell when we have committed to a disposal plan.

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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 Amended Revolving Credit Facility and our $5.0
million BofA senior term loan bear interest at floating rates and therefore, we
are impacted by changes in prevailing interest rates. However, our $3.5
million Amended Term Loan, our new loan from our principal stockholder, and our
New Notes, Old Notes, and Junior Notes all bear fixed interest rates and
therefore are not subject to the risk of interest rate fluctuations. A 10%
change in market interest rates that affect our financial instruments would
impact earnings during 2003 by approximately $45,000 before taxes and would
change the fair value of our financial instruments by approximately $13.2
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) |  | Following completion of their audit of our financial statements for 2002,
our independent auditors, KPMG LLP, advised our audit committee that
during the course of their audit, they noted two internal control
deficiencies constituting reportable conditions and material weaknesses as
defined in Statement of Auditing Standards No. 60, as follows:                                                                                                                                                                                                                                                                                                                       



| |  |  | in connection with their audit procedures to test the adequacy of
our accrual at year-end 2002 for anticipated losses on open contracts
in accordance with SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts,they
determined that we had not properly analyzed the costs in assessing
whether loss accruals were required on open contracts. While we had adequate provisions to cover anticipated losses, KPMG LLP
concluded that the lack of a formalized procedure to properly analyze
contract costs could lead to material misstatements of our financial
statements; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | KPMG LLP noted that management was not aware of the retrospective
provisions of an expired workers compensation insurance policy until
notified by the underwriter.
After investigating the underwriters claim, we accrued for the
retrospective premium adjustment, which is reflected in our 2002
year-end financial statements.                                                                                                                                                                                                                                                                                        



| |  | With respect to both issues, management has implemented corrective actions
to ensure that appropriate review of these areas takes place to avoid
future potential misstatements.                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During 2002, we moved our corporate headquarters, completed an extensive
restructuring of our capital and equity, refinanced all of our senior debt and
resolved a number of significant legacy items. We also experienced a
complete turnover of our key management responsible for financial reporting.
Management believes that the weaknesses described above were primarily
caused by the newness to the business of our current financial management
team. The weaknesses reported on by KPMG LLP
and described above did not cause KPMG LLP to not be
able to complete their audit of our 2002 financial statements.
|
| |  | In late 2002, our management, with the oversight of our audit committee, commenced a
comprehensive review of our internal controls. That review is currently
ongoing, and management expects to take further actions as required by such
continuing review during future periods, although we have made no
significant changes in our internal controls, except as described above, or
in other factors that could significantly affect internal controls,
subsequent to the date of our most recent evaluation of these controls.                                                                                         

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 6 to the Companys Unaudited Condensed Consolidated Financial
Statements included in this filing.

ITEM 2. CHANGES IN SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

No matters were presented to the Companys stockholders during the first
quarter of 2003.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K

(a)  Exhibits

|     |  |                                                                                                                 
|---- |  | ----------------------------------------------------------------------------------------------------------------
|99.1 |  | Certification of Chief Executive Officer and Chief Financial Officer under Section 302                          
|     |  |                                                                                                                 
|99.2 |  | Certification of Chief Executive Officer and Chief Financial Officer under Section
906 (furnished but not filed)

(b)  Reports on Form 8-K

During the quarter ended March 31, 2003, the Company did not file any reports
on Form 8-K.

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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 CampbellExecutive Vice President and Chief
Financial Officer
(Principal Financial Officer)

Dated: June 4, 2003

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Exhibit Index

|        |  |                                                                                                                 
|------- |  | ----------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                 
|Number  |  | Description                                                                                                     
|        |  |                                                                                                                 
|99.1    |  | Certification of Chief Executive Officer and Chief Financial Officer
under Section 302                          
|        |  |                                                                                                                 
|99.2    |  | Certification of Chief Executive Officer and Chief Financial Officer
under Section 906 (furnished but not filed)

34