United
States
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  Form
10-K
  ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE
SECURITIES EXCHANGE ACT OF 1934
  For the
fiscal year ended December 31, 2008
  Commission
file number 1-11398
  CPI
AEROSTRUCTURES, INC.
 (Exact
name of registrant as specified in its charter)
  New
      York
              
              11-2520310(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      No.)
  60
Heartland Blvd., Edgewood, New York 11717
 (Address
of principal executive offices)
 
 (631)
586-5200
 (Registrant’s
telephone number, including area code)
  Securities
registered pursuant to Section 12(b) of the Act:
  Title
      of Each Class
              
              Name
      of each exchange on which registeredCommon
      Stock, $.001 par value
              
              American
      Stock Exchange, Inc.
  Securities
registered pursuant to Section 12(g) of the Act: None
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
  Yes  oNox
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
  YesoNox
  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
  YesxNoo
  Indicate
by check mark if the disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  x
  1
   Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check
one):
 Large
      accelerated filer  o
              Accelerated
      filer  oNon-accelerated
      filer  o
              Smaller
      reporting company  x(do
      not check if a smaller reporting company)
 
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12-b-2 of the Exchange Act).
  Yes  o   
Nox
  
 As of
June 30, 2008 (the last business day of the registrant’s most recently completed
second fiscal quarter), the aggregate market value of the registrant’s common
stock (based on its reported last sale price on the American Stock Exchange of
$7.77) held by non-affiliates of the registrant was $49,459,658.
 
 As of
March 23, 2009, the registrant had 5,995,465 common shares, $.001 par value,
outstanding.
  Documents Incorporated by
Reference:
   Part III
(Items 10, 11, 12, 13 and 14) from the definitive Proxy Statement for the 2008
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission no later than 120 days after the end of the Registrant’s fiscal year
covered by this report.
  
 
 
  2
  CPI
AEROSTRUCTURES, INC.
 FORM 10-K
ANNUAL REPORT-2008
 TABLE OF
CONTENTS
 
 PART
      I
              
              
              4Item
      1.
              BUSINESS
              4Item
      1A.
              RISK
      FACTORS
              9Item
      1B
              UNRESOLVED
      STAFF COMMENTS
              13Item
      2.
              PROPERTIES
              13Item
      3.
              LEGAL
      PROCEEDINGS
              13Item
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITYHOLDERS
              13PART
      II
              
              
              14Item
      5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
              14Item
      6.
              SELECTED
      FINANCIAL DATA
              15Item
      7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
              16Item
      7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              21Item
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
              22Item
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL
      DISCLOSURE
              22Item
      9A(T)
              CONTROLS
      AND PROCEDURES
              22Item
      9B.
              OTHER
      INFORMATION
              23PART
      III
              
              
              23Item
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
              23Item
      11.
              EXECUTIVE
      COMPENSATION
              23Item
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
              23Item
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
              23Item
      14.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
              23Item
      15.
              EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
              24INDEX
      TO FINANCIAL STATEMENTS
              27
  3
  
  PART
I
   Item
1.  BUSINESS
   General
   CPI
Aerostructures, Inc. (“CPI Aero®” or the “Company”) is engaged in the contract
production of structural aircraft parts principally for the U.S. Air Force and
other branches of the U.S. armed forces, either as a prime contractor or as a
subcontractor for other defense prime contractors.  CPI Aero also acts
as a subcontractor to prime aircraft contractors in the production of commercial
aircraft parts.  Our strategy for growth has focused on government and
military sales as a prime contractor and increasingly as a subcontractor for
other defense prime contractors.  Due to our success as a
subcontractor to defense prime contractors and growth in the commercial sector,
we are also pursuing opportunities to increase our commercial subcontracting
business, which we expect will become a larger component of our business in the
future.
   As a
prime contractor supplying structural aircraft parts to the U.S. Government, we
deliver skin panels, leading edges, flight control surfaces, engine components,
wing tips, cowl doors, nacelle assemblies and inlet assemblies for military
aircraft such as the C-5A “Galaxy” cargo jet, the T-38 “Talon” jet trainer, the
C-130 “Hercules” cargo jet, the A-10 “Thunderbolt” or “Warthog” attack jet, and
the E-3 “Sentry” AWACS jet.  In 2008, we were awarded approximately
$9.2 million of prime contracts from the U.S. Government, compared to $22.7
million in 2007 and $23.0 million in 2006. Forty- nine percent and 63% of our
revenue in 2008 and 2007, respectively, was generated by prime government
contract sales.
   As a
subcontractor to leading defense prime contractors such as Northrop Grumman
Corporation, Lockheed Martin Corporation (“Lockheed”), Sikorsky Aircraft
Corporation (“Sikorsky”) and Vought Aircraft Industries, Inc. (“Vought”), we
deliver various pods, and modular and structural assemblies for military
aircraft such as the UH-60 “Black Hawk” helicopter, the MH-60S mine counter
measure helicopter and the C-5A cargo jet.  In 2008, we were awarded
approximately $36 million of government subcontracts from prime contractors,
compared to $9.0 million in 2007 and $7.0 million in 2006. Thirty percent of our
revenue in both 2008 and 2007, respectively, was generated by subcontracts with
defense prime contractors.
   We also
operate as a subcontractor to prime contractors, including Sikorsky and Spirit
AeroSystems, Inc. (“Spirit”), in the production of commercial aircraft
parts.  For Sikorsky, we deliver various kits and assemblies for the
S-92 civilian helicopter.  In 2008, we were awarded approximately
$10.0 million of commercial subcontracts from prime contractors. Twenty-one
percent and 7% of our revenue in 2008 and 2007, respectively, was generated by
commercial contract sales.
   CPI Aero
has over 28 years of experience as a contractor, completing over 2,500 contracts
to date.  Most members of our management team have held management
positions at large aerospace contractors, including Northrop Grumman
Corporation, Lockheed Martin Corporation and The Fairchild
Corporation.  Our technical team possesses extensive technical
expertise and program management and integration capabilities. Our competitive
advantage lies in our ability to offer large contractor capabilities with the
flexibility and responsiveness of a small company, while staying competitive in
cost and delivering superior quality products.  While the larger prime
contractors compete for significant modification awards and subcontract
components to other suppliers, they generally do not compete for awards for
smaller modifications or spare and repair parts, even for planes for which they
are the original manufacturer.  We qualify as a “small business” in
connection with U.S. government contract awards because we have less than 1,000
employees, and this allows us to compete for military awards set aside for
companies with this small business status.
   CPI Aero
was incorporated under the laws of the State of New York in January 1980 under
the name Composite Products International, Inc.  CPI Aero changed its
name to Consortium of Precision Industries, Inc. in April 1989 and to CPI
Aerostructures, Inc. in July 1992.  In January 2005, we began doing
business under the name CPI Aero®, a registered trademark of the
Company.  Our principal office is located at 60 Heartland Blvd.,
Edgewood, New York 11717 and our telephone number is (631)
586-5200.
   4
   
   We
maintain a website located at www.cpiaero.com.  Our
corporate filings, including our Annual Report on Form 10-K, our Quarterly
Reports on Form 10-Q, our Current Reports on Form 8-K, our proxy statements and
reports filed by our officers and directors under Section 16 (a) of the
Securities Exchange Act, and any amendments to those filings, are available,
free of charge, on our website as soon as reasonably practicable after we
electronically file such material with the Securities and Exchange
Commission.  We do not intend for information contained in our website
to be a part of this Annual Report on Form 10-K.
   
   Significant
Contracts
  The
ongoing maintenance of existing aircraft by the U.S. Air Force was the primary
driver of our growth in both the number of contracts and the size of awards
through mid-2005.  Our work related to providing parts for military
aircraft accounted for substantially all of our revenue for 2006 and
2007.  During 2008 approximately 21% of our revenue was derived from
our work as a subcontractor to major prime aerospace contractors on commercial
aircraft contracts.  Some of our significant military and commercial
contracts are as follows:
  Military
Aircraft – Prime Contracts with U.S. Government
   T-38
Talon.  The T-38 “Talon” is a twin-engine, high-altitude,
supersonic jet primarily used for pilot training that first flew in
1959.  More than 1,100 were delivered to the Air Force between 1961
and 1972, when production ended.  There are approximately 500 T-38’s
in active service with the Air Force, which has a program designed to extend the
structural life of the T-38 until 2020.  In 2001, we were awarded a
ten-year contract to build the structural inlets for the T-38 Propulsion
Modification Program. At the time, the T-38 contract was the largest in our
history, worth an estimated $61 million over the life of the
program.  The length and size of this program allowed us to develop a
long-term backlog and establish ourselves as a successful prime contractor for
larger and longer term programs.  The T-38 contract accounted for
approximately 24% of our revenue for 2008.
   C-5A.  The
C-5A “Galaxy” cargo jet is one of the largest aircraft in the world and can
carry a maximum cargo load of 270,000 pounds.  Lockheed delivered the
first C-5A in 1970.  The C-5A Galaxy carries fully equipped
combat-ready military units to any point in the world on short notice and then
provides field support to sustain the fighting force.  The Air Force
has created a comprehensive program to ensure the capabilities of its C-5A fleet
until 2040.  We are one of the leading suppliers of structural spare
parts and assemblies for the C-5A aircraft. We assemble numerous C-5A parts,
including panels, slats, spoilers and wing-tips and are the only supplier of
C-5A wing-tips to the U.S. government.  Like the C-5A itself, the
wing-tip is a large structure and is expensive – costing up to $750,000 for each
replacement piece.  Our first C-5A contract was approximately $590,000
of structural spares and was awarded in 1995.  In 2004, the Air Force
awarded us a seven-year TOP contract to build an assortment of parts for the
C-5A, including wing tips and panels.    Since 1995, we have
received releases under contracts for C-5A parts aggregating approximately $87
million, including $17.9 million from the TOP contract.  Future
releases under the TOP contract are unpredictable.  C-5A contracts
accounted for approximately 21%of our revenue for
2008.
   Military
Aircraft – Subcontracts with Prime Contractors
   UH-60
“Black Hawk” Helicopter.  The
UH-60 “Black Hawk” helicopter is a medium-lift utility or assault helicopter
built by Sikorsky. The Black Hawk was developed to meet a U.S. Army Utility
Tactical Transport Aircraft System (UTTAS) requirement for a replacement for the
UH-1 Iroquois helicopter in January 1972.  In September 2006, we
entered into a long-term agreement to supply Sikorsky with Hover Infra Red
Reduction System (HIRRS) module assemblies for the Black Hawk
helicopter.  There are approximately 1,500 Black Hawk helicopters
currently using the HIRRS configuration.  The initial order for the
HIRRS assemblies was valued at $4.4 million.  Through January 2008, we
have received three follow on orders, increasing the total value of the
requirements to $12.5 million.  We anticipate that additional
requirements will be added during the term and believe that total HIRRS
requirements will ultimately have a value in excess of $20 million by the end of
2010.  The UH-60 HIRRS contract accounted for approximately 12% of our
revenue for 2008.
   5
   Commercial Aircraft – Subcontracts
with Prime Contractors
  In March
2008, Spirit awarded us a contract to provide Spirit leading edges for the
Gulfstream G650 business jet, a commercial program that Spirit is supporting.
This is a multi-year contract with an initial order of approximately $3.5
million. The Spirit contract accounted for approximately 13% of our revenue for
2008.
  Sales
and Marketing
   We obtain
contracts for our products and services through the process of competitive
bidding. While historically the majority of our contracts have been less than
$200,000 in size, we successfully have competed for and have been awarded
significantly larger contracts.  Our average sales cycle, which
generally commences at the time a prospective customer issues a request for
proposal and ends upon delivery of the final product to the customer, typically
ranges from six months to two years for U.S. government contracts (although our
T-38 contract and our C-5 contract are for periods of 10 years and 7 years,
respectively), and up to 10 years for commercial contracts.  Our
military customers have included Defense Supply Center Richmond,
Wright-Patterson Air Force Base (AFB), Warner Robins AFB, Tinker AFB, NAVICP,
Hill AFB, U.S. Army Redstone Arsenal.  Our commercial customers have
included Sikorsky, Boeing, B.F. Goodrich (Rohr), Northrop Grumman, Lockheed,
Nordam, Shinmaywa and Derco.
   To
complement our in-house business development team, we use third party service
providers to help locate government contracts that are regularly posted by the
various defense logistic agencies.  The service providers screen
contracts according to criteria we establish and forward matching contracts to
us.  We then view the relevant contracts directly on government
websites and select contracts on which we will bid based on how well they fit
our core competency.  As of March 15, 2009, we had over $374 million
in bids outstanding, and we continue to make bids on contracts on a weekly
basis. We generally bid on 40 to 50 contracts per week.  Historically
we  have won approximately 14% of the contracts on which we have bid
that have been awarded, however during 2008 we won 41% of the contracts that
have been awarded.  We believe that this is a result of our emphasis
on bids for subcontracting work.
   We
qualify as a “small business” with respect to U.S. government contract awards
because we have fewer than 1,000 employees.  During 2008,
approximately 11% of the value of our current contracts were awarded to us under
this program.
   The U.S.
Air Force operates three Air Logistics Centers (ALC) through which it purchases
all structural replacement and modification parts.  Each ALC is
located on a domestic Air Force base and is responsible for the repair and
modification of different aircraft.  Parts worn out in the normal
course of operation and scrapped instead of repaired are ordered through the
centralized Defense Supply Center Richmond (DSCR).  We use consultants
to facilitate the procurement process some of whom are on-site at each ALC and
the DSCR.  These consultants are important as relationship managers
and typically have previous experience in aerospace procurement, engineering or
management.  The consultants provide us with timely feedback and keep
us apprised of large contracts, both commercial and military, that might be up
for bidding.  We expect that our consultants’ aerospace experience
will also be valuable as we continue to expand our marketing efforts in the
commercial aircraft sector.  We currently have ten consultants, three
of whom are compensated through monthly retainer arrangements; the others are
paid on a per diem basis.
  The
Market
 
 The
majority of our parts are sold for use by the U.S. Air
Force.  Accordingly, the national defense budget and procurement
funding decisions drive demand for our business.  The U.S. Department
of Defense (DoD) budget has been increasing over the past few
years.  Government spending requirements for procurement, operations
and maintenance for 2008 and beyond will continue to be affected by the global
war on terrorism through the continued need for military missions and
reconstruction efforts in Iraq and Afghanistan and the related fiscal
consequences of war.  We expect that DoD spending will grow with the
overall level of defense spending and we expect to benefit to the extent that
such spending is allocated to aircraft modification programs and spending on
spare and replacement parts.
 
 In 2006,
the DoD completed the Congressionally mandated 2006 Quadrennial Defense Review
(QDR).  The QDR
  6
  affirmed
the DoD’s commitment to its extensive investments in cargo transportability and
strategic lift and for maintaining and enhancing this capability by
recapitalizing and modernizing its mobility platforms, including the acquisition
and modernization of C-5 aircraft, one of our major
programs.  Notwithstanding defense budget increases and the DoD’s
commitment to maintaining support for aging aircraft during the two-year period
through August 2006, there was a significant slowdown in government contract
awards as well as releases under previously awarded contracts.  Faced
with the uncertainties of appropriations and timing of contract awards and
releases under previously awarded contracts, which we believe were driven by the
uncertainties of war, the market, change in presidential
administrations  and economic trends, we have expanded our activities
to include operating as a subcontractor to leading aerospace prime
contractors.  While uncertainties in government contract awards also
affected these prime contractors, because they are able to bid on and receive
contract awards for different programs than we are, we believe that pursuing
such opportunities has enabled us to access programs that we would not otherwise
be able to access given our smaller size and resources.  By increasing
our customer base, we have positioned our company to take advantage of
additional market opportunities and reduce the impact of the slowdown in
government contract awards and releases.  In 2006 and 2007 these
subcontracting opportunities have began to materialize, and in 2008 we had our
best subcontracting year ever as we were awarded approximately $36 million of
government subcontracts from prime contractors, compared to $9.0 million during
2007 and $7.0 million in 2006.
  Our
success as a subcontractor to defense prime contractors, coupled with growth in
the commercial sector, has provided us with opportunities to act as a
subcontractor to prime contractors in the production of commercial aircraft
parts.  In 2008, we were awarded approximately $10.0 million of
commercial subcontracts from prime contractors.
   Backlog
   We
produce custom assemblies pursuant to long-term contracts and customer purchase
orders.  Backlog consists of aggregate values under such contracts and
purchase orders, excluding the portion previously included in operating revenues
on the basis of percentage of completion accounting, and including estimates of
future contract price escalation.  Substantially all of our backlog is
subject to termination at will and rescheduling, without significant
penalty.  Congress often appropriates funds for a particular program
or contract on a yearly or quarterly basis, even though the contract may call
for performance that is expected to take a number of
years.  Therefore, our funded backlog does not include the full value
of our contracts.  Our backlog as of December 31, 2007 and December
31, 2008 was as follows:
  
 Backlog
              
              December
      31, 2007
              
              December
      31, 2008Funded
              
              $29,614,866
              
              $38,369,000Unfunded
              
              5,542,639
              
              205,822,000Total
              
              $35,157,505
              
              $244,191,000
  Approximately
48.3%of the total
amount of our backlog at December 31, 2008 was attributable to government
contracts.  Approximately $35million (91%)of the funded backlog at
December 31, 2008 is expected to be recognized as revenue during
2009.  Our unfunded backlog has increased significantly because of the
new long-term contracts that we received from Boeing, Spirit and another major
prime aerospace company during 2008.  These new long-term contracts
are expected to have yearly orders which will be funded in the
future.
   Material
and Parts
   We
subcontract production of substantially all parts incorporated into our products
to third party manufacturers under firm fixed price orders.  Our
decision to purchase certain components generally is based upon whether the
components are available to meet required specifications at a cost and with a
delivery schedule consistent with customer requirements. From time to time, we
are required to purchase custom made parts from sole suppliers and manufacturers
in order to meet specific customer requirements.
   We obtain
our raw materials from several commercial sources.  Although certain
items are only available from limited sources of supply, we believe that the
loss of any single supplier would not have a material adverse effect on our
business.
   7
   Competition
   We face
competition in our role as both a prime contractor to the U.S. government and as
a subcontractor to military and commercial aircraft
manufacturers.   We compete with numerous larger,
well-established prime contractors engaged in the supply of aircraft parts and
assemblies to the military, including Northrop Grumman Corporation, Lockheed,
Boeing , The Nordam Group and Vought.  All of these competitors
possess significantly larger infrastructures, greater resources and the
capabilities to respond to much larger contracts.  In certain
instances, we also may act as a subcontractor to some of these major prime
contractors.  We also compete against smaller contractors such as
AeroComponents, Aerospace Engineering and Support, GSE Dynamics, Honeycomb
Company of America, Alton Iron Works, B&B Devices and Precision
Manufacturing Solutions.
   We
believe that our competitive advantage lies in our ability to offer large
contractor capabilities with the flexibility and responsiveness of a small
company, while staying competitive in cost and delivering superior quality
products.  While the larger prime contractors compete for significant
modification awards and subcontract components to other suppliers, they
generally do not compete for awards in smaller modifications, spares and
replacement parts, even for aircraft for which they are the original
manufacturer.  We believe we compete effectively against the smaller
competitors because our smaller competitors generally do not have the expertise
we have in responding to requests for proposals for government
contracts.
   Government
Regulation
   Environmental
Regulation
   We are
subject to regulations administered by the United States Environmental
Protection Agency, the Occupational Safety and Health Administration, various
state agencies and county and local authorities acting in cooperation with
federal and state authorities.  Among other things, these regulatory
bodies impose restrictions to control air, soil and water pollution, to protect
against occupational exposure to chemicals, including health and safety risks,
and to require notification or reporting of the storage, use and release of
certain hazardous chemicals and substances.  The extensive regulatory
framework imposes compliance burdens and risks on us.  Governmental
authorities have the power to enforce compliance with these regulations and to
obtain injunctions or impose civil and criminal fines in the case of
violations.
   The
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA) imposes strict, joint and several liability on the present and former
owners and operators of facilities that release hazardous substances into the
environment.  The Resource Conservation and Recovery Act of 1976
(RCRA) regulates the generation, transportation, treatment, storage and disposal
of hazardous waste.  In New York, the handling, storage and disposal
of hazardous substances are governed by the Environmental Conservation Law,
which contains the New York counterparts of CERCLA and RCRA.  In
addition, the Occupational Safety and Health Act, which requires employers to
provide a place of employment that is free from recognized and preventable
hazards that are likely to cause serious physical harm to employees, obligates
employers to provide notice to employees regarding the presence of hazardous
chemicals and to train employees in the use of such substances.
   Our
operations require the use of a limited amount of chemicals and other materials
for painting and cleaning, including solvents and thinners, which are classified
under applicable laws as hazardous chemicals and substances.  We have
obtained a permit from the Town of Islip, New York, Building Division in order
to maintain a paint booth containing flammable liquids.
   Federal
Aviation Administration Regulation
   We are
subject to regulation by the Federal Aviation Administration (FAA) under the
provisions of the Federal Aviation Act of 1958, as amended.  The FAA
prescribes standards and licensing requirements for aircraft and aircraft
components.  We are subject to inspections by the FAA and may be
subjected to fines and other penalties (including orders to cease production)
for noncompliance with FAA regulations.  Our failure to comply with
applicable regulations could result in the termination of or our
disqualification from some of our contracts, which could have a material adverse
effect on our operations.
   Government
Contract Compliance
   Our
government contracts are subject to the procurement rules and regulations of the
United States government.  Many
   8
   of the
contract terms are dictated by these rules and
regulations.  Specifically, cost-based pricing is determined under the
Federal Acquisition Regulations (FAR), which provide guidance on the types of
costs that are allowable in establishing prices for goods and services under
U.S. Government contracts.  For example, costs such as those related
to charitable contributions, advertising, interest expense, and public relations
are unallowable, and therefore not recoverable through sales.  During
and after the fulfillment of a government contract, we may be audited in respect
of the direct and allocated indirect costs attributed thereto.  These
audits may result in adjustments to our contract costs.  Additionally,
we may be subject to U.S. government inquiries and investigations because of our
participation in government procurement.  Any inquiry or investigation
can result in fines or limitations on our ability to continue to bid for
government contracts and fulfill existing contracts. We believe that we are in
substantial compliance with all federal, state and local laws and regulations
governing our operations and have obtained all material licenses and permits
required for the operation of our business.
   Insurance
   We
maintain a $2 million general liability insurance policy, a $10 million products
liability insurance policy, and a $5 million umbrella liability insurance
policy.  Additionally, we maintain a $5 million director and officers’
insurance policy. We believe this coverage is adequate for the types of products
presently marketed because of the strict inspection standards imposed on us by
our customers before they take possession of our
products.  Additionally, the Federal Acquisition Regulations generally
provide that we will not be held liable for any loss of or damage to property of
the government that occurs after the government accepts delivery of our products
and that results from any defects or deficiencies in our products unless the
liability results from willful misconduct or lack of good faith on the part of
our managerial personnel.
   Proprietary
Information
   None of
our current assembly processes or products are protected by
patents.  We rely on proprietary know-how and information and employ
various methods to protect the processes, concepts, ideas and documentation
associated with our products.  These methods, however, may not afford
complete protection and there can be no assurance that others will not
independently develop such processes, concepts, ideas and
documentation.
   CPI Aero®
is a registered trademark of the Company.
   Employees
   As of
March 23, 2009, we had 85 full-time employees.  We employ temporary
personnel with specialized disciplines on an as-needed basis.  None of
our employees is a member of a union.  We believe that our relations
with our employees are good.
   
  Item
1A.  RISK FACTORS
  You
should consider the following risks carefully in evaluating us and our business
before making an investment decision.  The risks described below are
not the only risks we face.  Additional risks may also impair our
business operations.  If any of the following risks occur, our
business, results of operations or financial condition could be materially
adversely affected.  If that happens, the trading price of our common
shares could decline, and you may lose all or part of your
investment.
  Risks
related to our business
 
 We
depend on government contracts for most of our revenues.
  We are a
supplier, either directly or as a subcontractor, to the U.S. government and its
agencies, principally the U.S. Air Force.  79% of revenue for 2008,
93% of revenue for 2007 and 93% of revenue for 2006 was derived from government
contract sales.  Two of our prime contracts, for the T-38 “Talon” and
the C-5A, accounted for approximately 24% and 21% of our revenue for 2008 and
2007, respectively, and one of our government subcontracts, for the UH-60 “Black
Hawk” helicopter, accounted for approximately 12% of our revenue for
2008.  We depend on these government contracts for most of our
business.  If we are suspended or barred from contracting with the
U.S. government, if our reputation or relationship with individual federal
agencies were impaired, or if the government otherwise ceased doing business
with us or significantly decreased the amount of business it does with us, our
business, prospects, financial condition and operating results would be
materially adversely affected.
  9
  
 We
face risks relating to government contracts.
  There are
inherent risks in contracting with the U.S. government, including risks that are
peculiar to the defense industry, which could have a material adverse effect on
our business, prospects, financial condition and operating
results.  All contracts with the U.S. government contain provisions
and are subject to laws and regulations that give the government rights and
remedies not typically found in commercial contracts, including rights that
allow the government to:
  ·
              terminate
      contracts for convenience in whole or in part at any
  time;
   ·
              reduce
      or modify contracts or subcontracts if its requirements or budgetary
      constraints change;
   ·
              cancel
      multi-year contracts and related orders if funds for contract performance
      for any subsequent year become
unavailable;
   ·
              adjust
      contract costs and fees on the basis of audits completed by its
      agencies;
   ·
              claim
      rights in products and systems produced by
us;
   ·
              suspend
      or bar us from doing business with U.S. government;
  and
   ·
              control
      or prohibit the export of our
products.
  If the
U.S. government terminates a contract for convenience, we may recover only our
incurred or committed costs, settlement expenses and profit on work completed
prior to the termination.  If the government terminates a contract for
default, we may not recover even those amounts, and instead may be liable for
excess costs incurred by the government in procuring undelivered items and
services from another source.
 
 We
have risks associated with competing in the bidding process for U.S. government
contracts.
  
 We obtain
many of our U.S. government contracts through a competitive bidding process. In
the bidding process, we face the following risks:
 
 ·
              We
      must bid on programs in advance of their completion, which may result in
      unforeseen technological difficulties or cost
  overruns;
  ·
              We
      must devote substantial time and effort to prepare bids and proposals for
      competitively awarded contracts that may not be awarded to us;
      and
  ·
              Awarded
      contracts may not generate sales sufficient to result in
      profitability.
  We
are subject to strict governmental regulations relating to the environment,
which could result in fines and remediation expense in the event of
non-compliance.
  We are
required to comply with extensive and frequently changing environmental
regulations at the federal, state and local levels.  Among other
things, these regulatory bodies impose restrictions to control air, soil and
water pollution, to protect against occupational exposure to chemicals,
including health and safety risks, and to require notification or reporting of
the storage, use and release of certain hazardous substances into the
environment.  This extensive regulatory framework imposes significant
compliance burdens and risks on us.  In addition, these regulations
may impose liability for the cost of removal or remediation of certain hazardous
substances released on or in our facilities without regard to whether we knew
of, or caused, the release of such substances.  Furthermore, we are
required to provide a place of employment that is free from recognized and
preventable hazards that are likely to cause serious physical harm to employees,
provide notice to employees regarding the presence of hazardous chemicals and to
train employees in the use of such substances.  Our operations require
the use of a limited amount of chemicals and other materials for painting and
cleaning that are classified under applicable laws as hazardous chemicals and
substances.  If we are found not to be in compliance with any of these
rules, regulations or permits, we may be subject to fines, remediation expenses
and the obligation to change our business practice, any of which could result in
substantial costs that would adversely impact our business operations and
financial condition.
  10
  
 We
may be subject to fines and disqualification for non-compliance with Federal
Aviation Administration regulations.
 
 We are
subject to regulation by the Federal Aviation Administration under the
provisions of the Federal Aviation Act of 1958, as amended.  The FAA
prescribes standards and licensing requirements for aircraft and aircraft
components.  We are subject to inspections by the FAA and may be
subjected to fines and other penalties (including orders to cease production)
for noncompliance with FAA regulations.  Our failure to comply with
applicable regulations could result in the termination of or our
disqualification from some of our contracts, which could have a material adverse
effect on our operations.
 
 If
our subcontractors or suppliers fail to perform their contractual obligations,
our prime contract performance and our ability to obtain future business could
be materially and adversely impacted.
 
 Many of
our contracts involve subcontracts with other companies upon which we rely to
perform a portion of the services that we must provide to our
customers.  There is a risk that we may have disputes with our
subcontractors, including disputes regarding the quality and timeliness of work
performed by the subcontractor, customer concerns about the subcontract, our
failure to extend existing task orders or issue new task orders under a
subcontract, or our hiring of personnel of a subcontractor.  A failure
by one or more of our subcontractors to satisfactorily provide on a timely basis
the agreed-upon supplies or perform the agreed-upon services may materially and
adversely impact our ability to perform our obligations as the prime
contractor.  Subcontractor performance deficiencies could result in a
customer eliminating our ability to progress bill or terminating our contract
for default.  A prohibition on progress billing may have an adverse
effect upon our profitability and a default termination could expose us to
liability and have a material adverse effect on our ability to compete for
future contracts and orders.  In addition, a delay in our ability to
obtain components and equipment parts from our suppliers may affect our ability
to meet our customers’ needs and may have an adverse effect upon our
profitability.
 
 Due
to fixed contract pricing, increasing contract costs exposes us to reduced
profitability and the potential loss of future business.
 
  Operating
margin is adversely affected when contract costs that cannot be billed to
customers are incurred.  This cost growth can occur if estimates to
complete increase due to technical challenges or if initial estimates used for
calculating the contract price were incorrect.  The cost estimation process
requires significant judgment and expertise. Reasons for cost growth may include
unavailability and productivity of labor, the nature and complexity of the work
to be performed, the effect of change orders, the availability of materials, the
effect of any delays in performance, availability and timing of funding from the
customer, natural disasters, and the inability to recover any claims included in
the estimates to complete.  A significant
   change in
cost estimates on one or more programs could have a material effect on the
company’s consolidated financial position or results of operations.
  We
use estimates when accounting for contracts.  Changes in estimates
could affect our profitability and our overall financial position.
 
 We
recognize revenue from our contracts over the contractual period under the
percentage-of-completion (POC) method of accounting.  Under the POC
method of accounting, sales and gross profit are recognized as work is performed
based on the relationship between actual costs incurred and total estimated
costs at the completion of the contract.  Recognized revenues that
will not be billed under the terms of the contract until a later date are
recorded as an asset captioned “Costs and estimated earnings in excess of
billings on uncompleted contracts.”  Contracts where billings to date
have exceeded recognized revenues are recorded as a liability captioned
“Billings in excess of costs and estimated earnings on uncompleted
contracts.”  Changes to the original estimates may be required during
the life of the contract.  Estimates are reviewed monthly and the
effect of any change in the estimated gross margin percentage for a contract is
reflected in cost of sales in the period the change becomes
known.  The use of the POC method of accounting involves considerable
use of estimates in determining revenues, costs and profits and in assigning the
amounts to accounting periods.  As a result, there can be a
significant disparity between earnings (both for accounting and taxes) as
reported and actual cash received by us during any reporting
period.  We continually evaluate all of the issues related to the
assumptions, risks and uncertainties inherent with the application of the POC
method of accounting; however, one cannot be assured that our estimates will be
accurate.  If our estimates are not accurate or a contract is
terminated, we will be forced to adjust revenue in later
periods.  Furthermore, even if our estimates are accurate, we may have
a shortfall in our cash flow and we may need to borrow money to pay taxes until
the reported earnings materialize to actual cash receipts.
  11
  
 
 If
the contracts associated with our backlog were terminated, our financial
condition would be adversely affected.
  The
maximum contract value specified under each government contract that we enter
into is not necessarily indicative of the revenues that we will realize under
that contract.  Because we may not receive the full amount we expect
under a contract, we may not accurately estimate our backlog because the actual
accrual of revenues on programs included in backlog may never occur or may
change.  Cancellations of pending contracts or terminations or
reductions of contracts in progress could have a material adverse effect on our
business, prospects, financial condition or results of operations.  As
of December 31, 2008, our backlog was approximately $244.2 million, of which 16%
was funded and 84% was unfunded.
 
 
 We
may be unable to retain personnel who are key to our operations.
  
 Our
success, among other things, is dependent on our ability to attract and retain
highly qualified senior officers and engineers.  Competition for key
personnel is intense.  Our ability to attract and retain senior
officers and experienced, top rate engineers is dependent on a number of
factors, including prevailing market conditions and compensation packages
offered by companies competing for the same talent.  The inability to
hire and retain these persons may adversely affect our production operations and
other aspects of our business.
 
  The
current global credit crisis could make it more difficult for us to access
additional financing which is essential for funding the operations and growth of
our business.
 
 Our
ability to fund our operations and contractual commitments and refinance
maturing debt obligations requires access to sufficient bank credit
lines.  The current global economic environment has resulted in a
deterioration of credit markets, making borrowing more difficult for most
businesses. There is no indication when this credit crisis will
abate.  If in the future we are unable to obtain sufficient credit lines on
terms acceptable to us, the continued development or growth of our business and
our financial results may be materially adversely affected..
 
 We
are subject to the cyclical nature of the commercial aerospace industry, and any
future downturn in the commercial aerospace industry or general economic
conditions could adversely impact the demand for our products.
  Our
business may be affected by certain characteristics and trends of the commercial
aerospace industry or general economic conditions that affect our customers,
such as fluctuations in the aerospace industry’s business cycle, varying fuel
and labor costs, intense price competition and regulatory scrutiny, certain
trends, including a possible decrease in aviation activity and a decrease in
outsourcing by aircraft manufacturers or the failure of projected market growth
to materialize or continue.  In the event that these characteristics and
trends adversely affect customers in the commercial aerospace industry, they may
reduce the overall demand for our products.
 
 If we fail to maintain an effective
system of internal control over financial reporting, we may not be able to accurately
report our financial results. As a result, current and potential shareholders
could lose confidence in our financial reporting, which would harm our business
and the trading price of our common stock.
 
 Our
management determined that as of December 31, 2008, our internal control over
financial reporting was effective based on criteria created by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) set forth in Internal Control–Integrated Framework
(1992).  However, if material weaknesses are identified in our
internal control over financial reporting in the future, our management will be
unable to report favorably as to the effectiveness of our internal control over
financial reporting and/or our disclosure controls and procedures, and we could
be required to implement remedial measures.  A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial statements will
not be prevented or detected on a timely basis.  Such remedial
measures could be expensive and time consuming and could potentially cause
investors to lose confidence in the accuracy and completeness of our financial
reports, which could have an adverse effect on our stock price and potentially
subject us to litigation.
  12
  
  
  Item
1B. UNRESOLVED STAFF COMMENTS
 
 Not
Applicable
 
 Item
2.                                      PROPERTIES
  CPI
Aerostructures’ executive offices and production facilities are situated in an
approximate 60,000 square foot building located at 60 Heartland Blvd., Edgewood,
New York 11717.  CPI Aerostructures occupies this facility under a
ten-year lease that commenced in January 2005.  The current monthly
base rent is $34,148, plus real estate taxes.  Our base rent increases
at 3% per year through 2014.  We believe that our facilities are
adequate for our current needs.
  Item
3.                                      LEGAL
PROCEEDINGS
  None
  Item
4.                                      SUBMISSION
OF MATTERS TO A VOTE OF SECURITYHOLDERS
  None
   13
   PART
II
   Item
      5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
   Market
      Information
   Our
common shares are listed on the American Stock Exchange under the symbol
CVU.  The following table sets forth for 2008 and 2007, the high and
low sales prices of our common shares for the periods indicated, as reported by
the American Stock Exchange.
  
 Period
              High
              Low2007Quarter
      Ended March 31, 2007
              $7.25
              $6.50Quarter
      Ended June 30, 2007
              $8.35
              $6.60Quarter
      Ended September 30, 2007
              $9.10
              $7.79Quarter
      Ended December 31, 2007
              $8.73
              $7.602008Quarter
      Ended March 31, 2008
              $9.00
              $7.53Quarter
      Ended June 30, 2008
              $8.40
              $7.30Quarter
      Ended September 30, 2008
              $8.52
              $6.50Quarter
      Ended December 31, 2008
              $8.05
              $4.62
 
  On March
23, 2009, the closing sale price for our common shares on the New York Stock
Exchange Alternext US was $4.25. On March 23, 2009, there were 169 holders of
record of our common shares and, we believe, over 2,200 beneficial owners of our
common shares.
   Dividend
Policy
   To date,
we have not paid any dividends on our common shares.  Any payment of
dividends in the future is within the discretion of our board of directors and
will depend on our earnings, if any, our capital requirements and financial
condition and other relevant factors.  Our board of directors does not
intend to declare any cash or other dividends in the foreseeable future, but
intends instead to retain earnings, if any, for use in our business
operations.
   Recent
Sales of Unregistered Securities, Use of Proceeds from Registered
Securities
  None
   14
  
  Equity
Compensation Plan Information
  The
following table sets forth certain information at December 31, 2008 with respect
to our equity compensation plans that provide for the issuance of options,
warrants or rights to purchase our securities.
  Plan
      Category
              Number
      of Securities to be Issued upon Exercise of Outstanding Options, Warrants
      and Rights
              
              Weighted-Average
      Exercise Price of Outstanding Options, Warrants and Rights
              
              Number
      of Securities Remaining Available for Future Issuance under Equity
      Compensation Plans (excluding securities reflected in the first
      column)Equity
      Compensation Plans Approved by Security Holders
              1,047,332
              
              $6.42
              
              123,452
  
  ITEM
6.  SELECTED FINANCIAL DATA
 
 The
following table sets forth our financial data as of the dates and for the
periods indicated.  The data has been derived from our audited
financial statements.  The selected financial data should be read in
conjunction with our financial statements and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
 
 Statement
      of Operations Data:
              
              Years
      Ended December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Revenue
              
              $
              35,588,831
              
              
              $
              27,985,476
              
              
              $
              17,907,989
              
              
              $
              25,526,404
              
              
              $
              30,269,030Cost
      of sales
              
              
              27,065,243
              
              
              
              20,596,085
              
              
              
              16,264,351
              
              
              
              19,513,391
              
              
              
              19,973,231Gross
      profit
              
              
              8,523,588
              
              
              
              7,389,391
              
              
              
              1,643,638
              
              
              
              6,013,013
              
              
              
              10,295,799Selling,
      general and administrative expenses
              
              
              4,717,080
              
              
              
              4,355,027
              
              
              
              3,551,974
              
              
              
              3,342,729
              
              
              
              3,424,953Income
      (loss) from operations
              
              
              3,806,508
              
              
              
              3,034,364
              
              
              
              (1,908,336
              )
              
              
              2,670,284
              
              
              
              6,870,846Other
      income (expense):Interest/ other
      income
              
              
              78,952
              
              
              
              4,973
              
              
              
              6,656
              
              
              
              5,463
              
              
              
              7,294Interest
expense
              
              
              (31,847
              )
              
              
              (22,441
              )
              
              
              (20,326
              )
              
              
              (18,314
              )
              
              
              (8,109
              )Total
      other income (expense), net
              
              
              47,105
              
              
              
              (17,468
              )
              
              
              (13,670
              )
              
              
              (12, 851
              )
              
              
              (815
              )Income
      (loss) before taxes
              
              
              3,853,613
              
              
              
              3,016,896
              
              
              
              (1,922,006
              )
              
              
              2,657,433
              
              
              
              6,870,031Provision
      for (benefit from) income taxes
              
              
              1,263,000
              
              
              
              1,110,000
              
              
              
              (657,000
              )
              
              
              1,138,000
              
              
              
              1,794,000Net
      income (loss)
              
              $
              2,590,613
              
              
              $
              1,906,896
              
              
              $
              (1,265,006
              )
              
              $
              1,519,433
              
              
              $
              5,076,031Income
      (loss) per common share – basic
              
              $
              0.44
              
              
              $
              0.34
              
              
              $
              (0.23
              )
              
              $
              0.28
              
              
              $
              0.94Income
      (loss) per common share – diluted
              
              $
              0.42
              
              
              $
              0.32
              
              
              $
              (0.23
              )
              
              $
              0.25
              
              
              $
              0.83Basic
      weighted average number of shares outstanding
              
              
              5,952,703
              
              
              
              5,673,903
              
              
              
              5,446,711
              
              
              
              5,422,101
              
              
              
              5,386,595
  15
  
 Diluted
      weighted average number of shares outstanding
              
              
              6,203,789
              
              
              
              6,028,480
              
              
              
              5,446,711
              
              
              
              6,114,808
              
              
              
              6,096,302Balance
      Sheet Data:
              
              
              
              
              
              At
      December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Cash
              
              $
              424,082
              
              
              $
              338,391
              
              
              $
              38,564
              
              
              $
              877,182
              
              
              $
              1,756,350Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
              
              
              37,865,016
              
              
              
              31,148,181
              
              
              
              28,783,708
              
              
              
              28,389,202
              
              
              
              26,030,507Total
      current assets
              
              
              41,823,767
              
              
              
              35,575,822
              
              
              
              31,006,495
              
              
              
              31,458,345
              
              
              
              29,609,862Total
      assets
              
              
              43,351,506
              
              
              
              36,620,572
              
              
              
              32,160,187
              
              
              
              32,687,784
              
              
              
              30,759,124Total
      current liabilities
              
              
              6,688,372
              
              
              
              6,858,854
              
              
              
              5,883,991
              
              
              
              5,428,429
              
              
              
              5,213,460Working
      capital
              
              
              35,135,395
              
              
              
              28,716,968
              
              
              
              25,122,504
              
              
              
              26,029,916
              
              
              
              24,396,402Short-term
      debt
              
              
              920,668
              
              
              
              1,103,701
              
              
              
              392,188
              
              
              
              87,617
              
              
              
              83,144Long-term
      debt
              
              
              2,401,206
              
              
              
              7,605
              
              
              
              -----
              
              
              
              42,188
              
              
              
              129,276Shareholders’
      equity
              
              
              33,983,150
              
              
              
              29,603,514
              
              
              
              26,177,655
              
              
              
              27,162,272
              
              
              
              25,416,388Total
      liabilities and shareholders’ equity
              
              
              43,351,506
              
              
              
              36,620,572
              
              
              
              32,160,187
              
              
              
              32,687,784
              
              
              
              30,759,124
 
 Item
7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
  Forward-Looking
Statements
   When used
in this Form 10-K and in future filings by us with the Securities and Exchange
Commission, the words or phrases “will likely result,” “management expects” or
“we expect,” “will continue,” “is anticipated,” “estimated” or similar
expressions are intended to identify “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of
1995.  Readers are cautioned not to place undue reliance on any such
forward-looking statements, each of which speaks only as of the date
made.  Such statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected.  The risks are included
in “Item 1A: Risk Factors” and “Item 7: Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included in this Form
10-K.  We have no obligation to publicly release the result of any
revisions, which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
   You
should read the financial information set forth below in conjunction with our
financial statements and notes thereto.
   Business
Operations
   We are
engaged in the contract production of structural aircraft parts principally for
the U.S. Air Force and other branches of the U.S. armed forces, either as a
prime contractor or as a subcontractor for other defense prime contractors. Our
strategy for growth has focused on government and military sales as a prime
contractor and increasingly as a subcontractor for leading aerospace prime
contractors.
   Due to
our success as a subcontractor to defense prime contractors and growth in the
commercial sector, we are also pursuing opportunities to increase our commercial
subcontracting business.
   16
   Among our
major recent awards are:
  ·
                A
      long-term requirements contract of approximately $70 million from The
      Boeing Company for assemblies for 242 enhanced wings for the A-10
      “Thunderbolt” attack jet. The initial orders under this contract were for
      $13.2 million.
   ·
                An
      initial order of $7.9 million as part of a $98 million agreement by a
      leading global aerospace and defense company to provide structural kits
      for an in-production aircraft. The 8-year agreement has the potential to
      generate up to $150 million in revenue over the life of the
      program.
   ·
                A
      long-term multi-million dollar contract from Spirit AeroSystems for major
      aerostructure assemblies for the Gulfstream G650 aircraft for which we
      will build fixed leading edge assemblies.  We anticipate that
      this contract will generate significant revenue for us in the future. The
      initial order is valued at approximately $3.5
      million.  Deliveries of these assemblies will begin in 2009 and
      continue through 2014.
 The
lengths of our contracts vary but are typically between nine months and two
years for U.S. government contracts (although our T-38 contract and our C-5 TOP
contract are for periods of ten years and seven years,
respectively),  and up to ten years for commercial contracts. Except
in cases where contract terms permit us to bill on a progress basis, we must
incur upfront costs in producing assemblies and bill our customers upon
delivery.  Because of the upfront costs incurred, the timing of our
billings and the nature of the percentage-of-completion method of accounting
described below, there can be a significant disparity between the periods in
which (a) costs are expended, (b) revenue and earnings are recorded and (c) cash
is received.
  Critical
Accounting Policies
   Revenue
Recognition
  We
recognize revenue from our contracts over the contractual period under the
percentage-of-completion (POC) method of accounting.  Under the POC
method of accounting, sales and gross profit are recognized as work is performed
based on the relationship between actual costs incurred and total estimated
costs at the completion of the contract.  Recognized revenues that
will not be billed under the terms of the contract until a later date are
recorded as an asset captioned “Costs and estimated earnings in excess of
billings on uncompleted contracts.”  Contracts where billings to date
have exceeded recognized revenues are recorded as a liability captioned
“Billings in excess of costs and estimated earnings on uncompleted
contracts.”  Changes to the original estimates may be required during
the life of the contract.  Estimates are reviewed monthly and the
effect of any change in the estimated gross margin percentage for a contract is
reflected in cost of sales in the period the change becomes
known.  The use of the POC method of accounting involves considerable
use of estimates in determining revenues, costs and profits and in assigning the
amounts to accounting periods.  As a result, there can be a
significant disparity between earnings (both for accounting and taxes) as
reported and actual cash received by us during any reporting
period.  We continually evaluate all of the issues related to the
assumptions, risks and uncertainties inherent with the application of the POC
method of accounting; however, we cannot assure you that our estimates will be
accurate.  If our estimates are not accurate or a contract is
terminated, we will be forced to adjust revenue in later
periods.  Furthermore, even if our estimates are accurate, we may have
a shortfall in our cash flow and we may need to borrow money to pay taxes until
the reported earnings materialize to actual cash receipts.
  17
  Stock-Based
Compensation
 We
account for compensation expense associated with stock options in accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based
Payment.”
   Results
of Operations
   Year
Ended December 31, 2008 as Compared to the Year Ended December 31,
2007
   Revenue.  Revenue
for the year ended December 31, 2008 was $35,588,831 compared to $27,985,476 for
the same period last year, representing an increase of $7,603,355 or
27%.  The increase in revenue is primarily the result of our efforts
to increase our military and commercial subcontract business.  We
generate revenue primarily from government contracts for which we act as a prime
contractor or as a subcontractor and, to a lesser extent, from commercial
contracts.  Revenue generated from prime government contracts for the
year ended December 31, 2008 was $17,412,962 compared to $17,519,198 for the
year ended December 31, 2007, a decrease of $106,236 or 0.6%.  Revenue
generated from government subcontracts for the year ended December 31, 2008 was
$10,766,994 compared to $8,563,465 for the year ended December 31, 2007, an
increase of $2,203,529 or 26%.  Revenue generated from commercial
contracts was $7,408,875 for the year ended December 31, 2008 compared to
$1,902,813 for the year ended December 31, 2007, an increase of $5,506,062 or
289%.
   During
the year ended December 31, 2008, we received approximately $55.4 million of new
contract awards, which included approximately $9.2 million of government prime
contract awards, approximately $36.2 million of government subcontract awards
and approximately $10.0 million of commercial subcontract awards, compared to
$37.7 million of new contract awards in 2007, which included $22.7 million of
government prime contract awards, $9.0 million of government subcontract awards
and $6.0 million of commercial contract awards.
   As of
December 31, 2008, we had approximately $374 million in bids
outstanding.  We continue to make bids on contracts on a weekly
basis.
   As the
above results show, the Company has had success in our efforts to increase our
military and commercial subcontract business and as a result we expect to
continue to focus our marketing efforts in this area for the foreseeable
future.
  Gross
profit.  Gross profit for the year ended December 31, 2008 was
$8,523,588 compared to $7,389,391 for the year ended December 31, 2007, an
increase of $1,134,197.  As a percentage of revenue, gross profit for
the year ended December 31, 2008 was 24.0% compared to 26.4% for the same period
last year.
   The
decrease in gross margin percentage was anticipated by management and was due to
the impact of starting of new long term contracts and our shift to more
subcontracting business which is more price competitive.  We expect
that our gross margin percentage will stay in the range of 23%-25% for the
foreseeable future.
   Selling, general and administrative
expenses.  Selling, general and administrative expenses for the
year ended December 31, 2008 were $4,717,080 compared to $4,355,027 for the year
ended December 31, 2007, an increase of $362,053, or 8.3%.  This
increase was primarily due to a $100,000 increase in non-cash fees for stock
options issued as compensation to our board of directors, a result of the higher
valuation, on the same number of options issued, based on the Black-Sholes
option pricing model, a $78,000 increase in public fees, which included fees
paid for investor relations, fees for printing our reports and SEC filings,
transfer agent fees and other expenses associated with being a public company, a
$50,000 increase in miscellaneous charges taken by our commercial customers
because we are doing more subcontracting work and an $88,000 increase in
accounting and legal fees, which includes increased fees for Sarbanes-Oxley
compliance.
  
  Interest Expense.Interest
expense for the year ended December 31, 2008 was $31,847, compared to $22,441
for 2007, an increase of $9,406 or 41%.  Interest expense is increased
due to the company entering into a new term loan with Sovereign Bank in October
2008, for the purpose of funding tooling on new commercial
contracts.
   18
   Income (Loss) from
operations.  We had income from operations for the year ended
December 31, 2008 of $3,806,508 compared to $3,034,364 for the year ended
December 31, 2007.  The increase in income was a result of higher
sales.
   Year
Ended December 31, 2007 as Compared to the Year Ended December 31,
2006
   Revenue.  Revenue
for the year ended December 31, 2007 was $27,985,476 compared to $17,907,989 for
the same period last year, representing an increase of $10,077,487 or
56%.
   We
generate revenue primarily from government contracts for which we act as a prime
contractor or as a subcontractor and, to a lesser extent, from commercial
contracts.  Revenue generated from prime government contracts for the
year ended December 31, 2007 was $17,519,198 compared to $14,938,524 for the
year ended December 31, 2006, an increase of $2,580,674 or
17%.  Revenue generated from government subcontracts for the year
ended December 31, 2007 was $8,563,465 compared to $1,688,686 for the year ended
December 31, 2006, an increase of $6,874,779 or 407%.  The increase in
government contract revenue is predominantly the result of our efforts to
increase our subcontracting business, which accounted for 30% of our total
revenue in 2007 compared to 18% in 2006.  Revenue generated from
commercial contracts was $1,902,813 for the year ended December 31, 2007
compared to $1,280,779 for the year ended December 31, 2006, an increase of
$622,034 or 49%.  This increase resulted from our efforts to increase
our commercial subcontracting business due to our success as a subcontractor to
defense prime contractors and growth in the commercial sector.
   During
the year ended December 31, 2007, we received approximately $37.7 million of new
contract awards, which included approximately $22.7 million of government prime
contract awards, approximately $9.0 million of government subcontract awards and
approximately $6.0 million of commercial subcontract awards, compared to $30.0
million of new contract awards in 2006, which included $23.0 million of
government prime contract awards, $7.0 million of government subcontract awards
and no commercial contract awards.  Included in the 2006 government
prime contract award amount is a $5.0 million release on our C-5 TOP contract
compared to a $1.5 million C-5 TOP release in 2007.
  As of
December 31, 2007, we had approximately $220 million in bids
outstanding.  We continue to make bids on contracts on a weekly
basis.
 
 Gross
profit.  Gross profit for the year ended December 31, 2007 was
$7,389,391 compared to $1,643,638 for the year ended December 31, 2006, an
increase of $5,745,753.  As a percentage of revenue, gross profit for
the year ended December 31, 2007 was 26.4% compared to 9.2% for the same period
last year.  The increased gross profit percentage was a result of
several factors.  As revenue has increased, our overhead application
rate has improved, resulting in improved gross
profit.   Additionally, through a combination of on-site
observation and additional consulting and engineering assistance that we have
provided to our suppliers, we have worked at improving our suppliers’
efficiency, on-time performance and quality, which, in turn, has helped to
improve our profitability.  Notwithstanding these improvements, the
increase in gross profit percentage was lower than we expected because we
incurred costs to reconfigure the physical layout of our facility to accommodate
the increased activity that we anticipate from the new contracts that we have
been awarded recently. While this initiative reduced net income, we expect that
it will enhance our ability to increase net income in future years.
 
 Selling, general and administrative
expenses.  Selling, general and administrative expenses for the
year ended December 31, 2007 were $4,355,027 compared to $3,551,974 for the year
ended December 31, 2006, an increase of $803,053, or 22.6%.  This
increase was primarily due to:
 ·
              a
      $327,000 increase in consulting fees related to bids and proposals,
      predominantly the result of new bidding activity on subcontract
      work;
 ·
              a
      $72,000 increase in public company fees, which includes fees paid for
      investor relations, fees for printing our reports and SEC filings,
      transfer agent fees and other expenses associated with being a public
      company;
 ·
              a
      $415,000 increase in accrued bonus earned by three of our officers;
      and
 ·
              a
      $54,000 increase in expenses relating to relocating one of our
      employees.
  19
  This
increase was offset by a decrease in salaries of $86,000, resulting from having
one less Vice President on staff for the majority of 2007.
 
  Interest Expense.Interest
expense for the year ended December 31, 2007 was $22,441, compared to $20,326
for 2006, an increase of $2,115 or 10%.  Interest expense is
considered immaterial to our operations in both 2007 and 2006.
   Income (Loss) from
operations.  We had income from operations for the year ended
December 31, 2007 of $3,034,364 compared to a loss from operations of 1,908,336
for the year ended December 31, 2006.  The income was a result of
higher sales and higher gross margins described earlier.
   Liquidity
and Capital Resources
   General.At December 31,
2008, we had working capital of $35,135,395 compared to $28,716,968 at December
31, 2007, an increase of $6,418,427, or 22%.
   Cash Flow.A large portion of
our cash is used to pay for materials and processing costs associated with
contracts that are in process and which do not provide for progress
payments.  Contracts that permit us to bill on a progress basis must
be classified as “on time” for us to apply for progress payments.  In
February 2007, we agreed to pay $75,000 to have the late delivery orders on the
C-5 TOP contract classified as “on time.” Accordingly, beginning in February
2007, we have been able to apply for progress payments under this
program.  Costs for which we are not able to bill on a progress basis
are components of “Costs and estimated earnings in excess of billings on
uncompleted contracts” on our balance sheet and represent the aggregate costs
and related earnings for uncompleted contracts for which the customer has not
yet been billed.  These costs and earnings are recovered upon shipment
of products and presentation of billings in accordance with contract
terms.
   Because
the POC method of accounting requires us to use estimates in determining
revenues, costs and profits and in assigning the amounts to accounting periods,
there can be a significant disparity between earnings (both for accounting and
tax purposes) as reported and actual cash that we receive during any reporting
period.  Accordingly, it is possible that we may have a shortfall in
our cash flow and may need to borrow money until the reported earnings
materialize into actual cash receipts.
   At
December 31, 2008, our cash balance of $424,082 compared to $338,391 at December
31, 2007.  In addition, at December 31, 2008, accounts receivable of
$2,975,012 and costs in excess of billings on uncompleted contracts were
$37,865,016, which represents unbilled receivables of approximately $32,000,000,
which we expect to converted into cash within the next operating
cycle.
   JP Morgan Chase Credit
Facility.In September 2003, we entered into a three year, revolving
credit facility with JP Morgan Chase Bank (the “Chase Facility”), secured by our
assets.  In August 2006, we borrowed $350,000 under the Chase
Facility. The Chase Facility was amended and restated in October 2006, further
amended in May 2007 and expired on June 30, 2007.  All borrowings
under this facility were repaid in May 2007.
  
  Sovereign Bank Credit FacilitiesIn August 2007, we entered into a new two-year, $2.5 million revolving
credit facility with Sovereign Bank (the “Sovereign Revolving Facility”),
secured by all of our assets. The Sovereign Revolving Facility specifies an
interest rate equal to the lower of LIBOR plus 2% or Sovereign Bank’s prime rate
(3.3% as of December 31, 2008).  The Sovereign Revolving Facility
contains financial covenants related to interest coverage, net income and
capital expenditures, as defined in the credit agreement.  As of
December 31, 2008, we were in compliance with all of the financial covenants
contained in the credit agreement.  As of December 31, 2008, we had
borrowed $300,000 under the Sovereign Revolving Facility.
   20
  On
October 22, 2008, we obtained a $3 million term loan from Sovereign Bank to be
amortized over five years (the “Sovereign Term Facility”).  Prior to
entering into the term loan we had borrowed $2.5 million under the Sovereign
Revolving Facility to fund the initial tooling costs related to the previously
mentioned long-term contract with Spirit.  We used the proceeds from
the Sovereign Term Facility to repay the borrowings under the Sovereign
Revolving Facility and to pay for additional tooling related to the Spirit
contract.  The Sovereign Term Facility bears interest at the lower of
LIBOR plus 2.5%  or Sovereign Bank’s prime rate (3.3% as of December
31, 2008) and is secured by all of our assets.
   Concurrent
with entering into the Sovereign Term Facility, Sovereign Bank amended the terms
of the Sovereign Revolving Facility extending the term until August 2010 and
amending the covenants, as defined, commencing in the fourth quarter of
2009.
   The terms
and conditions of the Sovereign Revolving Facility are applicable to the
Sovereign Term Facility.
   Additionally,
the Company and Sovereign Bank entered into a five year interest rate swap
agreement, in the notional amount of $3 million.  Under the interest
rate swap, the Company pays an amount to Sovereign Bank representing interest on
the notional amount at a rate of 5.8% and receives an amount from Sovereign
representing interest on the notional amount at a rate equal to the one-month
LIBOR plus 2.5%. The effect of this interest rate swap will be the Company
paying a fixed interest rate of 5.8% over the term of the Sovereign Term
Facility.
  
  Contractual Obligations.The
table below summarizes information about our contractual obligations as of
December 31, 2008 and the effects these obligations are expected to have on our
liquidity and cash flow in the future years.
  
 Contractual
      Obligations
              Payments
      Due By Period ($)Total
              Less
      than 1 year
              1-3
      years
              4-5
      years
              After
      5 yearsDebt
              $2,950,000
              $600,000
              $1,200,000
              $1,150,000
              -Capital
      Lease Obligations
              71,873
              20,668
              38,093
              13,112
              -Operating
      Leases
              2,730,095
              422,066
              882,498
              936,241
              489,290Employment
      Agreement Compensation**
              1,571,300
              924,300
              647,000
              -
              -Interest
      Rate Swap Agreement
              128,056
              -
              -
              128,056
              -Total
      Contractual Cash Obligations
              $7,451,324
              $1,967,034
              $2,767,591
              $2,227,409
              $489,290
 
 **The
employment agreements provide for bonus payments that are excluded from these
amounts.
  Inflation.Inflation
historically has not had a material effect on our operations.
   Item
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
   We are
exposed to market risks, which include changes in interest rates and changes to
the credit markets. We attempt to minimize these risks by using interest rate
swap agreements and through maintaining counter-party credit limits. These
hedging activities provide only limited protection against interest rate and
credit risks. Factors that could influence the effectiveness of our programs
include volatility of the interest rate and liquidity of the credit markets. All
interest rate swap contracts that we enter into are components of hedging
programs and are entered into for the sole purpose of hedging an existing or
anticipated interest rate. We do not enter into such contracts for speculative
purposes.  We manage our credit risks by diversifying our investments,
maintaining a strong balance sheet and having multiple sources of
capital.
   21
   Interest
rate Swap Agreement.
   As of
December 31, 2008, the fair value of our interest rate swap agreement recorded
in other non-current liabilities in our balance sheet was $128,056, which
represented the estimated amount that would be payable upon unwinding the
interest rate swap agreement based on market conditions at the
time.  Changes in the fair value of the interest rate swap agreement
are reflected as an adjustment to current and non-current liabilities with an
offsetting adjustment to the other comprehensive income (loss) as such hedges
are deemed fully effective.
   
   Item
8.                      FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
   (a)           Financial
Statements
   This
information appears following Item 15 of this Report and is incorporated herein
by reference.
   
  Item
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
  None
  Item
9A(T).  CONTROLS AND PROCEDURES
 
 Evaluation of Disclosure Controls and
Procedures
 
 The
Company’s management has established disclosure controls and procedures designed
to ensure that information it is required to disclose in the reports that it
files or submits under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) is recorded, processed, summarized and reported within time
periods specified in the Securities and Exchange Commission rules and
forms.  Such disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information the
Company is required to disclose in the reports that it files or submits under
the Exchange Act is accumulated and communicated to the Company’s management to
allow timely decisions regarding required disclosure.
 
 Based on
an evaluation of the Company’s disclosure controls and procedures as of December
31, 2008 made by management, under the supervision and with the participation of
the Chief Executive Officer and Chief Financial Officer, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
promulgated under the Exchange Act) were effective as of December 31,
2008.
 
 Management’s Report on Internal
Control Over Financial Reporting
 
 The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company, as such term is
defined in Rule 13a-15(f) promulgated under the Exchange
Act.  Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  Internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the Company’s assets;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of the financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures are
being made only with proper authorizations; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Company’s assets that could have a material effect on
the financial statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate
  22
  because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
 
 The
Company’s management, under the supervision of and with the participation of the
Chief Executive Officer and the Chief Financial Officer, assessed the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008 based on criteria for effective control over financial
reporting described in Internal Control — Integrated
Framework (1992)created by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this assessment, the Company’s management concluded that the Company’s
internal control over financial reporting was effective as of December 31,
2008.
 
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
 
 Changes in Internal Control Over
Financial Reporting
 
 No
changes in our internal control over financial reporting occurred during the
quarter ended December 31, 2008 that has materially affected or is
reasonably likely to materially affect our internal control over financial
reporting.
  
  Item
9B.  OTHER INFORMATION
 
 None
 
 PART
III
 Item
10.                                      DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  See Item
14.
   
  Item
11. EXECUTIVE COMPENSATION
  See Item
14.
   
  
 Item
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED STOCKHOLDER MATTERS
  See Item
14.
   
  Item
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
  See Item
14.
   
  Item
      14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
 
  The
information required by Items 10, 11, 12, 13 and 14 will be contained in our
definitive proxy statement for our 2009Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission not later than 120 days after
the end of our fiscal year covered by this report pursuant to Regulation 14A
under the Exchange Act, and incorporated herein by reference.
   23
   PART IV
  Item
15.                                      EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
 Exhibit Number
              Name of Exhibit
              No. in Document1.1
              Form
      of Underwriting Agreement between EarlyBirdCapital, Inc. and the Company,
      dated February 12, 2003.  (7)
              1.13.1
              Certificate
      of Incorporation of the Company, as
amended.  (1)
              3.13.1(a)
              Certificate
      of Amendment of Certificate of Incorporation filed on July 14,
      1998.  (3)
              3.1(a)3.2
              Amended
      and Restated By-Laws of the Company.  (11)
              3.24.1
              Form
      of Warrant issued to designees of EarlyBirdCapital, Inc., dated February
      19, 2003.  (7)
              4.710.1
              1992
      Stock Option Plan.  (1)
              10.310.2
              1995
      Employee Stock Option Plan.  (2)
              10.410.3
              Form
      of military contract.  (1)
              10.710.4
              1998
      Performance Equity Plan.  (3)
              10.2810.5
              Performance
      Equity Plan 2000.  (4)
              10.2910.5.1
              Amendment
      to Performance Equity Plan 2000 (9)
              10.6.1*10.6
              Stock
      Option Agreement, dated August 14, 2001, between Edward J. Fred and the
      Company.  (5)
              10.35*10.7
              Stock
      Option Agreement between the Company and Edward J. Fred, dated June 18,
      2002.  (6)
              10.5610.8
              Form
      of Merger & Acquisition Agreement, between EarlyBirdCapital, Inc. and
      the Company.  (7)
              10.2610.9
              Registration
      Rights Agreement between the Company and Chemical Investments dated
      February 26, 2002, as assigned to Crescendo Partners, II.
    (7)
              10.2710.9.1
              Schedule
      of Omitted Document in the form of Exhibit 10.9, including material detail
      in which such document differs from Exhibit
      10.9.  (7)
              10.27.1*10.10
              Stock
      Option agreement between Vincent Palazzolo and the Company, dated as of
      May 17, 2004 (8)
              10.22*10.11
              Amended
      and Restated Employment Agreement between Vincent Palazzolo and the
      Company, dated as of December 1, 2006.  (8)
              10.23
  24
  
 *10.12
              Stock
      Option Agreement between the Company and Vincent Palazzolo, dated December
      1, 2006 (9)
              10.24*10.13
              Amended
      and Restated Employment Agreement between Edward J. Fred and the Company,
      dated July 18, 2007.  (10)
              10.2310.14
              Credit
      Agreement between CPI Aerostructures, Inc., and Sovereign Bank, dated as
      of August 13, 2007 (12)
              10.2310.15
              Commercial
      Security Agreement, dated August 13, 2007, between CPI Aerostructures,
      Inc., Grantor, and Sovereign Bank, Lender (12)
              10.24**10.16
              First
      Amendment to Credit Agreement, dated as of October 22, 2008, by and
      between CPI Aerostructures, Inc. and Sovereign Bank**10.17
              ISDA
      2002 Master Agreement and Schedule, dated as of October 22, 2008, between
      Sovereign Bank and CPI Aerostructures, Inc.14
              Code
      of Business Conduct and Ethics (13)
              14**21
              Subsidiaries
      of the Registrant.**23.1
              Consent
      of J.H. Cohn LLP**31.1
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002**31.2
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002**32.1
              Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
 
 *Management
compensation contract or arrangement.
 
 **Filed
herewith.
 
 (1)
              Filed
      as an exhibit to the Company’s Registration Statement on Form S-1 (No.
      33-49270) declared effective on September 16, 1992 and incorporated herein
      by reference.(2)
              Filed
      as an exhibit to the Company’s Annual Report on Form 10-KSB for year ended
      December 31, 1995 and incorporated herein by reference.(3)
              Filed
      as an exhibit to the Company’s Annual Report on Form 10-KSB for the year
      ended December 31, 1998 and incorporated herein by
    reference.(4)
              Filed
      as an exhibit to the Company’s Annual Report on Form 10-KSB for the year
      ended December 31, 2000 and incorporated herein by
    reference.(5)
              Filed
      as an exhibit to Schedule 13D filed on behalf of Edward J. Fred on October
      19, 2001 and incorporated herein by reference.(6)
              Filed
      as an exhibit to Schedule 13D filed on behalf of Edward J. Fred on July
      12, 2002 and incorporated herein by reference.(7)
              Filed
      as an exhibit to the Company’s Registration Statement on Form SB-2 (No.
      333-101902) declared effective on February 12, 2003 and incorporated
      herein by reference.
  25
  
 (8)
              Filed
      as an exhibit to the Company’s Current Report on Form 8-K dated May 24,
      2004 and incorporated herein by reference.(9)
              Filed
      as an exhibit to the Company’s Current Report on Form 8-K dated December
      1, 2006 and incorporated herein by reference.(10)
              Filed
      as an exhibit to the Company’s Current Report on Form 8-K dated July 20,
      2007 and incorporated herein by reference.(11)
              Filed
      as an exhibit to the Company’s Current Report on Form 8-K dated November
      13, 2007 and incorporated herein by reference.(12)
              Filed
      as an exhibit to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2007 and incorporated herein by
      reference.(13)
              Filed
      as an exhibit to the Company’s Annual Report on Form 10-KSB for the year
      ended December 31, 2003 and incorporated herein by
    reference.
 
  26
   
  CPI
AEROSTRUCTURES, INC.
 INDEX
TO FINANCIAL STATEMENTS
 Report
      of Independent Registered Public Accounting Firm
              F-1Financial
      Statements:Balance
      Sheets as of December 31, 2008 and 2007
              F-2Statements
      of Operations for the Years Ended December 31, 2008, 2007 and
      2006
              F-3Statements
      of Shareholders’ Equity for the Years EndedDecember
      31, 2008, 2007 and 2006
              F-4Statements
      of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006
              F-5Notes
      to Financial Statements
              F-6-F-18
 
  27
  
 
 
 
 
 Report of
Independent Registered Public Accounting Firm
  
 
 To the
Board of Directors and Shareholders
 CPI
Aerostructures, Inc.
  
 
 We have
audited the accompanying balance sheets of CPI Aerostructures, Inc. as of
December 31, 2008 and 2007 and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2008. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of CPI Aerostructures, Inc. as of
December 31, 2008 and 2007, and its results of operations and cash flows for
each of the three years in the period ended December 31, 2008, in conformity
with accounting principles generally accepted in the United States of
America.
  
  
 
 
 /s/J.H. Cohn
LLP
 
 
 Jericho,
New York
 March 24,
2009
 
 
 
 
  F-1
 
 CPI
AEROSTRUCTURES, INC.
  BALANCE
SHEETS
 December
      31,
              
              
              December
      31,2008
              
              
              2007ASSETSCurrent
      Assets:Cash
              
              $
              424,082
              
              
              $
              338,391Accounts
      receivable, net
              
              
              2,975,012
              
              
              
              3,344,375Costs
      and estimated earnings in excess of billings on
uncompletedcontracts
              
              
              37,865,016
              
              
              
              31,148,181Prepaid
      expenses and other current assets
              
              
              559,657
              
              
              
              216,405Refundable
      income tax
              
              
              ---
              
              
              
              528,470Total
      current assets
              
              
              41,823,767
              
              
              
              35,
      575,822Plant
      and equipment, net
              
              
              1,002,974
              
              
              
              719,069Deferred
      income taxes
              
              
              345,500
              
              
              
              129,000Other
      assets
              
              
              179,265
              
              
              
              196,681Total
      Assets
              
              $
              43,351,506
              
              
              $
              36,620,572LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
              
              $
              3,303,426
              
              
              $
              4,234,370Accrued
      expenses
              
              
              1,081,278
              
              
              
              571,783Current
      portion of long-term debt
              
              
              620,668
              
              
              
              3,701Line
      of credit
              
              
              300,000
              
              
              
              1,100,000Deferred
      income taxes
              
              
              476,000
              
              
              
              490,000Income
      taxes payable
              
              
              907,000
              
              
              
              459,000Total
      current liabilities
              
              
              6,688,372
              
              
              
              6,858,854Long-term
      debt, net of current portion
              
              
              2,401,206
              
              
              
              7,605Deferred
      income taxes
              
              
              ---
              
              
              
              20,000Other
      liabilities
              
              
              278,778
              
              
              
              130,599Total
      Liabilities
              
              
              9,368,356
              
              
              
              7,017,058CommitmentsShareholders’
      Equity:Common
      stock - $.001 par value; authorized 50,000,000 shares,issued
      6,046,273 and 5,816,457  shares, respectively,
    andoutstanding
      5,982,739 and 5,752,923 shares, respectively
              
              
              6,046
              
              
              
              5,816Additional
      paid-in capital
              
              
              26,660,606
              
              
              
              24,787,296Retained
      earnings
              
              
              7,942,021
              
              
              
              5,351,408Accumulated
      other comprehensive loss
              
              
              (84,517
              )
              
              
              ----Treasury
      stock, 63,534 sharesof
      common stock (at cost)
              
              
              (541,006
              )
              
              
              (541,006
              )Total
      Shareholders’ Equity
              
              
              33,983,150
              
              
              
              29,603,514Total
      Liabilities and Shareholders’ Equity
              
              $
              43,351,506
              
              
              $
              36,620,572
  See Notes
to Financial Statements
 F-2
 
 CPI
AEROSTRUCTURES, INC.
  STATEMENTS
OF OPERATIONS
 Year
      ended December 31,
              
              2008
              
              
              2007
              
              
              2006Revenue
              
              $
              35,588,831
              
              
              $
              27,985,476
              
              
              $
              17,907,989Cost
      of sales
              
              
              27,065,243
              
              
              
              20,596,085
              
              
              
              16,264,351Gross
      profit
              
              
              8,523,588
              
              
              
              7,389,391
              
              
              
              1,643,638Selling,
      general and administrative expenses
              
              
              4,717,080
              
              
              
              4,355,027
              
              
              
              3,551,974Income
      (loss) from operations
              
              
              3,806,508
              
              
              
              3,034,364
              
              
              
              (1,908,336
              )Interest
      income (expense)Interest/other
      income
              
              
              78,952
              
              
              
              4,973
              
              
              
              6,656Interest
      expense
              
              
              (31,847
              )
              
              
              (22,441
              )
              
              
              (20,326
              )Total
      other income (expense), net
              
              
              47,105
              
              
              
              (17,468
              )
              
              
              (13,670
              )Income
      (loss) before provision for (benefit from) income taxes
              
              
              3,853,613
              
              
              
              3,016,896
              
              
              
              (1,922,006
              )Provision
      for (benefit from) income taxes
              
              
              1,263,000
              
              
              
              1,110,000
              
              
              
              (657,000
              )Net
      income (loss)
              
              $
              2,590,613
              
              
              $
              1,906,896
              
              
              $
              (1,265,006
              )Basic
      net income (loss) per common share:
              
              $
              0.44
              
              
              $
              0.34
              
              
              $
              (0.23
              )Diluted
      net income (loss) per common share:
              
              $
              0.42
              
              
              $
              0.32
              
              
              $
              (0.23
              )Shares
      used in computing earnings per common share:Basic
              
              
              5,952,703
              
              
              
              5,673,903
              
              
              
              5,446,711Diluted
              
              
              6,203,789
              
              
              
              6,028,480
              
              
              
              5,446,711
 
  See Notes
to Financial Statements
 F-3
 
 CPI
AEROSTRUCTURES, INC.
  
 STATEMENTS OF
SHAREHOLDERS’ EQUITY
 Years
ended December 31, 2008, 2007 and 2006
 
 CommonStock
      Shares
              Amount
              Additional
      Paid-in Capital
              Retained
      Earnings
              Treasury
      Stock
              Accumulated Other
      Comprehensive Loss
              Total
      Shareholders EquityBalance
      at January 1, 2006
              5,475,057
              $5,475
              $22,768,135
              $4,709,518
              $(320,856)
              ----
              $27,162,272Net
      loss
              --
              --
              --
              (1,265,006)
              --
              ----
              (1,265,006)Common
      stock issued upon exercise of options
              3,000
              3
              19,047
              ----
              ----
              ----
              19,050Common
      stock issued as employee compensation
              750
              1
              5,064
              ----
              ----
              ----
              5,065Stock
      compensation expense
              ----
              ----
              256,274
              ----
              ----
              ----
              256,274Balance
      at December 31, 2006
              5,478,807
              $5,479
              $23,048,520
              $3,444,512
              $(320,856)
              ----
              26,177,655Net
      income
              ----
              ----
              ----
              1,906,896
              ----
              ----
              1,906,896Common
      stock issued upon exercise of options
              335,000
              335
              838,415
              ----
              ----
              ----
              838,750Common
      stock issued as employee compensation
              2,650
              2
              22,761
              ----
              ----
              ----
              22,763Stock
      compensation expense
              ----
              ----
              382,600
              ----
              ----
              ----
              382,600Treasury
      stock
              ----
              ----
              ----
              ----
              (220,150)
              ----
              (220,150)Tax
      benefit from stock option plans
              ----
              ----
              495,000
              ----
              ----
              ----
              495,000Balance
      at December 31, 2007
              5,816,457
              $5,816
              $24,787,296
              $5,351,408
              $(541,006)
              $----
              29,603,514Comprehensive
      income:Net
      Income
              ----
              ----
              ----
              2,590,613
              ----
              ----
              2,590,613Change
      in unrealized loss from interest rate swap
              ----
              ----
              ----
              ----
              ----
              (84,517)
              (84,517)Comprehensive
      income
              ----
              ----
              ----
              ----
              ----
              ----
              2,506,096Common
      stock issued upon exercise of options and warrants
              216,250
              216
              999,471
              ----
              ----
              ----
              999,687Common
      stock issued as employee compensation
              13,566
              14
              100,793
              ----
              ----
              ----
              100,807Stock
      compensation expense
              ----
              ----
              495,046
              ----
              ----
              ----
              495,046Tax
      benefit from stock option plans
              ----
              ----
              278,000
              ----
              ----
              ----
              278,000Balance
      at December 31, 2008
              6,046,273
              $6,046
              $26,660,606
              $7,942,021
              $(541,006)
              (84,517)
              33,983,150
 
  See Notes
to Financial Statements
 F-4
 
 CPI
AEROSTRUCTURES, INC.
  STATEMENTS
OF CASH FLOWS
 
 Year
      ended December 31,
              
              2008
              
              
              2007
              
              
              2006Cash
      flows from operating activities:Net
      income (loss)
              
              $
              2,590,613
              
              
              $
              1,906,896
              
              
              $
              (1,265,006
              )Adjustments
      to reconcile net income (loss)to
      net cash used in operating activities:Depreciation
      and amortization
              
              
              287,412
              
              
              
              235,227
              
              
              
              215,973Deferred
      rent
              
              
              20,122
              
              
              
              32,058
              
              
              
              43,646Stock-based
      compensation expense
              
              
              495,046
              
              
              
              382,600
              
              
              
              256,274Common
      stock issued as employee compensation
              
              
              18,260
              
              
              
              22,763
              
              
              
              5,065Deferred
      portion of provision (benefit) for income taxes
              
              
              (206,961
              )
              
              
              (49,000
              )
              
              
              (48,000
              )Tax
      benefit for stock options
              
              
              (278,000
              )
              
              
              (495,000
              )
              
              
              (4,600
              )Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable
              
              
              369,363
              
              
              
              (1,922,240
              )
              
              
              427,661Increase
      in costs and estimated earnings in excess of billingson
      uncompleted contracts
              
              
              (6,716,835
              )
              
              
              (2,364,473
              )
              
              
              (394,506
              )Decrease
      (increase) in prepaid expenses and other current assets
              
              
              (65,252
              )
              
              
              412,214
              
              
              
              208,546Decrease
      in other assets
              
              
              17,416
              
              
              
              23,275
              
              
              
              23,274(Decrease)
      increase in accounts payable and accrued expenses
              
              
              (338,902
              )
              
              
              (177,651
              )
              
              
              278,102Increase
      (decrease) in income taxes payable
              
              
              448,000
              
              
              
              459,000
              
              
              
              (133,110
              )Decrease
      (increase) in refundable income taxes
              
              
              528,470
              
              
              
              100,000
              
              
              
              (628,470
              )Net
      cash used in operating activities
              
              
              (2,831,248
              )
              
              
              (1,434,331
              )
              
              
              (1,015,151
              )Cash
      flows from investing activities:Purchase
      of plant and equipment
              
              
              (493,667
              )
              
              
              (98
      560
              )
              
              
              (109,500
              )Net
      cash used in investing activities
              
              
              (493,667
              )
              
              
              (98,560
              )
              
              
              (109,500
              )Cash
      flows from financing activities:Proceeds
      from exercise of stock options and warrants
              
              
              999,687
              
              
              
              618,600
              
              
              
              19,050Payment
      of line of credit
              
              
              (2,500,000
              )
              
              
              ----
              
              
              
              ----Proceeds
      from line of credit
              
              
              1,700,000
              
              
              
              750,000
              
              
              
              350,000Payment
      of long-term debt
              
              
              (67,081
              )
              
              
              (30,882
              )
              
              
              (87,617
              )Proceeds
      from long-term debt
              
              
              3,000,000
              
              
              
              ----
              
              
              
              ----Tax
      benefit for stock options
              
              
              278,000
              
              
              
              495,000
              
              
              
              4,600Net
      cash provided by financing activities
              
              
              3,410,606
              
              
              
              1,832,718
              
              
              
              286,033Net
      increase (decrease) in cash
              
              
              85,691
              
              
              
              299,827
              
              
              
              (838,618
              )Cash
      at beginning of year
              
              
              338,391
              
              
              
              38,564
              
              
              
              877,182Cash
      at end of year
              
              $
              424,082
              
              
              $
              338,391
              
              
              $
              38,564Supplemental
      schedule of noncash investing and financing activities:Deferred
      tax benefit of interest rate swap liability
              
              $
              43,539
              
              
              $
              ---
              
              
              $
              ---Equipment
      acquired under capital lease
              
              $
              77,650
              
              
              $
              ----
              
              
              $
              ----Accrued
      expenses settled in exchange for common stock
              
              $
              82,547
              
              
              $
              ----
              
              
              $
              ----Stock
      options proceeds paid with Company’s stock
              
              $
              ----
              
              
              $
              220,150
              
              
              $
              ----Supplemental
      schedule of cash flow information:Cash
      paid during the year for interest
              
              $
              19,262
              
              
              $
              22,441
              
              
              $
              20,326Cash paid for income taxes
              
              $
              765,000
              
              
              $
              102,400
              
              
              $
              403,093
 
  See Notes
to Financial Statements
 F-5
 
 CPI
AEROSTRUCTURES, INC.
  1.  PRINCIPAL
BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
 The
operations of CPI Aerostructures, Inc. (“CPI Aero” or the “Company”) consist of
the design and production of complex aerospace structural subassemblies under
U.S. government and commercial contracts.  The length of the Company’s
contracts varies but is typically between six months and two years for U.S.
government prime contracts, although the Company’s T-38 contract and C-5 TOP
contract are for 10 years and 7 years, respectively.  The Company’s
commercial and government subcontracting contracts also vary in length, but can
be for up to 10 years.
 
 The
Company’s revenue is recognized based on the percentage of completion method of
accounting for its contracts measured by the percentage of total costs incurred
to date to estimated total costs at completion for each
contract.  Contract costs include all direct material, labor costs,
tooling and those indirect costs related to contract performance, such as
indirect labor, supplies, tools, repairs and depreciation
costs.  Selling, general and administrative costs are charged to
expense as incurred. Estimated losses on uncompleted contracts are recognized in
the period in which such losses are determined.  Changes in job
performance may result in revisions to costs and income and are recognized in
the period in which revisions are determined to be required.  The
percentage of completion method of accounting involves considerable use of
estimates in determining revenues, costs and profits and in assigning the
amounts to accounting periods and, as a result, there can be a significant
disparity between earnings (both for accounting and taxes) as reported and
actual cash received by the Company during any reporting period.  In
accordance with industry practice, costs and estimated earnings in excess of
billings on uncompleted contracts, included in the accompanying balance sheets,
contain amounts relating to contracts and programs with long production cycles,
a portion of which will not be realized within one year.  The
Company’s recorded revenue may be adjusted in later periods in the event that
the Company’s cost estimates prove to be inaccurate or a contract is
terminated.
 
 The
Company’s government contracts are subject to the procurement rules and
regulations of the United States government.  Many of the contract
terms are dictated by these rules and regulations.  Specifically,
cost-based pricing is determined under the Federal Acquisition Regulations
(“FAR”), which provide guidance on the types of costs that are allowable in
establishing prices for goods and services under U.S. government contracts. For
example, costs such as those related to charitable contributions, advertising,
interest expense, and public relations are unallowable, and therefore not
recoverable through sales.  During and after the fulfillment of a
government contract, the Company may be audited in respect of the direct and
allocated indirect costs attributable thereto.  These audits may
result in adjustments to the Company’s contract cost, and/or
revenue.
 
 When
contractual terms allow, the Company invoices its customers on a progress
basis.
 
 The
Company considers all cash accounts, which are not subject to withdrawal
restrictions or penalties, and all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.  At
December 31, 2008 and 2007, there are no cash equivalents.
  F-6
 
 CPI
AEROSTRUCTURES, INC.
  
 The
Company maintains its cash in two financial institutions.  The
balances are insured by the Federal Deposit Insurance
Corporation.  From time to time, the Company’s balances may exceed
these limits.  At December 31, 2008, the Company’s uninsured balances
total approximately $345,000.  The Company limits its credit risk by
selecting financial institutions considered to be highly
creditworthy.
 
 Accounts
receivable are reported at their outstanding unpaid principal
balances.  The Company writes off accounts when they are deemed to be
uncollectible.  The Company has recorded an approximate $10,000
allowance for doubtful accounts at December 31, 2008 and 2007.
 
 Depreciation
and amortization of plant and equipment is provided by the straight-line method
over the estimated useful lives of the respective assets or the life of the
lease, for leasehold improvements.
 
 We
recognize rent expense on a straight-line basis over the expected lease
term.  Within the provisions of certain leases there are escalations
in payments over the lease term.  The effects of the escalations have
been reflected in rent expense on a straight-line basis over the expected lease
term.
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the use of estimates
by management.  Actual results could differ from these
estimates.
 
 The
Company reviews its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable.  As a result of its review,
the Company does not believe that any such change has occurred.  If
such changes in circumstance are present, a loss is recognized to the extent the
carrying value of the asset is in excess of the sum of the undiscounted cash
flows expected to result from the use of the asset and amounts expected to be
realized upon its eventual disposition.
 
 The fair
value of the Company’s short-term debt is estimated based on the current rates
offered to the Company for debt of similar terms and maturities. Using this
method, the fair value of the Company’s short-term debt was not significantly
different than the stated value at December 31, 2008.
 
 Our use
of derivative instruments has primarily been to hedge interest rates. These
derivative contracts are entered into with financial institutions.  We
do not use derivative instruments for trading purposes and we have procedures in
place to monitor and control their use.
 
 We
account for these derivative financial instruments in accordance with SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”)
as amended by SFAS No. 149, “Amendment of Statement 133 on Derivative
Instruments and hedging Activities” (“SFAS 149”).  SFAS 133 requires
that all derivative instruments be recorded on the balance sheet at fair
value.  For derivative instruments that are designated and qualify as
a fair value hedge, the gain or loss on the derivative instrument as well as the
offsetting gain or loss on the hedged item attributable to the hedged risk are
recognized in the results of operations.  For derivative instruments
that are designated and qualify as a cash flow hedge, the effective portion of
the gain or loss on the derivative instrument is reported as a component of
other comprehensive income (loss) and reclassified into earnings in the same
period or periods during which the hedged transaction affects
earnings.  For derivative instruments that are designated and qualify
as a net investment hedge, the effective portion of the gain or loss on
the
  F-7
 
 CPI
AEROSTRUCTURES, INC.
  derivative
instrument is reported in the foreign currency translation component of other
comprehensive income (loss).Any
ineffective portion of the gain or loss on the derivative instrument for a cash
flow hedge or net investmenthedge isrecorded in the results of
operations immediately.  For derivative instruments not designated as
hedging instruments, the gain or loss is recognized in the results of operations
immediately.  See below for a discussion of our use of derivative
instruments, management of credit risk inherent in derivative instruments and
fair value information.
 
 Derivative
Instruments
 
 In
October 2008, the Company entered into an interest rate swap with the objective
of reducing our exposure to cash flow volatility arising from interest rate
fluctuations associated with certain debt.  The notional amount,
maturity date, and currency of these contracts match those of the underlying
debt.  The Company has designated this interest rate swap contract as
a cash flow hedge.  The Company measures ineffectiveness by comparing
the cumulative change in the forward contact with the cumulative change in the
hedged item.  No material ineffectiveness was recognized in
2008.  As of December 31, 2008, we had a net deferred loss associated
with cash flow hedges of approximately $128,000, due to the interest rate swap
which has been included in Other Liabilities.
 
 As a
result of the use of derivative instruments, the Company is exposed to risk that
the counterparties may fail to meet their contractual
obligations.  Recent adverse developments in the global financial and
credit markets could negatively impact the creditworthiness of our
counterparties and cause one or more of our counterparties to fail to perform as
expected.  To mitigate the counterparty credit risk, we only enter
into contracts with carefully selected major financial institutions based upon
their credit ratings and other factors, and continually assess the
creditworthiness of counterparties.  To date, all counterparties have
performed in accordance with their contractual obligations.
 
 Fair
Value
 
 At
December 31, 2008 and 2007, the fair values of cash, accounts receivable,
accounts payable and accrued expenses approximated their carrying values because
of the short-term nature of these instruments.
 
 
 2008Carrying
      Amount
              Fair
      ValueDebtShort-term
      borrowings and long-term debt
              $3,321,874
              $3,321,874
 
 We
estimated the fair value of debt using market quotes and calculations based on
market rates.
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”).  SFAS 157 establishes a framework for measuring fair value
in accounting principles generally accepted in The United States of
America and expands disclosures about fair value
measurements.  The Company adopted the provisions of SFAS 157
effective January 1, 2008.
  F-8
 
 CPI
AEROSTRUCTURES, INC.
  
 The
following table presents the fair values of those financial assets and
liabilities measured on a recurring basis as of December 31, 2008:
 
 Fair Value MeasurementsDescription
              Total
              Quoted
      Prices in Active Markets for Identical
      assets     (Level 1)
              Significant
      Other Observable Inputs (Level 2)
              Significant
      Unobservable Inputs   (Level 3)Interest
      Rate Swap, liability
              $128,056
              --
              $
      128,056
              --Total
              $
      128,056
              --
              $
      128,056
              --
 
 The fair
value of the Company’s interest rate swap was determined by comparing the fixed
rate set at the inception of the transaction to the “replacement swap rate,”
which represents the market rate for an offsetting interest rate swap with the
same notional amounts and final maturity date.  The market value is
then determined by calculating the present value interest differential between
the contractual swap and the replacement swap.
 
 As of
December 31, 2008, $128,056 was included in Other Liabilities related to the
fair value of the Company’s interest rate swap, and $84,517, net of tax of
$43,539, was included in Other Comprehensive Income and Accumulated Other
Comprehensive Loss.
 
 The
Company incurred freight and delivery costs of approximately $159,000, $144,000
and $123,000, respectively, during the years ended December 31, 2008, 2007 and
2006. These costs are included in cost of sales.
 
 Basic
earnings per common share is computed using the weighted-average number of
shares outstanding.  Diluted earnings per common share is computed
using the weighted-average number of shares outstanding adjusted for the
incremental shares attributed to outstanding options and warrants to purchase
common stock.  Incremental shares of 251,086 were used in the
calculation of diluted earnings per common share in 2008. Incremental shares of
400,000 were not included in the diluted earnings per share calculations at
December 31, 2008,  as their exercise price was in excess of the
Company’s quoted market price  and, accordingly, these shares are not
assumed to be exercised for the diluted earnings per share
calculation.  Incremental shares of  354,377 were used in
the calculation of diluted earnings per common share in 2007. Incremental shares
of 320,000 were not included in the diluted earnings per share calculations at
December 31, 2007,  as their exercise price was in excess of the
Company’s quoted market price  and, accordingly, these shares are not
assumed to be exercised for the diluted earnings per share
calculation.  No incremental shares were included in the diluted
earnings per share calculation for December 31, 2006 as the Company recorded a
net loss and the effect would be anti-dilutive.
 
 The
Company records compensation expense associated with stock options in accordance
with Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based
Payment” (“SFAS No. 123R”).
 
 In June
2006, the Financial Accounting Standards Board (“FASB”) issued interpretation
No. 48, “Accounting for Uncertainty in Income Taxes-an
interpretation
  F-9
 
 CPI
AEROSTRUCTURES, INC.
  of SFAS
No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income
taxes.  Currently, the accounting for uncertainty in income taxes is
subject to significant and varied interpretations that have resulted in diverse
and inconsistent accounting practices and measurements.  Addressing
such diversity, FIN 48 prescribes a consistent recognition threshold and
measurement attribute, as well as clear criteria for subsequently recognizing,
derecognizing and measuring changes in such tax positions for financial
statement purposes.  The Company adopted the provision of FIN 48
effective January 1, 2007.  The adoption of FIN 48 had no impact on
our financial position, results of operations, cash flows or financial statement
disclosures, nor did the Company have any related interest or
penalties.
 
 In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS
159”).  SFAS  159 provides a “Fair Value Option” under which
a company may irrevocably elect fair value as the initial and subsequent
measurement attribute for certain financial assets and
liabilities.  SFAS 159 will be available on a contract-by-contract
basis with changes in fair value recognized in earnings as those changes
occur.  SFAS 159 is effective for fiscal years beginning after
November 15, 2007.  SFAS 159 also allows early adoption provided that
the entity also adopts the requirements of SFAS 157.  The Company
adopted the provisions of SFAS 159 effective January 1, 2008. The adoption of
SFAS 159 had no impact on our financial position, results of operations, cash
flows or financial statement disclosures.
 
 In
December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations” (“SFAS
141 (R)”) (effective for business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008), and SFAS No. 160, “Non-Controlling Interests in
Consolidated Financial Statements” (“SFAS 160”) (effective for annual periods
beginning December 15, 2008).  These new rules are products of a joint
project between the FASB and the International Accounting Standards Board and
continue the movement toward the greater use of fair values in financial
reporting.  SFAS 141 (R) will significantly change how future business
acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods.  SFAS 160 will change the
accounting and reporting for minority interests, which will be recharacterized
as non-controlling interests and classified as a component of
equity.
 
 
 
 
  F-10
 
 CPI
AEROSTRUCTURES, INC.
  2.  COSTS
AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
 At
December 31, 2008, costs and estimated earnings in excess of billings on
uncompleted contracts (unbilled) consist of:
 
 
 U.S.
      Government
              
              
              Commercial
              
              
              TotalCosts
      incurred on uncompleted contracts
              
              $
              66,604,669
              
              
              $
              21,555,809
              
              
              $
              88,160,478Estimated
      earnings
              
              
              42,788,296
              
              
              
              9,595,396
              
              
              
              52,383,692109,392,965
              
              
              
              31,151,205
              
              
              
              140,544,170Less
      billings to date
              
              
              78,849,843
              
              
              
              23,829,311
              
              
              
              102,679,154Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
              
              $
              30,543,122
              
              
              $
              7,321,894
              
              
              $
              37,865,016At
      December 31, 2007, costs and estimated earnings in excess of billings on
      uncompleted contracts (unbilled) consist of:U.S.
      Government
              
              
              Commercial
              
              
              TotalCosts
      incurred on uncompletedcontracts
              
              $
              57,487,194
              
              
              $
              16,632,515
              
              
              $
              74,119,709Estimated
      earnings
              
              
              36,465,753
              
              
              
              7,248,714
              
              
              
              43,714,46793,952,947
              
              
              
              23,881,229
              
              
              
              117,834,176Less
      billings to date
              
              
              64,782,716
              
              
              
              21,903,279
              
              
              
              86,685,995Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
              
              $
              29,170,231
              
              
              $
              1,977,950
              
              
              $
              31,148,181
 
 Unbilled
costs and estimated earnings are billed in accordance with applicable contract
terms.  As of December 31, 2008, approximately $6,000,000 of the
balances above are not expected to be collected within one
year.  There are no amounts billed under retainage
provisions.
 
  Revisions
in the estimated gross profits on contracts and contract amounts are made in the
period in which the circumstances requiring the revisions occur. During the year
ended December 31, 2008, the effect of such revisions in total estimated
contract profits resulted in a decrease to the total gross profit to be earned
on the contract of approximately $2,500,000, from that which would have been
reported had the revised estimate been used as the basis of recognition of
contract profits in prior years.
  
 Although
management believes it has established adequate procedures for estimating costs
to complete on open contracts, it is at least reasonably possible that
additional significant costs could occur on contracts prior to
completion.
 
  F-11
 
 CPI
AEROSTRUCTURES, INC.
  
 3.  ACCOUNTS
RECEIVABLE
 
 Accounts
receivable consists of trade receivables as follows:
 
 2008
              2007
 
 Billed
      receivables
              $2,884,592
              $3,338,207Unbilled
      receivables on completed contracts
              99,400
              15,148Less:
      allowance for doubtful accounts
              (8,980)
              (8,980)$2,975,012
              $3,344,375
 
 4.       PLANT
AND EQUIPMENT:
 Plant
      and equipment, at cost, consists of the followingEstimated
      Useful LifeDecember
      31,
              2008
              2007Machinery
      and equipment
              $588,298
              571,647
              5
      to 10 yearsComputer
      equipment
              1,124,645
              797,938
              5
      yearsFurniture
      and fixtures
              186,886
              152,885
              7
      yearsAutomobiles
      and trucks
              13,162
              13,161
              5
      yearsLeasehold
      improvements
              815,723
              621,829
              10
      years2,728,714
              2,157,460Less
      accumulated depreciation and amortization
              1,725,740
              1,438,391$1,002,974
              $719,069
 
 Depreciation
and amortization expense for the years ended December 31, 2008, 2007 and 2006
was $287,412, $235,227 and $215,973, respectively.
 
 During
the year ended December 31, 2008 the Company acquired $77,650 of plant and
equipment under capitalized leases.
 
 5.  LINE
OF CREDIT:
  In
September 2003, the Company entered into a three-year, revolving credit facility
with JP Morgan Chase Bank (the “Chase Facility”), secured by the Company’s
assets.  In August 2006, the Company borrowed $350,000 under the Chase
Facility. The Chase Facility was amended and restated in October 2006, further
amended in May 2007 and expired on June 30, 2007. All borrowings under this
facility were repaid in May 2007.
  
 In August
2007, the Company entered into a two-year, $2.5 million revolving credit
facility with Sovereign Bank (the “Sovereign Revolving Facility”), secured by
all of the Company’s assets. The Sovereign Revolving Facility specifies an
interest rate equal to the lower of LIBOR plus 2% or Sovereign Bank’s prime rate
(3.3% as of December 31, 2008). The Sovereign Revolving Facility contains
financial covenants related to interest coverage, net income and capital
expenditures, as defined in the credit agreement.  As of December 31,
2008, the Company was in compliance with all of the financial
  F-12
 
 CPI
AEROSTRUCTURES, INC.
  covenants
contained in the credit agreement. As of December 31, 2008, the Company had
borrowed $300,000 against the Sovereign Revolving Facility.
 
  Concurrent
with entering into the Sovereign Term Facility (See Note 6), Sovereign Bank
amended the terms of the Sovereign Revolving Facility extending the term until
August 2010 and amending the covenants, as defined, commencing in the fourth
quarter of 2009.
  
  6.  LONG-TERM DEBT
   On
October 22, 2008, the Company obtained a $3 million term loan from Sovereign
Bank to be amortized over five years (the “Sovereign Term
Facility”).  Prior to entering into the term loan the Company had
borrowed $2.5 million under the Sovereign Revolving Facility to fund the initial
tooling costs related to a long-term contract.  The Company used the
proceeds from the Sovereign Term Facility to repay the borrowings under the
Sovereign Revolving Facility and to pay for additional tooling related to a
long-term contract.  The Sovereign Term Facility bears interest at the
lower of LIBOR plus 2.5% or Sovereign Bank’s prime rate (3.3% as of December 31,
2008) and is secured by all of our assets.
   The terms
and conditions of the Sovereign Revolving Facility are applicable to the
Sovereign Term Facility.
   Additionally,
the Company and Sovereign Bank entered into a five year interest rate swap
agreement, in the notional amount of $3 million.  Under the interest
rate swap, the Company pays an amount to Sovereign Bank representing interest on
the notional amount at a rate of 5.8% and receives an amount from Sovereign
representing interest on the notional amount at a rate equal to the one-month
LIBOR plus 2.5%. The effect of this interest rate swap will be the Company
paying a fixed interest rate of 5.8% over the term of the Sovereign Term
Facility.  The value of debt exchanged for a fixe rate of interest
reduces according to the repayment schedule of the notes.
   The
maturities of the Sovereign Term Facility are as follows:
  Year
      ending December 31,2009
              $600,0002010
              600,0002011
              600,0002012
              600,0002013
              550,000$2,950,000
 
 Also
included in long-term debt are capital leases of $71,874 at December 31, 2008,
net of a current portion of $20,668.
 
 7.  COMMITMENTS:
 The
Company has employment agreements with five employees.  The aggregate
future commitment under these agreements is as follows:
 
 Year
      ending December 31,2009
              $
      924,3002010
              587,000Thereafter
              __60,000$1,571,300
 
  F-13
 
 CPI
AEROSTRUCTURES, INC.
  These
agreements provide for additional bonus payments that are calculated as
defined.
 
 The
Company leases an office and warehouse facility under a non-cancelable operating
lease which expires in December 2014.  The aggregate future commitment
under this agreement is as follows:
 
 Year
      ending December 31,2009
              422,0662010
              434,7282011
              447,7702012
              461,2032013
              475,038Thereafter
              489,290$2,730,095
 
 Rent
expense for the years ended December 31, 2008, 2007 and 2006 was $430,061,
$430,056 and $430,050, respectively.
 
 8.  INCOME
TAXES
 The
provision for (benefit from) income taxes consists of the
following:
 
 Years
      ended December 31,
              
              2008
              
              
              2007
              
              
              2006Current:Federal
              
              $
              1,513,500
              
              
              $
              1,159,000
              
              
              $
              (628,000
              )Deferred:Federal
              
              
              (250,500
              )
              
              
              (49,000
              )
              
              
              (29,000
              )$
              1,263,000
              
              
              $
              1,110,000
              
              
              $
              (657,000
              )
 
  The
difference between the income tax provision (benefit) computed at the federal
statutory rate and the actual tax provision (benefit) is accounted for as
follows:
 
 December
      31,
              
              2008
              
              
              2007
              
              
              2006Taxes
      computed at the federalstatutory
      rate
              
              $
              1,310,000
              
              
              $
              1,026,000
              
              
              $
              (597,000
              )State
      income taxes
              
              
              -----
              
              
              
              -----
              
              
              
              (78,000
              )Permanent
      differences
              
              
              (47,000
              )
              
              
              84,000
              
              
              
              18,000Temporary
      differences
              
              $
              1,263,000
              
              
              $
              1,110,000
              
              
              $
              (657,000
              )
 
 The
components of deferred income tax assets and liabilities are as
follows:
 
 2008
              
              
              2007Property
      and Equipment
              
              $
              5,000
              
              
              $
              (20,000
              )Revenue
      Recognition
              
              
              (476,000
              )
              
              
              (490,000
              )Stock
      options
              
              
              297,000
              
              
              
              129,000Interest
      rate swap
              
              
              43,500
              
              
              
              ----$
              (130,500
              )
              
              $
              (381,000
              )
 
 The
Company recognized, for income tax purposes, a tax benefit of $278,000 and
$495,000 and
$4,600 for the years ended December 31, 2008, 2007 and 2006, respectively, for
compensation expense related to its stock option plan for which
no
  F-14
 
 CPI
AEROSTRUCTURES, INC.
  corresponding
charge to operations has been recorded.  Such amounts have been added
to additional paid-in capital in those years.
 
 9.  EMPLOYEE STOCK OPTION
PLANS:
 Effective
January 1, 2006, the Company began recording compensation expense associated with stock options in accordance SFAS No.
123R.  Prior to January 1, 2006, the Company accounted for stock-based
compensation related to stock options under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25; therefore, the Company
measured compensation expense for its stock option plans using the intrinsic
value method, that is, as the excess, if any, of the fair market value of the
Company’s stock at the grant date over the amount required to be paid to acquire
the stock, and provided the disclosures required by SFAS No. 123 and
148.
 
 The Company has adopted the modified prospective transition method
provided under SFAS No. 123R, and as a result, has not retroactively adjusted
results from prior period.  Under this transition method, compensation
expense associated with stock options recognized in fiscal year 2006 includes:
(1) expense related to the remaining unvested portion of all stock option awards
granted prior to January 1, 2006, based on the grant date fair value estimated
in accordance with the original provisions of SFAS No. 123; and (2) expense
related to all stock option awards granted subsequent to January 1, 2006, based
on the grant date fair value estimated in accordance with the provisions of SFAS
No. 123R.  The modified transition method includes a simplified method
to establish the beginning balance of the additional paid-in-capital pool
related to the tax effects of employee share-based compensation, which is
available to absorb tax deficiencies recognized subsequent to the adoption of
SFAS 123R.
 
 As a
result of the adoption of SFAS No. 123R, the Company’s net income (loss) for the
years ended December 31, 2008, 2007 and 2006, includes approximately $495,000,
$383,000 and $256,000 of compensation expense, respectively and related
reductions in income tax payable of approximately $278,000, $495,000 and $4,600,
respectively.  The compensation expense related to the Company’s
stock-based compensation arrangements is recorded as a component of selling,
general and administrative expenses.  Prior to the Company’s adoption
of SFAS 123R, the Company presented tax benefits resulting from the exercise of
stock options as cash flows from operating activities on the Company’s statement
of cash flows.  SFAS 123R requires that cash flows resulting from tax
deductions in excess of the cumulative compensation cost recognized from options
exercised (excesstax
benefits) be classified as cash inflows from financing activities and cash
outflows from operating activities.
 
 In 1995, the Company adopted the 1995 Stock Option Plan (the “1995
Plan”), as amended, for which 200,000 common shares are reserved for issuance.
The 1995 Plan provides for theissuanceof either incentive stock
options or nonqualified stock options to employees, consultants or others who
provide services to the Company.  The options’ exercise price is equal
to the closing price of the Company’s shares on the day of issuance, except for
incentive stock options granted to the Company’s president, which are
exercisable at 110% of the closing price of the Company’s shares on the date of
issuance.
 
 In 1998,
the Company adopted the 1998 Performance Equity Plan (the “1998
Plan”).  The 1998 Plan, as amended, reserved 463,334 common shares for
issuance.  The 1998 Plan provides for the issuance of either incentive
stock options or nonqualified stock options to employees, consultants or others
who provide services to the Company.  The options’ exercise price is
equal to the closing price of the Company’s shares on the day of issuance,
except for incentive stock options granted to the Company’s
president,
  F-15
 
 CPI
AEROSTRUCTURES, INC.
  which are
exercisable at 110% of the closing price of the Company’s shares on the date of
issuance.
 
 In 2000,
the Company adopted the Performance Equity Plan 2000 (the “2000
Plan”).  The 2000 Plan, as amended, reserved 1,230,000 common shares
for issuance.  The 2000 Plan provides for the issuance of either
incentive stock options or nonqualified stock options to employees, consultants
or others who provide services to the Company. The options’ exercise price is
equal to the closing price of the Company’s shares on the day of issuance,
except for incentive stock options granted to the Company’s president, which are
exercisable at 110% of the closing price of the Company’s shares on the date of
issuance.
 
 The
Company has 285 options available for grant under the 1995 Plan, 14,000 options
available for grant under the 1998 Plan, and 109,167 options available for grant
under the 2000 Plan.
 
 The
estimated fair value of each option award granted was determined on the date of
grant using the Black-Scholes option valuation model.  The following
weighted average assumptions were used for option grants during the years ended
December 31, 2008, 2007 and 2006:
 
 2008
              2007
              2006Risk-free
      interest rate
              3.5%
              4.9%
              4.2%Expected
      volatility
              77%
              68%
              61%Dividend
      yield
              0%
              0%
              0%Expected
      option term-in years
              5
              5
              5
 
 The risk
free interest rate for the years ended December 31, 2008, 2007 and 2006 is based
on the 5 year U.S. Treasury note rate on the day of grant.  The
expected volatility computation for the years ended December 31, 2008, 2007 and
2006 is based on the average of the volatility over the most recent four year
period, which represents the Company’s estimate of expected volatility over the
expected option term.  The Company has never paid a dividend, and is
not expected to pay a dividend in the foreseeable future, therefore the dividend
yield is assumed to be zero.  The Company assumes zero forfeitures of
options as the historical forfeiture rate is below 1%.
 
 A summary
of the status of the Company’s stock option plans is as follows:
 
 Fixed
      Options
              Options
              Weighted
      average Exercise Price
              Weighted
      average remaining contractual
      term        (in
    years)
              Aggregate
      Intrinsic Value
 
 OutstandingAt
      January 1, 2006
              1,130,085
              $5.14
              5.36Granted
      during period
              113,333
              8.12Exercised
              (3,000)
              6.35Forfeited/Expired
              -----Outstandingat
      December 31, 2006
              1,240,418
              $5.17
              4.38
  F-16
 Granted
      during period
              105,000
              7.27Exercised
              (335,000)
              2.50Forfeited/Expired
              -----Outstandingat
      December 31, 2007
              1,010,418
              $6.28
              3.91Granted
      during period
              80,000
              8.33Exercised
              (21,250)
              6.67Forfeited/Expired
              (21,835)
              6.59Outstandingat
      December 31, 2008
              1,047,333
              $6.42
              3.21
              $986,800Vestedat
      December 31, 2008
              1,022,333
              $6.39
              3.07
              $986,800
 
 The
weighted-average fair value of each option granted during the years ended
December 31, 2008, 2007 and 2006, estimated as of the grant date using the
Black-Scholes option valuation model was $5.30, $4.41 and $2.78,
respectively.
 
 The
Company’s stock options granted to non-employee directors vest immediately upon
grant and have a maximum contractual term of five years.  Stock
options granted to employees vest over three years and have a maximum
contractual term of ten years.  The expected option term is calculated
utilizing historical data of option exercises.
 
 As of
December 31, 2008, 2007 and 2006, there was $104,769, $175,868 and $90,562,
respectively, of unrecognized compensation cost related to non-vested stock
option awards which will be amortized through December 2010, the requisite
service period.
 
 During
the year ended December 31, 2008, 21,250 stock options were exercised for cash
resulting in proceeds to the Company of $141,688.
 
 During
the year ended December 31, 2008, the Company earned a tax benefit of
approximately $11,000 resulting from the exercise of stock
options.  This amount has been credited to additional paid-in capital
and applied to the current tax liability.
 
 10.  WARRANTS AND
OPTIONS:
 In
February 2003, the Company issued to an underwriter (and its designees) warrants
to purchase an aggregate of 200,000 shares of the Company’s common stock as
compensation related to the Company’s public offering.
 
 In
February 2008, 195,000 of the warrants to purchase shares, all that remained
outstanding, were exercised, resulting in net proceeds to the company of
$858,000. During the year ended December 31, 2008, the Company earned a tax
benefit of approximately $267,000 resulting from the exercise of these
warrants.  This amount has been credited to additional paid-in capital
and applied to the current tax liability.
 
 
 11.  EMPLOYEE BENEFIT
PLAN:
 On
September 11, 1996, The Company’s board of directors instituted a defined
contribution plan under Section 401(k) of the Internal Revenue Code (the
“Code”).  On October 1, 1998, the Company amended and standardized its
plan as required by the Code.  Pursuant to the amended plan, qualified
employees may contribute a percentage of their pretax eligible compensation to
the Plan and the Company will match a percentage
  F-17
 
 CPI
AEROSTRUCTURES, INC.
  of each
employee’s contribution.  Additionally, the Company has a
profit-sharing plan covering all eligible employees.  Contributions by
the Company are at the discretion of management.  The amount of
contributions recorded by the Company in 2008, 2007 and 2006 amounted to
$122,670, $93,698 and $65,823, respectively.
 
 
 12.  MAJOR
CUSTOMER:
 
 Forty-nine
percent (49%) of sales in 2008, 63% of sales in 2007 and 75% of sales in 2006
were directly to the U.S. government. Forty-two percent (42%) and 79% of
accounts receivable at December 31, 2008 and 2007 respectively, were from the U.
S. government. In addition, 24% and 31% of sales in 2008 and 2007, respectively,
were to one company.
 
 
 
 
 
  F-18
 
 CPI
AEROSTRUCTURES, INC.
  
 SIGNATURES
 
 Pursuant
to the requirements of  Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
 
 Dated:                      March
      24, 2009
              CPI
      AEROSTRUCTURES, INC.(Registrant)By:
              /s/
      Edward J. FredEdward
      J. Fred
                Chief
      Executive Officer, President and
Director
 
 
 In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
 
 Signature
              Title
              Date/s/
      Eric Rosenfeld
              Chairman
      of the Board of
              March
      24, 2009Eric
      Rosenfeld
              Directors/s/
      Edward J. Fred
              Chief
      Executive Officer and
              March
      24, 2009Edward
      J. Fred
              President/s/
      Vincent Palazzolo
              Chief
      Financial Officer and Secretary
              March
      24, 2009Vincent
      Palazzolo/s/
      Walter Paulick
              Director
              March
      24, 2009Walter
      Paulick/s/
      Kenneth McSweeney
              Director
              March
      24, 2009Kenneth
      McSweeney/s/
      Harvey Bazaar
              Director
              March
      24, 2009Harvey
      Bazaar
  28