##### 



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 June 30, 2004

OR

o
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.



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


Registrants telephone number, including area code: (336) 668-4410 (x3061)

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
x      No
o

Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
o      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 August 13, 2004.





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TIMCO AVIATION SERVICES, INC.

INDEX

Part I. Financial Information

PageItem 1.
    
    FINANCIAL STATEMENTSCondensed Consolidated Balance Sheets at June 30, 2004 and
December 31, 2003 (unaudited)
    
    
    3-4Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 2004 and 2003
(unaudited)
    
    
    5-6Condensed Consolidated Statements of Stockholders Deficit
and Comprehensive Loss for the six months ended June 30,
2004 (unaudited)
    
    
    7Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2004 and 2003 (unaudited)
    
    
    8-9Notes to Condensed Consolidated Financial Statements
    
    
    10Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
    
    
    18Item 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    26Item 4.
    
    CONTROLS AND PROCEDURES
    
    
    26Part II. Other InformationItem 1.
    
    LEGAL PROCEEDINGS
    
    
    27Item 2.
    
    CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    
    27Item 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    27Item 4.
    
    SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
    
    
    27Item 5.
    
    OTHER INFORMATION
    
    
    27Item 6.
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    27-28


2



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TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

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

June 30,
    
    December 31,2004
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    257
    
    
    $
    1,603Accounts receivable, net
    
    
    47,619
    
    
    
    36,950Inventories
    
    
    25,654
    
    
    
    25,724Net assets of discontinued operations
    
    
    
    
    
    
    459Other current assets
    
    
    4,449
    
    
    
    4,986Total current assets
    
    
    77,979
    
    
    
    69,722Fixed assets, net
    
    
    31,558
    
    
    
    55,100Other Assets:Goodwill, net
    
    
    26,124
    
    
    
    26,124Deferred financing costs, net
    
    
    3,799
    
    
    
    1,590Other
    
    
    579
    
    
    
    355Total other assets
    
    
    30,502
    
    
    
    28,069Total assets
    
    $
    140,039
    
    
    $
    152,891LIABILITIES & STOCKHOLDERS DEFICITCurrent Liabilities:Accounts payable
    
    $
    19,913
    
    
    $
    21,446Accrued expenses
    
    
    15,723
    
    
    
    16,854Customer deposits
    
    
    16,100
    
    
    
    12,586Revolving loan
    
    
    11,674
    
    
    
    14,705Current maturities of capital lease obligations
    
    
    1,102
    
    
    
    1,510Accrued interest
    
    
    999
    
    
    
    992Current maturities of notes payable to financial
institutions
    
    
    873
    
    
    
    291Net liabilities of discontinued operations
    
    
    184
    
    
    
    278Total current liabilities
    
    
    66,568
    
    
    
    68,662Senior subordinated notes, net:New notes due 2006
    
    
    115,800
    
    
    
    115,800Old notes due 2008
    
    
    16,247
    
    
    
    16,247Term loan with a related party
    
    
    14,412
    
    
    
    8,250Notes payable to financial institutions, net of
current portion
    
    
    13,527
    
    
    
    8,209Capital lease obligations, net of current portion
    
    
    4,197
    
    
    
    26,188Junior subordinated notes due 2007, net
    
    
    3,289
    
    
    
    3,063Deferred income
    
    
    1,389
    
    
    
    1,473Other long-term liabilities
    
    
    505
    
    
    
    764Total long-term liabilities
    
    
    169,366
    
    
    
    179,994


3



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Commitments and Contingencies (see notes)Stockholders Deficit:Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding, 15,000 shares
designated Series A Junior Participating
    
    
    
    
    
    
    Common stock, $.001 par value, 500,000,000 shares
authorized, 31,640,994 shares issued and
outstanding
    
    
    32
    
    
    
    32Additional paid-in capital
    
    
    182,088
    
    
    
    182,088Accumulated deficit
    
    
    (278,015
    )
    
    
    (277,885
    )Total stockholders deficit
    
    
    (95,895
    )
    
    
    (95,765
    )Total liabilities and stockholders deficit
    
    $
    140,039
    
    
    $
    152,891


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 MonthsEnded June 30,2004
    
    2003Operating revenue:Sales, net
    
    $
    78,172
    
    
    $
    52,076Other
    
    
    
    
    
    
    3678,172
    
    
    
    52,112Cost of sales
    
    
    71,164
    
    
    
    50,537Gross profit
    
    
    7,008
    
    
    
    1,575Operating expenses
    
    
    5,608
    
    
    
    3,721Income (loss) from operations
    
    
    1,400
    
    
    
    (2,146
    )Interest expense
    
    
    2,144
    
    
    
    1,527Other income  net
    
    
    (352
    )
    
    
    (58
    )Loss before income taxes and discontinued
operations
    
    
    (392
    )
    
    
    (3,615
    )Income tax benefit
    
    
    
    
    
    
    (710
    )Loss from continuing operations before discontinued
operations
    
    
    (392
    )
    
    
    (2,905
    )Income from discontinued operations, net of income taxes
    
    
    144
    
    
    
    2,878Net Loss
    
    $
    (248
    )
    
    $
    (27
    )Basic and diluted loss per share:Loss from continuing operations
    
    $
    (0.01
    )
    
    $
    (0.09
    )Income from discontinued operations
    
    
    
    
    
    
    0.09Net Loss
    
    $
    (0.01
    )
    
    $
    Weighted average shares outstanding:Basic and diluted
    
    
    31,640,994
    
    
    
    31,640,994


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

For the Six MonthsEnded June 30,2004
    
    2003Operating revenue:Sales, net
    
    $
    161,502
    
    
    $
    103,307Other
    
    
    
    
    
    
    89161,502
    
    
    
    103,396Cost of sales
    
    
    148,403
    
    
    
    98,303Gross profit
    
    
    13,099
    
    
    
    5,093Operating expenses
    
    
    10,907
    
    
    
    6,671Income (loss) from operations
    
    
    2,192
    
    
    
    (1,578
    )Interest expense
    
    
    3,953
    
    
    
    3,075Other income  net
    
    
    (516
    )
    
    
    (886
    )Loss before income taxes and discontinued
operations
    
    
    (1,245
    )
    
    
    (3,767
    )Income tax benefit
    
    
    
    
    
    
    (884
    )Loss from continuing operations before discontinued
operations
    
    
    (1,245
    )
    
    
    (2,883
    )Income from discontinued operations, net of income taxes
    
    
    1,115
    
    
    
    3,175Net(loss)income
    
    $
    (130
    )
    
    $
    292Basic and diluted (loss)income per share:Loss from continuing operations
    
    $
    (0.04
    )
    
    $
    (0.09
    )Income from discontinued operations
    
    
    0.04
    
    
    
    0.10Net (loss) income
    
    $
    
    
    
    $
    0.01Weighted average shares outstanding:Basic and diluted
    
    
    31,640,994
    
    
    
    31,640,994


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 STATEMENT OF STOCKHOLDERS DEFICIT AND
COMPREHENSIVE LOSS
(In Thousands, Except Share Data)
(Unaudited)

TotalStockholders'Common Stock
    
    Additional
    
    
    
    
    
    Deficit andPaid-in
    
    Accumulated
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Deficit
    
    LossBalance as ofDecember 31, 2003
    
    
    31,640,994
    
    
    $
    32
    
    
    $
    182,088
    
    
    $
    (277,885
    )
    
    $
    (95,765
    )Net loss and comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (130
    )
    
    
    (130
    )Balance as ofJune 30, 2004
    
    
    31,640,994
    
    
    $
    32
    
    
    $
    182,088
    
    
    $
    (278,015
    )
    
    $
    (95,895
    )


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

7



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TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

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

For the SixMonths EndedJune 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (130
    )
    
    $
    292Adjustments to reconcile net (loss) income to cash used
in operating activities:Income from discontinued operations
    
    
    (1,115
    )
    
    
    (3,175
    )Paid-in-kind interest note obligations
    
    
    1,095
    
    
    
    225Write-off of deferred financing fees
    
    
    145
    
    
    
    Gain on Aerocell settlement, net of cash received
    
    
    
    
    
    
    (455
    )Depreciation and amortization
    
    
    2,654
    
    
    
    2,583Amortization of deferred financing costs
    
    
    542
    
    
    
    1,164Provision for (recovery of) doubtful accounts
    
    
    27
    
    
    
    (158
    )Change in working capital:Accounts receivable
    
    
    (10,696
    )
    
    
    (12,782
    )Inventories
    
    
    70
    
    
    
    (3,085
    )Other assets
    
    
    173
    
    
    
    (2,272
    )Accounts payable
    
    
    (2,363
    )
    
    
    6,611Customer deposits
    
    
    3,514
    
    
    
    1,008Other liabilities
    
    
    (1,216
    )
    
    
    (423
    )Net cash used in operating activities
    
    
    (7,300
    )
    
    
    (10,467
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of fixed assets, net of transaction
expenses
    
    
    24,861
    
    
    
    Purchases of fixed assets
    
    
    (1,139
    )
    
    
    (612
    )Net cash provided by (used in) investing activities
    
    
    23,722
    
    
    
    (612
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under senior debt facilities
    
    
    171,787
    
    
    
    103,897Payments under senior debt facilities
    
    
    (174,818
    )
    
    
    (95,330
    )Proceeds of term loan with related party
    
    
    6,162
    
    
    
    3,050Proceeds of term loans with financial institutions, net
    
    
    5,900
    
    
    
    Payments on capital leases
    
    
    (24,623
    )
    
    
    (558
    )Payments of deferred financing costs
    
    
    (2,896
    )
    
    
    (435
    )Net cash (used in) provided by financing activities
    
    
    (18,488
    )
    
    
    10,624Net cash provided by discontinued operations
    
    
    720
    
    
    
    254Net decrease in cash and cash equivalents
    
    
    (1,346
    )
    
    
    (201
    )Cash and cash equivalents, beginning of period
    
    
    1,603
    
    
    
    339Cash and cash equivalents, end of period
    
    $
    257
    
    
    $
    138


8



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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest paid
    
    $
    2,422
    
    
    $
    3,012Income taxes refunded
    
    
    
    
    
    $
    174SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES:Acquisition of property through capital lease
    
    $
    2,224
    
    
    $
    Value of warrant issued to shareholder in exchange for
note payable financing
    
    $
    
    
    
    $
    1,258


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

9



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TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
(Amounts and Shares in Thousands, Except Per Share Data)

1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY

DESCRIPTION OF BUSINESS

TIMCO Aviation Services, Inc. (the 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 distributors throughout the world.

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 U.S. generally accepted
accounting principles 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, 2003 (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 June 30, 2004, the results of its
operations for the three month and six month periods ended June 30, 2003 and
2004 and its cash flows for the six month periods ended June 30, 2003 and 2004.
The results of operations and cash flows for the six month period ended June
30, 2004 are not necessarily indicative of the results of operations or cash
flows which may be reported for the year ending December 31, 2004.

LIQUIDITY

During the quarter ended June 30, 2004, the Company refinanced all of its
senior debt. On April 8, 2004, the Company closed on an agreement with the CIT
Group in which the Company obtained a $35,000 senior secured revolving line of
credit (the CIT Group Revolving Line of Credit) and a $6,400 senior secured
term loan (the CIT Group Term Loan, and collectively with the CIT Group
Revolving Line of Credit, the CIT Group Credit Facility). The CIT Group
Credit Facility matures on December 31, 2007. Effective on the same date, the
Company obtained an $8,000 senior secured term loan from Hilco Capital LP (the
Hilco Term Loan) and refinanced the $14,412 of aggregate term debt due to its
principal stockholder. In addition, on March 31, 2004, the Company sold its
office and warehouse facility located in Miramar, Florida and used the proceeds
to repay in full the Companys TROL financing obligation ($23,824 as of March
31, 2004). For details of these events, see Notes 3, 4 and 5.

For the year ended December 31, 2003, the Company incurred a loss from
continuing operations of $4,303 (adjusted for the reclassification of
income and expenditures related to the Companys Miramar
facility. See Note 2 for particulars). The Company also had a net stockholders
deficit as of December 31, 2003 and continued to require additional cash flow
above amounts currently being provided from operations to meet its working
capital requirements. The Companys ability to service its debt obligations as
they come due, including maintaining compliance with the covenants and
provisions of all of its debt obligations, is dependent upon the Companys
future financial and operating performance. That 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, as a result of the state of the
general economy, fluctuations in the price of jet fuel, a significant decline
but partial resurgence, from calendar year 2000, in passenger airline travel,
the currently on-going global war on terrorism, the war in Iraq, and a
competitive price reduction in airfare prices has significantly impacted the
airline industry, and thus the Companys customer base. 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.

10



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The Company is highly leveraged and has significant obligations under its
outstanding debt agreements. As a result, significant amounts of cash flow from
operations are needed to make required payments of the Companys debt
obligations, thereby reducing funds available for other purposes. Even if the
Company is able to meet its debt service and other obligations when due, the
Company may not be able to comply with the covenants and other provisions under
its debt instruments. A failure to comply, unless waived by the lenders and
noteholders, would be an event of default and would permit the lenders to
accelerate the maturity of these debt obligations. It would also permit the
lenders to terminate their commitments to extend additional credit under their
financing agreements. If the Company was unable to meet its obligations under
its debt instruments, or if the Company could not obtain waivers of defaults
under any such agreements (including defaults caused by the failure to meet
financial covenants), the lenders could proceed against the collateral securing
these financing obligations and exercise all other rights available to them.
While the Company expects that it will make all required debt payments and meet
all financial covenants in 2004, there can be no assurance that it will be able
to do so.

2. SALE OF ASSETS AND OPERATING ENTITIES

In March 2004, the Company sold its office and warehouse facility located in
Miramar, Florida for a sales price of $26,000. See Note 5 for particulars of
this sales transaction and resulting repayment of the Companys TROL financing
that was secured by the assets of this facility. The Company has
determined that the gain from its sale of the
Miramar facility along with the related rental income, depreciation
expense and interest expense should be netted with income from discontinued
operations. These amounts were reported as part of continuing
operations in the Companys
condensed consolidated financial statements for the three months ended
March 31, 2004. Had the
Company reported these amounts as components of discontinued
operations for the quarter ended March 31, 2004 the
Companys loss from continuing operations before discontinued
operations would have been $853 ($0.03 per basic share and $0.00 per
diluted share) and the Companys income from discontinued
operations would have been $971 ($0.03 per basic share and $0.00 per
diluted share).

In December 2003, the Company entered into an agreement to sell an idle
facility located in Covington, Kentucky. This facility was previously part of
the Companys manufacturing operations and had no operations since fiscal 2000.
The net sales price was $454 and is included within net assets of discontinued
operations as of December 31, 2003 within the accompanying condensed
consolidated balance sheet. The resulting gain on this sale, which was
recognized with the consummation of the sale during the fourth quarter of 2003,
was $411. The cash proceeds related to this sale were fully funded in February
2004.

3. SENIOR CREDIT FACILITIES

Commencing January 30, 2004, the Company entered into a series of two
amendments and limited waiver agreements pursuant to which the maturity date of
the Companys then existing senior revolving credit and term loan facilities,
which were scheduled to mature on January 31, 2004, were extended until July
31, 2004. Through these series of amendments and limited waiver agreements,
the Company temporarily extended its senior revolving credit facility and term
loan (the Amended Credit Agreement). Under the Amended Credit Agreement, the
Company had a $30,000 senior secured revolving line of credit (the Amended
Revolving Credit Facility) and a $3,500 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 were
secured by a lien on substantially all of the Companys assets and the
borrowing base consisted primarily of certain of the Companys account
receivables, inventory, and machinery and equipment. The interest rate on the
Amended Revolving Credit Facility was, at the Companys option, (a) prime plus
3% per annum, or (b) LIBOR plus 4.5% per annum. The interest rate on the
Amended Term Loan was 12% per annum.

On April 8, 2004, the Company closed on a refinancing of its senior debt as
contemplated by a financing agreement dated April 5, 2004 between the Company
and the CIT Group. Under this financing agreement, the Company obtained the
CIT Group Revolving Line of Credit, which is a $35,000 senior secured revolving
line of credit, and the CIT Group Term Loan, which is a $6,400 senior secured
term loan. The Company used the proceeds from the CIT Group Credit Facility to
repay in full amounts outstanding under its Amended Revolving Credit Facility,
to repay the warrant repurchase obligation due to a previous lender (as
described in Note 7) and for working capital.

The CIT Group Revolving Line of Credit is due December 31, 2007 and bears
interest, at the Companys option, at (a) Prime plus an advance rate ranging
from 0.00% to 0.75%, or (b) LIBOR plus an advance rate ranging from 2.50% to
4.00%, with the advance rates contingent on the Companys leverage ratio. The
Company has currently elected the Prime option. Also, in accordance with the
requirements of EITF 95-22, the Company has presented this revolving line of
credit as a short-term obligation. The CIT Group Term Loan is due in quarterly
installments of $291, commencing on October 1, 2004, with the final quarterly
installment due on December 31, 2007. The CIT Group Term Loan bears interest
at the prevailing rate of the CIT Group Revolving Line of Credit plus one
percent. Also, the CIT Group Credit Facility contains certain financial
covenants regarding the Companys financial performance and certain other
covenants, including limitations on the incurrence of additional debt, and
provides for the termination of the CIT Group Credit Facility and repayment of
all debt in the event of a change in control, as defined. In addition, an
event of default under the Hilco Term Loan (described below) will also result
in a default under the CIT Group Credit Facility. Borrowings under the CIT
Group Credit Facility are secured by a lien on substantially all of the
Companys assets. Borrowings under the CIT Group Revolving Line of Credit are
based on a borrowing base formula that takes into account the level
of the Companys

11



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##### 



receivables and inventory. Further,
the amounts that the Company can borrow under the CIT Group Revolving
Line of Credit are affected by
various availability reserves that are established by the lenders under the
financing agreement, and the Companys borrowings under the CIT Group Revolving
Line of Credit are limited based on the ratio of the Companys debt to EBITDA.
Finally, the agreement relating to the CIT Group Revolving Line of
Credit requires that at the time of each additional borrowing, the
Company must be in a position to make various representations and
warranties to its lenders regarding its business (including several reaffirming
that there have been no changes in the status of specific aspects of
the Companys business that could reasonably be expected to have
a material adverse effect upon the business, operation, assets,
financial condition or collateral of the Company and its subsidiaries
taken as a whole), and be in compliance with various affirmative and
negative covenants, all as more particularly set forth in the
agreement. As of June 30, 2004, the outstanding aggregate amount borrowed under the CIT
Group Revolving Credit Facility was $11,674, the outstanding CIT Group Term
Loan was $6,400, the amount of outstanding letters of credit under the CIT
Group Revolving Credit Facility was $10,064 and $10,063 was available for
additional borrowing under the CIT Group Revolving Credit Facility.

Additionally, simultaneous with its obtaining the CIT Group Credit Facility,
the Company obtained the Hilco Term Loan, which is an $8,000 term
loan, from Hilco Capital LP. The Company used the proceeds from the Hilco Term Loan to
repay amounts outstanding under its Amended Revolving Credit Facility and
Amended Term Loan. The Hilco Term Loan matures on December 31, 2007 and bears
interest at Prime plus an advance rate ranging from 3.00% and 6.00% with the
advance rate contingent upon our meeting (from time to time) a ratio of the
Companys secured debt to EBITDA. In addition, the Hilco Term Loan bears PIK
interest ranging from 2.00% to 5.00% with the prevailing rate also being
contingent upon the ratio of the Companys level of secured debt to EBITDA. At
no time during the term of this loan, however, will the combined cash and PIK
interest rate be less then 9.00% nor greater then 18.00% per annum. Also, the
Hilco Term Loan contains certain financial covenants regarding the Companys
financial performance and certain other covenants, including limitations on the
incurrence of additional debt, and provides for the termination of the Hilco
Term Loan and repayment of all debt in the event of a change in control, as
defined. In addition, an event of default under the CIT Group Credit Facility
(described above) will also result in a default under the Hilco Term Loan.
Borrowings under the Hilco Term Loan are secured by a lien on substantially all
of the Companys assets.

In connection with the CIT Group Credit Facility and the Hilco Term Loan, the
Company paid aggregate fees of approximately $2,858. These fees will be
amortized as deferred financing fees over the term of the new loans. In
addition, as a result of these financing activities, the Company has expensed
approximately $145 of deferred financing costs in April 2004 which relate to
the Amended Credit Facility.

In addition, the Company
previously had a $5,000 term loan with Bank of America (BofA),
which had been credit supported by various parties, including the Companys
principal stockholder, and which was scheduled to mature on January 31, 2004.
In connection with the above-described short-term extension of the Amended
Credit Facility, the Companys principal stockholder repaid BofA and agreed to
extend the term of this loan, under the same terms previously extended by BofA,
except the maturity date was extended until July 31, 2004. Under these terms,
this $5,000 related party term loan bore interest at the rate of LIBOR plus 2%.
In April 2004, the Company refinanced all of its previously outstanding debt
(principal plus accrued and unpaid interest), including this $5,000 term loan,
with its principal shareholder. See Note 4.

4. RELATED PARTY TERM LOAN

On May 14, 2003, the Company entered into an agreement with its principal
stockholder pursuant to which the principal stockholder loaned the Company
$6,050. This term loan was used for working capital requirements. This term
loan had a three-year maturity, was secured, and bore paid-in-kind interest at
the rate of 16% per annum. From inception through April 8, 2004 (the date the
Company refinanced of all of its outstanding related party debt obligations),
all interest obligations ($1,127) had been paid-in-kind. Further, the $1,300
loan obtained from the principal stockholder in connection with the acquisition
of Brice Manufacturing in October 2002 was combined with and
added into this $6,050 loan. This
term loan from the Companys principal stockholder contained cross acceleration
provisions if the obligations to the Companys senior lenders were accelerated.

In connection with the funding of the $6,050 term 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. The warrant valuation, as determined by an independent business
valuation specialist through a fair market value assessment of the Company, was
recorded at $1,258 as of May 14, 2003. The Company has recorded the value of
this warrant as deferred financing costs and was amortizing this amount to
expense over a three-year period (the original period of this loan). As a
result of the related party term loan refinancing described below, effective
April 8, 2004 the Company reset the amortization period for the unamortized
deferred financing balance and will amortize this amount over the term of the
newly established related party term loan (January 31, 2008).

In September 2003, the Company recorded a $900 obligation reflecting the
Companys purchase from its principal stockholder of the aircraft parts
inventory located at the Goodyear facility (which inventory was acquired by the
Companys principal stockholder in the AMS bankruptcy proceedings; see Note 7).

12



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In January 2004, the Companys principal stockholder repaid the Companys
previously outstanding $5,000 term loan with BofA and continued to extend this
loan to the Company under the same terms previously extended by BofA, except
the maturity date was extended until July 31, 2004. See Note 3 for
particulars.

On April 8, 2004, the Company combined all of its previously outstanding debt
(principal plus accrued and unpaid interest) with its principal stockholder
into a new $14,412 term loan due on January 31, 2008 (the LJH Term Loan). The
LJH Term Loan combines the $1,300 loan relating to the Brice acquisition, the
$6,050 related party term loan made in May 2003, the $900 obligation related to
the AMS inventory purchase, the $5,000 loan which replaced the BofA term loan
and PIK interest previously paid on these obligations. See above and Note 3
for a discussion of the outstanding debt components due to the Companys
principal stockholder that were combined in this new note. The LJH Term Loan
bears interest at 18% per annum, 6% of which is payable in cash and the balance
of which will be PIK. The LJH Term Loan is pari-passu with the New Notes, but
is secured by a lien on substantially all of the Companys assets. The LJH
Term Loan also contains cross acceleration provisions if the Companys
obligations to the CIT Group and Hilco are accelerated.

5. TAX RETENTION OPERATING LEASE (TROL) FINANCING

The Companys TROL financing arrangement was originally utilized to develop two
facilities: (i) a corporate headquarters and warehouse facility, which was
being 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 had guaranteed the Companys obligations under the
TROL financing arrangement. Payments were at a rate of Prime plus 3.25% to
4.00% and the Company was responsible for all property taxes, insurance and
maintenance of the property. Under the terms of the Amended TROL Financing
Agreement, entered into in July 2002, 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.

On February 5, 2004, the Company entered into a definitive agreement to sell
its office and warehouse facility located in Miramar, Florida, and on March 31,
2004, the Company closed on the sale contemplated by this definitive agreement.
The gross sales price was $26,000. The proceeds of the sale were used to repay
in full the TROL financing obligation ($23,824). The balance, net of
transaction expenses and other Miramar property related expenses which the
Company was obligated to pay, which approximates $320, was used to repay
amounts outstanding under the Amended Term Loan (which repayment occurred in
April 2004 as part of Companys refinance of all of its senior debt
obligations. See Note 3). Additionally, as a result of this sale, the Company
has recorded a gain on disposal of fixed assets of $825 in the first quarter.
This gain is included within income from discontinued operations, net
of income taxes within the accompanying condensed
consolidated statements of operations for the six months ended June 30, 2004.
Finally, as was required under the Companys previous senior credit facility,
in February 2004, the Company entered into an amendment and limited waiver
agreement with its previous senior lenders for the purpose of releasing the
Miramar facility for sale.

6. SUBORDINATED NOTES

8% SENIOR SUBORDINATED PIK NOTES DUE 2006

On February 28, 2002, in connection with its capital and debt restructuring,
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. See Note 10 to Notes to Consolidated Financial
Statements contained in the Companys 2003 Form 10-K for particulars of the
Companys February 2002 capital and debt restructuring and for further details
of the 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: 2004  73.0%, 2005  75.625% and 2006  77.5%. The New Notes also
provide that the holders will receive an aggregate of 3,003 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 270,276 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 share.

13



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8 1/8% SENIOR SUBORDINATED NOTES DUE 2008

In 1998, the Company sold $165,000 of senior subordinated notes (Old Notes)
with a coupon rate of 8.125% at a price of 99.395%, which mature on February
15, 2008. On February 28, 2002, $149,000 face value of these notes were
cancelled as part of a note exchange in exchange for cash and securities, and
substantially all of the covenants contained in the indenture relating to the
remaining Old Notes were 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, 2004. Interest on the
Old Notes is payable on February 15 and August 15 of each year. See Note 5 to
the Notes to Consolidated Financial Statements contained in the Form 10-K for
details regarding the Old Notes.

The Old 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) 2004102.708%; (ii) 2005101.354%; and (iii) 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 remaining Old Notes
upon a change in control or that such repurchase will then be permitted under
the Companys senior credit facilities.

8% JUNIOR SUBORDINATED PIK NOTES DUE 2007

In September 2002, as part of a class action settlement, the Company issued
$4,000 face value, in aggregate, new junior subordinated convertible PIK notes
(Junior Notes). The Junior Notes bear interest at 8% and mature on January
2, 2007. Interest on the Junior Notes is 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. 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. See
Notes 5 and 7 of Notes to Consolidated Financial Statements contained in the
Form 10-K for particulars of the class action settlement and for further
details regarding the Junior 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: 2004  73.0%, 2005  75.625% and 2006  77.5%. The Junior
Notes also provide that the holders will receive an aggregate of 104 shares of
common stock if the Junior Notes are redeemed in 2004, 2005 or 2006.

If the Junior Notes have not already been redeemed or repurchased, the Junior
Notes, including those Junior Notes previously issued as paid-in-kind interest
and all accrued but unpaid interest, will automatically convert on January 2,
2007 into an aggregate of 9,320 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.

7. COMMITMENTS AND CONTINGENCIES

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. 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 adequate accrual for the estimated costs associated with its
current remediation strategies. Additionally, there are other areas adjacent to TIMCO-Lake Citys facility that
could also require remediation. The Company does not believe that it is
responsible for these areas; however, it may be asserted that the Company and
other parties are jointly and severally liable and are responsible for the
remediation of those properties. Based upon the most recent cost
estimates provided by environmental consultants, it is estimated that
the total remaining

14



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testing, remediation and compliance costs for this facility will be $768.
Additionally, during 2003, the Company secured an insurance policy to comply
with financial assurances required by the FDEP.

Accrued expenses in the accompanying June 30, 2004 and December 31, 2003
condensed consolidated balance sheets include $768 and $810, respectively,
related to obligations to remediate the environmental matters described above.
Future information and developments will require the Company to continually
reassess the expected impact of the environmental matters discussed above.
Actual costs to be incurred in future periods may vary from the estimates,
given the inherent uncertainties in evaluating environmental exposures. These
uncertainties include the extent of required remediation based on testing and
evaluation not yet completed and the varying costs and effectiveness of
remediation methods. In the opinion of management, the ultimate resolution of
these environmental exposures will not have a material adverse effect upon the
financial condition or results of operations of the Company.

TRANSACTIONS WITH RELATED PARTIES

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 the
Goodyear Airport. In April 2003, the Company entered into an operating sublease
agreement with the principal stockholder to operate the business in the
facilities that were previously leased to AMS. The term of the sublease is for
three years with rental payments of $432 annually. Under the sublease
agreement, the Company is also responsible for insurance, taxes and charges
levied by the City of Phoenix under the main lease. In addition, as discussed
in Note 4, the Company increased its related party obligation by $900
reflecting the purchase from its principal stockholder of the aircraft parts
inventory located at the Goodyear facility (which inventory was acquired by the
Companys principal stockholder in the AMS bankruptcy proceedings). Further,
on April 4, 2004, the Company entered into an equipment lease with its
principal stockholder with respect to certain equipment and tooling used at the
Goodyear facility (which equipment and tooling had been acquired by the
Companys principal stockholder in the AMS bankruptcy proceedings). The lease,
which is recorded as a capital lease, is for a two-year term and requires
monthly payments of $74. Both the inventory sale and the equipment lease are
believed to be on terms not less favorable to the Company than could be
obtained from an unaffiliated third party.

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. This
lease agreement is believed to be on terms not less favorable to the Company
than could be obtained from an unaffiliated third party. The sale and
resulting leaseback qualify for sale leaseback accounting pursuant to SFAS No.
98, Accounting for Leases. The Company 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 June 30, 2004 and December 31, 2003 condensed consolidated balance
sheets includes $1,389 and $1,473, respectively, relating to this sale
leaseback transaction.

An entity controlled by the Companys principal stockholder purchases aircraft
for resale and lease, and the Company provides certain services for that
entity. Services provided to that entity are charged at not less then the
rates that would be charged for such services to an unaffiliated third party.
At June 30, 2004, receivables from this entity approximated $790 and are
included within the accompanying condensed consolidated balance sheet.

LITIGATION AND CLAIMS

The Company is involved in various 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.

15



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OTHER MATTERS

In connection with a previously outstanding term loan, the Company granted to
one of its lenders common stock purchase warrants to purchase 13 shares of the
Companys common stock exercisable for par value at any time until December 31,
2005. The warrants entitled 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 ($1,079 in the aggregate). In connection with the April 8,
2004 refinancing of the Companys senior debt (see Note 3), the Company settled
its warrant repurchase obligation to its prior lender by paying $870 in cash.
As a result of this settlement, the Company recognized a gain of $209. This
gain is included within other income-net for the three and six month periods
ended June 30, 2004 within the accompanying condensed consolidated statement of
operations.

On June 30, 2003, the Company entered into a long-term purchase agreement for
various inventory components to be used in the Companys Oscoda, Michigan
engine center. Contingent upon the achievement of guaranteed sales volume to
the Company by the third party supply vendor, the Company was committed to this
vendor to purchase an aggregate of $2,800 of inventory components over an
approximate two-year period. An initial inventory purchase of $500 took place
on June 30, 2003. The residual inventory purchase obligation of $2,300 was to
occur in $100 monthly increments. These monthly purchase commitments were
first to be reduced by inventory used in the normal course of business that is
currently on consignment from this third party supplier. Through portions of
2003 and most of 2004, the third party supply vendor did not achieve the
guaranteed sales volume levels and thus was in default of this purchase
agreement. As a result, during the second quarter ended June 30, 2004, the
Company terminated this purchase agreement.

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.

8. 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
    
    For the SixMonths Ended
    
    Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Weighted average common and common
equivalent shares outstanding:Basic
    
    
    31,640,994
    
    
    
    31,640,994
    
    
    
    31,640,994
    
    
    
    31,640,994Effect of dilutive securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    31,640,994
    
    
    
    31,640,994
    
    
    
    31,640,994
    
    
    
    31,640,994Common stock equivalents outstanding
which are not included in the
calculation of diluted earnings
per share because their impact
is antidilutive
    
    
    308,514,906
    
    
    
    300,736,282
    
    
    
    308,501,700
    
    
    
    297,301,584


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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 (loss) and earnings
(loss) per share if the Company had applied the fair value recognition of FASB
Statement No. 123 to stock-based employee compensation:

For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net (loss) income  as reported
    
    $
    (248
    )
    
    $
    (27
    )
    
    $
    (130
    )
    
    $
    292Additional expense
    
    
    (26
    )
    
    
    (154
    )
    
    
    (208
    )
    
    
    (388
    )Net loss  pro forma
    
    
    (274
    )
    
    
    (181
    )
    
    
    (338
    )
    
    
    (96
    )Net (loss) income per share, basic  as reported
    
    
    (0.01
    )
    
    
    
    
    
    
    
    
    
    
    0.01Net (loss) income per share, diluted  as reported
    
    
    (0.01
    )
    
    
    
    
    
    
    
    
    
    
    0.01Net loss per share, basic  pro forma
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    Net loss per share, diluted  pro forma
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    


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. 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.

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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
(Form 10-Q) includes TIMCO Aviation Services,
Inc. and its subsidiaries. This Form 10-Q contains, or may contain,
forward-looking statements, such as statements regarding our prospects,
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 Form 10-Q and in our Annual Report on
Form 10-K for the year ended December 31, 2003 (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 on us of the war on terrorism, the Iraq war, 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 future changes in government regulations. Should one or more of these
risks or uncertainties materialize, or should the assumptions underlying our
forward-looking statements prove incorrect, actual results may differ
significantly from results expressed or implied in any forward-looking
statements made by us in this 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

TIMCO Aviation Services, Inc. is among the worlds largest providers of fully
integrated aviation maintenance, repair and overhaul (MR&O) services for major
commercial airlines, regional air carriers, aircraft leasing companies,
government and military units and air cargo carriers. We provide four MR&O
services: TIMCO, which, with its four active locations, is one of the largest
independent providers of heavy aircraft maintenance services in the world;
Aircraft Interior Design and Brice Manufacturing, which specialize in the
refurbishment of aircraft interior components and the manufacture and sale of
aftermarket parts and new aircraft seats; TIMCO Engineered Systems, which
provides engineering services to both our other MR&O operations and our
customers; and TIMCO Engine Center, which refurbishes JT8D engines and performs
on-wing repairs for both JT8D and CFM-56 series engines. Visit TIMCO online at
www.timco.aero.

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

We were incorporated in Delaware in 1996 under the name Aviation Sales
Company. We changed our corporate name to TIMCO Aviation Services, Inc. in
February 2002. Our principal operating business, TIMCO, commenced operations in
1990. Our principal executive offices are at 623 Radar Road, Greensboro, North
Carolina 27410, and our telephone number is (336) 668-4410.

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RESULTS OF OPERATIONS

General

Operating revenues consist primarily of service revenues and sales of materials
consumed while providing services, net of allowances for any reworks,
discounts, or 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:



| |  | the timing of repair orders and payments from our customers,
and particularly our large customers,                                                                                       
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the state of the economy generally, the state of the airline
industry generally, and the financial condition and MR&O
requirements 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 impact during future periods on airline use of out-of-production aircraft
(such as 727, DC 8, DC 9 and DC 10) and JT8D engines as a result of
increased fuel costs and other factors,
| 
| |  | our ability to retain the services of our executive officers and
key employees,                                                                                                          
| 
| |  | 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 cost of operations are relatively fixed. Since we
typically do not obtain long-term commitments from our customers, we must
anticipate the future volume of orders based upon the historic patterns of our
customers and upon discussions with our customers as to their future
requirements. Cancellations, reductions or delays in orders by a customer or
group of customers have in the past and could in the future have a material
adverse effect on our business, financial condition and results of operations.

Three Months and Six Months Ended June 30, 2004 and 2003

Operating revenue for the six months ended June 30, 2004 increased $58,106 or
56.2% to $161,502, from $103,396 for the same period in 2003. Operating
revenue for the first half of 2004 included $19,107 in revenue from our
Goodyear, Arizona facility, which was subleased from our principal stockholder
in April 2003. During the first half of 2003, we generated $4,832 in revenue
from this facility. Without the revenue from our Goodyear facility, revenue for
the six month period ended June 30, 2004 and 2003 would have been $142,395 and
$98,564, respectively. Operating revenue for the three months ended June 30,
2004 increased $26,060 or 50.0% to $78,172, from $52,112 for the same period in
2003. Comparative three month revenue without the revenue from the operations
of our Goodyear facility would have been $70,770 for 2004 and $48,206 for 2003
(we are providing this information in order to compare the revenue derived from
facilities open in both the second quarter and first half of 2004 and the second
quarter and first half of 2003).

The increase in revenue for the three and six month periods ended June 30, 2004
compared to the revenue for the three and six month periods ended June 30, 2003
can primarily be attributed to additional revenue in our airframe heavy
maintenance operations (described below), in our engine center operation due to
an expanded customer base, in our Goodyear, Arizona facility (as discussed
above), and in our Brice operation, which has benefited from the cross sales of
our other service offerings and from an expanded customer base for its aircraft
seats.

Revenue for the three and six months ended June 30, 2004 were favorably
impacted by a significant influx of airframe heavy maintenance work to our MR&O
operations. Adverse market conditions during the first half of fiscal 2003
resulted in delays of maintenance service work by several of our significant
customers and adversely impacted our 2003 second quarter and six month results
of operations. Many of these delayed maintenance programs, however, were
inducted for service during the second half of 2003 and have continued through
the first half of fiscal 2004. In addition, during the first half of 2004 we
have expanded our customer base and, in some instances, increased our share of
outsourced maintenance by our existing customers. The impact on revenue for
the first half of 2004 and for the second quarter of 2004 was an

19



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##### 



increase in
revenue for our airframe MR&O facilities, including Goodyear, over the first half of 2003 and for the
second quarter of 2003 of approximately $50,804 and $21,687, respectively.
This increase in revenues from the operation of our airframe MR&O facilities,
coupled with the increased revenue for our engine center operation and our
Brice operation, resulted in a $57,105 and $25,780 improvement in revenue for
the first half of 2004 and for the second quarter of 2004 over the first half
of 2003 and for the second quarter of 2003, respectively.

While significantly improved over the first six months of 2003 and second
quarter of 2003, our revenue for the six month and three month periods ended
June 30, 2004 continued to be unfavorably impacted by general economic
conditions affecting the airline industry. For most of fiscal 2004, these unfavorable impacts include
increased jet fuel prices, increased price competition and continued downward pricing
pressures from airline customers. These factors forced us during fiscal 2003
and the first half of 2004 to reduce pricing and take fixed priced work at
lower rates, which adversely impacted revenues and gross margins.
Additionally, instability in the Middle East, the currently on-going war on
terrorism, and the war in Iraq have unfavorably impacted airline passenger
levels during fiscal 2004, which has equated to additional further delays of
maintenance service by some of our customers. Finally, changes in customer
maintenance schedules have impacted us in the past and are likely to impact us
in the future.

Gross profit increased to $13,099 for the six month period ended June 30, 2004
compared with a gross profit of $5,093 for the six month period ended June 30,
2003. Gross profit increased to $7,008 for the three month period ended June
30, 2004 compared with a gross profit of $1,575 for the three month period
ended June 30, 2003. The improvement of gross margin results for the six month
and three month periods ended June 30, 2004 over the same periods for 2003 was
spurred by the receipt of long-term repetitive customer maintenance programs
(referred to in the industry as nose-to-tail lines), where greater
efficiencies are generally achieved, and by higher revenues which
allowed us to better leverage our fixed costs contained in cost of
sales.

During the first half of 2003, because we
did not have significant nose-to-tail lines during this period, we were forced
to take a higher proportion of single-visit customers which resulted in a
deterioration of gross margin results due to lower productivity. In addition
to the increase in nose-to-tail maintenance programs, an overall increase in
sales levels, particularly for our engine center operation and Brice operation,
resulted in an improved gross margin. Gross profit as a percentage of revenue
increased to 8.1% and 9.0% for the six and three month periods ended June 30,
2004, respectively, from 4.9% and 3.0% for the comparable periods ended in
2003.

Gross profit levels are impacted by the fact that many of the costs of
operating our facilities are relatively fixed and therefore revenues above a
certain level have a more than proportional favorable impact on gross
margins. Further, gross margins 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 appropriately
valued our inventory at the lower of cost or market value, additional
allowances may be required in the future, depending on the market for aircraft
parts 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 six month
period ended June 30, 2004 were $10,907
compared to $6,671 for the six month period ended June 30, 2003. Operating
expenses for the three months ended June 30, 2004 were $5,608 compared to
$3,721 for the three months ended June 30, 2003. Operating expenses as a
percentage of revenues were 6.8% and 7.2% for the six and three month periods
ended June 30, 2004, respectively, compared to 6.5% and 7.1% for the same
respective periods in 2003.

During the second quarter of fiscal 2003, we terminated a lease agreement with
a third party for an abandoned facility in Burnsville, Minnesota. As a result
of this lease termination, we eliminated an accrual of $300 previously
established for our operating lease commitment. Additionally, during the
second quarter of fiscal 2003, we eliminated an environmental reserve that had
been established for property sold in the prior year. As it was determined
that we no longer had any exposure related to possible environmental matters
for this property, we eliminated an accrual of $264 previously established for
this exposure. Also, at the end of the second quarter of fiscal 2003, we
entered into an operating agreement with a third party vendor. As a result of
this agreement and modifications made to an accounts receivable balance due
from this vendor within the operating agreement, we eliminated the need for a
reserve of $300 against this receivable balance. Each of these eliminations of
exposures is reflected as a reduction to operating expenses for the three and
six month periods ended June 30, 2003. In addition, during the first quarter
of fiscal 2003 we were able to extend a sublease agreement with a third party
for a facility that we currently lease in Opa-Locka, Florida. As a result of
this sublease extension, we eliminated an accrual 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 $300 benefit
during the 2003 first quarter. Also, as a result of a revised estimate of
workers compensation insurance claims, we reduced our accrual for workers
compensation insurance by $400 during the first quarter of 2003. These
reductions in exposures are also reflected as an offset to operating expenses
for the

20



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six month period ended June 30, 2003. Had all of these offsets to operating expenses not occurred,
the 2003 first half and second quarter operating expenses as a percentage of
revenues would have been 8.0% and 8.8%, respectively. The combination of these
offsets to operating expenses for the first half of 2003, coupled with a
significant increase in revenues for the first half of 2004 compared to the
first half of 2003, resulted in the increased three and six month period
operating expenses reflected above.

As a result of these factors,
income from operations was $2,192 for the first
half of 2004, compared to loss from operations of $1,578 for the first half of
2003, and income from operations was $1,400 for the second quarter of 2004,
compared to a loss from operations of $2,146 for the second quarter of 2003.

Interest expense (excluding amortization of deferred financing fees) for the
six months ended June 30, 2004 increased by $1,355 or 70.9% to
$3,266, from $1,911 for the six months ended June 30, 2003. Interest expense (excluding
amortization of deferred financing fees) for the second quarter ended June 30,
2004 increased by $800 or 86.9% to $1,721 from $921 for the second quarter
ended June 30, 2003. The increases for the six and three month periods ended
June 30, 2004 as compared to the same periods of 2003 are primarily
attributable to non-cash interest expense (since the original $7,350 related
party term loan was a PIK instrument) on our related party term loan (which was
substantially funded in July 2003), the cash interest and non-cash interest
expense on our restructured $14,412 related party term loan (established April
8, 2004), the additional cash interest and non-cash interest expense on our
newly established $8,000 Hilco Term Loan (established April 8, 2004) and by
increased borrowing levels, year-over-year, under our credit facility. For the
three and six month periods ended June 30, 2004, our non-cash PIK interest
expense increased $528 and $868, respectively, as compared to the same periods
of 2003, while our cash interest expense increased for the three and six month
periods ended June 30, 2004 by $272 and $487, respectively, as compared to the
same periods of 2003.

Amortization of deferred financing costs was $687 and $1,164 for the six months
ended June 30, 2004 and 2003, respectively, and was $423 and $606 for the three
months ended June 30, 2004 and 2003, respectively. The decrease for the six
and three month periods ended June 30, 2004, compared to the six and three
month periods ended June 30, 2003 are primarily attributable to deferred
financing fees related to our July 2002 financing being fully amortized at the
end of January 2004 (the original maturity date for our Amended Credit Facility
and BofA Term Loan) with minimal additional financing fees incurred related to
the extension of the Amended Credit Facility through July 2004 (see Note 3 to
Notes of Condensed Consolidated Financial Statements for particulars of this
short-term extension). Partially offsetting this reduction is amortization of
deferred financing fees incurred in conjunction with our May 2003 amendment to
our July 2002 credit facility and TROL financing arrangement, deferred
financing fees incurred in conjunction with our newly established credit
facility and Hilco Term Loan, and deferred financing fees incurred in
conjunction with the warrant that was extended to our majority stockholder in
conjunction with securing a portion of our related party term loan. In
addition, during the second quarter ended June 30, 2004 we wrote-off $145 of
deferred financing fees that related to the above-described short-term extension of our
Amended Credit Facility.

Other income  net was
$516 and $352 for the six and three-month periods
ended June 30, 2004, respectively, compared to $886 and $58 for the six and
three-month periods ended June 30, 2003, respectively. Other income  net for
the first half of fiscal 2004 included a gain on the settlement relating to our warrant
repurchase obligation ($209). See Note 7 of the Notes to the Condensed
Consolidated Financial Statements. Other income  net for the first half of
fiscal 2003 was primarily comprised of a gain on the settlement of outstanding purchase price adjustments and
other obligations and funds held in escrow related to the July 2002 sale of our
Aerocell Structure operations ($570). See Note 3 of the Notes to the
Consolidated Financial Statements in our 2003 Form 10-K.

As a result of the above factors, our loss from continuing operations before
income taxes and discontinued operations for the six months ended June 30, 2004
was $1,245, compared to our loss from continuing operations before income taxes
and discontinued operations of $3,767 for the six months ended June 30, 2003.
Our loss from continuing operations before income taxes and discontinued
operations for the three months ended June 30, 2004 was $392, compared to our
loss from continuing operations before income taxes and discontinued operations
of $3,615 for the three months ended June 30, 2003.

For the first half of 2003, we recognized a $710 income tax benefit as a result
of the Internal Revenue Service (IRS) completing audits of our 1996, 1997,
1998 and 1999 federal income tax returns. Based on the findings in the IRS
agents report, we eliminated a $400 accrual for tax exposure matters and
established an income tax receivable for $310. Additionally, during 2003, we
recognized a tax benefit of $174 for the receipt of miscellaneous state
carryback refunds.

21



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For the reasons set forth above, our loss from continuing operations for the
six months ended June 30, 2004 was $1,245, or $0.04 per basic share and diluted
share, compared to a loss of $2,883, or $0.09 per basic share and diluted
share, for the six months ended June 30, 2003. Our loss from continuing
operations for the three months ended June 30, 2004 was $392, or $0.01 per
basic share and diluted share, compared to a loss of $2,905, or $0.09 per basic
share and diluted share, for the three months ended June 30, 2003.

Income from discontinued operations for the six and three month periods ended
June 30, 2004 was $1,115 and $144, respectively, or $0.04 and $0.00 per basic
share and diluted share, respectively, compared to income of $3,175
and $2,878,
respectively, or $0.10 and $0.09, respectively, per basic share and diluted
share for the same periods of 2003. Income from discontinued operations for
the first half of 2004 is comprised of a gain on the
disposition of our office and warehouse facility located in Miramar, Florida
($825), net rental income and expenses associated with this office and warehouse facility received prior to
its disposition ($75), and 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. Income
from discontinued operations for the first half of 2003 includes
net rental income and expenses associated with our Miramar facility ($86), 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. Additionally,
income from discontinued operations for the first half of 2003 includes $2,700
resulting from the elimination and settlement of contingency exposures and
obligations relating to our redistribution operations and new parts bearing
operations, based on a current evaluation of those exposures.

LIQUIDITY AND CAPITAL RESOURCES

Developments Concerning the Aviation Industry and Our Operations

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

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 reduction in passenger levels
from fiscal 2001 through portions of fiscal 2004, and the overall instability
in the Middle East (including the currently on-going war on terrorism and the
war in Iraq) have resulted in operating losses for U.S. airline carriers in
excess of $10.3 billion for 2001, $8.6 billion for 2002, and an approximate
$2.5 billion for 2003. 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 for us has been the filing for protection
from creditors under Chapter 11 by United Air Lines on December 9, 2002 (United
was our largest customer during the last three fiscal years). As of the date
of this Form 10-Q, United Air Lines has not emerged from protection under the
Bankruptcy Court. In addition to United Air Lines, other carriers 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.

We believe that all of the above factors could continue to have a negative
impact on our business in the foreseeable future. In response, 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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Contractual Payment Obligation and Other Commercial Commitments

Below is a chart setting forth our contractual payment obligations and other
commercial commitments as of June 30, 2004 which have been aggregated in order
to facilitate a basic understanding of our liquidity (in thousands):

Contractual
    
    
    
    
    
    Less than
    
    Payments due by periodObligations
    
    Total
    
    One Year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsRevolving
Credit
Facility
    
    $
    11,674
    
    
    $
    11,674
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-Term
Debt
    
    
    164,148
    
    
    
    873
    
    
    
    121,417
    *
    
    
    41,858
    
    
    
    Capital
Leases
    
    
    5,299
    
    
    
    1,102
    
    
    
    900
    
    
    
    336
    
    
    
    2,961Operating
Leases
    
    
    23,921
    
    
    
    3,530
    
    
    
    6,329
    
    
    
    4,615
    
    
    
    9,447Total
contractual
cash
obligations
    
    $
    205,042
    
    
    $
    17,179
    
    
    $
    128,646
    
    
    $
    46,809
    
    
    $
    12,408Other Commercial
    
    
    
    
    
    Less than
    
    Payments due by periodCommitments
    
    Total
    
    One Year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsLetters of
Credit
    
    
    10,064
    
    
    
    10,064
    
    
    
    
    
    
    
    
    
    
    
    Total Other
Commercial
Commitments
    
    $
    10,064
    
    
    $
    10,064
    
    
    $
    
    
    
    $
    
    
    
    $
    


* Included within this amount is $115,800 of our New Senior Subordinated Notes
and $3,289 of our Junior Subordinated Notes. If not redeemed or repurchased by
the Company prior to the maturity dates of these obligations, these notes
automatically convert to 270,276 and 9,320 shares, respectively, of our
authorized but unissued common stock.

 Outstanding letters of
credit primarily relate to security for our obligation to make
payments on an operating lease requiring annual payments of approximately $16,400. This
amount is removed from the operating lease and total contractual cash
obligations line because it is included with the letters of credit.

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

Liquidity

For the year ended December 31, 2003, we incurred losses from continuing
operations of $4,303 (adjusted for the reclassification of
income and expenditures related to our Miramar
facility. See Note 2 of the Notes to Condensed Consolidated
Financial Statements). We also had a net stockholders deficit as of December
31, 2003 and June 30, 2004, and continued to require additional cash flow above
amounts currently being provided from operations to meet our working capital
requirements.

Our ability to service our debt and note obligations, as they come due,
including maintaining compliance with the covenants and provisions under our
debt instruments, is and will be dependent upon our future financial and
operating performance. This performance, in turn, is subject to various
factors, including certain factors beyond our control, such as changes in
conditions affecting the airline industry and changes in the overall economy.
Additionally, our customer base has been adversely impacted in the past by
various factors, such as the state of the general economy, fluctuations in the
price of jet fuel, a significant decline but partial resurgence, from calendar
year 2000, in passenger airline travel, the currently on-going war on
terrorism, the war in Iraq, the outbreak of the SARS virus in Asia, and a
competitive price reduction in airfare prices. These and other factors may
adversely affect our customers in the future.

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Cash flow from operations service payments due on our debt and note
obligations, thereby reducing funds available for other purposes. Even if we
are able to meet our debt service and other obligations when due, we may not be
able to comply with the covenants and other provisions under our debt and note
obligations. A failure to comply, unless waived by the lenders and noteholders,
would be an event of default and would permit the lenders and noteholders to
accelerate the maturity of these debt and note obligations. It would also
permit them to terminate their commitments to extend credit under their
financing agreements. If we were unable to repay the debt to the lenders or
obligations to the noteholders, or otherwise obtain a waiver, the lenders and
holders could proceed against the collateral securing the financing obligations
and notes, and exercise all other rights available to them. While we expect to
be in a position to continue to meet our obligations in future periods, there
can be no assurance we will be able to do so.

On April 8, 2004, we completed the refinancing of all of our outstanding senior
credit facilities. Within our refinancing, we obtained a new a $35,000 senior
secured revolving line of credit and a $6,400 senior secured term loan from a
group of financial institutions led by CIT Group. Additionally, we obtained an
$8,000 senior secured term loan from Hilco Capital, LP. The proceeds of these
new facilities were primarily used to repay amounts outstanding under our
previous revolving credit and term loan facilities. Additional borrowings
available under the revolving credit portion of this new facility are being
used for working capital. As of August 11, 2004, we had availability under our
new revolving credit facility of $6,610. Additionally, we have combined all
of the previously outstanding debt due to our principal stockholder with a
restructured $14,412 term loan. Finally, we have recently sold our office and
warehouse facility located in Miramar, Florida for a gross purchase price of
$26,000. We used a portion of the proceeds from the sale to repay the $23,624
outstanding principal balance of our TROL financing arrangement and we used the
balance of the proceeds, net of transaction expenses and other property related
costs that we were obligated to pay, to repay amounts outstanding under our
previous term loan facility. See Notes 3, 4 and 5 of Notes to Condensed
Consolidated Financial Statements for a description of all of these
transactions.

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, general corporate or other purposes,
particularly where our current lenders have a lien on all of our assets;
| 
| |  | the requirement that we obtain the consent from our lenders if we wish
to borrow additional amounts; 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.

We believe that we will meet our working capital requirements during 2004 from
funds available under our revolving credit agreement 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.

Cash

Net cash used in continuing operating activities during the six months ended
June 30, 2004 was $7,300, compared to net cash used in continuing operating
activities of $10,467 for the same period in 2003. Cash used in operating
activities was primarily the result of earnings, adjusted for non-cash charges,
of approximately $3,218, increases in accounts receivable of $10,696, and
decreases in customer deposits of $3,514, offset by decreases in inventories
and other current assets, and increases in accounts payable, and other
liabilities of $70, $173, $2,363, and $1,216, respectively. The increase in
accounts receivable provided additional borrowing base for our revolving credit
facility, which funded this use of cash. Cash of $23,722 was provided by
investing activities during the first half of 2004, which included cash
proceeds of $24,861 from the sale of the Companys Miramar facility, offset by
$1,139 for the purchase of fixed assets. Cash used in financing activities
during 2004 was $18,488. Net proceeds from our newly established credit
facility and term loans, and from the sale of our Miramar facility were used
for operations, to make repayments under our previously outstanding Amended
Credit Facility, to pay $2,896 of bank and refinancing fees and to pay $24,623
of capital leases obligations, including $23,624 under our TROL financing
arrangement. Cash of $720 was provided by our discontinued operations.

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Senior Credit Facilities

See discussion of our senior credit facilities in Note 3 to Notes to Condensed
Consolidated Financial Statements and in our Form 10-K.

Subordinated Notes

See discussion of our subordinated note obligations in Note 6 to Notes to
Condensed Consolidated Financial Statements and in our Form 10-K.

TROL Financing

See discussion of our TROL financing in Note 5 to Notes to Condensed
Consolidated Financial Statements and in our Form 10-K.

CONTINGENCIES

We are involved in various litigation and environmental matters arising in the
ordinary course of business. These are discussed in Note 7 of Notes to
Condensed Consolidated Financial Statements and in our Form 10-K. 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.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Financial Reporting Release No. 60 requires 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.

See our Form 10-K for a discussion of our critical accounting policies and use
of estimates.

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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 as of June 30, 2004 under our CIT Group Credit Facility and
under our Hilco Term Loan bear interest at floating rates and therefore, we are
impacted by changes in prevailing interest rates. However at the same date,
our $14,412 related party term loan, our New Notes, Old Notes, and Junior Notes
all bore fixed interest rates and therefore were 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 2004 by approximately
$192 before taxes and would change the fair value of our financial instruments
by approximately $16,148.

ITEM 4: CONTROLS AND PROCEDURES



|(a) |  | Our Chief Financial Officer and Chief Executive Officer evaluated our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act)). Based on that evaluation, these
officers have concluded that as of June 30, 2004 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | As of June 30, 2004, we have carried out an evaluation, under the
supervision and with the participation of our management, including
our principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure
controls and procedures. Based on such evaluation, our principal
executive officer and principal financial officer concluded that the
Companys disclosure controls and procedures are effective.                                                                                                                    
|   
|(b) |  | There have been no significant changes in our internal controls or in
other factors that, have materially affected, or are reasonably likely
to affect, our internal controls over financial reporting.                                                                                                                                                                                                                                                                                                                                                                                        

26



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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 7 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

None

ITEM 5. OTHER INFORMATION

In June 2004, we named Clyde Kizer to our Board
of Directors. Further, during June 2004, Stephen E. Gorman resigned from our
Board of Directors.

ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K

(a) Exhibits

10.1
    
    Financing Agreement dated as of April 5, 2004 between the Company, The CIT Group/Business
Credit, Inc. and the Lenders. (2)10.2
    
    Financing Agreement between the Company and Hilco Capital LP. (2)10.3
    
    Intercreditor Agreement between The CIT Group/Business Credit, Inc., Hilco Capital LP and the
Company. (2)10.4
    
    Amended and Restated Consolidated Term Promissory Note in favor of LJH, Ltd. (2)10.5
    
    Amended and Restated Security Agreement between the Company and LJH, Ltd. (2)10.6
    
    Amended and Restated Guaranty Agreement. (2)10.7
    
    Intercreditor Agreement between the Company, The CIT Group/Business Credit, Inc., Hilco
Capital LP and LJH, Ltd. (2)10.8
    
    Equipment Lease Agreement between the Company and LJH, Ltd. (2)31.1
    
    Certification of Chief Executive Officer under Section 302 the Sarbanes-Oxley Act of 2002 (1)31.2
    
    Certification of Chief Financial Officer under Section 302 the Sarbanes-Oxley Act of 2002 (1)32.1
    
    Certification of Chief Executive Officer under Section 906 the Sarbanes-Oxley Act of 2002 (1)


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32.2
    
    Certification of Chief Financial Officer under Section 906 the Sarbanes-Oxley Act of 2002 (1)




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Notes to Exhibits

|(1) |  | Filed herewith                                                                                                
|--- |  | --------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference to the registrants Annual Report on Form 10-K for the year ended
December 31,
2003.

(b) Reports on Form 8-K

During the quarter ended June 30, 2004, the Company furnished a Current Report
on Form 8-K reporting under Item 12 of the Companys financial results for the
three month period ended March 31, 2004.

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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 ChiefFinancial Officer(Principal Financial Officer)Dated: August 13, 2004


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Exhibit Index

ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer under Section 302 the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer under Section 302 the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer under Section 906 the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer under Section 906 the Sarbanes-Oxley Act of 2002


30