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

                                    FORM 10-K
(Mark One)

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934 (No Fee Required) 
      For the fiscal year ended January 31, 1998

|_|   TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
      OF 1934 (No Fee Required) 
      For the transition period from___________ to ____________

Commission File Number  0-2199

                          First Aviation Services Inc.
             (Exact name of registrant as specified in its charter)

            Delaware                                        06-1419064
            (State or other jurisdiction                    (I.R.S. Employer
            of incorporation or organization)               Identification No.)

            15 Riverside Avenue
            Westport, Connecticut                           06880-4214
            (Address of principal executive offices)        (Zip Code)

                    Issuer's telephone number (203) 291-3300
                            (Office of the Secretary)

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

                                          Name of each exchange
            Title of each class           on which registered
            -------------------           -------------------
            None                          None

 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
                                    par value

Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days or for such short period that the registrant was subject to such filing
requirements. Yes |X| No |_|

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

The aggregate market value of the voting stock held by non-affiliates as of
April 24, 1998 was approximately $24,984,368.

The number of shares outstanding of the registrant's common stock as of April
24, 1998 is 8,971,592 shares.

                    Documents incorporated by reference: None

<PAGE>

                                     PART I

Item 1. Business

General

      First Aviation Services, Inc. ("First Aviation" or the "Company") is a
worldwide leader in providing services to aircraft operators of some of the most
widely used military, commercial, and general aviation aircraft engines in the
world. The Company's operations include repair and overhaul of gas turbine
engines and accessories, remanufacturing of engine components and accessories,
and redistribution of new and remanufactured parts. With the acquisition of
Aircraft Parts International ("API") from AMR Combs, Inc. ("AMR Combs") (see
below), the Company has become one of the leading suppliers of aircraft engine
parts and other aircraft parts to the general aviation industry worldwide.

      First Aviation was formed in March 1995 to acquire all of the stock of
National Airmotive Corporation (NAC). The acquisition was completed on June 1,
1995, and was accounted for under the purchase method of accounting. Through
NAC, the Company provides repair and overhaul services for several aircraft
engine types, including: (i) engines manufactured by the Allison Engine Company
("Allison"), a subsidiary of Rolls Royce USA, that power the Lockheed Martin
C-130 "Hercules" cargo aircraft, the most popular cargo aircraft in the world;
(ii) the engines employed on most light helicopters; and (iii) industrial
turbine engines used primarily for power co-generation and gas transmission. The
Company also is an industry leader in the remanufacture of serviceable engine
parts and components for use in engine overhauls, and, through API, as a general
aircraft parts supplier.

      On March 5, 1997, Aircraft Parts International Combs, Inc., a majority
owned subsidiary of the Company ("API Combs"), completed the acquisition of API.
API distributes more than 100 major product lines of aircraft parts. API
Technologies, API's licensed repair station, offers brake and starter generator
overhaul services, and is an authorized hose assembly manufacturing facility.

      The API acquisition was an initial step in meeting the Company's goal of
participating in the consolidation of the aviation services industry. API
expands the Company's services by focusing on supplying aircraft parts to the
general aviation market, thereby allowing the Company to leverage its repair and
overhaul and remanufacturing expertise to a new customer base.

      The Company believes it is positioned to benefit from certain industry
trends that favor independent repair and overhaul and aircraft providers
including: (i) increased outsourcing of repair and overhaul services by engine
operators as engine operators seek to reduce operating costs and turnaround
time; (ii) increasing consolidation among repair and overhaul and parts
providers as engine operators reduce the number of providers used for these
services; (iii) increased emphasis on the traceability of aircraft parts which
has, in turn, increased the required sophistication of information systems used
by parts distributors and engine overhaul shops; (iv) growing demand for
remanufactured parts as engine operators seek to lower costs of repair and
overhaul services; (v) increasing aviation activity which, in turn, increases
the demand for repair and overhaul services; and (vi) increased demand by
aircraft operators for third parties to manage and maintain parts inventories so
that aircraft operators may reduce their parts inventory.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 
1995.

      Statements which are not historical facts in this report constitute
forward looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward looking statements, including those
concerning the Company's expectations, all involve risk and uncertainties, which
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievement
expressed or implied by such forward looking statements. Such factors include,
among others, the Company's ability to obtain parts from its principal supplier
on a timely basis, the ability to consummate suitable acquisitions, the ability
to expand its remanufacturing capabilities, and other items that are beyond the
Company's control and may cause actual results to differ from management's
expectations.

Industry Overview

      Engine Repair and Overhaul. The Company believes that the current annual
worldwide market for gas turbine engine repair and overhaul services is in
excess of $6.5 billion. Gas turbine engines are used to power aircraft and
marine vessels, and to generate electricity for industrial applications. Repair
and overhaul services are performed by engine operators, engine manufacturers,
and independent operators such as the Company. The engine repair and overhaul
market is highly fragmented with numerous service providers, competing primarily
on the basis of price, quality and turnaround time. The repair and overhaul of
aircraft engines and engine components is regulated by governmental agencies
throughout the world, including the U.S. Federal Aviation Administration (the
"FAA"), the Joint Airworthiness Administration (the "JAA") and the U.S.
Department of Defense (the "DOD"), and is supplemented by engine manufacturers'
guidelines which generally require that engines be 


                                       2
<PAGE>

overhauled and certain engine components be replaced after a certain number of
flight hours and/or cycles (take-offs and landings). Many engine operators have
recognized outsourcing of repair and overhaul services as an opportunity to
reduce operating costs and turnaround time. Outsourcing allows engine operators
to benefit from the expertise of service providers, such as the Company, who
have developed proprietary repair schemes and achieved economies of scale
unavailable to individual operators. As engine operators continue to become more
cost and value conscious, and as modern aircraft engines become increasingly
more sophisticated, the Company expects the trend to outsourcing to continue.

      Aviation Parts Sales. The Company believes that the current annual
worldwide market for new and used spare engine parts and spare aircraft engines
is approximately $10.0 billion, of which $1.3 billion is supplied to the general
aviation market. The aviation parts market is highly-fragmented with a limited
number of large, well-capitalized companies selling a broad range of aircraft
spare parts, and numerous smaller competitors serving niche markets. The
Company, through API, serves the general aviation sector of this market, which
includes regional airlines, business aviation, helicopter and recreational
operators.

      Increasing Consolidation. The Company believes that customers are
increasingly seeking the services of larger, more sophisticated and
better-capitalized service providers. In order to reduce costs, satisfy
increased governmental regulatory scrutiny, streamline buying decisions and
assure quality, engine operators are seeking to reduce the number of providers
that are used both for repair and overhaul and parts supply services. As modern
aircraft engines become more sophisticated, so do the repairs and parts
requirements for such engines. At the same time, engine operators have become
more sensitive to quick turnaround times. As a result, the Company believes that
engine operators increasingly select those service providers that have made a
significant capital commitment toward developing proprietary repair schemes and
acquiring remanufacturing equipment and inventories, and therefore are capable
of providing higher quality and more timely services than under-capitalized
competitors can offer. Additionally, the increasing costs of technology and
inventory levels required to compete effectively has made entry into and
continued success in the industry more difficult and expensive. The Company
believes that well-capitalized, technologically sophisticated providers capable
of offering a wide range of services will benefit from this consolidation trend.
During the past year, a number of service providers have consolidated or
combined their operations. This is a trend that the Company believes will
continue.

Competition

      Engine Repair and Overhaul. In the repair and overhaul market for Allison
Models 250 or T56/501, NAC competes primarily with other independent operators,
including the other Allison Authorized Maintenance Centers (each an "AMC")
located throughout the world. Management believes that its most significant
competitors in this market include: Standard Aero of Winnipeg, Canada; UNC
Airwork and Dallas Airmotive in the United States; Hunting of Manchester, United
Kingdom; and Singapore Aerospace of Singapore, each of which is an AMC in one or
more product lines. In addition, OEM's may establish joint ventures to compete
for large contracts that are subject to bid. Certain international competitors
of the Company have the advantage of a monopoly on their country's military
contracts for repair and overhaul of the engines serviced by the Company. In the
market for repair and overhaul of other lines serviced by the Company, including
Pratt & Whitney Canada and McDonnell Douglas, the Company competes against the
original equipment manufacturers as well as other independent operators. Many of
the Company's competitors have financial resources substantially greater than
those of the Company, and have a longer and more extensive record of repair and
overhaul work on the Pratt & Whitney Canada engine lines and McDonnell Douglas
helicopter lines relative to the Company.

      Aviation Parts Sales. Competition in the parts distribution market is
generally based on price, availability of product and quality, including
traceability. NAC's major competitors include Allison, Rolls Royce and other
AMCs. API's major competitors include Aviall, Inc., AAR Corporation and Cessna
Aircraft Company (a subsidiary of Textron). There is also substantial
competition, both domestically and overseas, from companies who focus on
regional/niche markets, or on market segments of secondary interest. Examples of
these companies include Satair A/S, Superior Air Parts, Inc., Avteam and Omaha
Aircraft Supply.

      Accessory and Engine Component Remanufacturing. NAC's significant
competitors in this market include Standard Aero, Dallas Airmotive and UNC
Airwork. The Company believes that the primary competitive factors in this
marketplace are price, quality, engineering and availability. The Company has
engineered and developed a significant number of Engineering Authorities, which
are proprietary in nature. Due to its advanced systems, technology and years of
expertise in Allison component remanufacturing, the Company believes its
competes favorably with regard to such factors.


                                       3
<PAGE>

Parts Distribution

      Parts Sales. The Company, principally through API, sells more than 100
product lines and 80,000 new and factory reconditioned parts to professional
aircraft maintenance organizations. The parts are FAA approved and are acquired
from small, specialized manufacturers as well as major original equipment
manufacturers such as Allison, Champion Aviation Products, Goodyear, Michelin,
B.F. Goodrich, General Electric, Textron Lycoming, Teledyne Continental, Parker
Hannifin, AlliedSignal, Piper and Cessna. Most of the aforementioned suppliers
are committed to servicing aftermarket customers solely through wholesale
distributors such as API. Distributors add value to commonly available products
by offering immediate availability, broad product lines, technical assistance
and additional services. API does not have any long-term agreements or
commitments from the original equipment manufacturers from whom it purchases
parts and is dependent on these manufacturers for access to parts for resale.

      NAC Sales of Remanufactured Engine Components and Accessories.
Traditionally, overhaul companies remanufactured select components from a
particular engine for reinsertion into the same engine. In recent years,
however, a market for rotable remanufactured parts has emerged, due primarily to
engine owners becoming more price-sensitive and more willing to purchase a
remanufactured part at a substantial discount to the cost of a new part. The
Company has increased its focus on the remanufacture of components and
accessories as a separate segment of its business, apart from its overhaul
business.

Computer-based Advanced Remanufacturing System (CARS)

      The Company has made substantial expenditures to develop CARS. CARS has
been in use for approximately three years to shorten turnaround times for
customer orders, increase output, improve inventory management and reduce costs
by eliminating duplication of work and reducing errors in ordering of parts. The
system consists of two parts; an automated inspection and routing system and a
remanufacturing variable control system. The Company has copyrighted its
self-developed software.

      CARS enables NAC to shorten lead times, increase output and improve
inventory management by allowing NAC to manage and control the process of
detailed parts inspection, material requisitioning, and work order scheduling
and release. The system's database contains much of the information required to
perform engine inspection activities, including illustrated parts catalogues.
This has largely eliminated the need to update parts catalogues manually and
allows an engine inspector using a personal computer located at his workstation
to (i) refer to computer based parts manuals and catalogues to identify needed
parts, (ii) access and check on the availability in inventory of needed parts,
(iii) requisition needed parts from inventory and schedule the time for delivery
of the parts to repair and overhaul mechanics and (iv) create and record an
audit trail for all inspected parts and processes. These features of the system
have substantially reduced total detailed engine inspection time required in the
overhaul process.

Principal Supplier

      During the year ended January 31, 1998 the Company derived more than 66%
of its revenues from the repair and overhaul of Allison engines and Allison part
sales. In prior years, the Company derived greater than 90% of its revenues from
Allison related services and parts sales. Allison continues limited production
of new Model T56/501 flight engines.

      NAC principally services gas turbine engines manufactured by Allison.
NAC's relationship with Allison began over 30 years ago when NAC expanded its
overhaul and repair operations to include support of the Allison turbine engine.
In 1970, NAC became a direct service dealer franchise for the Model T56/501
flight engine and the Model T56/501-K industrial engine, and thereafter grew to
become one of the largest independent commercial overhaul facilities in the
world for Allison engines. In 1982, NAC was appointed as an AMC for the Model
250, pursuant to which it was given an exclusive territory in which to operate.
In 1983, NAC was appointed as an AMC for the Allison 570/571-K industrial
engines.

      Allison modified its aftermarket support system for the Model 250 and
Model T56/501 engines in 1994. Under the current system, Allison appoints as
AMCs independent service providers, such as the Company, who satisfy Allison's
technical and quality standards and pay a "technical fee" for such appointment.
Although each AMC is assigned a non-exclusive region of responsibility in which
such AMC undertakes to provide repair and overhaul services, component repair,
warranty work and other customer support functions, Allison permits all AMCs to
market such services throughout the world. All AMCs are permitted to purchase
parts directly from Allison rather than having to purchase parts from an
Authorized Distributor, as was required under the previous system. The terms of
an agreement between Allison and the AMC (the "AMC Agreement") restrict the
establishment of an AMC's repair and marketing facilities to specific sites
identified in its AMC Agreement.


                                       4
<PAGE>

      NAC, pursuant to its three AMC Agreements with Allison, is authorized to
purchase parts from Allison and service designated Allison Model T56/501 flight
engines, Model 250 engines and Model 570/571-K industrial engines. The AMC
Agreements with Allison for the Model T56/501 and Model 250 were scheduled to
expire on December 31, 1997 and the AMC Agreement for the Model 570/571-K
expires on December 31, 1998. The AMC Agreements for the Model T56/501 and Model
250 provide, however, that qualifying AMCs who have adhered to the terms and
conditions of their AMC Agreements and who have the "ability and desire" to
continue through three, three year renewal periods may renew the AMC agreements
for each of the additional three year periods for a renewal fee of $1 per three
year period. Renewal of the 570/571 AMC Agreement is subject to Allison's
discretion. The Company has no reason to believe that these agreements with
Allison will not be extended. The failure of Allison to renew or extend the
contracts would have a material and adverse impact on the Company and its
operations.

      On November 16 and 17, 1997 Allison notified NAC that it would extend the
term of the existing AMC Agreements for the Model T56/501 and Model 250 engines
to March 31, 1998. On March 16, 1997, Allison and NAC further agreed to extend
the term of such agreements until April 30, 1998.

      In May 1998, Allison provided NAC, and all other "AMC's in good standing",
with proposed amendments to the AMC Agreements for the 250 and T56/501 engines.
As an "AMC in good standing", NAC has, in accordance with the terms of the
existing AMC Agreement of 1994, elected not to amend its existing AMC Agreements
for the Model 250 and Model T56/501 engines, but rather to exercise its option
to renew such agreements each for a period of three years. NAC notified Allison
on March 19, 1998 of its decision to renew the existing AMC Agreement for the
250 engine, and on April 22, 1998 of its decision to renew the existing AMC
Agreement for the T56/501 engines. Discussions between NAC and Allison are
continuing with respect to possible future amendments to these agreements as
well as to the AMC Agreement for the Model 570/571-K engines.

Sales and Marketing

      Overhauls and Repairs. NAC uses direct sales personnel and agents for all
product lines. The Vice Presidents of each of the product lines supervise their
sales professionals, whose sales efforts are supported by the quality assurance
and engineering departments to aid in customer support. Senior management plays
an active role in marketing several of the Company's product lines. NAC's
professionals provide cost effective solutions to maintaining engines, stressing
NAC's repair and overhaul engineering expertise, turnaround times and component
remanufacturing capabilities. The Company actively participates in many of the
major industry gatherings and air shows globally, and serves as host to groups
of engine operators at technical and other meetings.

      Parts Distribution. New and serviceable parts are sold to overhaul
customers, parts resellers, regional airlines, FBO's, and business aviation,
helicopter and recreational operators. The Company uses regional sales managers,
inside salespersons, outbound telephone salespersons, independent contract
representatives, and associated distributors in its sales and marketing efforts.

      ISO/9001 Certification. During the fiscal year, the Company's Oakland,
California facility became the first independent repair and overhaul facility in
the world to receive ISO/9001 certification. NAC has also been certified by the
DOD to the ISO/9001 standard for performance of work on DOD contracts.

Customers

      The Company provides repair and overhaul services and sells parts to more
than 300 customers, which include both foreign and U.S. militaries, air cargo
carriers, major industrial corporations and others.

      During the year ended January 31, 1998 and 1997, and the eight months
ended January 31, 1996, respectively, the Company's top 10 customers accounted
for approximately 31%, 45% and 45% of revenues. During the year ended January
31, 1998, no single customer's purchases exceeded 10% of the Company's revenues.
During the year ended January 31, 1997, revenues from System Control
Technologies represented 12.3% of Company's operating revenues. During the eight
months ended January 31, 1996, revenues from the U.S. government represented 18%
of the Company's operating revenues.


                                       5
<PAGE>

Backlog

      As of January 31, 1998, the total contract price of the backlog of orders
for repair and overhaul services was approximately $20.3 million.

Regulation

      Governments around the world, through regulatory bodies such as the FAA
and DOD, require all aircraft and engines to follow a defined maintenance
program to ensure airworthiness and safety. Such programs are developed by the
original equipment manufacturer in coordination with the regulatory body. The
DOD's regulatory program for engines used by the armed services is separate and
apart from the FAA procedures. The maintenance of industrial engines used in
power plants is relatively unregulated, except when such maintenance is
performed for the government. The Company has certificates from the FAA and the
JAA covering its repair and overhaul facilities. Under the authority of these
certifications, the Company is permitted to service all Allison engine lines,
the Pratt & Whitney Canada PT6 and its other product lines. The DOD requires
that parties servicing aircraft engines for branches of the U.S. armed services
comply with applicable government regulations, and the DOD continually reviews
the operations for compliance with applicable regulations.

      All aircraft must be maintained under a continuous condition-monitoring
program and periodically must undergo thorough inspection and maintenance. The
inspection, maintenance and repair procedures for the various types of aircraft
and equipment are prescribed by regulatory authorities and can be performed only
by certified repair facilities and/or certified technicians. Certification and
conformance is required prior to installation of any part on an aircraft.
Presently, whenever necessary with respect to a particular part, the Company
utilizes FAA certified repair stations to repair and certify parts to ensure
marketability. The operations of the Company may in the future be subject to new
and more stringent regulatory requirements. The Company believes it is in
material compliance with applicable regulations. See Item 3, "Legal
Proceedings".

Environmental Matters and Proceedings

      The Company's operations are subject to extensive federal, state and local
environmental laws and related regulation by government agencies, including the
United States Environmental Protection Agency (the "EPA"), the California
Environmental Protection Agency (the "Cal EPA") and the United States
Occupational Safety and Health Administration. Among other matters, these
regulatory authorities impose requirements that regulate the operation,
handling, transportation and disposal of hazardous materials, the health and
safety of workers, and require the Company to obtain and maintain licenses and
permits in connection with its operations. This extensive regulatory framework
imposes significant compliance burdens and risks on the Company. The Company
believes that it is in material compliance with all federal, state, and local
laws and regulations governing its operations. The Company does not anticipate
that any material capital expenditures will be required during fiscal 1999 in
order to maintain compliance with the federal, state and local laws and
regulations.

      In October 1995, a committee comprised of a group of companies and
individuals responsible for the cleanup of the Petroleum Products Corporation
Superfund Site in Pembroke Park, Florida (the "Superfund Site") contacted NAC
and alleged that NAC was responsible for a share of the cleanup costs pursuant
to Comprehensive Environmental Response, Compensation and Liability Act of 1980.
NAC has been designated as a potentially responsible party by the EPA for costs
associated with cleanup of the Superfund Site, and as such, as with each of the
other potentially responsible parties, is potentially liable on a joint and
several basis for the entire cleanup cost for the Superfund Site. The committee
demanded that NAC pay approximately $70,000 to join the committee handling the
cleanup and threatened to add NAC as a defendant to an existing lawsuit
regarding the site if NAC declined to pay. The Committee alleges that NAC is
responsible to pay a portion of the cleanup costs due to its status as the
successor of Design Engineering Company ("DEC"), which the committee alleges
sent waste oil from property located in Miami, Florida (the "Miami Property") to
the Superfund Site between approximately 1969 and 1973. The Committee alleges
that DEC sent approximately 194,500 gallons of waste oil to the Superfund Site
and has estimated that the total cleanup costs for the Superfund Site allocable
to the Company could range from $0.75 to $1.25, per gallon. At this time, the
Company is unable to determine the accuracy of the Committee's cleanup cost
estimates or the likelihood that NAC will be required to contribute a portion of
such cleanup costs. In mid 1997 the Company advised the committee that it would
not join in funding cleanup of the site. Since then, neither the Company nor NAC
have received any communication from the committee. The Company will vigorously
contest the committee's allegations regarding the amount of waste oil allegedly
shipped by DEC to the Superfund Site.


                                       6
<PAGE>

      In February 1996, NAC and several other past and present owners/operators
of the Miami Property were served with a complaint filed in the Florida District
Court of the 11th Judicial Circuit in and for Dade County, Florida, wherein the
owners of certain property adjacent to the Miami Property allege that
contamination at the Miami Property has migrated to and/or impacted their
adjacent property. The complaint seeks unspecified damages for cleanup costs,
loss of property value and attorneys' fees. NAC has answered the complaint and
continues to contest the plaintiffs' allegations.

Employees

      As of January 31, 1998, approximately 541 persons were employed on a
full-time basis by the Company. None of the Company's employees are covered by
collective bargaining agreements. The Company believes that its relations with
its employees are good.

Item 2.  Properties

The Company operates within the following facilities:

<TABLE>
<CAPTION>
                                                                                Square      Lease
Location                Entity                  Description                     Footage     Expiration
--------                ------                  -----------                     -------     ----------
                                                                                
<S>                     <C>                   <C>                              <C>        <C> 
Westport, CT            First Aviation         Executive offices                  2,000        2007
                                                                                
Oakland, CA (1)         NAC                    Allison engine repair and        
                                               overhaul shop and offices        157,000        2015
                                                                                
Long Beach, CA          NAC                    Allison engine and Pratt         
                                               & Whitney PT6 repair and         
                                               overhaul                          28,500        1999
                                                                                
Long Beach, CA          NAC                    Maintenance of McDonnell         
                                               Douglas helicopter components      3,000     Monthly
                                                                                
San Leandro, CA         NAC                    Warehouse                          8,900        1999
                                                                                
Indianapolis, IN (2)    NAC                    Overhaul center                   12,800        1998
                                                                                
Indianapolis, IN (2)    NAC                    Overhaul center                   12,300        1999
                                                                                
Indianapolis, IN (2)    NAC                    Overhaul center                   19,200        1998
                                                                                
Houston, TX (3)         NAC                    Repair of industrial engines      15,000       Owned
                                                                                
Memphis, TN             API                    Distribution/sales                80,000        2013
</TABLE>

      (1)   NAC owns the buildings at this location but leases the land on which
            the structures are located.

      (2)   Pursuant to the agreement between Allison and NAC under which these
            facilities are made available to Allison, Allison has "deemed it
            necessary to overhaul and repair some products in Indianapolis for
            the purpose of maturing the product sooner, reducing direct
            operating cost to the customer, gaining product knowledge more
            rapidly, improving engineering awareness, providing improved
            reliability data and reducing warranty, policy and campaign cost".
            This agreement limits the number of personnel that are to be
            employed at the facility. NAC is reimbursed its direct cost for the
            facilities as well as the labor pool provided. The arrangement is
            expected to terminate in May 1998. The Company will not be renewing
            the leases.

      (3)   In November 1997, the Company purchased a 15,000 sq. foot facility
            in Houston Texas. The property includes a two bay test cell that the
            Company is in the process of outfitting with the appropriate test
            equipment. The facility will 


                                       7
<PAGE>

            support the Company's capabilities in the industrial engine market.
            The Company is presently using the facility to support staff in
            Houston who provide field and overhaul services to gas turbine users
            for engines manufactured by Allison Engine Co. and other original
            equipment manufacturers.

Item 3. Legal Proceedings

      The Company's business exposes it to possible claims for personal injury,
death or property damage which may result from a failure of engines serviced by
the Company or spare parts sold by it. The Company takes what it believes to be
adequate precautions to ensure the quality of the work it performs and the
traceability of the aircraft spare parts which it sells. The Company maintains
what it believes is adequate liability insurance to protect it from such claims.

      In March 1998, the Company's NAC subsidiary, along with a number of other
entities, was served with complaints asserting wrongful death claims deriving
from the crash of a Nomad 24 type aircraft on February 12, 1996 in
Port-au-Prince, Haiti. NAC was named as a defendant along with seven other
companies. The lawsuits assert claims for unspecified damages based on, as they
pertain to NAC, its alleged negligence, breach of implied warranty and failure
to warn in connection with an aircraft which NAC allegedly serviced, repaired or
maintained. The Company's insurance underwriter is coordinating the response to
these claims.

      In December 1997, NAC was added as a defendant to an amended complaint
filed in Superior Court Los Angeles County, California by plaintiffs H.S.
Hubschrauberservice et. al. wherein they assert claims based upon fraud and
breach of express and implied warranty against non-NAC defendants deriving from
the sale of an allegedly defective helicopter. Plaintiffs have asserted that NAC
is liable as a successor in interest to California Airmotive Group and other
non-NAC corporate defendants. NAC has filed an answer denying the allegations of
the amended complaint applicable to NAC.

      In 1995 and early 1996, the Office of Special Investigations ("OSI") of
the U.S. Air Force conducted an investigation concerning NAC's use of new
government surplus parts in repairing aircraft engines pursuant to FMS contracts
with the Air Force from 1987 through 1995. OSI investigated whether NAC used new
government surplus parts with knowledge that doing so was in violation of the
FMS contracts. Such a knowing and intentional violation of a government contract
could create a criminal or civil liability. The Company does not believe that
any Company employee knowingly violated the FMS contracts, and the Company
believes that the U.S. Air Force knew of NAC's utilization of new surplus parts
and in some cases requested that the Company use certain new government surplus
parts under the FMS contracts. Although NAC has been informed that the
government has determined not to pursue this matter criminally, it is not clear
whether or to what extent the government will pursue a civil complaint. The U.S.
Air Force also may claim a breach of contract if new government surplus parts
were used in violation of the FMS contracts, even if it was not a knowing
violation. It is unclear what, if any, damages would be awarded for such a
breach.

      In November 1994, NAC made a formal voluntary disclosure to the DOD
Inspector General concerning apparent product substitution by employees of
Heli-Dyne prior to the Company's acquisition of the assets of Heli-Dyne in April
1994. NAC was accepted into the voluntary disclosure program and in early 1995
executed a written agreement with the DOD Inspector General and the Department
of Justice ("DOJ"). In August 1995, NAC submitted a written report to the DOD
Inspector General concerning the relevant facts and detailing the corrective
actions taken. On behalf of the DOD Inspector General, the Defense Contract
Audit Agency and the Army Criminal Investigative Division conducted audit and
verification investigations concerning the Company's written report. NAC
believes that the results of such investigations were forwarded to the civil
division of the DOJ for a determination of whether NAC bears any financial
responsibility for damages caused by Heli-Dyne.

      The Company is also involved in various matters relating to compliance
with DOD regulations governing services performed for U.S. military aircraft and
environmental regulations. See also Item 1, "Business-Environmental Matters and
Proceedings."


                                       8
<PAGE>

      In 1997, a former director and officer of the Company initiated litigation
in the Alameda County Superior Court, California, against the Company, NAC,
Aaron P. Hollander, Michael C. Culver, First Equity Development Inc. ("First
Equity") and First Equity Group Inc. This litigation alleges wrongful
termination, breach of contract, and various acts of fraud, deceit and
misrepresentation and seeks various damages, as well as common shares of the
Company. This litigation relates to the termination of the employment of the
plaintiff by the Company, NAC and First Equity, compensation matters relating to
employment of plaintiff and the claim by plaintiff of entitlement to a portion
of the outstanding shares of the Company.

      The Company is involved in certain claims and lawsuits relating to
personnel matters which are incidental to its operations.

      The Company is vigorously contesting each of the claims mentioned.
Management does not believe that the ultimate resolution of any of such claims
will have a material adverse effect on the Company's business, financial
condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

      None


                                       9
<PAGE>

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder
Matters

      Market Information. The Company's common stock trades on The NASDAQ Stock
Market under the symbol FAVS. The table below sets forth the quarterly high and
low sales prices for the Company's common stock as reported on the NASDAQ
Composite Tape since March 5, 1997, the date public trading commenced.

                                     High          Low
                                     ----          ---
                First Quarter        11 3/4        8
                Second Quarter       11 1/8        8 1/4
                Third Quarter        11            7 5/8
                Fourth Quarter       8 3/4         5 7/8
                                                 

      Holders. As of April 24, 1998, there were approximately eighteen holders
of record of the Company's common stock.

      Dividends. The Company has not declared or paid any cash dividends or
distributions on its common stock since its inception. The Company anticipates
that, for the foreseeable future, all earnings will be retained for use in the
Company's business and no cash dividends will be paid on the common stock. Any
payment of cash dividends in the future on the common stock will be dependent
upon the Company's financial condition, results of operations, current and
anticipated cash requirements, plans for expansions, the ability of its
subsidiaries to pay dividends or otherwise make cash payments or advances to it,
and restrictions, if any, under any current or future debt obligations, as well
as other factors that the Board of Directors deems relevant. API's and NAC's
credit facilities prohibit the payment of cash dividends except with the
applicable lender's consent.


                                       10
<PAGE>

Item 6.  Selected Financial Data

      The selected financial data set forth below should be read in conjunction
with the Consolidated Financial Statements and related Notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included herein.

<TABLE>
<CAPTION>

                                                                                                     Predecessor (2)
                                                                                     Twelve     -------------------------
                                                           Fiscal Year  Fiscal Year  Months     Fiscal Year   Fiscal Year
(All  amounts in  thousands,  except per share amounts)      Ended        Ended       Ended        Ended         Ended
                                                           January 31,  January 31, January 31,   March 31,     April 1,
                                                            1998 (1)       1997      1996 (2)       1995          1994
                                                           ----------   ---------    --------     --------      --------
<S>                                                        <C>          <C>           <C>          <C>          <C>     
Statement of Operations Data:
  Net sales                                                $ 153,642    $ 104,236    $  92,857    $  83,091    $  92,513
  Cost of sales                                              130,433       89,426       81,199       72,796       79,315
                                                           ---------    ---------    ---------    ---------    ---------
  Gross profit                                                23,209       14,810       11,658       10,295       13,198
  Selling, general and administrative expenses                14,827        9,881        8,578        9,362        8,536
                                                           ---------    ---------    ---------    ---------    ---------
  Income from operations                                       8,382        4,929        3,080          933        4,662
  Interest expense                                             1,842        3,470        3,249        1,807        1,076
  Interest Income                                               (357)          --           --           --           --
  Other expense                                                   38           --          801        1,302          519
                                                           ---------    ---------    ---------    ---------    ---------
  Income (loss) before taxes and extraordinary items           6,859        1,459         (970)      (2,176)       3,067
  Income tax expense (benefit)                                 1,500           --           90         (885)       1,046
                                                           ---------    ---------    ---------    ---------    ---------
  Income (loss) before extraordinary item                      5,359        1,459       (1,060)      (1,291)       2,021
  Extraordinary item (3)                                        (108)        (864)          --           --           --
                                                           ---------    ---------    ---------    ---------    ---------
  Net income (loss)                                        $   5,251    $     595    $  (1,060)   $  (1,291)   $   2,021
                                                           =========    =========    =========    =========    =========

Dividends on preferred stock (4)                                  11          132
                                                           ---------    ---------
Net income available to common stockholders                $   5,240    $     463
                                                           =========    =========

Net income (loss) per common share:
  Basic net income per common share before
   extraordinary item                                      $    0.63    $    0.37
  Extraordinary item                                           (0.01)       (0.24)
                                                           ---------    ---------
  Basic net income per common share                        $    0.62    $    0.13
                                                           =========    =========

Weighted average shares outstanding                            8,432        3,557

  Net income (loss) per common
   share - assuming dilution - before extraordinary item   $    0.61    $    0.26
  Extraordinary item                                           (0.01)       (0.17)
                                                           ---------    ---------
Adjusted net income per common
   share - assuming dilution                               $    0.60    $    0.09
                                                           =========    =========
Weighted average shares
   outstanding and assumed
   conversions                                                 8,698        5,194


Balance Sheet Data:
  Working capital                                          $  53,735    $  37,487    $  31,413    $  35,560    $  30,379
  Total assets                                                82,523       62,372       60,384       64,074       65,059
  Current portion of long-term
    debt                                                          --        1,100        1,970          379          289
  Long-term debt, less current
    portion                                                   13,866       32,794       27,005       18,660       10,963
  Other long-term liabilities                                  1,041        2,119        3,601        2,168        2,243
  Series A Preferred Stock                                        --        1,650        1,650           --           --
  Total stockholders' equity                               $  45,957    $   6,281    $   4,186    $  35,024    $  36,315
</TABLE>


                                       11
<PAGE>

Notes to Selected Financial Data

(1)   The financial information for the year ended January 31, 1998 includes the
      results of API, which was acquired on March 5, 1997. See "Management's
      Discussion and Analysis of Financial Condition and Results of Operations
      Results of Operations".

(2)   The historical data of NAC and the Company are not comparable in all
      respects. The financial information presented for the twelve months ended
      January 31, 1996 includes four months during which NAC was owned by its
      former shareholder (the "Predecessor"). This information also includes the
      eight months during which NAC was owned by the Company. The results of
      operations for this period are as follows:

                                                                     
<TABLE>
<CAPTION>
                                    Predecessor     First Aviation     Twelve-months
                                      2/1/95 -         6/1/95 -           Ended
                                      5/31/95          1/31/96       January 31, 1996
                                  ----------------  ---------------- ----------------
<S>                                   <C>               <C>              <C>     
Net sales                             $ 24,338          $ 68,519         $ 92,857
Cost of sales                           23,809            57,390           81,199
                                  ----------------  ---------------- ----------------
Gross profit                               529            11,129           11,658
Selling general and                                                      
  administrative expenses                3,229             5,349            8,578
                                  ----------------  ---------------- ----------------
Income (loss) from operations           (2,700)            5,780            3,080
Interest expense                           644             2,605            3,249
Other expense                              801                --              801
                                  ----------------  ---------------- ----------------
Income (loss) before tax and                                             
  extraordinary item                    (4,145)            3,175             (970)
Income tax expense (benefit)            (1,210)            1,300               90
                                  ================  ================ ================
Net income (loss)                     $ (2,935)         $  1,875         $ (1,060)
                                  ================  ================ ================
</TABLE>

      Due to the change in ownership and equity structure, income (loss) per
      share data for these periods cannot be presented meaningfully.

(3)   Represents extraordinary charges of $108, or $0.01 per share, for
      prepayment penalties for the year ended January 31, 1998, and $864, or
      $0.24 per share, for the write-off of prepaid financing costs and early
      extinguishment charges for the year ended January 31, 1997, both in
      connection with early extinguishments of debt. See "Management's
      Discussion and Analysis of Financial Condition and Results of Operations -
      Liquidity and Capital Resources".

(4)   The calculation of net income per common share requires the deduction from
      net income of undeclared preferred stock dividends. Accumulated but
      undeclared preferred stock dividends were $132 for the fiscal year ended
      January 31, 1997. Net income per common share for all periods, except as
      shown, cannot be presented meaningfully due to the change in ownership and
      equity structure.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

      The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements, including the Notes thereto, and selected
financial data of the Company included elsewhere in this Annual Report on Form
10-K.

General

      On March 5, 1997, the Company completed an initial public offering of
3,900,000 shares of common stock, $0.01 par value per share (the "Offering").
The Company received net proceeds of approximately $34.5 million after deducting
expenses of approximately $4.5 million. The net proceeds were used for, among
other things, the repayment of term and subordinated debt, a paydown of the
Company's credit facility (for a total debt reduction of $22.6 million), payment
of accrued dividends on preferred stock ($0.2 million), and the acquisition of
API for $10.6 million.

      Immediately prior to the closing of the Offering, the following
transactions were completed: (i) all outstanding shares of the Series A
Preferred Stock of the Company were converted into 165,000 shares of common
stock at the offering price, (ii) all outstanding warrants to purchase the
1,293,335 shares of the Company's common stock were exercised in full, 


                                       12
<PAGE>

(iii) the Company's certificate of incorporation was amended to increase the
authorized common stock of the Company to 25,000,000 shares, and (iv) a
6.4549-to-1 stock split with respect to common stock was effected. Accordingly,
all common share amounts have been restated to give effect to the 6.4549-to-1
stock split.

      With the closing of the offering, the Company completed the acquisition of
API. The adjusted purchase price for API was $10.6 million in cash, including
expenses of approximately $0.5 million which were incurred in connection with
the acquisition. The acquisition was accounted for under the purchase method of
accounting as of the closing date. The purchase price, including acquisition
costs, was allocated to the assets and liabilities of API based upon their
relative fair values. The excess of purchase price paid over the value of the
net assets acquired was included in goodwill in the accompanying consolidated
balance sheets. The consolidated financial statements of the Company since March
5, 1997 reflect the impact of the results of operations of API as well as the
purchase price allocation.

      In conjunction with the acquisition, AMR Combs purchased 10,407 shares of
API Combs Series A Cumulative Convertible Preferred Stock, $0.001 par value, at
a price of $100 per share. Total proceeds to the Company were $1,041,000. This
transaction is accounted for as a minority interest in the consolidated balance
sheets. Dividends of $4.00 per share are payable quarterly on the preferred
stock. Dividends of $38,000 accrued during the year ended January 31, 1998, and
have been reflected in minority interest in equity of its subsidiary in the
consolidated statements of operations.

      Net sales consist of revenues derived from the overhaul and repair of
aircraft engines, engine components and industrial turbines as well as the sales
of parts and components. Net sales are generally recorded when repaired or
overhauled engines and components are completed, tested and shipped. Net sales
of spare parts and components are recorded when parts are shipped. In the fiscal
years ended January 31, 1998 and 1997, and the twelve months ended January 31,
1996, revenues from the servicing, repair and overhaul of gas turbine engines
and original aircraft components accounted for approximately 59.8%, 81.8% and
75.3% of net sales, respectively, with revenue from the sale of spare parts and
components accounting for the remaining 40.2%, 18.2% and 24.7%, respectively of
net sales. The decrease in the percentage of revenues from servicing, repair and
overhaul, and the increase in percentage of revenues from the sale of spare
parts and components in the year ended January 31, 1998 is due to the
acquisition of API, which sells principally parts and components, and internal
growth at NAC. 

      On April 6, 1998 the Company announced that it had initiated a plan to
streamline operations at NAC, and took pre-tax restructuring charges of
approximately $1.7 million and other non-recurring charges of $1 million in the
first quarter. The economic impact of the restructuring is expected to
positively affect results beginning in the third quarter. The Company expects
that annual savings from the plan will approximate $3.4 million on a pretax
basis.

      The plan to streamline NAC's operations includes the consolidation of the
Light Turbine business unit at the Long Beach, California facility as well as a
reduction in force of approximately 80 positions at its Oakland facility.

      The Light Turbine business unit currently performs repair and overhaul
work of the Allison 250 engines at both the Oakland and Long Beach facilities.
Pratt & Whitney Canada PT6 gas turbines and Bell Helicopter rotating components
are serviced at the Long Beach facility. Consolidating the two operations is
expected to bring increased efficiency and focus, as well as improved customer
service.

      The reduction in force at Oakland is a result of softness in the Large
Flight Engine business unit, and the consolidation of the Light Turbine
operations. The Large Flight Engine business unit's Allison T-56 repair and
overhaul business has slowed due to the deteriorating financial situation in
Asia and a postponement of inputs from customers primarily located in Middle
Eastern countries.

      The Company's fiscal year ends January 31. Prior to their acquisitions,
NAC's fiscal year ended on the Saturday closest to March 31, and API's fiscal
year ended on December 31.


                                       13
<PAGE>

Results of Operations

      The following table sets forth, for the periods indicated, the percentages
of the Company's net sales that certain income and expense items represent. The
results of API are included in the financial information for the fiscal year
ended January 31, 1998 which is presented and discussed below.

<TABLE>
<CAPTION>
                                    Fiscal Year         Twelve-months         Twelve-months
                                       Ended               Ended                  Ended
                                  January 31, 1998     January 31, 1997     January 31, 1996
                                  ----------------     ----------------     ----------------
<S>                                     <C>                <C>                   <C>   
Net sales                               100.0%             100.0%                100.0%
Cost of sales                            84.9               85.8                  87.4
                                  ----------------     ----------------     ----------------
Gross profit                             15.1               14.2                  12.6
Selling general and                                                              
  administrative expenses                 9.7                9.5                   9.2
                                  ----------------     ----------------     ----------------
Income from operations                    5.4                4.7                   3.4
Interest expense                          1.2                3.3                   3.5
Interest income                          (0.2)                --                    --
Other income (expense)                     --                 --                  (0.9)
                                  ----------------     ----------------     ----------------
Income (loss) before tax and                                                     
  extraordinary item                      4.4                1.4                  (1.0)
Income tax expense                        1.0                 --                   0.1
                                  ================     ================     ================
Net income (loss) before                                                         
  extraordinary item                      3.4%               1.4%                 (1.1)%
                                  ================     ================     ================
</TABLE>

Fiscal year ended January 31, 1998 compared to fiscal year ended January 31,
1997

      Net sales for the fiscal year ended January 31, 1998 increased $49.4
million, or 47.4%, to $153.6 million from $104.2 million during the fiscal year
ended January 31, 1997. The growth in net sales was due to the acquisition of
API and a 5.2% increase in net sales at NAC. The increase in net sales at NAC
was due to a 4.2% increase in sales from the performance of engine repair and
overhauls, and a 9.8% increase in parts sales. During the fourth quarter of
fiscal 1998, the Company was adversely impacted by the financial downturn that
affected several countries in Asia and the Pacific Rim. As a result of economic
conditions in these countries, especially Thailand, Malaysia, and Japan, the
Company has experienced a reduction in the level of anticipated inputs for
engine overhauls and sales of parts and components. It is management's opinion
that the situation will continue for the foreseeable future.

      Cost of sales increased $41.0 million, or 45.9%, to $130.4 million from
$89.4 million during the year ended January 31, 1988. The increase in cost of
sales was due principally to the acquisition of API, and the increase in sales
at NAC.

      Total gross profit increased to 15.1% of net sales, compared to 14.2% for
the last fiscal year. A significant portion of the increase is due to the
acquisition of API. API is a distribution business and, as is typical in such
businesses, incurs less direct labor costs than a company such as NAC that
performs engine repair and overhaul services, which require a substantial amount
of direct labor cost. Consequently, gross profits at API are higher than those
at NAC, and the addition of API gross profits increased the Company's overall
gross profit percentage.

      Selling, general and administration expenses increased $4.9 million, or
50.1%. This was due to the inclusion of API, offset by a reduction in expense at
NAC during the fiscal year ended January 31, 1998 compared to the prior fiscal
year. NAC's results for the fiscal year ended January 31, 1997 were negatively
impacted by a non-cash charge of $1.5 million for compensatory stock options and
a $0.2 million charge for bonus. These charges were not incurred during the
fiscal year ended January 31, 1998.

      Interest expense decreased from the prior fiscal year by $1.6 million or
46.9%. The decrease was due principally to the $22.6 million reduction in
outstanding debt that was paid down from the proceeds of the Offering.

      Interest income increased $0.4 million from the prior fiscal year as
interest was received from one of the Company's customers.


                                       14
<PAGE>

      During the fiscal year ended January 31, 1998, the Company incurred an
extraordinary charge, net of associated income tax benefits, of $0.1 million for
prepayment penalties associated with the early extinguishment of debt. This
compares to a net extraordinary charge of $0.9 million in the fiscal year ending
January 31, 1997 which also was due to an early extinguishment of debt.

      Income taxes for the year ended January 31, 1998 increased $1.5 million.
The increase reflects the profitability of the Company offset by a reduction in
the valuation allowance.

      Net income increased $4.7 million to $5.3 million for the fiscal year
ended January 31, 1998, compared to net income of $0.6 million for the fiscal
year ended January 31, 1997.

Fiscal year ended January 31, 1997 compared to the twelve months ended January
31, 1996

      The twelve months ended January 31, 1996 is comprised of three separate
periods of time and operation. The initial two months of the period, February
and March of 1995, also are reported as part of the fiscal year ended March 31,
1995. During these two months, NAC incurred after tax losses of $1.9 million.
April and May of 1995 represent the two months immediately preceding the
acquisition of NAC by the Company. The Predecessor incurred after tax losses of
$1.0 million during this two month period. The Company acquired NAC on June 1,
1995 and installed new senior management during the last eight months of this
period. During this period, the Company generated net income of $1.9 million.

      Net sales for the fiscal year ended January 31, 1997 increased $11.3
million, or 12.2%, to $104.2 million from $92.9 million during the twelve months
ended January 31, 1996. The growth in net sales was due primarily to the $15.3
million, or 22%, increase in revenue from repair and overhauls. This increase
was offset in part by a $3.9 million, or 17%, decrease in the level of parts
sold directly to customers due primarily to larger than normal parts orders from
two customers in the twelve months ended January 31, 1996.

      Cost of sales increased $8.2 million during the fiscal year ended January
31, 1997 due to the increase in sales during that period. As a percentage of net
sales, cost of sales decreased 1.6% to 85.8% during the fiscal year ended
January 31, 1997 from 87.4% during the twelve months ended January 31, 1996.
This decrease was due primarily to charges of $1.0 million for inventory
obsolescence and $0.9 million for warranty and other accruals that were incurred
during the twelve months ended January 31, 1996.

      The Company's total gross profit increased $3.2 million, or 27.4%, to
$14.8 million for the fiscal year ended January 31, 1997. As a percentage of net
sales, total gross profit increased 1.6% from 12.6% to 14.2% for the fiscal year
ended January 31, 1997. The profit margins, before other costs of goods sold,
from engine repair and overhaul services increased from 14.7% to 16.9% for the
fiscal year ended January 31, 1997, while profit margins on part sales declined
from 16.1% to 12.2%.

      For parts ordered after September 1994, Allison reduced the Company's
discount from list price on over-the-counter parts sales by 60% for the T56/501
product line. For parts embodied in overhauls, Allison reduced the discount from
list price by 20% for the T56/501 engine, and by 20% for the 250 engine. The
decrease in profit margins on over-the-counter parts sales for the fiscal year
ended January 31, 1997 was largely the result of the change in Allison's
arrangements with its AMC's. Profit margins for the fiscal year ended January
31,1997 reflect the full implementation of changes in Allison's arrangements
with its AMCs. Due to increased levels of productivity, profit margins for
engine repair and overhaul services increased during the fiscal year ended
January 31, 1997 despite the adverse effect of the change in Allison's parts
discounts.

      The Company's total gross profit margins for the fiscal year ended January
31, 1997 reflect a reduction of $0.4 million of other cost of goods sold
compared to the twelve months ended January 31, 1996, primarily due to a $1.0
million inventory obsolescence charge and other related expenses incurred during
the twelve months ended January 31, 1996. During the fiscal year ended January
31, 1997 unfavorable production variances of $0.6 million were attributed
primarily to increased levels of training costs associated with the increase in
the direct labor force.

      Selling, general and administrative expenses for the fiscal year ended
January 31, 1997 increased by $1.3 million, or 15.1%, to $9.9 million from $8.6
million for the twelve months ended January 31, 1996. The increase is due
primarily to the $1.5 million non-cash charge for compensatory stock options and
a $0.2 million charge for bonus. This was offset in part by


                                       15
<PAGE>

a charge of $0.2 million incurred during the twelve months ended January 31,
1996 for a lump sum settlement to eliminate longevity pay to certain personnel.

      Interest expense for the fiscal year ended January 31, 1997 increased $0.3
million to $3.5 million from $3.2 million for the twelve months ended January
31, 1996. The increase was due to an increase in the average borrowings under
the Company's credit facilities as a result of the Company's need for increased
working capital and indebtedness incurred in connection with the acquisition of
NAC in June 1995.

      Other expenses decreased $0.8 million for the fiscal year ended January
31, 1997. During the twelve months ended January 31, 1996, the Company incurred
$0.8 million of expenses, representing the write-off of a marine gas turbine
engine joint venture investment, including related advances and professional
fees incurred in connection with the sale of NAC by the Predecessor.

      During the fiscal year ended January 31, 1997 the Company incurred an
extraordinary charge, net of associated income tax benefit, of $0.9 million due
to the early extinguishment of debt.

      Net income increased by $1.7 million to $0.6 million for the fiscal year
ended January 31, 1997, compared to a loss of $1.1 million for the twelve months
ended January 31, 1996.

Liquidity and Capital Resources

      The Company utilized the net proceeds from the Offering to complete the
acquisition of API for $10.6 million in cash, to pay down $22.6 million of the
credit facility and term loans of NAC, and for general working capital needs.
The Company also retired the $1.8 million 15% subordinated note due to
Canpartners Investments IV, LLC ("Canpartners"), and paid $231,000 of
accumulated and unpaid dividends on the Company's Series A Preferred Stock. The
preferred was converted into common stock as part of the Offering. In connection
with the retirement of the subordinated note, the Company recorded an
extraordinary after tax charge of $108,000 for prepayment penalties.

      First Aviation's aggregate capital expenditures for the fiscal years ended
January 31, 1998 and 1997, and the ten months ended January 31, 1996 were $2.4
million, $1.0 million, $1.1 million, respectively, exclusive of acquisition
costs of API. Management anticipates that capital expenditures for fiscal 1999
will aggregate approximately $4.2 million, exclusive of any costs of
acquisitions. These expenditures will be used to fund the purchases of tooling,
test equipment, and data processing equipment, the construction of a test cell
and the expansion and modernizations of the Company's distribution and logistics
capabilities. Management expects to fund these capital expenditures from cash
flows from operations and from borrowings.

      The Company's cash flows (deficit) from operations for the fiscal years
ended January 31, 1998 and 1997, and the ten months ended January 31, 1996 was
$(2.2) million, $(3.7) million, and $2.2 million, respectively. Cash used for
investing during these same periods, including acquisitions, was $13.0 million,
$1.3 million, and $13.9 million, respectively, while cash generated by financing
activities was $15.4 million, $5.0 million, and $11.6 million, respectively.

      In June 1996, NAC entered into a $40.0 million credit agreement.
Borrowings under this credit facility were used to retire the outstanding debt
under NAC's then-existing $30.0 million revolving credit line and term loan.
Additionally, the new facility provided funds needed to finance the Company's
expansion plans by enabling the Company to acquire an adequate supply of
inventory, and to finance receivables. In connection with the refinancing, the
Company recorded an extraordinary after tax charge of $864,000 for prepayment
penalties and the write-off of the unamortized balance of loan fees.

      Advances under the revolving portion of the credit facility bear interest
at LIBOR plus 3.0%. The revolving portion of the credit facility also allows for
the issuance of letters of credit up to an aggregate of $2.5 million. At January
31, 1998, borrowings under the revolving portion of the credit facility amounted
to $13.9 million and carried an interest rate of 8.15%. The original term of the
credit facility is through May 15, 1999. A termination of the facility prior to
that date requires the payment of a prepayment penalty of $400,000. Thereafter
the agreement automatically renews for additional one-year periods.

      The credit agreement contains a number of covenants, including
restrictions on mergers, consolidations and acquisitions, the incurrence of
indebtedness, transactions with affiliates, the creation of liens, limitations
on capital expenditures, and payment of management fees. The credit agreement
also requires NAC to maintain minimum levels of net worth, specified interest
expense coverage ratios and minimum backlog levels, and currently restricts the
payment of dividends from NAC to the Company without the lender's consent.
Substantially all of NAC's assets are pledged as collateral under the revolving
line of credit.


                                       16
<PAGE>

      In connection with the API acquisition, First Aviation, API Combs and AMR
Combs entered into a Stockholders Agreement. Pursuant to this agreement, AMR
Combs agreed that it would not sell its shares of the Preferred Stock or the
shares of API Combs common stock into which such Preferred shares are
convertible (collectively the "API Acquisition Shares") for a minimum period of
three years. API Combs has the right to redeem the API Acquisition Shares at any
time. AMR Combs has the right to cause the Company to repurchase the API
Acquisition Shares commencing three years after the closing of the API
acquisition. The redemption price is equal to the fair market value of the API
Acquisition Shares as determined by an independent appraisal. The Stockholders
agreement also contains certain other rights, including: (i) a right of first
refusal on the part of First Aviation with respect to any proposed sale of the
API Acquisition Shares; (ii) the right of First Aviation to require AMR Combs to
participate, on a pro rata basis, with it in the sale of the capital stock of
API Combs to a third party; (iii) the right of AMR Combs to elect to
participate, on a pro rata basis, in the sale of the capital stock of API Combs
to a third party; and (iv) piggyback and demand registration rights granted to
AMR Combs with respect to the API Acquisition Shares. The demand registration
rights are not exercisable until three years after the closing of the API
acquisition, and, if API Combs has not previously closed an underwritten public
offering of its common stock at the time AMR Combs elects to exercise its demand
registration rights, API Combs may elect to treat the demand as an exercise by
AMR Combs of its put option with respect to the API Acquisition Shares. The
Company has no plans to cause API Combs to conduct a public offering of its
securities.

      On April 23, 1998, API entered into a one year $10 million revolving
credit facility with Fleet National Bank. Advances under the credit facility
bear interest, at the Company's option, at (i) a variable rate per annum equal
to the prime rate, or (ii) a variable rate equal to the cost of funds rate plus
1.5% or (iii) at a fixed rate equal to the LIBOR rate plus 1.5%. The credit
agreement contains a number of covenants, including restrictions on mergers,
consolidations and acquisitions, the incurrence of indebtedness, transactions
with affiliates, the creation of liens, and limitations on capital expenditures.
The credit agreement also requires API to maintain minimum levels of net worth
and specified interest expense coverage ratios, and currently restricts the
payment of dividends. Substantially all of API's accounts receivable, inventory
and equipment are pledged as collateral under the revolving credit facility.

      The Company believes that its cash flow from operations, combined with
borrowings available under its existing and new lines of credit, will be
sufficient to meet its current and anticipated cash operating requirements,
including scheduled interest and principal payments, capital expenditures,
preferred dividend requirements and working capital needs through the end of the
fiscal year ending January 31, 1999. The Company currently is in compliance with
all of its debt covenants.

      Year 2000. The Company is currently working to resolve the potential
impact of the Year 2000 on the processing of date-sensitive information by the
Company's computerized information systems. The Year 2000 problem is the result
of computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in miscalculations and or system failures. Management
estimates that the cost to the Company of addressing the potential problems is
approximately $400,000, and it is not expected to have a material adverse effect
on the Company's overall financial position. The majority of this charge is
expected to be incurred, and will adversely affect the results of operations and
cash flow during this the fiscal year ended January 31, 1999. Moreover, if the
Company or its vendors are unable to resolve such processing issues in a timely
manner, it could result in a material financial risk. Accordingly, the Company
plans to devote the necessary resources to resolve all significant Year 2000
issues in a timely manner.

Inflation

      The Company does not believe that the relatively moderate levels of
inflation which have been experienced in the United States has had or will have
a significant effect on its revenues or operations.

Item 8.  Financial Statements and Supplementary Data

      See Index to Financial Statements, which appears on page F-1 hereof.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

      None.


                                       17
<PAGE>

                                 PART III

Item 10.  Directors and Executive Officers of the Registrant

      The executive officers and directors of the Company are as follows:

Name                    Age            Positions
----                    ---            ---------

Aaron P. Hollander      41    Chairman of the Board

Michael C. Culver       47    President, Chief Executive Officer and Director

John A. Marsalisi       42    Chief Financial Officer, Secretary and Director

Gerald Schlesinger      53    Senior Vice President

Joshua S. Friedman      42    Director

Robert L. Kirk          68    Director

Charles Ryan            47    Director

      Aaron P. Hollander has served as Chairman of the Company since March 1995.
Mr. Hollander became a director of NAC in June 1995. In 1985, Mr. Hollander
co-founded First Equity Development Inc. ("First Equity"), an aerospace
investment and advisory firm, and has served as Co-Managing Director since that
time.

      Michael C. Culver has served as a Director and Chief Executive Officer of
the Company since March 1995. Mr. Culver became a director of NAC in June 1995
and Chairman in August 1996. In 1985, Mr. Culver co-founded First Equity, along
with Mr. Hollander, and has served as Co-Managing Director since that time.

      John A. Marsalisi has served as a Director and Chief Financial Officer and
Secretary of the Company since March 1995. He has been an officer of First
Equity since 1996. From 1991 to May 1996, Mr. Marsalisi was Director of Taxes
for Omega Engineering. Prior to joining Omega Engineering, Mr. Marsalisi was
Director of Taxes for the Entrepreneurial Services Group of Ernst & Young's
Stamford, Connecticut office. Mr. Marsalisi is a Certified Public Accountant.

      Gerald Schlesinger became Senior Vice President upon his employment by the
Company in June 1997. From 1993 to 1997, Mr. Schlesinger was affiliated with the
SK Group and served as its Managing Principal. The SK Group provides consulting
and management advisory services to its clients. Prior to 1993, Mr. Schlesinger
served as Executive Vice-President, CFO and CIO for Butler Aviation.

      Joshua S. Friedman became a Director in March 1997. Mr. Friedman has been
an executive officer of Canyon Capital Management L.P. and various related or
predecessor entities ("Canyon Capital") since their inception in 1990. Canyon
Capital is a merchant banking and money management firm which Mr. Friedman
co-founded and which is an affiliate of Canpartners, a former subordinated
creditor and warrant holder of the Company. From 1984 to 1990, Mr. Friedman was
an Executive Vice President and Co-Director of Capital Markets of Drexel Burnham
Lambert Incorporated. Mr. Friedman currently serves as a member of the Board of
Directors of Signature Resorts, Inc., a publicly traded developer and operator
of timeshare resorts, and several privately held companies and charitable
organizations.

      Robert L. Kirk became a Director in March 1997. Since 1992, Mr. Kirk has
been the Chairman of British Aerospace Holdings, Inc., an international
aerospace corporation. Mr. Kirk served as Chairman and Chief Executive Officer
of CSX Transportation, Inc., the railroad subsidiary of CSX Corporation, from
1990 to 1992, and was Chairman and Chief Executive Officer of Allied-Signal
Aerospace Co. from 1986 to 1989. Mr. Kirk is a director of United Defense L.P.,
a defense contractor, and Harsco Corporation, a diversified industrial company.

      Charles B. Ryan became a Director in March 1997. Since 1982, Mr. Ryan has
been the President and Chief Operating Officer of Nordam Group Inc., a
manufacturer and overhaul agency of airframes, nacelles and thrust reversers.
Mr. Ryan has been associated with Nordam Group Inc. since 1976.


                                       18
<PAGE>

Board Committees

      The Board of Directors has established an Audit Committee, a Compensation
Committee and an Executive Committee. The Audit Committee is composed of Messrs.
Hollander and Ryan. The Audit Committee reviews the Company's annual audit
results and meets with the Company's independent auditors to review the
Company's internal controls and financial management practices. The Compensation
Committee is composed of Messrs. Hollander and Kirk. The primary function of the
Compensation Committee is to review and make recommendations to the Board with
respect to compensation of the Company's officers, including bonuses. The
Company's Executive Committee is composed of Messrs. Culver and Hollander. The
Executive Committee has and may exercise all of the powers and authority of the
Board of Directors in the management of the business affairs of the Company
except that it does not have the power and authority to: (i) amend the
Certificate of Incorporation or Bylaws of the Company; (ii) adopt an agreement
of merger or consolidation or to recommend to stockholders the sale, lease or
exchange of all or substantially all of the Company's property and assets; (iii)
recommend to stockholders a dissolution of the Company or a revocation of the
dissolution; or (iv) declare a dividend or authorize the issuance of stock of
the Company unless expressly authorized by a resolution of the Board of
Directors.

Item 11.  Executive Compensation

                           Summary Compensation Table

      The following table sets forth certain information for the fiscal years
ended January 31, 1998 and 1997, and the twelve months ended January 31, 1996,
regarding compensation awarded to, earned by, or paid to the Company's Chief
Executive Officer and each of the other executive officers of the Company, and
one executive of a subsidiary whose compensation exceeded $100,000.

<TABLE>
<CAPTION>
       Name                    Period                      Salary          Bonus          Other         Options
-----------------------   -----------------------      --------------   ------------   ------------   ------------
<S>                       <C>                          <C>            <C>             <C>         <C>          
Michael C. Culver          FYE 1/31/98                 $180,000  
Chief Executive Officer    FYE 1/31/97                   23,000  
                           12-months ended 1/31/96          N/A (1)

John F. Risko (3)          FYE 1/31/98                 $ 78,886                        $108,604
                           FYE 1/31/97                  187,887(2) 
                           12-months ended 1/31/96          N/A(1)                                  

                           FYE 1/31/98                 $155,000 
John A. Marsalisi          FYE 1/31/97                   20,000 
Chief Financial Officer    12-months ended 1/31/96          N/A(1)

Gerald E. Schlesinger      FYE 1/31/98                  $99,167         $40,000
Senior Vice President          

Rajesh Sharma              FYE 1/31/98                 $170,000                                        
                           FYE 1/31/97                  165,416        $250,000        $  4,655       $1,500,000(4)
                           12-months ended 1/31/96      130,358           8,185          20,670         
</TABLE>

      (1)   The Company was formed in March 1995 to acquire NAC. None of the
            executive officers of the Company received any employment
            compensation from the Company or NAC during the twelve months ended
            January 31, 1996.

      (2)   The salary payments to Mr. Risko reduced, dollar for dollar, the
            amount of the $300,000 annual management fee NAC paid to First
            Equity for management services. The obligation to pay a management
            fee to First Equity terminated upon consummation of the Offering.

      (3)   Mr. Risko's employment by the Company was terminated on June 9,
            1997, and he resigned as a director on June 24, 1997.

      (4)   The Company has granted to Mr. Sharma, the Chief Operating Officer
            of NAC, options to purchase 150,000 shares of the Company's common
            stock at an exercise price of $.01 per share. Mr. Sharma elected to
            exercise 40,000 options on April 13, 1998.


                                       19
<PAGE>

                      Option Grants in the Last Fiscal Year

      The following table sets forth information regarding the stock options
that were granted during the last fiscal year to each of the officers named in
the Summary Compensation Table.

<TABLE>
<CAPTION>
                      Number of   
                      Securities     Percent of Total   
                      Underlying     Options Granted    
                      Options        to Employees in   Exercise of                     Grant Date
Name                  Granted        Fiscal year       Base Price    Expiration date   Valuation            
-----------------     ------------   ---------------   ------------  ---------------   --------------       
<S>                       <C>              <C>        <C>              <C>            <C>   
Michael C. Culver           None          N/A            N/A            N/A              N/A
                                                                                     
John E. Risko (1)           None          N/A            N/A            N/A              N/A
                                                                                     
John A. Marsalisi         40,000           18%           $10           2007              $10
                                                                                     
Jerry Schlesinger         50,000         22.5%           $10           2007              $10
                                                                                     
Rajesh Sharma               None          N/A            N/A            N/A              N/A
</TABLE>
                                                                              
      (1)   Mr. Risko's employment by the Company was terminated on June 9,
            1997, and he resigned as a director on June 24, 1997.

       Aggregated Option Exercises in the Fiscal Year and Fiscal Year-End
                                 Option Values

      The following table sets forth the aggregate positions in stock options at
January 31, 1998 held by each of the officers named in the Summary Compensation
Table.

                    Number of Securities          Value of Unexcercised
                   Underlying Unexercised         In-The-Money Options
                 Options at Fiscal Year End        at Fiscal Year End
      Name        Exercisable/Unexercisable     Excercisable/Unexcercisable
----------------  -------------------------     ---------------------------

Michael C. Culver        None/None                        N/A
 
John F. Risko (1)        None/None                        N/A

John A. Marsalisi        None/40,000                      N/A

Gerald E. Schlesinger    None/50,000                      N/A

Rajesh Sharma (2)        150,000/None                 $1,012,500

      (1)   Mr. Risko's employment by the Company was terminated on June 9,
            1997, and he resigned as a director on June 24, 1997. 

      (2)   On April 13, 1998, Mr. Sharma elected to exercise 40,000 options.

Employment Contracts, Termination of Employment and Change in Control
Arrangements

      In December 1996, First Aviation entered into employment agreements with
Michael C. Culver and John A. Marsalisi. Mr. Culver's and Mr. Marsalisi's
employment agreements are each for terms of three years which expire on December
31, 1999, and provide for an annual base salary of $180,000 and $155,000,
respectively. In July 1997, First Aviation entered into a three-year employment
agreement with Gerald E. Schlesinger. The agreement provides for a base salary
of $170,000 subject to adjustment at the discretion of the Board of Directors.
Each of the employment agreements provides for: (i) benefits which are also
generally available to other employees of First Aviation in similar employment
positions; (ii) reimbursement of reasonable business related expenses; (iii)
three weeks paid vacation a year; and (iv) a severance payment, upon termination
without cause or for death or disability, equal to six months base salary. Each
of the agreements may be terminated by First Aviation without cause at any time
upon 30 days notice or by the executive for any reason upon 30 days notice.


                                       20
<PAGE>

      Mr. Culver, Mr. Marsalisi and Mr. Schlesinger each have, as part of their
respective employment agreements, agreed not to compete with First Aviation for
a period of six months following the end of his employment by First Aviation and
not to solicit employees or customers of First Aviation for a period of six
months following the end of his employment with First Aviation.

      First Aviation also entered into an employment agreement with John Risko
in December 1996 on substantially the same terms as those described for Mr.
Culver. Mr. Risko's employment by the Company was terminated on June 9, 1997,
and he resigned as a director on June 24, 1997.

      NAC has entered into a Post-Employment Consulting Agreement with Mr.
Sharma. The agreement requires Mr. Sharma to provide specified consulting
services to NAC following a termination of Mr. Sharma's employment by (i) NAC
without "Cause" or (ii) by Mr. Sharma for "Good Reason" (either, a "Qualifying
Termination") as these terms are defined. "Cause" is defined to include
misappropriation of funds, acts of fraud or gross misconduct, conviction of a
felony, disclosure of confidential information, misappropriation of business
opportunities and competitive behavior against NAC. "Good Reason" is defined as
a reduction in Mr. Sharma's base salary or benefits other than in connection
with an across-the-board reduction in salaries and/or benefits for similarly
situated employees of the Company, or pursuant to the Company's standard
retirement policies. The agreement provides that following a Qualifying
Termination, Mr. Sharma shall thereafter provide consulting services to NAC for
12 months, or if sooner, until such date as Mr. Sharma is entitled to receive
full retirement benefits under NAC's applicable retirement plans. In exchange
for his services, Mr. Sharma is entitled to receive a fee, payable in equal
monthly installments, equivalent to his annual base salary in effect prior to
the Qualifying Termination. The agreement also obligates NAC to continue
medical, dental, vision and life insurance for Mr. Sharma to the extent such
were provided to him prior to his termination of employment. Mr. Sharma is
obligated to pay 50% of NAC's cost for all such insurance. If Mr. Sharma enters
into new employment during the consulting period, the agreement provides that
the consulting fee and benefits otherwise payable to Mr. Sharma shall be reduced
or terminated by specified amounts depending upon the terms and conditions of
his new employment.

Compensation Committee Interlocks and Insider Participation

      No member of the Compensation Committee is or has been an employee of the
Company.

Director Compensation

      Each of the Company's non-employee directors is entitled to receive an
annual fee of $20,000. The fees are payable quarterly in cash or stock. No
director of the Company receives any fees for attendance at meetings of the
Board of Directors or committees thereof, although members of the Board do
receive reimbursement for actual expenses of such attendance. Messrs. Hollander,
Kirk and Ryan have directed that their directors' fees are to be paid in stock.


                                       21
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management

      The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of April 24, 1998, (i) by each person
who is known by the Company to own beneficially 5% or more of the outstanding
shares of common stock, (ii) each of the Company's directors, (iii) each of the
officers named in the Summary Compensation Table, and (iv) all directors and
executive officers as a group. Except as indicated in the footnotes to the
table, the persons named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them,
subject to community property laws where applicable, and are located at 15
Riverside Avenue Westport, Connecticut 06880.

Name and Address                Amount and Nature of
of  Beneficial Owner            Beneficial Ownership           Percent of Class
--------------------            --------------------           ----------------

FAS Inc. ("FAI")(1)                          3,721,665           41.5%
Canpartners Investments IV, LLC(2)           1,293,335           14.4%
   9665 Wilshire Boulevard
   Suite 200
   Beverly Hills, California 90212
The Wynnefield Group(3)
   One Penn Plaza, Suite 4720
   New York, NY 10119                          958,300          10.7%
Wellington Management Company, LLP
   75 State Street
   Boston, MA 02109                            882,000            9.8%
Aaron P. Hollander(1)                        3,743,648           41.7%
Michael C. Culver(1)                         3,743,648           41.7%
John F. Risko(4)                                    --              --
   2461 Roscomare Road
   Los Angeles, CA 90077
John A. Marsalisi                                2,362              --
Gerald E. Schlesinger                               --              --
   Aircraft Parts International
   3778 Distriplex Drive North
   Memphis, TN 38118
Rajesh Sharma(5)                                31,764            0.4%
   National Airmotive Corporation
   7200 Earhart Road
   Oakland, California
Joshua S. Friedman(6)                               --              --
Robert L. Kirk                                   7,433              --
Charles B. Ryan                                 11,983              --
All directors and executive
   officers as a group (9 persons)           3,797,190           42.3%

      (1)   Aaron P. Hollander and Michael C. Culver own, in the aggregate, all
            of the outstanding shares of First Equity Group Inc. First Equity
            Group Inc. indirectly owns all the outstanding shares of common
            stock of FAI. In addition to the shares of the Company owned by FAI,
            21,983 shares of the Company are owned directly by First Equity
            Group Inc.
      (2)   Canpartners Incorporated is a Managing Member of Canpartners. Mr.
            Friedman, Mitchell R. Julis and R. Christian B. Evenson are the sole
            shareholders and directors of Canpartners Incorporated and such
            individuals may be deemed to share beneficial ownership of the
            shares shown as owned by Canpartners. Such persons disclaim
            beneficial ownership of such shares.
      (3)   The Wynnefield Group is composed of the Wynnefield Partners Small
            Cap Value, L.P., Channel Partnership II L.P., Wynnefield Small Cap
            Value Offshore Fund, Ltd., and the Wynnefield Small Cap Value, L.P.
            I.
      (4)   Mr. Risko's employment by the Company was terminated on June 9, 1997
            and he resigned as a Director on June 24, 1997. See "Legal
            Proceedings" for a description of certain claims by Mr. Risko
            relating to the ownership of shares of the Company.
      (5)   On April 13, 1998, Mr. Sharma exercised 40,000 stock options.


                                       22
<PAGE>

      (6)   Excludes 1,293,335 shares shown as owned by Canpartners. Mr.
            Friedman is a Vice-President of Canpartners and is a shareholder and
            director of Canpartners Incorporated, a Managing Member of
            Canpartners, and as such may be deemed to have voting and investment
            power over such shares. Mr. Friedman disclaims any beneficial
            ownership of such shares.

            Section 16 (a) Beneficial Ownership Reporting Compliance

      Section 16 (a) of the Exchange Act requires the Company's directors,
executive officers and ten percent shareholders to file initial reports of
ownership and reports of changes in ownership of the Company's common stock with
the Securities and Exchange Commission. Directors, executive officers and ten
percent shareholders are required to furnish the Company with copies of all
Section 16 (a) forms that they file. Based upon a review of these filings, the
Company notes that Messrs. Hollander, Culver, Marsalisi and Risko inadvertently
failed to file their Form 3s on a timely basis upon the consummation of the
Offering. Messrs. Hollander, Culver and Marsalisi made their filings on March 7,
1997 and Mr. Risko made his filing on May 10, 1997.

Item 13. Certain Relationships and Related Transactions

      On June 1, 1995, in connection with the Company's acquisition of NAC from
Triton Group Ltd., the Company issued 33,000 shares of its Series A Preferred
Stock to FAS Inc. ("FAI") for an aggregate price of $1,650,000 and issued
3,556,665 shares of its Common Stock for an aggregate price of $551,000. In
connection with the closing of the Offering, the Company's face value $1,650,000
Series A Preferred Stock held by FAI was exchanged for 165,000 shares of common
stock.

      On June 1, 1995, NAC entered into the Loan and Security Agreement (the
"Loan Agreement") between NAC and Canpartners (as assignee of Canpartners
Investments III, L.P.). Mr. Friedman, a director of the Company, is affiliated
with Canpartners. See Item 10 "Directors and Executive Officers of Registrant."
Pursuant to the Loan Agreement, Canpartners made a $3,000,000 loan (the
"Subordinated Debt") to NAC which was subordinated in right of payment to NAC's
credit facility. The Subordinated Debt bore interest at the rate of 15% per
year, required scheduled prepayments of principal and interest, and initially
was due no later than July 5, 1997. On June 13, 1996, in connection with a
refinancing of NAC's credit facility, NAC repaid $1,000,000 in principal to
Canpartners and made certain modifications to the Loan Agreement, including an
extension of the final maturity date of the Subordinated Debt to June 13, 1999.
In connection with the execution of the Loan Agreement, NAC and Canpartners
entered into a Warrant Agreement (the "Warrant Agreement"), pursuant to which
NAC issued warrants to Canpartners to purchase 1,832,225 shares of its Common
Stock at an exercise price of $0.0545 per share. In connection with the
repayment of $1,000,000 of the Subordinated Debt in June 1996, 538,890 of the
warrants held by Canpartners were canceled. Pursuant to the Second Amendment to
Warrant Agreement, dated December 20, 1996, the remaining warrants held by
Canpartners became exercisable for and were exercised for shares of the
Company's common stock at an exercise price of $0.0545 per share upon
consummation of the Offering. A portion of the proceeds of the Offering were
utilized to retire the remaining debt with Canpartners.

      On September 30, 1996, the Company entered into two agreements with First
Equity whereby First Equity was to provide certain investment advisory services
in connection with the Offering as well as to provide advice with respect to,
and to negotiate for the API acquisition. Upon the closing of the Offering,
First Equity was paid a fee of $350,000 for assistance rendered in connection
with the Offering, and $250,000 for its services with regard to the API
acquisition. First Equity may render other investment advisory services to the
Company in the future. If it does, any investment advisory fees paid to it would
not exceed customary fees for such services.

      On December 20, 1996, the Company and First Equity entered into an
agreement allocating potential investment and acquisition opportunities in the
global aircraft engine repair and overhaul market. Pursuant to the agreement,
First Equity agreed that commencing with the consummation of the Offering,
neither First Equity nor any of its majority-owned subsidiaries will, as a
principal, consummate any acquisition of a majority interest in any business
that is engaged in the repair and overhaul of military and commercial aircraft
engines anywhere in the world (a "Covered Acquisition"), without first notifying
the Company and providing the Company with the opportunity to choose to effect
the Covered Acquisition for its own account. The Company's decision as to
whether to effect the Covered Acquisition will be made by the directors of the
Company that have no affiliation with First Equity. The agreement will remain in
effect for a five-year term, subject to earlier termination in the event First
Equity reduces its ownership interest in the Company to less than 10% of the
Company's outstanding voting securities. The agreement does not apply to any
proposed acquisition by First Equity of any business that generates less than
15% of its aggregate net sales from the repair and overhaul of military and
commercial aircraft engines, nor to any advisory services performed by First
Equity on behalf of third parties.


                                       23
<PAGE>

      The Company subleases from First Equity approximately 2,000 square feet of
office space in Westport, Connecticut. The sublease, which became effective
April 21, 1997, is for a period of ten years, and is cancelable by either party
with six months notice. The Company has the option to renew the sublease for two
additional five-year periods. Monthly payments under this sublease currently are
approximately $5,000.

      The Company believes that the terms of the two advisory services
agreements and the sublease agreement between the Company and First Equity are
at least as favorable as the terms which would have been obtained by the Company
from an unaffiliated third-party. 

                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)(1) Financial Statements and Schedules

       See Index to Consolidated Financial Statements, which appears on Page 
       F-1 hereof

   (2) Financial Statement Schedule II - Valuation and Qualifying Accounts, 
       which appears on Page F-24 hereof.

(b)    Form 8-K
       No reports on Form 8-K were filed by the registrant during the fourth
       quarter of fiscal 1998.

(c)    Exhibits

Exhibit
Number                                        Description of Exhibit
------                                        ----------------------

3.1+   Restated Certificate of Incorporation of the Company
       
3.2+   Restated Bylaws of the Company
       
10.1+  Form of Director Indemnification Agreement between the Company and each 
       of its directors
       
10.2+  Loan and Security Agreement, dated June 13, 1996, by and between NAC and
       Fleet Capital Corporation
       
10.3+  Amendment Number One to Loan and Security Agreement, dated September 1,
       1996, by and between NAC and Fleet
       
10.4+  Loan and Security Agreement, dated June 1, 1995, by and between NAC and
       Canpartners Investments IV, LLC (as successor in interest to Canpartners
       Investments III, L.P.) ("Canpartners")
       
10.5+  First Amendment to Loan and Security Agreement, dated June 13, 1996, by
       and between NAC and Canpartners
       
10.6+  Warrant Agreement, dated June 1, 1995, by and between NAC and Canpartners
       
10.7+  First Amendment to Warrant Agreement, dated June 13, 1996, by and between
       NAC and Canpartners
       
10.8+  Second Amendment to Warrant Agreement, dated December 20, 1996, by and
       between NAC and Canpartners
       
10.9+  Asset Purchase Agreement, dated November 25, 1996, by and between AMR
       Combs and API Combs
      
10.10+ Authorized Maintenance Center Agreement, effective as of November 14,
       1994, by and between NAC and Allison Engine Company (Model T56/501)

10.11+ Employment  Agreement,  dated  as of  December 20,  1996,  by  and
       between John F. Risko and the Company

10.12+ Employment  Agreement,  dated  as of  December 20,  1996,  by  and
       between John Marsalisi and the Company


                                       24
<PAGE>

10.13+ Post-Employment Consulting Agreement,  dated January 17,  1992, by
       and between Rajesh Sharma and NAC

10.14+ Stock Option Plan

10.15+ Employee Stock Purchase Plan

10.16+ Lease, dated January 23, 1991, by and between NAC and the City of
       Oakland (main building lease)

10.17+ First Supplement to lease, dated November 22, 1991, by and between
       NAC and the City of Oakland (main building lease)

10.18+ Lease, dated January 23, 1991, by and between NAC and the City of
       Oakland (test cells lease) Energy Resources, as amended

10.20+ Employment Agreement, dated as of December 20, 1996, by and between
       Michael C. Culver and the Company

10.21+ Investment Advisory Services Agreement Relating to the API Combs
       Acquisition, dated as of September 30, 1996, by and between First
       Equity and First Aviation

10.22+ Investment Advisory Services Agreement Relating to the Offering, dated as
       of September 30, 1996, by and between First Equity and First Aviation

10.23+ Letter, dated as of December 20, 1996, by and between First Equity and
       First Aviation regarding pursuit of acquisition opportunities

10.24+ Amended and Restated Registration Rights Agreement, dated as of February
       21, 1996, by and between the Company and FAI

10.25+ Agreement and Plan of Merger, dated as of March 3, 1995, by and among the
       Company, FE Acquisition Subsidiary, Triton Group Ltd. and NAC

10.26+ Amendment No. 1 to Agreement and Plan of Merger, dated as of June 1, 
       1995, by and among the Company, FE Acquisition Subsidiary, Triton Group 
       Ltd.and NAC

10.27+ Authorized Maintenance Center Agreement, effective as of November 30,
       1994, by and between NAC and Allison Engine Company (Model 250)

10.28+ Authorized Maintenance Center Agreement, effective as of December 31,
       1995, by and between NAC and Allison Engine Company (Model 570/571)

10.29+ Registration Rights Agreement,  dated as of February 21,  1997, by
       and between the Company and Canpartners

10.30+ Sublease Agreement,  dated as of December 31,  1996, between First Equity
       and the Company

10.31+ Letter Agreement between FAI and the Company regarding the exchange of
       Series A Preferred Stock for Common Stock of the Company

10.32f Letter, dated as of November 13, 1997 by and between Allison Engine Co.
       and National Airmotive Corporation regarding the extension of the A250
       Authorized Maintenance Agreement until March 31,1998

10.33f Letter, dated as of November 14, 1997 by and between Allison Engine Co.
       and National Airmotive Corporation regarding the extension of the T56/501
       Engine Authorized Maintenance Agreement until March 31,1998

10.34  Letter, dated as of March 5, 1998, by and between Allison Engine Co. and
       National Airmotive Corporation regarding the extension of the A250 Engine
       Authorized Maintenance Agreement until April 30, 1998


                                       25
<PAGE>

10.35 Letter, dated as of March 13, 1998, by and between Allison Engine Co. and
      National Airmotive Corporation regarding the extension of the T56/501
      Engine Authorized Maintenance Agreement until April 30, 1998

10.36 Letter, dated as of March 19, 1998, by and between National Airmotive
      Corporation and Allison Engine Corporation wherein National Airmotive
      elects to extend the Authorized Maintenance Center Agreement, effective
      November 30, 1994, by and between NAC and Allison Engine Company (Model
      250)

10.37 Letter, dated as of April 22, 1998, by and between National Airmotive
      Corporation and Allison Engine Corporation wherein National Airmotive
      elects to extend the Authorized Maintenance Center Agreement, effective
      November 30, 1994, by and between NAC and Allison Engine Company (Model
      T56/501)

10.38 Loan and Security Agreement, dated April 23, 1998 by and between API and
      Fleet National Bank

10.39 Amendment to the First Aviation Services Stock Incentive Plan

21.1+ List of Subsidiaries

23.1  Consent of Ernst & Young LLP, independent auditors

27.1  Financial Data Schedules for the years ended January 31, 1998 and
      1997, and the eight months ended January 31, 1996

   +     Incorporated by reference and filed as an Exhibit to the Company's
         Registration Statement on Form S-1 (No. 333-18647), as amended.
   f     Incorporated by reference and filed as an Exhibit to the Company's
         Quarterly Report on Form 10Q for the quarter ended October 31, 1997.


                                       26
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has fully caused this report to be signed
on its behalf by the undersigned thereunto duly authorized on May 1, 1998.


                                                FIRST AVIATION SERVICES INC.


                                                By:  /s/ John A. Marsalisi
                                                     ---------------------
                                                John A. Marsalisi
                                                Chief Financial Officer

Signature                     Title                               Date
---------                     -----                               ----

/s/ Aaron P. Hollander        Chairman  of the Board              May 1, 1998
----------------------        
Aaron P. Hollander


/s/ Michael C. Culver         Chief Executive Officer and         May 1, 1998
---------------------         Director (Principal Executive                   
Michael C. Culver             Officer)                            
                              


/s/ John A. Marsalisi         Chief Financial Officer and         May 1, 1998
---------------------         Director (Principal Financial and 
John A. Marsalisi             Accounting Officer)               
                              

/s/ Joshua S. Friedman        Director                            May 1, 1998
----------------------        
Joshua S. Friedman


/s/ Robert L. Kirk            Director                            May 1, 1998
------------------            
Robert L. Kirk


/s/ Charles B. Ryan           Director                            May 1, 1998
-------------------           
Charles B. Ryan


                                       27
<PAGE>

                          First Aviation Services Inc.

                        Consolidated Financial Statements

                               For the years ended
                           January 31, 1998 and 1997,
                             the eight-month period
                           ended January 31, 1996, and
                     the two-month period ended May 31, 1995


                                    Contents

Report of Independent Auditors...............................................F2

Consolidated Financial Statements

Consolidated Balance Sheets..................................................F3
Consolidated Statements of Operations........................................F4
Consolidated Statements of Stockholders' Equity..............................F5
Consolidated Statements of Cash Flows.....................................F6-F7
Notes to Consolidated Financial Statements...............................F8-F23

Schedule II - Valuation and Qualifying Accounts.............................F24


                                       F1
<PAGE>

                         Report of Independent Auditors

The Board of Directors and Stockholders
First Aviation Services Inc.

We have audited the accompanying consolidated balance sheets of First Aviation
Services Inc. as of January 31, 1998 and 1997, and the consolidated statements
of operations, stockholders' equity, and cash flows for the years ended January
31, 1998 and 1997, the eight-month period ended January 31, 1996 and the
two-month period ended May 31, 1995. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Aviation Services Inc. as of January 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the years ended January 31,
1998 and 1997, the eight-month period ended January 31, 1996 and the two-month
period ended May 31, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.


                                                          /s/  Ernst & Young LLP

Stamford, Connecticut
March 15, 1998,
except for Note 13, as to which the date is
April 23, 1998


                                       F2
<PAGE>

                          First Aviation Services Inc.

                           Consolidated Balance Sheets
                      (in thousands, except share amounts)


<TABLE>
<CAPTION>
                                                                              January 31,
                                                                            1998      1997
                                                                            --------------
<S>                                                                      <C>       <C>    
Assets
Current assets:
     Cash and cash equivalents                                           $   237   $    --
     Trade receivables, net of allowance for doubtful accounts of $346
       and $278 at January 31, 1998 and 1997                              27,841    19,931
     Inventories, net                                                     43,311    36,323
     Deferred income taxes                                                 2,381     1,036
     Prepaid expenses and other                                            1,624     1,375
                                                                         -------   -------

Total current assets                                                      75,394    58,665

Plant and equipment, net                                                   5,027     2,793
Goodwill, net                                                              1,873        --
Other assets                                                                 229       914
                                                                         -------   -------
                                                                         $82,523   $62,372
                                                                         =======   =======
Liabilities and stockholders' equity 
Current liabilities:
     Accounts payable                                                    $14,106   $15,104
     Accrued compensation and related expenses                             2,146     2,006
     Other accrued liabilities                                             2,631     2,968
     Income taxes payable                                                  2,776        --
     Current portion of long-term debt                                        --     1,100
                                                                         -------   -------
Total current liabilities                                                 21,659    21,178

Long-term debt, less current portion                                      13,866    32,794
Minority interest                                                          1,041        --
Other non-current liabilities                                                 --     2,119
                                                                         -------   -------

Total liabilities                                                         36,566    56,091

Stockholders' equity:
     Preferred stock, $0.01 par value, 5,000,000 shares authorized,
        33,000 shares issued and outstanding at January 31, 1997              --     1,650
     Common stock, $0.01 par value, 25,000,000 shares authorized,
        8,928,925 and 3,556,665  shares issued and outstanding                89        36
     Additional paid-in capital                                           38,378     2,125
     Retained earnings                                                     7,490     2,470
                                                                         -------   -------
Total stockholders' equity                                                45,957     6,281
                                                                         -------   -------


                                                                         $82,523   $62,372
                                                                         =======   =======
See accompanying notes 
</TABLE>


                                       F3
<PAGE>

                          First Aviation Services Inc.
                                        `
                      Consolidated Statements of Operations
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                                        Predecessor
                                                                                                        -----------
                                                                                        Eight-month     Two-month
                                                            Year ended    Year ended    period ended   period ended
                                                           January 31,    January 31,    January 31,      May 31,
                                                               1998           1997          1996            1995
                                                          --------------------------------------------------------
<S>                                                       <C>            <C>            <C>            <C>        
Net sales                                                 $   153,642    $   104,236    $    68,519    $    10,896
Cost of sales                                                 130,433         89,426         57,390         10,463
                                                          -----------    -----------    -----------    -----------

Gross profit                                                   23,209         14,810         11,129            433
Selling, general and administrative expenses                   14,827          9,881          5,349          1,160
                                                          -----------    -----------    -----------    -----------

Income (loss) from operations                                   8,382          4,929          5,780           (727)
Interest expense                                                1,842          3,470          2,605            287
Interest income                                                  (357)            --             --             --
Minority interest in subsidiary                                    38             --             --             --
                                                          -----------    -----------    -----------    -----------

Income (loss) before provision for income taxes and
   extraordinary item                                           6,859          1,459          3,175         (1,014)
Provision for income taxes                                      1,500             --          1,300             --
                                                          -----------    -----------    -----------    -----------

Income (loss) before extraordinary item                         5,359          1,459          1,875         (1,014)
Extraordinary item:
Loss on early extinguishment of debt                             (108)          (864)            --             --
                                                          -----------    -----------    -----------    -----------

Net income (loss)                                               5,251            595          1,875         (1,014)
Dividends on preferred stock                                       11            132             88             --
                                                          -----------    -----------    -----------    -----------

Net income (loss) available to common stockholders        $     5,240    $       463    $     1,787    $    (1,014)
                                                          ===========    ===========    ===========    =========== 

Basic net income per common share:

Income before extraordinary item available to common
    stockholders
                                                          $      0.63    $      0.37    $      0.50
Extraordinary item                                              (0.01)         (0.24)            --
                                                          -----------    -----------    -----------

Basic net income per common share                         $      0.62    $      0.13    $      0.50
                                                          ===========    ===========    ===========
Shares used in the calculation of basic net income 
   per common share                                         8,432,234      3,556,665      3,556,665
                                                          ===========    ===========    ===========

Net income per common share - assuming dilution:

Income before extraordinary item available to 
    common stockholders                                   $      0.61    $      0.26    $      0.32
Extraordinary item                                              (0.01)         (0.17)            --
                                                          -----------    -----------    -----------

Net income per common share - assuming dilution           $      0.60    $      0.09    $      0.32
                                                          ===========    ===========    ===========
Shares used in the calculation of net income per common
   share - assuming dilution                                8,698,400      5,194,456      5,529,579
                                                          ===========    ===========    ===========
</TABLE>

See accompanying notes


                                       F4
<PAGE>

                          First Aviation Services Inc.

                 Consolidated Statements of Stockholders' Equity
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                        Preferred Stock               Common Stock                  
                                                  ------------------------    -------------------------       
                                                    Number of                   Number of              
                                                     Shares       Amount         Shares         Amount 
                                                  ----------    ----------    ----------    ----------
<S>                                             <C>            <C>            <C>          <C>
Balances at March 31, 1995 (Predecessor)                  --    $       --     4,750,000    $    4,750
   Net loss for the two-month period ended
     May 31, 1995                                         --            --            --            -- 
                                                  ----------    ----------    ----------    ----------

Balances at May 31, 1995 (Predecessor)                    --            --     4,750,000         4,750
   Elimination of Predecessor divisional equity
     upon acquisition on  June 1, 1995                    --            --    (4,750,000)       (4,750)
   Common stock and preferred stock issued
     for cash on June 1, 1995                         33,000         1,650     3,556,665            36
   Warrants issued in connection with
     subordinated note payable                            --            --            --            -- 
   Net income for the eight-month period
     ended January 31, 1996                               --            --            --            -- 
                                                  ----------    ----------    ----------    ----------

Balances at January 31, 1996                          33,000         1,650     3,556,665            36

   Issuance of options to purchase common
     stock                                                --            --            --            -- 
   Net income for the year ended
     January 31, 1997                                     --            --            --            -- 
                                                  ----------    ----------    ----------    ----------

Balances at January 31, 1997                          33,000         1,650     3,556,665            36
   Payment of preferred stock dividends              
   Conversion of preferred stock                     (33,000)       (1,650)      165,000             1
   Issuance of common stock in initial public
     offering                                             --            --     3,900,000            39
   Exercise of warrants to purchase common
     stock                                                --            --     1,293,335            13
   Shares issued under qualified plans                    --            --        13,925            -- 
   Net income for the year ended
     January 31, 1998                                     --            --            --            -- 
                                                  ----------    ----------    ----------    ----------
   Balance at January 31, 1998                            --    $       --     8,928,925    $       89
                                                  ==========    ==========    ==========    ==========

<CAPTION>

                                                  Additional                                             
                                                   Paid-in         Retained 
                                                   Capital         Earnings      Total  
                                                  ----------    ----------    ----------
<S>                                             <C>           <C>           <C>       
Balances at March 31, 1995 (Predecessor)          $   27,385    $    2,889    $   35,024
   Net loss for the two-month period ended
     May 31, 1995                                         --        (1,014)       (1,014)
                                                  ----------    ----------    ----------

Balances at May 31, 1995 (Predecessor)                27,385         1,875        34,010
   Elimination of Predecessor divisional equity
     upon acquisition on  June 1, 1995               (27,385)       (1,875)      (34,010)
   Common stock and preferred stock issued
     for cash on June 1, 1995                            515            --         2,201
   Warrants issued in connection with
     subordinated note payable                           110            --           110
   Net income for the eight-month period
     ended January 31, 1996                               --         1,875         1,875
                                                  ----------    ----------    ----------

Balances at January 31, 1996                             625         1,875         4,186
   Issuance of options to purchase common
     stock                                             1,500            --         1,500
   Net income for the year ended
     January 31, 1997                                     --           595           595
                                                  ----------    ----------    ----------

Balances at January 31, 1997                           2,125         2,470         6,281
   Payment of preferred stock dividends                               (231)         (231)
   Conversion of preferred stock                       1,649            --            --

   Issuance of common stock in initial public
     offering                                         34,438            --        34,477

   Exercise of warrants to purchase common
     stock                                                57            --            70
   Shares issued under qualified plans                   109            --           109

   Net income for the year ended
     January 31, 1998                                     --         5,251         5,251
                                                  ----------    ----------    ----------

   Balance at January 31, 1998                    $   38,378    $    7,490        45,957
                                                  ==========    ==========    ==========

</TABLE>
See accompanying notes.


                                       F5
<PAGE>

                          First Aviation Services Inc.

                      Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                          Predecessor
                                                                                                          -----------
                                                                                           Eight-month      Two-month
                                                             Year ended    Year ended      period ended    period ended
                                                             January 31,   January 31,     January 31,       May 31,
                                                               1998           1997            1996             1995
                                                          -------------------------------------------------------------
<S>                                                       <C>            <C>            <C>            <C>         
Cash flows from operating activities
Net income (loss)                                         $     5,251    $       595    $     1,875    $    (1,014)
Adjustments to reconcile net income (loss)
 to net cash provided by (used in)
 operating activities:
   Depreciation and amortization                                  908          1,047            947            400
   Extraordinary item, loss on early
     extinguishment of debt                                        --            538             --             --
   Compensation expense on stock
     options issued                                                --          1,500             --             --
   Deferred income taxes                                          448             --            664            129
   Termination of executive defined
     benefit plan                                                  --             --           (548)            --
   Changes in assets and liabilities:
      Trade receivables                                        (2,142)         3,457        (13,460)         1,860
      Inventories                                              (1,041)        (5,116)        (1,744)          (605)
      Prepaid expenses and other assets                           819           (957)           947           (341)
      Accounts payable                                         (4,153)        (3,063)        12,587            821
      Accrued compensation and related
        expenses, and other accrued
        liabilities                                            (3,154)          (106)            58            578
      Income taxes payable                                        874             --             --             --
      Other noncurrent liabilities                                 --         (1,642)          (842)           (64)
                                                          ----------------------------------------------------------
Net cash provided by (used in) operating
 activities                                                    (2,190)        (3,747)           484          1,764

Cash flows from investing activities
Purchase of assets from former owners,
  including acquisition costs                                 (10,636)            --        (12,397)            --
Purchases of plant and equipment                               (2,375)          (957)          (862)          (282)
Payment for license rights and other
  intangibles                                                      --           (375)          (375)            --
Proceeds from disposals of plant and
  equipment                                                        --             --             13              6
                                                          ----------------------------------------------------------
Net cash used in investing activities                         (13,011)        (1,332)       (13,621)          (276)

</TABLE>

See accompanying notes.


                                       F6
<PAGE>

                          First Aviation Services Inc.

                Consolidated Statements of Cash Flows (continued)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                           Predecessor
                                                                                                           -----------
                                                                                             Eight-month    Two-month
                                                               Year ended    Year ended      period ended  period ended
                                                               January 31,   January 31,     January 31,      May 31,
                                                                 1998          1997             1996          1995
                                                               --------------------------------------------------------
<S>                                                           <C>              <C>            <C>           <C>    
Cash flows from financing activities
Net (repayments) / borrowings on
  revolving line of credit                                    (15,628)         5,393          6,244         (1,488)
Proceeds from borrowings on term loans                             --          3,000          2,000             --
Repayments of term loans                                       (2,650)        (2,117)          (233)            --
Proceeds from borrowings on
  subordinated note                                                --             --          3,000             --
Repayments of subordinated note                                (1,750)        (1,197)           (75)            --
Sale of preferred stock of subsidiary                           1,041             --          1,650             --
Payment of dividends on preferred stock                          (231)            --             --             --
Proceeds from issuance of common stock
  in initial public offering                                   39,000             --            551             --
Expenses relating to initial public offering                   (4,523)            --             --             --
Proceeds from exercise of common stock
  warrants and issuance of stock under
  employee stock purchase plan                                    179             --             --             --
                                                              -----------------------------------------------------
Net cash provided by (used in) financing
  activities                                                   15,438          5,079         13,137         (1,488)
                                                              -----------------------------------------------------
Net change in cash and cash equivalents                           237             --             --             --
Cash at the beginning of 
  the period                                                       --             --             --             --
                                                              =====================================================

Cash and cash equivalents at the end of
  the period                                                  $   237       $     --       $     --       $     -- 
                                                              =====================================================
Supplemental cash flow disclosures:
Cash paid for:
Interest                                                      $ 1,748       $  3,148       $  2,322            154
                                                              =====================================================

Income taxes                                                  $    --       $    545       $    129       $     --
                                                              =====================================================
</TABLE>
See accompanying notes.



                                       F7
<PAGE>

                          First Aviation Services Inc.

                 Notes to 1998 Consolidated Financial Statements
                      (in thousands, except share amounts)

1. Business and Basis of Presentation

First Aviation Services Inc., through its subsidiaries, National Airmotive
Corporation ("NAC") and Aircraft Parts International Combs, Inc. ("API")
(collectively, "First Aviation" or the "Company"), repairs and overhauls
commercial and military aircraft engines and industrial turbines, and sells and
distributes aircraft parts. The Company is headquartered in Westport,
Connecticut. Customers of the Company include passenger and cargo airlines,
foreign governments, U.S. and foreign military services, fleet operators, fixed
base operators, certified repair facilities and industrial companies.

The accompanying consolidated financial statements include the accounts of First
Aviation Services Inc. and its subsidiaries. Significant intercompany balances
and transactions have been eliminated in consolidation.

First Aviation was formed in March 1995 to acquire the capital stock of NAC. The
acquisition was accounted for under the purchase method of accounting as of the
closing date. The purchase price, including acquisition costs, was allocated to
the assets and liabilities of NAC based on their relative fair values. The
purchase price allocation was finalized within the time period prescribed by
generally accepted accounting standards.

In connection with the allocation of the purchase price, and in order to
implement plans and actions designed to streamline operations, the Company
recorded a reorganization accrual to cover the estimated costs of employee
separations and other employee incentive programs. The Company incurred and
charged against accrued reorganization costs $1,086 and $1,400 during the year
ended January 31, 1997 and the eight-month period ended January 31, 1996,
respectively. The Company also recorded accruals for various liabilities,
including pension plan termination (Note 9), environmental matters (Note 12),
and legal matters. The remaining accruals as of January 31, 1998 and 1997
totaled $391 and $2,143, respectively, and are included in other accrued
liabilities in the accompanying consolidated balance sheets. The reduction in
the accruals arose from changes in facts and circumstances principally relating
to the termination of the NAC pension plan.

The financial statements for the two-month period ended May 31, 1995 represent
the operations of NAC when NAC was owned by Triton ("Predecessor"). The
financial statements of the Company since June 1, 1995 ("Successor") reflect the
results of operations and the impact of indebtedness incurred in the acquisition
of NAC, as well as the impact of the purchase price allocation. Accordingly, the
financial statements of the Successor are not directly comparable to those of
the Predecessor.

On March 5, 1997 the Company completed an initial public offering of 3,900,000
shares of common stock, $0.01 par value per share (the "Offering"). The Company
received net proceeds of approximately $34.5 million after deducting expenses of
approximately $4.5 million. The net proceeds were used for, among other things,
the repayment of term and subordinated debt, a paydown of the Company's credit
facility (for a total debt reduction of $22.6 million), payment of accrued
dividends on preferred stock ($0.2 million), and the acquisition of API from AMR
Combs Inc. ("AMR Combs") ($10.6 million - see below).


                                       F8
<PAGE>

1. Business and Basis of Presentation (continued)

Immediately prior to the closing of the Offering, the following transactions
were completed: (i) all outstanding shares of the Series A Preferred Stock of
the Company were converted into 165,000 shares of common stock at the offering
price, (ii) all outstanding warrants to purchase 1,293,335 shares of the
Company's common stock were exercised in full, (iii) the Company's certificate
of incorporation was amended to increase the authorized common stock of the
Company to 25,000,000 shares, and (iv) a 6.4549-to-1 stock split with respect to
common stock was effected. Accordingly, all common share amounts have been
restated to give effect to the 6.4549-to-1 stock split.

With the closing of the Offering, the Company acquired certain assets and
assumed certain liabilities of API from AMR Combs for an adjusted purchase price
of $10.6 million in cash, including expenses of approximately $523 that were
incurred in connection with the acquisition. The acquisition was accounted for
under the purchase method of accounting as of the closing date. The purchase
price, including acquisition costs, was allocated to the assets and liabilities
of API based upon their relative fair values. The excess of purchase price paid
over the value of the net assets acquired is included in goodwill in the
accompanying consolidated balance sheets. The consolidated financial statements
of the Company since March 5, 1997 reflect the impact of the results of
operations of API as well as the purchase price allocation.

In conjunction with the API acquisition, AMR Combs purchased from API 10,407
shares of API Series A Cumulative Convertible Preferred Stock, $0.001 par value
(the "Preferred Stock"), at a price of $100 per share. Total adjusted proceeds
to the Company were $1,041. This transaction has been accounted for as minority
interest in the accompanying consolidated balance sheets. Dividends are payable
on a quarterly basis on the Preferred Stock at an annual rate of $4.00 per
share. Dividends of $38 accrued during the year ended January 31, 1998, and have
been reflected in minority interest in subsidiary in the accompanying
consolidated statements of operations.

In connection with the API acquisition, First Aviation, API and AMR Combs
entered into a Stockholders Agreement. Pursuant to this agreement, AMR Combs
agreed that it would not sell its shares of the Preferred Stock or the shares of
API common stock into which such Preferred shares are convertible (collectively
the "API Acquisition Shares") for a minimum period of three years. API has the
right to redeem the API Acquisition Shares at any time. AMR Combs has the right
to cause the Company to repurchase the API Acquisition Shares commencing three
years after the closing of the API acquisition. The redemption price is equal to
the fair market value of the API Acquisition Shares as determined by an
independent appraisal. The Stockholders Agreement also contains certain other
rights, including: (i) a right of first refusal on the part of First Aviation
with respect to any proposed sale of the API Acquisition Shares; (ii) the right
of First Aviation to require AMR Combs to participate, on a pro rata basis, with
it in the sale of the capital stock of API to a third party; (iii) the right of
AMR Combs to elect to participate, on a pro rata basis, in the sale of the
capital stock of API to a third party; and (iv) piggyback and demand
registration rights granted to AMR Combs with respect to the API Acquisition
Shares. The demand registration rights are not exercisable until three years
after the closing of the API acquisition, and, if API has not previously closed
an underwritten public offering of its common stock at the time AMR Combs elects
to exercise its demand registration rights, API may elect to treat the demand as
an exercise by AMR Combs of its put option with respect to the API Acquisition
Shares. There are no plans to cause API to conduct a public offering of its
securities.


                                       F9
<PAGE>

1. Business and Basis of Presentation (continued)

The following unaudited summary, on a pro-forma basis, presents the consolidated
results of operations as if the acquisitions of NAC and API had taken place as
of April 1, 1995, after including the impact of certain pro-forma adjustments,
such as reduced depreciation expense due to asset write-downs, amortization of
intangibles arising from the acquisitions, increased interest expense due to
acquisition financing, and the related tax effects, including the tax benefit
arising from the utilization of the Predecessor net operating loss.

<TABLE>
<CAPTION>
                                                                     Period from
                                         Years Ended January 31,   April 1, 1995 to
                                           1998          1997     January 31, 1996
                                         --------     --------    ----------------
<S>                                      <C>          <C>            <C>     
Net Sales                                $156,867     $143,545       $101,946
Net income                                  5,248          494          1,156
Net income available to common                                       
  stockholders                              5,237          362          1,068
                                                                     
Basic net income per common share        $   0.62     $   0.10       $   0.30
Net income per common share - assuming                               
  dilution                               $   0.60     $   0.07       $   0.19
</TABLE>
                                                                   

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.

Net Sales

Sales are recorded net of discounts, allowances and commissions. Net sales
related to the repair and overhaul of engines are recorded upon completion of
repair and overhaul services. Net sales for parts and engine components sold are
recorded when the product is shipped.

The Company provides credit in the form of trade accounts receivable to its
customers. The Company generally does not require collateral to support domestic
customer receivables. Receivables arising from export activities generally are
supported by letters of credit or foreign credit insurance. The Company performs
ongoing credit evaluations of its customers and maintains allowances which
management believes are adequate for potential credit losses.

Combined sales to agencies of the U.S. government represented 9%, 16%, 27% and
35% of net sales for the years ended January 31, 1998 and 1997, the eight-month
period ended January 31, 1996, and the two-month period ended May 31, 1995,
respectively. The combined accounts receivable from agencies of the U.S.
government represented 10% and 18% of total trade receivables as of January
31, 1998 and 1997, respectively. Sales to one customer who acts as an agent for
a number of foreign governments accounted for 3% and 12%, respectively, of total
net sales for the years ended January 31, 1998 and 1997.


                                      F10
<PAGE>

2. Summary of Significant Accounting Policies (continued)

Net Sales (continued)

The Company has no foreign operations; however, export sales to unaffiliated
customers were approximately 31%, 32%, 35% and 31% of net sales in the years
ended January 31, 1998 and 1997, the eight-month period ended January 31, 1996,
and the two-month period ended May 31, 1995, respectively. The majority of
export sales activities were to the following geographic areas: Middle East, Far
East, Central America, Canada, and Europe.

Stock Based Compensation

For the year ended January 31, 1997, the Company implemented the disclosure
provisions of Financial Accounting Standards Board (FASB) Statement No. 123,
"Accounting for Stock-Based Compensation". The Company accounts for stock option
grants in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and, accordingly, recognizes
compensation expense to the extent a difference exists between the exercise
price and the fair market value per share at the date of grant.

Reclassifications

Certain amounts in the accompanying consolidated financial statements have been
reclassified to conform to the current year's presentation.

Cash and Cash Equivalents

Cash and cash equivalents consist of demand deposits and money market funds.

Inventories

Inventories are stated at the lower of cost or market, with cost determined
using the first-in, first-out ("FIFO") and specific identification methods.
Costs include direct material, direct labor and applicable manufacturing
overhead. A significant portion of the Company's inventory consists of new,
overhauled, serviceable and repairable aircraft engine parts that are purchased
principally from Allison Engine Company ("Allison"), a subsidiary of Rolls Royce
Ltd., and also from other parts resellers and customers. Inventory also consists
of general aircraft parts. Before any part may be installed in an aircraft, it
must meet certain standards of condition established by the Federal Aviation
Administration, the U.S. Department of Defense, or the equivalent regulatory
agencies in other countries, depending on whose engines the Company is
servicing. Specific regulations vary from country to country, although
regulatory requirements in other countries generally coincide with applicable
U.S. requirements. Parts also must be traceable to sources deemed acceptable by
such agencies. Parts owned or acquired by the Company may not meet applicable
standards prior to remanufacturing, or standards may change in the future,
causing parts which already are contained in the Company's inventory to be
scrapped or to require modification. Aircraft engine manufacturers also may
develop new parts to be used in lieu of parts already contained in the Company's
inventory.

Provisions are made in each period for the estimated effect of excess and
obsolete inventories. Actual excess and obsolete inventories may differ
significantly from such estimates, and such differences could be material to the
financial statements.


                                      F11
<PAGE>

2. Summary of Significant Accounting Policies (continued)

Plant and Equipment

Plant and equipment are stated at cost, less allowance for accumulated
depreciation. Additions and improvements that materially increase the productive
capacity or extend the useful life of an asset are added to the cost of the
asset. Expenditures for normal maintenance and repairs are charged to expense as
incurred.

Depreciation of plant and equipment is computed using the straight-line method
over the estimated lives of the assets, which range from 3 to 30 years.
Leasehold improvements are amortized over the shorter of the estimated life of
the improvement or the terms of the related lease.

Noncurrent Assets

During the year ended January 31, 1997, the Company implemented the provisions
of FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". The Company records impairment
losses on long-lived assets when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.

Income Taxes

The Company uses the liability method to account for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

Major Suppliers 

Allison historically has been a major supplier to the Company, and NAC is an
Authorized Maintenance Center for Allison's product lines. During the years
ended January 31, 1998 and 1997, NAC purchased $46,407 and $47,254,
respectively, in parts and engine components from Allison. At January 31, 1998
and 1997, accounts payable to Allison totaled $4,460 and $5,939, respectively.
NAC is also an authorized distributor for Bendix, AC and several suppliers of
accessories that compliment the Allison commercial engine. NAC has, from time to
time, experienced difficulty in obtaining certain parts because of parts
shortages and inventory fluctuations at Allison. The shortage or unavailability
of Allison parts can and has from time to time caused delays in the timely
completion of repair and overhaul production schedules. Such delays may
adversely affect NAC's relationship with its customers and could adversely
affect NAC's commitments to customers and its work-in-process inventory levels.
An inability to maintain timely access to Allison parts and components on
commercially reasonable terms would have a material adverse effect on the
Company's consolidated business, financial condition and results of operations.

Goodwill

The excess of purchase price over the fair value of the net assets acquired is
amortized under the straight-line method over a thirty-year period. Accumulated
amortization was $92 at January 31, 1998.


                                      F12
<PAGE>

2. Summary of Significant Accounting Policies (continued)

Net Income Per Common Share

In 1997 the FASB issued Statement No. 128, "Earnings per Share". Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic earnings per share and earnings per share - assuming dilution. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Earnings per share -
assuming dilution is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128
requirements.

Net income per common share is not presented for the two-month period ended May
31, 1995 since such amounts are not meaningful as a result of the change in
ownership and capital stock structure which occurred with the purchase of NAC.

3. Inventories

Inventories consist of the following:

                                                               January 31,
                                                             1998        1997
                                                          ----------------------

Parts held for manufacturing or resale                     $ 31,025    $ 21,218
Work-in-process                                               8,099      11,067
Finished goods                                                6,566       6,399
                                                           --------    --------
                                                             45,690      38,684
Less: allowance for obsolete and slow moving inventory       (2,379)     (2,361)
                                                           --------    --------
                                                           $ 43,311    $ 36,323
                                                           ========    ========

4. Plant and Equipment

Plant and equipment consist of the following:

                                                                January 31,
                                                             1998        1997
                                                          ----------------------

Machinery and equipment                                     $ 3,147     $ 1,658
Building and other leasehold improvements                     1,934       1,055
Office furniture, fixtures and equipment                      1,202         863
Construction-in-process                                         821         510
                                                            -------     -------
                                                              7,104       4,086
Less: accumulated depreciation                               (2,077)     (1,293)
                                                            -------     -------
                                                            $ 5,027     $ 2,793
                                                            =======     =======
                                                       

                                      F13
<PAGE>

5. Related Parties

In 1997 the Company entered into a ten-year sublease with an affiliate for
office space. The lease is cancellable upon six months notice by either party.
The Company has the option of renewing the sublease for two additional five-year
periods. Lease payments totaled $50 under the lease for the year ended January
31, 1998. During 1996 the Company leased office space from the same affiliate
under a month-to-month sublease. Annual lease payments totaled $36 for the year
ended January 31, 1997.

On September 30, 1996, the Company entered into two agreements with an affiliate
whereby the affiliate was to provide certain investment advisory services in
connection with the Offering, and provide advice and negotiate on behalf of the
Company for the acquisition of API. Upon closing of the Offering and the API
acquisition, the affiliate was paid fees for its services of $350 and $250,
respectively.

Prior to the Offering, the Company agreed to pay a management fee to an
affiliate in the amount of $300 per year, payable quarterly. The Company reduced
the payment of this management fee by the amount of compensation paid to certain
employees in connection with their services as officers of the Company and its
subsidiaries. The obligation to pay the management fee terminated upon the
consummation of the Offering. The Company also agreed to pay an annual
management fee of $50 per year to the subordinated debtholder for each of the
four years commencing June 1, 1995. This agreement also provided for accelerated
payment of all remaining annual management fees upon the occurrence of certain
events, including the consummation of a public offering of the Company's common
stock. These management fees also terminated upon consummation of the Offering.

Fees under the management agreements totaled $100, $170 and $133, respectively,
for the years ended January 31, 1998 and 1997, and the eight-month period ended
January 31, 1996, and were included in selling, general, and administrative
expenses in the accompanying consolidated statements of operations. There were
no management fees for the two-month period ended May 31, 1995.

6. Long-Term Debt

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                            January 31,
                                                                         1998       1997
                                                                       -------------------
<S>                                                                    <C>        <C>     
Borrowings under revolving line of credit                              $ 13,866   $ 29,516
Term loans (with interest at 8.95% at January 31, 1997)                      --      2,650
Subordinated note payable (with interest at 15% at January 31, 1997)         --      1,728
                                                                       --------   --------
Total long-term debt                                                     13,866     33,894
Less current portion                                                         --     (1,100)
                                                                       --------   --------
Long-term portion                                                      $ 13,866   $ 32,794
                                                                       ========   ========
</TABLE>

The Company used $22,600 of the proceeds from the Offering to retire the term
loans and the subordinated note payable, and reduce the Company's outstanding
borrowings under its revolving line of credit. In connection with the retirement
of the subordinated note, the Company recorded an extraordinary charge during
the year ended January 31, 1998 of $108, net of associated income tax benefit,
for prepayment penalties. 

During the year ended January 31, 1997, NAC entered into a credit agreement that
provides for borrowings up to a total of $40,000, principally through a
revolving credit facility. Initial borrowings under this agreement were used to
retire borrowings under the Company's previous revolving line of credit and term
loan, and to reduce the Company's subordinated note by $1,000. In connection
with this refinancing the Company recorded an


                                      F14
<PAGE>

6. Long-Term Debt (continued)

extraordinary charge, net of associated income tax benefit, of $864 for
prepayment penalties and the write-off of unamortized loan fees.

Borrowings under the revolving credit facility bear interest at the LIBOR rate
plus 3% (8.15% and 8.45% at January 31, 1998 and 1997, respectively). Borrowings
are limited to specified percentages of eligible accounts receivable and
inventories of NAC. The original term of the credit agreement is through May 15,
1999. A termination of the agreement prior to that date will cause a prepayment
penalty of 1% of the total facility to become due. Thereafter, the agreement
automatically renews for additional one-year periods, and may be terminated
without penalty. Management believes that the borrowing base under this credit
facility will exceed the outstanding borrowings for at least the next twelve
months, and therefore has classified these borrowings as long-term in the
accompanying consolidated balance sheets.

The credit agreement also allows for the issuance of letters of credit not to
exceed an aggregate of $2,500. Such letters of credit reduce the availability of
borrowings under the facility. At January 31, 1998 and 1997, NAC was
contingently liable for $1,819 and $424, respectively, under letters of credit,
with $31 and $60, respectively of cash being restricted as security against an
outstanding letter of credit. The restricted cash has been classified in prepaid
and other assets in the accompanying consolidated balance sheets.

The credit agreement contains a number of covenants and provisions imposed on
NAC, including restrictions on mergers, consolidations and acquisitions, the
incurrence of indebtedness, transactions with affiliates, the creation of liens,
limitations on capital expenditures, and payment of management fees. The credit
agreement also requires NAC to maintain minimum levels of net worth, certain
interest expense coverage ratios and minimum backlog levels, and currently
restricts the payment of dividends from NAC to the Company without the lender's
consent. Substantially all of NAC's assets are pledged as collateral under the
revolving line of credit.

Management believes that the carrying amount of the Company's borrowings under
its revolving credit facility approximates fair value because the interest rate
is variable and resets frequently.

7. Stockholders' Equity

The preferred stock that was converted to common as part of the Offering bore
cumulative annual dividends of $4.00 per share. Total cumulative dividends which
had been earned but not yet declared at January 31, 1997 were $220. Subsequently
$11 of dividends were earned. The total cumulative unpaid dividends of $231 were
paid from the proceeds of the Offering.

On December 20, 1996, the Board of Directors approved a 6.4549 to 1 stock split
of issued and outstanding common stock, to be effected as a stock dividend.
Common shares in the accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock split. The Directors also adopted an
Employee Stock Purchase Plan and a Stock Option Plan.

Certain of the Company's directors elected to receive their compensation for the
year ended January 31, 1998 in the form of shares of the Company's common stock.
The fair value of the shares at the date of issuance is charged to expense with
a corresponding credit to additional paid-in capital.

In connection with the issuance of the subordinated note on June 1, 1995, the
Company issued to the debtholder warrants to purchase up to 1,832,225 shares of
the Company's common stock at $.0545 per share. In connection with the debt
transactions completed in 1996, the number of shares eligible for purchase under
this warrant was reduced to 1,293,335. The warrants were exercised in full in
connection with the Offering.


                                      F15
<PAGE>

7. Stockholders' Equity (continued)

Under the Employee Stock Purchase Plan, 250,000 shares of common stock have been
reserved for issuance. The plan allows for eligible employees to purchase stock
at 85% of the lower of the fair market value of the Company's common stock as of
the first day of each semi-annual offering period or the fair market value of
the stock at the end of the offering period. The initial offering period
commenced in May 1997 and ran through December 31, 1997. In January 1998, the
Company issued 10,643 shares to employees under the plan.

The Stock Option Plan provides for the grant of incentive stock options,
nonqualifying stock options, stock appreciation rights and stock purchase
rights. A total of 800,000 shares of common stock have been reserved for
issuance under this plan. During the year ended January 31, 1998, 222,300
options were granted to various employees of the Company at an exercise price of
$10.00. These options vest over two to four-year periods, beginning one year
after the date of the grant, and expire ten years after issuance. Options for
900 shares were forfeited during the year. Since the exercise price of all of
the options granted was at or above the fair market value per share at the date
of grant, no compensation expense relating to stock options was recorded during
the year ended January 31, 1998. In January 1997, the Company granted a key
employee options to acquire 150,000 shares of the Company's common stock. These
options carry an exercise price of $0.01 per share, were fully vested at the
date of issuance, and expire ten years from the date of grant. In addition to
the option grant, the employee also received a bonus of $200. To account for the
stock option grant and the bonus the Company recorded a pre-tax charge of
approximately $1,700 for compensation expense during the fiscal year ended
January 31, 1997, with a $1,500 credit to additional paid-in capital. No options
were exercised during the years ended January 31, 1998 and 1997. Under the Stock
Option Plan, 371,400 options were outstanding at January 31, 1998.

Under the provisions of FASB No. 123, the Company is required to disclose the
fair value, as defined, of options granted to employees and the related
compensation expense. The fair value of the stock options granted was estimated
at the date of grant using a Black-Scholes option pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. In
management's opinion, because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

The fair value of the options granted during the year ended January 31, 1998 was
determined using a risk-free interest rate of 6.4%, a dividend yield of 0%, an
average volatility factor of .533, and weighted average expected lives of two to
four years. Under these assumptions the weighted average fair value of each
option is approximately $3.76, and the additional pro forma compensation that
would be recorded is approximately $176, or $0.02 per share. The weighted
average remaining contractual life of these stock options is approximately 9.5
years.


                                      F16
<PAGE>

8. Income Taxes

The provision for income taxes is as follows:

                                                 Eight-month     Two-month
                    Year ended     Year ended    period ended   period ended
                    January 31,    January 31,    January 31,     May 31,
                      1998           1997            1996          1995
                   -----------    -----------    ------------   -----------
Current:
     Federal       $     2,221    $        --    $       523    $        --
     State                  36             --            113             --
                   -----------    -----------    -----------    -----------
                         2,257             --            636             --
Deferred:
     Federal            (1,014)            --            529             --
     State                 257             --            135             --
                   -----------    -----------    -----------    -----------
                          (757)            --            664             --
                   -----------    -----------    -----------    -----------
                   $     1,500    $        --    $     1,300    $        --
                   ===========    ===========    ===========    ===========

A reconciliation between income tax provisions computed at the U.S. federal
statutory rate and the effective rate reflected in the consolidated statements
of operations is as follows:

<TABLE>
<CAPTION>
                                                                         Eight-month     Two-month
                                           Year ended       Year ended   period ended   period ended
                                           January 31,      January 31,   January 31,       May 31,
                                              1998            1997          1996            1995
                                           ----------      -----------   ------------   ------------
<S>                                             <C>            <C>            <C>            <C>  
Provision at statutory rate                     34.0%          34.0%          34.0%          34.0%
State tax provision, net of federal
  benefit                                        5.5            6.6            6.6            6.6
Effect of losses of predecessor
  business                                        --             --             --          (41.0)
Change in valuation allowance                  (47.4)         (40.6)            --             --
Provision for contingencies                     29.1             --             --             --
Other, net                                       0.7             --            0.4            0.4
                                                 ---            ---            ---            ---
                                                21.9%           0.0%          41.0%           0.0%
                                                ====            ===           ====            === 
</TABLE>

                                      F17
<PAGE>

8. Income Taxes (continued)

Deferred tax assets and liabilities result from temporary differences in the
recognition of income and expenses for tax and financial statement purposes.
These differences are set forth below:

                                                         January 31, January 31,
                                                           1998         1997
                                                         ----------  -----------
Financial statement accruals not currently deductible
  for income tax purposes                                 $ 3,482      $ 4,200
Differences in the financial statement and income tax                  
  bases of fixed assets                                     1,212        1,870
Attributes subject to IRC Section 382                         251          628
Net operating loss carryforwards                               --          593
Other                                                         690          334
                                                          -------      -------
                                                            5,635        7,625
Valuation allowance                                        (3,254)      (6,589)
                                                          -------      -------
Net deferred tax assets                                   $ 2,381      $ 1,036
                                                          =======      =======
                                                                     
The Company believes that based on a number of factors, including its recent
history of tax operating losses, substantial uncertainty exists as to the
realization of its deferred tax assets. Accordingly, a valuation allowance has
been provided on deferred tax assets. The Company will continue to assess the
realizability of the deferred tax assets in future periods and make such
adjustments to the valuation allowance as it considers appropriate. The
valuation allowance decreased by $3,335 and $547 in the years ended January 31,
1998 and 1997, respectively.

During the year ended January 31, 1997, the Company recorded compensation
expense for book purposes of $1,500 resulting from the issuance of stock
options. The associated tax benefit of $600 was recorded as a deferred tax asset
at that time. When the tax benefit is realized, any excess tax benefit, if any,
will be recorded as additional paid-in capital.

Prior to the Offering, the Company filed a consolidated federal tax return with
its parent company, First Equity Group, Inc. The Company's federal income tax
provision had been based on the tax sharing agreement between the companies
which stipulated that the Company was liable for federal taxes as if it filed on
a separate company basis, subject to certain limitations and adjustments. Income
taxes payable during that period related primarily to the intercompany liability
under the tax sharing agreement. As a result of the Offering, the Company will
file its own tax return and will no longer file a consolidated federal income
tax return with First Equity Group, Inc.

Because of the "change of ownership" provision of the Tax Reform Act of 1986,
and applicable state statutes, utilization of the Company's "net unrealized
built-in losses" and state net operating loss carryforwards which existed as of
the acquisition date are subject to annual limitations in current and future
periods. As a result of the annual limitation, a portion of the net operating
loss carryforwards may expire unused. In addition, the Offering may result in a
change in ownership for federal income tax purposes and, consequently, a
limitation on annual utilization by the Company of certain tax attributes
existing at the date of the Offering.


                                      F18
<PAGE>

8. Income Taxes (continued)

Prior to June 1, 1995, NAC was a party to a tax sharing agreement with Triton.
In accordance with the terms of the tax sharing agreement, federal income taxes
for the two-month period ended May 31, 1995 were calculated on a stand-alone
basis. For the two-month period ended May 31, 1995, a valuation allowance was
established for NAC's net operating loss carryforwards due to uncertainties as
to the realization of these amounts. Consequently, no income tax benefit or
expense was recorded for the period.

9. Employee Benefits Plans

Profit Sharing

The Company maintains a discretionary, non-qualified profit sharing plan
covering a substantial number of its employees. The Company recorded profit
sharing expense of $342, $355, and $216 in the years ended January 31, 1998 and
1997, and the eight-month period ended January 31, 1996. No expense was
recorded for the two-month period ended May 31, 1995.

Defined Contribution Plans

The Company maintains 401(k) savings plans that cover substantially all
full-time employees. The plans allow employees to defer up to 15 percent of
their salary, with the Company partially matching employee contributions.
Certain employees vest in the Company contribution ratably over three years. The
Company and its Predecessor expensed $642, $531, $236 and $13 in the years ended
January 31, 1998 and 1997, the eight-month period ended January 31, 1996, and
the two-month period ended May 31, 1995, respectively, related to the plans.

Pension Plans

Prior to June 1, 1995 substantially all employees of NAC were covered by a
qualified noncontributory defined benefit retirement plan. NAC's funding policy
was to contribute annually the amount required by ERISA as determined by the
plan's actuaries. All of the qualified plan's assets were held by, and invested
in, investment funds of Principal Mutual Life Insurance Company, a qualified
insurance company.

On June 1, 1995, NAC decided to terminate its retirement plan. In connection
with the termination of the plan, NAC amended the plan agreement to provide 100%
vesting for all participants, and froze further benefit accruals for
participants. At that date, the Company recorded $1,000 in other noncurrent
liabilities to cover the cost of settling the obligations under this plan. On
October 7, 1996, NAC purchased $3,923 in guaranteed annuities for all retirees
who were receiving benefits from the plan. On October 15, 1996, NAC announced
the termination of its qualified defined benefit retirement plan. The plan was
amended to allow for lump sum distributions in cash or rollovers to an IRA or
another qualified retirement plan. Active employees of NAC also had the option
to transfer funds to NAC's 401K plan. At January 31, 1997 prepaid pension costs
of $453 were netted against the accrued pension obligation in the accompanying
consolidated balance sheets.

The pension plan was liquidated according to regulatory guidelines on July 28,
1997. A portion of the excess of the net assets remaining after settlement of
liabilities, $102, was contributed to NAC's 401(k) plan. The remaining balance
of $308 reverted back to the Company. In addition, the remaining balance of the
accrual related to settling pension obligations under the plan was reversed.


                                      F19
<PAGE>

10.  Earnings per Share

The following sets forth the computation of basic earnings per share and
earnings per share - assuming dilution.

<TABLE>
<CAPTION>
                                                                                                Eight-month
                                                                                               period ended
                                                                   Years ended January 31,      January 31,
                                                                     1998           1997          1996
                                                                -------------- ------------   ---------------- 
<S>                                                             <C>            <C>            <C>        
Numerator:
   Net income before extraordinary item                         $     5,359    $     1,459    $     1,875
   Preferred stock dividends                                            (11)          (132)           (88)
                                                                -------------- ------------   ---------------- 
   Numerator for earnings per share - net income available to
     common stockholders before extraordinary item                    5,348          1,327          1,787

   Effect of extraordinary item, net of associated income tax
     benefit                                                           (108)          (864)            --
                                                                -------------- ------------   ---------------- 
   Numerator for earnings per share - net income available to
     common stockholders                                        $     5,240    $       463    $     1,787
                                                                ============== ============   ================
Denominator:

   Denominator for basic earnings per share - weighted
     average shares                                               8,432,234      3,556,665      3,556,665

   Effect of dilutive warrants and employee stock options           266,166      1,637,791      1,972,914
                                                                -------------- ------------   ---------------- 
   Denominator for earnings per share - assuming dilution -
     adjusted weighted average shares and assumed
     conversions                                                  8,698,400      5,194,456      5,529,579
                                                                ============== ============   ================
</TABLE>

Stock options to purchase shares of common stock at $10 per share were issued to
employees during the year but were not included in the computation of earnings
per share - assuming dilution because the exercise price of the options was
greater than the average market price of the common stock during the period and,
therefore, the effect would be antidilutive.

                                      F20
<PAGE>

11. Commitments and Contingencies

Commitments

The Company leases certain land, plant facilities, equipment and office space.
Many of the Company's operating leases have options which allow the Company, at
the end of the initial lease term, to renew the leases for periods ranging from
three to five years. Certain lease agreements also contain escalation clauses
which are based on the consumer price index. Future minimum rental payments
under operating leases that have initial noncancellable lease terms in excess of
one year as of January 31, 1998 are as follows:

Fiscal year 1999                                                         $ 1,209
Fiscal year 2000                                                           1,062
Fiscal year 2001                                                           1,070
Fiscal year 2002                                                             577
Fiscal year 2003                                                             585
Thereafter                                                                 6,348
                                                                         -------
                                                                         $10,851
                                                                         =======

Rental expense under all short-term and noncancellable operating leases amounted
to $1,551, $933, $316 and $79, net of sublease rental income of $116, $299, $193
and $39 for the years ended January 31, 1998 and 1997, the eight-month period
ended January 31, 1996, and the two-month period ended May 31, 1995,
respectively.

Contingencies

In the ordinary course of business, the Company is subject to many levels of
governmental inquiry and investigation. Among the agencies which oversee the
Company's business activities are the Federal Aviation Administration, the
Department of Defense, the Department of Justice, the Environmental Protection
Agency and the Defense Contract Audit Agency. The Company does not anticipate
that any action as a result of such inquiries and investigations would have a
material adverse affect on its consolidated financial position, results of
operations or its ability to conduct business. In the normal conduct of its
business, the Company also is involved in various claims and lawsuits, none of
which, in the opinion of the Company's management, will have a material adverse
impact on the Company's consolidated financial position or results of
operations. However, depending on the amount and timing, unfavorable resolution
of any of these matters could have a material effect on the Company's
consolidated results of operations or cash flows in a particular period.

12. Environmental

Liabilities are recorded when environmental claims for remedial efforts are
probable and the cost can be reasonably estimated. As of January 31, 1998 and
1997, the Company had provided for environmental remediation costs in the amount
of $262 and $285, respectively, and such amounts are included in other accrued
liabilities in the accompanying consolidated balance sheet. Environmental
expenditures that relate to current operations are expensed.


                                      F21
<PAGE>

12. Environmental (continued)

The Company potentially is a responsible party to certain properties that are
contaminated and will require remediation. The exact extent of the Company's
liability, if any, has not yet been determined but, in the opinion of
management, these matters will not have a material adverse impact on the
Company's consolidated financial position or its results of operations. However,
depending on the amount and timing, unfavorable resolution of any of these
matters could have a material effect on the Company's consolidated results of
operations or cash flows in a particular period.

13. Subsequent Events

Restructuring

On April 6, 1998 the Company announced that it had initiated a plan to
streamline and restructure operations at NAC. In connection with this plan, the
Company will record a $1.7 million pre-tax restructuring charge and take other
non-recurring charges of $1.0 million in the first quarter of the fiscal year
ending January 31, 1999. The restructuring charges relate to costs associated
with consolidating certain facilities and severance charges related to a
reduction in its workforce.

New Credit Facility

On April 23, 1998, API entered into a one year $10 million revolving credit
facility with Fleet National Bank. Advances under the credit facility bear
interest, at the Company's option, at (i) a variable rate per annum equal to the
prime rate, (ii) a variable rate equal to the cost of funds rate plus 1.5% or
(iii) at a fixed rate equal to the LIBOR rate plus 1.5%. The credit agreement
contains a number of covenants, including restrictions on mergers,
consolidations and acquisitions, the incurrence of indebtedness, transactions
with affiliates, the creation of liens, and limitations on capital expenditures.
The credit agreement also requires API to maintain minimum levels of net worth
and specified interest expense coverage ratios, and currently restricts the
payment of dividends. Substantially all of API's accounts receivable, inventory
and equipment are pledged as collateral under the revolving credit facility.


                                      F22
<PAGE>

14. Quarterly Financial Information (unaudited)

<TABLE>
<CAPTION>
                                            First Quarter   Second Quarter  Third Quarter  Fourth Quarter
                                            -------------   --------------  -------------  --------------
Fiscal year ended January 31, 1998                                                         
<S>                                         <C>             <C>             <C>            <C>        
Net sales                                   $   35,847      $   38,575      $   39,543     $   39,677
Gross profit                                     5,294           6,054           6,759          5,102
Net income before extraordinary item             1,120           1,558           1,647          1,034
Extraordinary item - loss on early                                                         
   extinguishment of debt, net of                                                          
   associated income tax benefit                  (108)             --              --             --
                                            -------------   --------------  -------------  --------------
Net income                                  $    1,012      $    1,558      $    1,647     $    1,034
                                            =============   ==============  =============  ==============
Basic net income per share before                                                          
   extraordinary item                       $     0.17      $     0.17      $     0.18     $     0.12
Extraordinary item                               (0.02)             --              --             --
                                            -------------   --------------  -------------  --------------
Basic net income per share                  $     0.15      $     0.17      $     0.18     $     0.12
                                            =============   ==============  =============  ==============
                                                                                           
Net income per share - assuming dilution,                                                  
   before extraordinary item                $     0.16      $     0.17      $     0.18     $     0.11
Extraordinary item                               (0.01)             --              --             --
                                            -------------   --------------  -------------  --------------
Net income per share - assuming dilution    $     0.15      $     0.17      $     0.18     $     0.11
                                            =============   ==============  =============  ==============
                                                                                           
Fiscal year ended January 31, 1997                                                         
                                                                                           
Net sales                                   $   24,582      $   27,772      $   24,422     $   27,460
Gross profit                                     4,007           3,739           3,424          3,640
Net income/(loss) before extraordinary                                                     
   item                                          1,052             921             415           (929)
Extraordinary item - loss on early                                                         
   extinguishment of debt, net of                                                          
   associated income tax benefit                    --            (864)             --             --
                                            -------------   --------------  -------------  --------------
Net income/(loss)                           $    1,052      $       57      $      415     $     (929)
                                            =============   ==============  =============  ==============
Basic net income/(loss) per share before                                                   
   extraordinary item                       $     0.29      $     0.25      $     0.11     $    (0.27)
Extraordinary item                                  --           (0.24)             --             --
                                            -------------   --------------  -------------  --------------
Basic net income/(loss) per share           $     0.29      $     0.01      $     0.11     $    (0.27)
                                            =============   ==============  =============  ==============
Net income/(loss) per share - assuming                                                     
   dilution, before extraordinary item      $     0.18      $     0.17      $     0.08     $    (0.19)
Extraordinary item                                  --           (0.16)             --             --
                                            -------------   --------------  -------------  --------------
Net income/(loss) per share - assuming                                                     
   dilution                                 $     0.18      $     0.01      $     0.08     $    (0.19)
                                            =============   =============================================
</TABLE>
                                                                       


                                      F23
<PAGE>

Schedule II - Valuation and Qualifying Accounts

           First Aviation Services Inc. and Consolidated Subsidiaries
                             (amounts in thousands)

<TABLE>
<CAPTION>
                                                     Balance at
                                                    beginning of                                                 Balance as of
                                                       period              Additions          Deductions         end of period
                                                  ------------------   ------------------  ------------------  ------------------
<S>                                                 <C>                  <C>                 <C>                 <C>        
Description

Two months ended May 31, 1995
   Allowance for doubtful accounts                  $     460            $       -           $       -           $       460

Eight months ended January 31, 1996
   Allowance for doubtful accounts                        460                   55                 237                   278

Year ended January 31, 1997
   Allowance for doubtful accounts                        278                   75                  75                   278

Year ended January 31, 1998
   Allowance for doubtful accounts                        278                   74                   6                   346


Two months ended May 31, 1995
   Slow moving and obsolete inventory                   3,713                   90                 886                 2,917

Eight months ended January 31, 1996
   Slow moving and obsolete inventory                   2,917                    -                 129                 2,788

Year ended January 31, 1997
   Slow moving and obsolete inventory                   2,788                    -                 427                 2,361

Year ended January 31, 1998
   Slow moving and obsolete inventory                   2,361                   18                   -                 2,379

</TABLE>