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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(Mark One)

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

For the fiscal year ended December 31, 1996

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

For the transition period from _____ to _____

Commission file number 0-23764

                           KELLSTROM INDUSTRIES, INC.
                 (Name of Small Business Issuer in its Charter)

Delaware                                                        13-3753725   
--------                                                       ----------
(State or Other Jurisdiction                                 (I.R.S. Employer
of Incorporation or Organization)                           Identification No.)

14000 N.W. 4 St., Sunrise, Florida               33325
-----------------------------------              ------
(Address of Principal Executive Offices)        Zip Code

                                 (954) 845-0427
                                 ---------------
                           (Issuer's Telephone Number)

       Securities registered under Section 12(b) of the Exchange Act: None

                  Securities registered under Section 12(g) of
                               the Exchange Act:

                               Title of Each Class
                               -------------------
             Common Stock, $.001 par value (NASDAQ SmallCap Market)
            Preferred Stock Purchase Rights (NASDAQ SmallCap Market)

Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act  during the  preceding  12 months (or for such
shorter periods that the registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes  X  No  
                                                                       --    --
Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

Issuer's revenues for the fiscal year ending December 31, 1996 were: $24,921,587

As of March 25,  1997,  the  aggregate  market value of the voting stock held by
non-affiliates  of the registrant  was  approximately  $97,590,261  based on the
closing  price on that date of $14 1/8.  As of that date,  there were  7,495,583
shares of the registrant's Common Stock outstanding.

Transitional Small Business Disclosure Format.  Yes         No  X
                                                   --           --


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         This report  contains  forward-looking  statements,  under the captions
"Description of Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." These forward-looking statements are based
on many assumptions and factors,  and are subject to many conditions,  including
the Company's  continuing  ability to acquire  adequate  inventory and to obtain
favorable  pricing for such inventory,  the ability to arrange for the repair of
aircraft  engines  by  third-party   contractors   prior  to  resale  or  lease,
competitive pricing for the Company's products,  customer concentration,  demand
for the  Company's  products  which  depends  upon the  condition of the airline
industry,  ability to collect  receivables  and government  regulation,  and the
effects of increased indebtedness as a result of the acquisition of the business
of International Aircraft Support, L.P.

                                     PART I

Item 1.  Description of Business.

General

         Kellstrom   Industries,   Inc.   ("Kellstrom"  or,  together  with  its
subsidiaries,  the "Company") engages in the purchasing,  refurbishing  (through
subcontractors),  leasing,  marketing and selling of commercial  jet engines and
jet  engine  parts.   The  Company's   customers   include  major  domestic  and
international  airlines,  engine  manufacturers,  engine part  distributors  and
dealers and overhaul service suppliers throughout the world. The Company enables
customers to reduce their engine maintenance costs by providing Federal Aviation
Administration  ("FAA")-approved  engines and engine parts on a timely basis and
at competitive prices. On January 15, 1997,  Kellstrom completed the acquisition
of  the  business  of  International   Aircraft  Support,   L.P.   ("IASI"),   a
California-based  worldwide  seller of new and used aircraft engine parts.  (See
"History  of the  Company  --  Recent  Developments").  The  Company  previously
conducted  business  under the name "Westco  International"  and  "International
Aircraft  Support," and changed the  operational  name of both business units to
"Kellstrom Industries" on January 30, 1997.

         The  Company's  principal  executive  office  is  located  at  Sawgrass
International Corporate Park, 14000 N.W. Fourth Street, Sunrise,  Florida 33325.
Its telephone number is (954) 845-0427.

History of the Company

         KST Acquisition.

         Kellstrom,  formerly  Israel  Tech  Acquisition  Corp.,  was  formed in
December 1993 as a Specified Purpose Acquisition Company ("SPAC"), the objective
of which was to consummate an initial  public  offering and then to enter into a
business  combination  with an  operating  business.  In April  1994,  Kellstrom
consummated the initial public  offering,  from which it derived net proceeds of
$11,321,197  after  expenses.  On February 15, 1995,  Kellstrom  entered into an
Asset Purchase  Agreement (the  "Acquisition  Agreement")  with Rada  Electronic
Industries, Inc., an Israeli corporation

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("Rada"),  Tasco  Electronics  Inc. (a wholly  owned  subsidiary  of Rada),  and
Kellstrom  Industries,  Inc.  ("KST"),  which  was  an  indirect,   wholly-owned
subsidiary  of Rada,  to  acquire  from  KST  substantially  all of the  assets,
liabilities   and  operations  of  its  commercial  jet  aircraft   engine  part
distribution business (the "Business"). This acquisition is hereinafter referred
to as the "KST  Acquisition."  In connection  with the closing (the  "Closing"),
which took place on June 22, 1995,  Kellstrom  changed its name from Israel Tech
Acquisition Corp. to Kellstrom Industries, Inc.

         In consideration for the Business,  Kellstrom paid $9,000,000, of which
$6,000,000 was paid in cash at the Closing. The remaining $3,000,000 was paid in
the form of an unsecured,  non-interest  bearing promissory note of Kellstrom of
which $1,000,000 is to be paid in eight equal  installments over four years from
the Closing and  $2,000,000  is to be paid as a balloon  payment  (the  "Balloon
Payment")  on the fourth  anniversary  of the  Closing.  The Balloon  Payment is
payable by  Kellstrom in cash or, under  certain  circumstances,  in whole or in
part by  issuance of shares of  Kellstrom's  common  stock,  par value $.001 per
share (the "Common Stock"), which for such purpose shall be valued at the higher
of the  market  price per share at such time or $5.00 per share.  Subsequent  to
December 31, 1996, the promissory note of Kellstrom was paid in full.

         In  addition,  (i) Rada issued to  Kellstrom a five-year  warrant  (the
"Rada  Warrant")  to  purchase  400,000  shares of common  stock of Rada  (which
represented  approximately 7% of the then-issued and outstanding  stock of Rada)
at $3.00 per share; (ii) Kellstrom and Rada entered into a five-year  marketing,
management  and consulting  agreement  which provided for: (A) the nomination of
Mr. Joram Rosenfeld and Mr. Yoav Stern, then-current Co-Chairmen of the Board of
Directors of Kellstrom  (the  "Board") for election to Rada's Board of Directors
and (B) the payment by Rada to Kellstrom of an annual  $200,000  consulting  fee
for five years;  and (iii)  Kellstrom  was  granted a right of first  refusal to
purchase any additional securities which may be privately offered by Rada during
the five year period  following  the  Closing.  In order to maintain a long-term
strategic  relationship  between  the Company and Rada,  on December  26,  1996,
Kellstrom exercised the Rada Warrant upon payment of $1,200,000.  As a result of
certain antidilution  provisions contained in the Rada Warrant,  upon payment of
the $1,200,000 exercise price,  Kellstrom received 464,643 shares of Rada common
stock,  representing  5.6% of the  outstanding  shares  of  Rada at the  time of
exercise.

         Recent Developments.

         On January 15,  1997,  Kellstrom,  through a wholly  owned  subsidiary,
completed  the  acquisition  of   substantially   all  the  assets  and  certain
liabilities  of IASI for $26.5  million in cash and warrants to acquire  500,000
shares of Common Stock at $9.25 per share, expiring January 15, 1999.

         IASI is a worldwide  seller of new and used  aircraft  engine  parts to
maintenance  and  overhaul  facilities,  major  commercial  airlines  and  other
redistributors.  Along with its engine parts sales  (which  includes the sale of
consignment  parts),  IASI is a lessor of jet engines and offers  engine  repair
management programs through its technical

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services  business.   The  technical  services  and  engine  leasing  businesses
represented only 0.3% and 8.2%,  respectively of 1996 revenues, but both support
the resale of engine spare parts.  Technical services allow IASI to supply parts
for engines  during engine shop visits managed by IASI and for those engines for
which it has  developed  maintenance  programs.  IASI's mix of business  and its
purchasing  activities ultimately contribute to its position as a "market-maker"
in redistributed engines and/or various engine spare parts.

         IASI's current product lines power aircraft which constitute 65% of the
world aircraft  fleet.  Its customers  include major  airlines,  engine overhaul
facilities  including  those  operated by  airlines,  independent  overhaul  and
maintenance organizations and aircraft engine manufacturers.

Industry Overview

         The demand for after-market  engine parts is driven primarily by flying
hours or cycles; a cycle is defined as a take-off or landing.  Regardless of the
profitability  of the  airline  industry,  regulations  require  that  parts  be
serviced and/or replaced at scheduled  intervals;  often after specified  flight
hours or cycles.  As such,  the demand for  after-market  parts is a function of
demand for world air travel.  The airline industry has experienced  rapid growth
in business and leisure air travel since 1993, primarily due to a world economic
recovery.  The high demand for airline capacity has increased the utilization of
aircraft which in turn has  significantly  increased the demand for spare engine
parts.  The  Company's  business  remains  dependent  upon the overall  economic
condition  of  the  airline  industry,  however,  which  has  historically  been
volatile.

         According to an industry  report by the Canaan Group, a consulting firm
that tracks the  aviation  market,  the total size of the market for  commercial
spare engine parts (new and used) is  approximately  $3 billion.  The $3 billion
spare parts  market is divided  between  new and  after-market  parts.  The $2.5
billion new parts  market  includes  parts  manufactured  by original  equipment
manufacturers  ("OEMs") and third party  manufacturers.  The $500 million engine
parts after-market  includes parts refurbished by third party  manufacturers and
overhaul  facilities.  In addition to this $3 billion  spare parts  market,  the
whole  engine  market is  estimated  to be $7 billion and  includes the sale and
leasing of new and  overhauled  engines.  With the addition of IASI, the Company
competes in the entire $10 billion  market for  engines  and engine  parts.  The
Company  competes in the  after-market  for engine  parts,  the new engine spare
parts market,  and the market for whole  engines  through its leasing and engine
resale businesses.

         The engine parts industry is being affected by the following trends:

         Increasing  emphasis  on  documentation  and  traceability.  As  safety
requirements have become more stringent,  regulatory  authorities have increased
the level of documentation required of aircraft operators.  This requirement has
in turn been  extended by  operators  to  independent  dealers.  The expense and
sophistication required

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to track the history of  inventory  consisting  of thousands  of  components  is
considerable  and  provides a barrier to entry into the  aircraft  engine  parts
resale   market.   In  addition  to  the  barriers   created  by   documentation
requirements,   management  believes  that  tighter  regulations  regarding  the
operating  procedures of resellers may eliminate smaller participants and create
additional barriers to entry.

         Outsourcing  of  inventory  management  function.  Some  airlines  have
attempted to streamline  their  operations by outsourcing  the entire  inventory
management  function to independent  third parties.  This improves the airline's
profitability,  as measured by return on assets by  removing  parts  inventories
from the balance sheet.  Outsourcing  allows third party  inventory  managers to
achieve economies of scale unavailable to individual airlines. Under consignment
agreements,  the  supplier  is granted  the right to sell  spare  parts from the
airlines'  inventory,  with the  proceeds  divided  between the supplier and the
airline itself.

         Leasing. Similar to outsourcing,  leasing aircraft jet engines or parts
is an attempt  by  airlines  to lower  their  overhead  and/or  working  capital
requirements.  Short-term leases, often 30-90 days in duration, are used by some
carriers that do not wish to maintain a pool of spare engines.  Intermediate and
long-term  leases  (up to 10 years)  are used by many  larger  carriers  as they
upgrade their fleets. Almost all of the new aircraft flown by the major carriers
are leased.  These  carriers  prefer to lease rather than purchase spare engines
for their fleet.  In addition,  many of the new entrant jet carriers are capital
constrained and thereby prefer to lease rather than own engines.

         Reduction  in number of approved  suppliers  and  consolidation  of the
engine  part  after-market.  In  order to  reduce  their  administrative  costs,
airlines are increasingly  limited to a small number of approved  suppliers with
whom they do business.  To remain an approved supplier to the airlines,  dealers
must  maintain very high  standards of quality  control,  enabling  customers to
trace  the  complete  history  of any part.  This  move to limit  the  number of
approved  suppliers is causing a realignment among independent  dealers. A small
number of dealers continue to do business directly with airlines, and a new tier
of dealers sell to these  approved  suppliers.  This  reduction in supplier base
will continue to lead to consolidation in the market for aircraft spare parts.

         Increased importance of capital. Suppliers need ready access to capital
in  order  to take  advantage  of  various  profitable  opportunities  including
outsourcing  and  leasing.   Larger   inventories,   sophisticated   information
technology  systems and more expensive jet engines require  increased  access to
capital.

The Aero Engine After-Market.

         Airlines  maintain   inventories  of  engines  and  spare  parts,  with
inventory levels determined by the expected usage for the particular part. These
inventories are stored primarily at the airline's maintenance centers,  although
limited quantities of certain

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parts are also kept at each  airport  serviced by the operator in order to avoid
revenue-damaging AOG (aircraft on ground) situations.

         For the first few years  after a new engine is  introduced,  most parts
are supplied by the engine manufacturer  itself.  After about five years, engine
parts tend to become available on the surplus market.  This  availability is the
result of three primary factors.

          When aircraft and engines are sold, supporting inventories may be sold
          to third parties.

          The  development of repair  scenarios  provides a supply of overhauled
          and serviceable parts.

          With  experience,  operators become better able to forecast their need
          for a particular engine part, enabling them to declare excess new part
          inventory as surplus.

         Three types of engine  parts are  available  in the  after-market:  new
parts;  serviceable  parts (i.e.  used parts that were removed from aircraft and
were  inspected and  designated  airworthy by the airline or by an  FAA-approved
repair  station  or  that  were  overhauled  by  an  FAA-approved  entity);  and
unserviceable parts (i.e. used parts that were removed from aircraft that may or
may not be  repairable).  The  decision  as to which type of part to purchase is
made based upon the relative price and  availability of parts,  the condition of
the specific part, the repair  facilities that have been used during the life of
the part,  the previous  owners of the part,  the life remaining on the part (if
applicable),  the maintenance  policy of the airline which will use the part and
other considerations.

         Commercial  aircraft  engine  parts are  available  from a  variety  of
sources,   including  OEMs,  third  party  dealers,  brokers  (who  maintain  no
inventory),  overhaul  and repair  facilities,  lessors and  airline  operators.
Relationships  in the  engine  parts  market are  complex;  at  different  times
participants  may act as both buyers and sellers,  suppliers  and  clients.  The
Company,  for  example,  both buys from and sells to  airlines,  OEMs,  lessors,
operators of refurbishment facilities and other independent dealers.

         Sources  for  surplus  aircraft  engines  do not exist as an  organized
market,  and the  Company  must  rely on field  representatives  and  personnel,
advertisements  and its  reputation as a buyer of surplus  aircraft  engines and
components in order to generate  opportunities to purchase these materials.  The
market for bulk sales of  surplus  aircraft  engines  and  components  is highly
competitive,  in some instances  involving a bidding process.  While the Company
has been able to purchase surplus  aircraft engines in this manner  successfully
in the past,  there can be no  assurance  that such parts will be  available  on
acceptable terms when needed in the future.

         The engine after-market consists of several business segments including
engine sales, leasing, maintenance management, parts distribution,  parts repair
and overhauls.

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Kellstrom and IASI are active in most of these segments, either directly through
in-house  activity or  indirectly,  by contracting  refurbishment  work to third
party suppliers.

Products

         Engine spare parts are  purchased  by customers in both the  commercial
and  military  sectors.  The Company is active only in the  commercial  aircraft
sector,  which itself is divided into large jet transports,  smaller  commercial
aircraft (known as general aviation aircraft) and helicopters.  General aviation
includes both jet and propeller-driven planes for business and personal use. The
Company  currently  specializes  in the large jet segment of the  business.  The
Company has chosen not to get  involved in  turbojet  technology,  which is used
mainly in older commercial engines and in military engines. The Company also has
not entered the turboprop market which is typically low-end in terms of cost per
unit.

         The Company  specializes in providing  refurbished,  new and as-removed
parts for large fan engines, particularly the Pratt & Whitney JT9D engine and to
a lesser  extent the PW 4000 engine,  as well as  narrow-body  engines  (through
IASI) such as the Pratt & Whitney JT8D and PW 2000 engines. The JT9D and PW 4000
power the Boeing 747 and 767  aircraft,  McDonnell  Douglas MD-11 and the Airbus
A300/310/330,  and the JT8D and PW2000 engines power the Boeing 727, 737 and 757
aircraft  as well as the  McDonnell  Douglas  MD-80  and DC-9  series  aircraft.
Moreover, IASI recently entered the CFM-56 engine market which powers the Boeing
737-300,  -400 and  -500  aircraft  as well as the  Airbus  A320,  A321 and A340
aircraft and the McDonnell  Douglas DC-8. The Company's growth strategy is based
upon its goal of  purchasing  inventory  at  attractive  prices,  its ability to
identify parts for which there should be strong demand and its  concentration on
the  Pratt &  Whitney  engines,  which  represent  the  largest  segment  of the
commercial jet engines and engine parts after-market.  The Company's  management
has developed a systematic  algorithm and management  procedures to assess which
parts will be in demand.

         Purchasers of engine parts have strict approval processes through which
a company may achieve status as an approved  supplier for such  purchaser.  Some
purchasers  maintain a very limited  number of, and will do business  only with,
those companies who are one of their "Approved  Suppliers."  Since the Company's
founding  in 1990,  it has  achieved  "Approved  Supplier"  status  with over 50
purchasers  in six  countries  that  maintain  such a limited  list of "Approved
Suppliers," including the leading aero engine OEMs,  international airlines, and
major aero  engine  refurbishment  and repair  facilities.  In  addition  to the
relationships with those clients for whom the Company is an "Approved Supplier,"
the Company also maintains active  relationships  with many other customers that
utilize a broader list of approved suppliers.

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         Several   manufacturers   dominate  the  market  for  large  commercial
airplanes,  including Boeing,  McDonnell Douglas, and Airbus Industries. A small
number  of  suppliers  provide  the  bulk of  engines  used to power  large  jet
aircraft.  The  suppliers  include  the  Pratt  &  Whitney  division  of  United
Technologies, General Electric, Rolls Royce and CFM International.  Following is
a brief description of the engines for which the Company supplies engine parts:

         The JT9D Engine.  JT9D  engines,  introduced  by Pratt & Whitney in the
late  1960's  are used in Boeing 747 and 767  aircraft,  the  McDonnell  Douglas
DC-10, and Airbus A300/310's. The JT9D was the first commercial turbo fan with a
high bypass  ratio,  enabling  the engine to provide  unprecedented  thrust with
outstanding fuel efficiency and relatively low noise.

         The JT9D engine has flown more than 135 million  hours.  Three thousand
of these  engines were built until  production  ceased in 1990;  2,800 are still
flying on wide body aircraft operated by over 50 airlines.  Kellstrom  estimates
that JT9D engines will be widely used for the next ten to fifteen years. Pratt &
Whitney  continues  to upgrade and improve  in-service  engines to meet  current
noise  and  emissions  requirements,  thus  increasing  the  life  span of these
engines.

         The JT8D Engine.  JT8D engines,  a derivative  military J-52  Turbojet,
were  originally  developed  by Pratt & Whitney  for the Boeing 727  airliner in
1963. The engine is the most widely used engine in commercial  aviation history.
More than 12,000 of the JT8D family of engines have been produced and the engine
is still in production today. A variant of the basic JT8D, called the 200 Series
was introduced in 1977. More than 13,000 of these engines have been manufactured
to date.

         The older,  less fuel efficient JT8D engines are used in the Boeing 727
and 737,  the  McDonnell  Douglas  DC-9,  the  Aerospatiale  Carvelle,  Dassualt
Mercure,  and the C-9 and  C-22,  U.S.  military  versions  of the  DC-9 and 727
aircraft.  The newer 200 Series JT8D engines are used  throughout  the McDonnell
Douglas  MD-80 range of aircraft  models.  The Company  estimates  that the JT8D
engines will be in service for at least ten more years.

         The PW 2000  Engine.  Pratt & Whitney  began  development  in 1974 of a
series  of  advanced   technology  aircraft  engines  to  power  the  commercial
transports of the mid-1980s  and beyond.  The PW 2037,  the first in the series,
was awarded FAA  certification  in December  1983.  These highly fuel  efficient
engines feature high thrust, low noise and reduced emissions. The PW 2000 series
engines  are used to power  the  Boeing  757 and are  considered  to be  current
technology  engines  that  are  likely  to  continue  in  service  for at  least
twenty-five more years.

         The PW4000 Engine. In 1982, Pratt & Whitney launched development of the
PW 4000 Series turbofan - an all-new  commercial jet engine series with improved
fuel efficiency and higher takeoff thrust rating.  The PW4000 entered commercial
service in mid 1987.  The PW4000 is  designed  for use on current  and  advanced
versions of such

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wide-body  aircraft as the Airbus A300, A310, A330, the Boeing 747, 767, 777 and
the  McDonnell  Douglas  MD-11.  These  engines  are  considered  to be  current
technology  engines  and  are  likely  to  continue  in  service  for  at  least
twenty-five more years.

         The  CFM-56  Engine.  IASI  has  recently  added  CFM56  parts  to  its
inventory.  The CFM56 is  manufactured  by CFM  International,  a joint  venture
between  General  Electric and SNECMA,  and is the second most popular engine as
measured  by number of aircraft in the  worldwide  fleet  powered by this engine
type.  The CFM56 is used to power the Boeing 737 and the Airbus  A320/A321/A340,
and the  McDonnell  Douglas  DC-8.  These  engines are  considered to be current
technology  engines  and  are  likely  to  continue  in  service  for  at  least
twenty-five more years.

         The development of a new engine for a commercial aircraft can take five
to fifteen  years.  Often,  an engine  becomes  the basis for  numerous  series,
tailored to the needs of  particular  aircraft.  For example,  the JT9D and JT8D
engine families for Pratt & Whitney include more than 15 models each.

Quality Control

         Engine parts are generally more expensive, flight critical, technically
complex and utilize more  specialized  heat tolerant  metals than other aircraft
parts.  A high  standard for quality  control and  documentation  is an absolute
necessity.  The  history of a given part from the date of  original  manufacture
must be documented and available to regulators and  maintenance  personnel.  The
Company is dependent on third-party FAA certified  repair  facilities to perform
repair  services to bring surplus  aircraft  engines held for resale and certain
engine components into a condition of airworthiness so that the Company can sell
such equipment.

         The Company's  management  believes that obtaining  "Approved Supplier"
status  is  heavily  dependent  on  quality  assurance,  and that the  Company's
comprehensive  quality assurance program is among the best in its industry.  The
Company is a member of the Coordinating Agency for Supplier Evaluation (CASE), a
self-governing  organization  formed by the airlines  that  evaluates and audits
parts  suppliers  and  repair  stations,   as  well  as  the  Airline  Suppliers
Association.  In addition, in September 1996, the Company received certification
under ISO 9002. The ISO 9002 designation  indicates a quality assurance standard
recognized by leading companies  throughout the world. The Company was the first
aftermarket supplier of commercial jet engines and engine parts in North America
to receive  such a  certification.  In  addition,  the Company is one of the few
vendors in the  industry to have  invested in a  sophisticated  optical  imaging
system for document storage and retrieval. This system provides a high degree of
traceability by serial number for parts sold by the Company.

Customers

         The Company's customers include airlines, OEMs, lessors, operators of
refurbishment facilities and other independent dealers.  Five of the Company's

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customers (each individually accounting for over 10% of trade receivables and/or
revenues at December 31, 1995 and December  31, 1996)  collectively  account for
94% and 96%  (1995) and 64% and 55% (1996) of trade  receivables  and  revenues,
respectively.  Certain  significant  customers  vary from  period to period as a
result of the large unit prices associated with whole aircraft engine sales. The
loss of, or significant  curtailments of purchases by, the Company's significant
customers  could  have a  material  adverse  effect on the  Company's  business,
financial condition and results of operations.

Competition

         The aviation  after-market is highly competitive.  Competition is based
on product  quality,  the ability to provide needed parts quickly and price. The
largest segment of the after-market is served by OEM's.  However, the relatively
high  overhead  and  slow  response   times  which   characterize   these  large
organizations   can  present  a  handicap  in  a  fast-moving,   price-sensitive
marketplace. OEMs generally concentrate on selling new parts, leaving the market
in serviceable and refurbished  parts to other suppliers.   OEM-manufactured new
parts generally do not compete with refurbished parts.

         The largest  resellers (with annual revenues of approximately  $70-$100
million  generated from engine spare parts related  reselling  activity) include
companies such as AAR Corp. and AGES Group.  There are  approximately 10 midsize
competitors  with  annual  engine and  engine  parts  sales of $10-$30  million.
Midsize resellers include AVTEAM and the Company.  A large portion of the market
revenue is generated  by over 50 small  aftermarket  suppliers  and brokers with
$1-$10  million  in  annual  sales.  As  a  result  of  industry  consolidation,
management  expects  that a number of these  smaller  operators  will  either be
acquired or will have difficulty competing in this changing market. There can be
no  assurance  that the Company  will  continue to compete  effectively  against
present and future  competitors  or that  competitive  pressures will not have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

         In addition,  the engine parts supply business has been reshaped by the
widespread  adoption of ILS - the Inventory  Locator Service.  The ILS lists the
availability of thousands of types of parts from brokers,  distributors,  repair
facilities and airlines.  The listing  includes the quantity of parts available,
the condition of the parts,  when the parts are available and a contact for more
information. The ILS has created a much freer flow of information concerning the
supply and demand for particular parts. Dealers now must compete not only on the
basis of their  relationships with customers and knowledge regarding a potential
source  for  products,  but also on the  quality  of the  parts  available,  the
documentation tracing the history of the parts and the price.

                                      -10-


<PAGE>

<PAGE>



Government Regulation

         The aviation  industry,  including the life and  maintenance  of engine
parts,  is highly  regulated in the United States by the FAA and the  equivalent
regulatory  agencies in other countries.  While the Company's business of buying
and selling engine parts is not directly regulated, the aircraft engines, engine
components and airframe  materials must be  accompanied by  documentation  which
enable the customers to comply with applicable regulatory requirements. Aircraft
operators  must  maintain  logs  concerning  the  utilization  and  condition of
aircraft engines, life-limited engine components and airframes.

         Management  believes  that the  industry  will be subject to  continued
regulatory activity. Increased oversight has and will continue to originate with
quality assurance departments at airline operators. The Company has been able to
meet  all  such  requirements  to  date,  and  believes  that it will  meet  any
additional requirements that may be imposed. There can be no assurance, however,
that new,  more  stringent  government  regulations  will not be  adopted in the
future or that any such new regulations,  if enacted,  would not have an adverse
impact on the Company.

Environmental Matters

         The Company believes that it is in compliance in all material  respects
with applicable  environmental laws and regulations and due to the nature of the
Company's  business  there is  little  or no direct  cost  associated  with such
compliance.

Employees

         At  the  end  of  1996,  Kellstrom  had 18  full-time  employees  and 2
part-time  employees,  and  IASI  had 16  full-time  employees  and 2  part-time
employees.  None of the  Company's  or IASI's  employees  are members of a labor
union.

Item 2.  Description of Property.

         The Company owns its newly built 31,000 square foot facility located on
its 2.5 acres in the Sawgrass  International  Corporate Park,  Sunrise,  Florida
which is near Fort  Lauderdale.  Kellstrom's  address  is 14000  N.W.  4 Street,
Sunrise,  Florida  33325.  The property is subject to a ten-year  fixed interest
rate  (10.49%  per annum)  mortgage  held by  BankAtlantic.  The  balance of the
mortgage note as of December 31, 1996 was $1,194,277.

         The  Company  leases  a  facility,   assumed  in  connection  with  the
acquisition  of IASI,  located at 821 Industrial  Road,  San Carlos,  California
94070.  The property is subject to a lease which  expires  January 31, 1999 (the
"IASI Lease").  Under the terms of the lease, the current monthly base rental is
$20,903 per month,  subject to increases  each year based on the consumer  price
index.

                                      -11-



<PAGE>

<PAGE>



         In  addition,  the  Company's  Board  of  Directors  has  approved  the
construction  of a new facility in the Fort  Lauderdale  area in anticipation of
the expiration of the IASI Lease and the consolidation of operations in a single
location.  The cost and scope of the new facility have not yet been  determined,
but  management  believes  that the  necessary  funds  for  construction  can be
obtained from  financial  institutions  in the area and from the Company's  cash
resources.  See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

Item 3. Legal Proceedings.

         There are no material legal proceedings  pending against the Company or
any of its property.

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

         None.

                                      -12-



<PAGE>

<PAGE>



                                     PART II

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

         The Common Stock was quoted on the OTC Bulletin  Board under the symbol
ITAC from April 19, 1994 to August 18, 1995, at which time the Company's  Common
Stock was listed on the National  Association  of Securities  Dealers  Automated
Quotation  System,  Inc.  ("Nasdaq")  SmallCap  market  under the  symbol  KELL.
Following  the filing of this Report,  the Company will apply for listing of the
Common Stock on the Nasdaq National Market.

         The following table sets forth the range of high and low bid prices for
the Common Stock for the last two years,  as reported by the OTC Bulletin  Board
and Nasdaq, as applicable.  The quotes represent  "Inter-dealer"  prices without
retail  markups,  markdowns or  commissions  and may not  necessarily  represent
actual transactions.
<TABLE>
<CAPTION>

                                                                                     Common Stock  
                                                                                     --------------
                                                            High                            Low

<S>                                                         <C>                         <C>
Year Ended December 31, 1995:

First Quarter.............................................  4 13/16                         3 7/8

Second Quarter............................................  5 1/2                           4 3/4

Third Quarter.............................................  5 3/4                           5

Fourth Quarter............................................  6 3/8                           4 7/8

Year Ended December 31, 1996:

First Quarter.............................................  7 1/4                           4 3/4

Second Quarter............................................  8 7/8                           6 1/2

Third Quarter.............................................  8 3/8                           7

Fourth Quarter............................................  8 9/16                          7 3/8
</TABLE>


         As of March 25,  1997,  there  were  7,495,583  shares of Common  Stock
outstanding,  held by 56  stockholders  of record.  The  Company  believes  that
certain holders of record hold a substantial number of shares of Common Stock as
nominees for a significant  number of beneficial  owners.  The closing price for
the Company's Common Stock on March 25, 1997 was $14 1/8.

         Kellstrom has not paid any cash  dividends on its Common Stock to date.
The payment of dividends is within the discretion of the Board of Directors.  It
is the present  intention  of the Board of  Directors to retain all earnings for
use in the

                                      -13-



<PAGE>

<PAGE>



Company's business  operations and,  accordingly,  the Board does not anticipate
declaring any dividends in the foreseeable future.

Item 6. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.

         The following should be read in conjunction with Kellstrom's  financial
statements and the related notes thereto included elsewhere herein.

         Kellstrom,  formerly named Israel Tech Acquisition Corp., was formed in
December  1993 as a SPAC,  the  objective of which was to  consummate an initial
public offering and then to enter into a business  combination with an operating
business.  In April 1994 Kellstrom  consummated the initial public offering.  On
June 22, 1995,  Kellstrom  completed the acquisition of substantially all of the
assets,  liabilities  and operations of the commercial jet aircraft  engine part
distribution business of Kellstrom Industries,  Inc., an indirect,  wholly-owned
subsidiary of Rada Electronic  Industries,  Inc. In connection with the Closing,
Kellstrom  changed its name from  Israel Tech  Acquisition  Corp.  to  Kellstrom
Industries,  Inc.  The  operations  of the SPAC  are no  longer  pertinent  and,
accordingly,  this  analysis  of results of  operations  will focus upon the pro
forma  combined  operating  results of Kellstrom and the SPAC for the year ended
December  31,  1995  (as  set  forth  in Note  15(b)  to  Kellstrom's  financial
statements  included  elsewhere  herein) and upon actual  operating  results for
Kellstrom  for the year ended  December  31,  1996 as  reported  in  Kellstrom's
financial statements included elsewhere herein.

         On January 15,  1997,  Kellstrom,  through a  wholly-owned  subsidiary,
completed  the  acquisition  of   substantially   all  the  assets  and  certain
liabilities  of IASI for $26.5 million in cash and warrants to purchase  500,000
shares of Common Stock at $9.25 per share.  The warrants expire in January 1999.
See Note 15(c) to the Kellstrom's  financial statements for a pro forma combined
balance  sheet of the  Company  and IASI at  December  31,  1996 and a pro forma
combined statement of earnings for 1996. Historical financial statements of IASI
appear as Exhibits to this report.  The  following  discussion  does not reflect
IASI's operations.

         The  Company  has  only a  limited  operating  history  upon  which  an
evaluation of the Company and its  prospects can be based.  Although the Company
has  historically  experienced  increasing net sales, the Company may experience
significant  fluctuations  in its gross  margins  and  operating  results in the
future,  both on an annual and a  quarterly  basis,  caused by various  factors,
including  general  economic  conditions,  specific  economic  conditions in the
commercial  aviation  industry,  the  availability and price of surplus aviation
material,  the size and timing of customer orders,  returns by and allowances to
customers and the cost of capital to the Company.  In a strategic  response to a
changing,  competitive  environment,  the Company may elect from time to time to
make certain  pricing,  product or marketing  decisions,  and any such decisions
could  have a  material  adverse  effect on the  Company's  periodic  results of
operations,  including  net  sales  and net  income  from  quarter  to  quarter.
Therefore, comparisons

                                      -14-



<PAGE>

<PAGE>



of recent net sales and operating  results of the Company should not be taken as
indicative  of the  results of  operations  that can be  expected in the future.
There  can be no  assurance  that the net  sales and  operating  results  of the
Company will continue at their current  levels or will grow, or that the Company
will be able to achieve sustained profitability on a quarterly or annual basis.

         The Company's  inability to collect receivables from a substantial sale
could  adversely  affect  the  Company's   financial  position  and  results  of
operations for a particular period although the Company's policy is to generally
sell whole engines for cash at closing. Although the Company's bad debt loss was
zero for the year ended December 31, 1996, the Company  anticipates  that it may
incur  some bad debt  losses  in the  future  as its  customer  base  grows.  In
addition, the Company expects to experience greater exposure to its customers as
a result,  in part,  of the  implementation  of its  program  for the short term
leasing of aircraft engines.

Results of Operations.

         Net  revenues  increased  69% from  $14,708,178  (pro forma) in 1995 to
$24,921,587  (actual) in 1996. The Company was able to increase its net revenues
in 1996 primarily due to the increased availability of cash resources to acquire
inventory for resale. The Company believes that the availability of inventory is
a critical  factor in achieving sales growth in its industry.  In addition,  the
Company's  foreign  revenues  increased  by over  $1,000,000  in 1996 due to the
Company's expansion of its product lines to include the PW4000 engine type which
is widely used by the Company's foreign customers.

         Gross  margins  increased  68% from  $5,161,784  (pro forma) in 1995 to
$8,686,428  (actual) in 1996,  but decreased as a percentage of sales from 35.1%
for 1995 to 34.9% for 1996.  The decrease in gross  margins as a  percentage  of
sales in 1996  compared to 1995 resulted  primarily  from  unusually  high gross
margins of nearly 40%  experienced  by the Company  during the fourth quarter of
1995 as a result of several large, very profitable engine sales. Management does
not anticipate that the unusually high margins experienced in the fourth quarter
of 1995 will continue on a regular basis.

         Total selling,  general and administrative  expenses increased 47% from
$2,382,172 (pro forma) in 1995 to $3,491,457  (actual) in 1996, but decreased as
a percentage of net revenues from 16.2% to 14.0%. The increase in these expenses
was a result of expanding the Company's  office and warehouse  facilities  along
with its sales,  administrative  and warehouse  personnel  levels to efficiently
address the Company's  increased  inventories and the resultant increased volume
of revenues.

         Depreciation and amortization  expense increased 26% from $350,904 (pro
forma) in 1995 to $441,854  (actual)  in 1996,  but  decreased  from 2.4% of net
revenues  in 1995 to 1.8% of net  revenues  in 1996.  The  increase  in the 1996
expense is attributable

                                      -15-



<PAGE>

<PAGE>



primarily to the increased  depreciation expense resulting from the expansion of
the Company's office and warehouse facilities during 1996.

         Interest expense (net of interest income)  increased 448% from $117,641
(pro forma) in 1995 to  $644,527  (actual)  in 1996 due to  increased  borrowing
levels necessary to expand the Company's  inventory levels, as well as financing
of the  expansion of the  Company's  office and  warehouse  facilities.  Further
increases in interest  expense can be  anticipated  in the future as the Company
continues to expand its inventory levels and facilities to support future growth
in operations.

         Net  income  increased  83%  from  $1,444,417  (pro  forma)  in 1995 to
$2,646,343  (actual) in 1996.  Net income per share  increased by 50% from $0.30
per share in 1995 to $0.45 per share in 1996.  Net income per share is  reported
based upon the weighted average of the common shares  outstanding along with the
inclusion  of the effect of the  options  and  warrants  outstanding  during the
periods  using the  modified  treasury  stock  method.  The effect of this is to
increase  the  weighted  average  number of shares  outstanding  from  2,764,757
(weighted  average actual  outstanding) to 7,188,095 for 1995 and from 2,943,902
(weighted average actual outstanding) to 8,147,455 for 1996.

Liquidity And Capital Resources.

         The Company's  working capital was $13,735,157 as of December 31, 1996,
an increase of $4,064,785 since December 31, 1995. The principal reasons for the
increase in working  capital were the increase in inventories and an increase in
cash resulting from the exercise of warrants.

         The primary use of funds during the twelve month period ended  December
31,  1996  was to  purchase  inventory  ($3,871,351),  to  construct  additional
warehouse  and office  facilities  and  provide  the  necessary  furnishing  and
fixtures  for the new  facility  ($1,372,244)  and for the  exercise of the Rada
Warrant  ($1,200,000).  The source of the funds  utilized for these purposes was
from financing activities ($5,106,870) and the remainder was from operations.

         The Company intends to use its available  funds to acquire  inventories
of  jet  aircraft  engines  and  jet  engine  parts.   Greater  availability  of
inventories  will better enable the Company to continue to increase its revenues
as well as to encourage  the  development  of strategic  relationships  with new
customers.  The  Company  intends to finance  its  inventory  expansion  program
through its current  credit  facilities  and through the  employment of its cash
flows along with the management of trade credits.

         The Company  contracted  for the  expansion of its warehouse and office
facilities during the third quarter of fiscal 1995. This expansion was completed
in September,  1996. These expanded facilities  accommodated increased inventory
purchases to enable the Company's anticipated future growth and also allowed the
Company to eliminate the cost of leasing off-site warehouse facilities. The cost
of this expansion was financed principally from a $750,000 construction/mortgage
loan. The Company intends to

                                      -16-



<PAGE>

<PAGE>



acquire  land and  construct a new  facility  to  accommodate  the  consolidated
Kellstrom/IASI businesses. This project is scheduled to be commenced in 1997 and
to be  completed by  mid-1998.  The cost and scope of the new facility  have not
been  determined,  but  management  believes  that the funds  necessary for this
project can be  obtained  from  financial  institutions  in the  vicinity of the
facility and from the Company's cash resources.

         The Company entered certain  short-term  engine leases during 1996. The
Company  believes  this  activity  should  allow it to liquidate  the  remaining
maintenance  value of jet engines on a profitable basis by realizing both rental
income as well as maintenance reserve fees charged to the Company's engine lease
customers for their utilization of the engines. Upon the full consumption of the
remaining  maintenance  value in each  engine,  the Company  will  evaluate  the
engine's condition in order to determine if such engine should be refurbished or
should be disassembled into piece parts in support of the Company's parts supply
business.

         During May 1996,  the Company  and its  then-lead  bank,  BankAtlantic,
completed an increase of the Company's  working capital line of credit,  secured
by substantially all the Company's assets, from $3.0 million to $5.0 million and
also agreed upon a new guidance line of $3.0 million to fund the  acquisition of
specific  jet engines.  The interest  rate on these lines was 1% over the bank's
prime rate with the interest payable monthly. Principal on the guidance line was
payable upon the earlier of the disposition of the underlying  collateral or the
line maturity date. The working  capital line and the guidance line both were to
mature on May 31, 1997.

         On December  23,  1996,  the  Company  entered  into a  Revolving  Loan
Agreement with Barnett Bank,  N.A. This  Revolving  Loan Agreement  replaced the
working capital line and the guidance line with BankAtlantic,  and increased the
Company's  bank  credit  lines  from $8.0  million  to $15.0  million.  This new
arrangement  also  reduced the  interest  rate paid by the Company from 1% above
BankAtlantic's  prime rate to 1/8% below  Barnett's  prime rate (which  interest
rate  payable  by the  Company  was  8.125%  at  December  31,  1996) or, at the
Company's  option, to LIBOR (which was 5.50 at December 31, 1996) plus 275 basis
points.   Indebtedness   under  the  Revolving  Loan  Agreement  is  secured  by
substantially all the Company's assets. The advance rate formulas under this new
bank  facility  were   liberalized  to  provide  for  advances  against  foreign
receivables.  This  modification  is  important  to the  Company as its  foreign
business has recently represented a greater percentage of its net revenues.

         The    $1,194,277     first    mortgage     (including    a    $750,000
construction/mortgage  loan) held by  BankAtlantic  and secured by the Company's
office and warehouse  facilities  continues to remain in place.  The interest on
the mortgage is 10.49% per annum.  Principal and interest are payable in monthly
installments  of $20,238.  Principal is amortized over a ten-year  period with a
final payment of $20,238 due May 2005.

         During 1996 the Company's highest  utilization of its BankAtlantic $5.0
million  working   capital  line  was  $4,251,000  and  the  Company's   highest
utilization of the

                                      -17-



<PAGE>

<PAGE>



BankAtlantic  guidance  line was $3.0  million.  The balance due at December 31,
1996 on the Barnett  Bank  revolving  credit  facility  was  approximately  $5.2
million.

         The  acquisition  of IASI was  completed  on January  15,  1997 and was
primarily  financed  through the issuance of $15 million in senior  subordinated
debt (the  "Senior  Debt") and  warrants  and from the  proceeds of a $6,000,000
subordinated  bridge loan ("Bridge Loan") and warrants with the balance from the
Company's  working  capital.  The Company also  assumed  IASI's  existing  debt,
including  various credit  facilities  with Union Bank of California  secured by
IASI's  assets,  which  facilities  provided  for  credit of up to a maximum  of
approximately  $20,000,000  as of the date of the  acquisition.  The  amount  of
credit  outstanding as of the date of acquisition was  $14,555,826.  Interest on
the credit  facilities  accrues  daily and ranges  from .50% to 1.0% above Union
Bank's prime rate, and is payable monthly.

         The Senior Debt is held by The Equitable Life Assurance  Society of the
United States ("Equitable").  The interest rate on the Senior Debt is 11.75% per
annum, payable quarterly.  Additionally,  warrants to purchase 305,660 shares of
Common Stock were issued to Equitable.  The warrants are  exercisable at $10 per
share and expire on January 15, 2004. Principal on this debt is payable in three
equal  annual  installments  beginning  January 15, 2002.  An advance  principal
payment of up to  $3,750,000 is permitted  (along with a premium  payment of 1%)
prior to December 31, 1998 from the  proceeds of the  exercise of the  Company's
publicly traded warrants.  It is anticipated by the Company that such an advance
payment will be made during this advance payment period.  Moreover,  the Company
may, at its option,  redeem up to $4.5  million  principal  amount of the Senior
Debt  concurrently  or within  five  days  after the  occurrence  of any  public
offering of the Company's  Common Stock as long as the principal  balance of the
debt is not reduced below $10.5 million.

         The Bridge Loan is due April 15, 1997.  In  connection  with the Bridge
Loan, the Company issued  warrants to purchase  75,000 shares of Common Stock at
an  exercise  price of $10 per share,  exercisable  until  three  years from the
repayment of the Bridge  Loan.  A portion of the Bridge  Loan,  in the amount of
$1,000,000, was repaid on February 12, 1997.

         The Company  called its  publicly  traded  warrants on February 4, 1997
pursuant  to  their  terms.   There  were  4,166,510  publicly  traded  warrants
outstanding at December 31, 1996.  Each warrant  entitles the holder to purchase
one share of the Company's Common Stock at an exercise price of $5.00 per share.
The Company received total proceeds of $22,961,950 from the exercise of warrants
during the period from October 1, 1996 to March 21, 1997.

         The  Company's  management  believes  that cash  flow from  operations,
combined with the Company's  borrowing  facilities  should be sufficient for the
Company's  current level of operations.  In addition,  the Company is seeking to
further  increase its bank financing to expand its facility (as described  above
and  under  the  caption  "Properties")  and to  increase  inventory  purchases.
However, the Company may elect to seek equity

                                      -18-



<PAGE>

<PAGE>



capital in the future  depending upon market  condition and the capital needs of
the Company.

         Effective  January 1, 1996, the Company adopted  Statement of Financial
Accounting  Standards No. 123,  "Accounting  for Stock-Based  Compensation."  As
provided for in Statement  No. 123, the Company has elected to continue to apply
the  provisions  of APB No. 25,  "Accounting  for Stock Issued to  Employees" in
accounting for stock-based  compensation  and to provide pro forma disclosure of
what the  impact  on the  Company's  financial  results  would  have been had it
applied SFAS No. 123. The disclosures required by the new statement are included
in Note 10 to Kellstrom's financial statements.

Item 7.           Financial Statements.

         Kellstrom's   financial   statements  and  IASI's  combined   financial
statements  for 1995 and 1996 and the  respective  notes  thereto  are set forth
herein  as  Exhibits  to this  report.  An index of these  financial  statements
appears in Item 13.

Item  8.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure.

None.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.

Executive Officers and Directors

         The  directors  and  executive  officers  of the  Company,  their ages,
positions in the Company, and the dates of their initial election or appointment
as director or executive officer are as follows:
<TABLE>
<CAPTION>

                                                                                                 Officer or
Name                       Age      Position with the Company                                    Director Since
-----------------------------------------------------------------------------------------------------------------
<S>                        <C>       <C>                                                       <C> 
Yoav Stern (1)             43       Chairman of the Board                                        December 1993
Zivi R. Nedivi             39       Chief Executive Officer, President and Director              June 1995
John S. Gleason            47       Chief Financial Officer, Executive Vice President,Treasurer  July 1995
Fred von Husen             52       Executive Vice President                                     January 1997
Anthony Motisi             38       Vice President and Secretary                                 June 1995
Donald Reynolds            58       Vice President, Technical Operations                         January 1997
Paul F. Steele             37       Vice President, Purchasing                                   June 1995
Ian McDonald               45       Vice President, Sales                                        January 1997
Thomas McMillen (1)        44       Director                                                     October 1996
David Jan Mitchell (1)     36       Director                                                     December 1993
</TABLE>

------------------
(1)    Member of the Audit Committee.

                                      -19-



<PAGE>

<PAGE>



         Yoav Stern is the  Chairman of the Board and a director of the Company.
Mr.  Stern is a  principal  of Helix  Capital  Corporation,  L.L.C.,  a merchant
banking firm  ("Helix").  From the Company's  inception until June 22, 1995, Mr.
Stern was the Co-Chief  Executive  Officer and Co-President of the Company.  Mr.
Stern has been a director of the Company  since its  inception.  Mr. Stern was a
Co-CEO of European Gateway  Acquisition  Corporation  ("EGAC") since March 1995.
EGAC  acquired  Bogen  Communications,  Inc.  and  changed  its  name  to  Bogen
International,  Inc.  ("Bogen") in August 1995. Bogen's shares are traded on the
American Stock Exchange. Since that time, Mr. Stern has served as a director and
member of the  executive  committee of Bogen.  From February 1994 to April 1995,
Mr. Stern served as a director of Random  Access,  Inc., a public company traded
on the Nasdaq National  Market,  which is engaged in the information  technology
business.  From January 1993 to September  1993,  Mr. Stern was  President and a
director  of  WordStar  International,  Inc.  ("WordStar"),  which is engaged in
research and  development and worldwide  marketing and  distribution of software
for business  and  consumer  applications.  Mr.  Stern  structured  the business
combination  of WordStar with two other public  companies,  after which WordStar
changed its name to SoftKey International,  Inc. ("SoftKey").  SoftKey is traded
on the Nasdaq  National  Market.  Mr.  Stern is  currently a director  of, and a
consultant  to,  SoftKey.  From March 1990 to December  1992, Mr. Stern was Vice
President of Business Development of Elron Electronic Industries Ltd. ("Elron"),
a  multinational  high-technology  public  holding  company based in Israel with
aggregate  annual  revenues  in  excess of $900  million.  Elron is  engaged  in
operating and investing in companies in the technology-led  industry,  including
medical diagnostic imaging,  advanced defense  electronics,  data communication,
manufacturing automation, semiconductor and software products, and sophisticated
productivity  tools.  Elron is traded on both the Nasdaq National Market and Tel
Aviv Stock  Exchange.  From August 1988 to February 1990, Mr. Stern was director
of Business Development at Keter Plastics Ltd., a private company engaged in the
manufacture of injection molded plastic products. From December 1988 to February
1990, he was the  President,  Chief  Executive  Officer and a director of Lipski
Ltd., an Israel public company traded on the Tel Aviv Stock  Exchange,  which is
engaged in the development, production and marketing of injection molded plastic
products.  From January 1985 to June 1988,  he was founder,  President and Chief
Executive  Officer of  Co/Rent  Computer  Rentals,  a private  company  based in
Canada,  active in the rental of microcomputers.  From February 1973 to December
1983,  Mr.  Stern  served in the Israeli Air Force as a fighter  pilot,  avionic
systems  officer,  commander of Operational  Training Unit and a Deputy Squadron
Commander. Mr. Stern earned a Practical Engineering Diploma in advance mechanics
and automation from ORT Technological College, Israel, graduated from the Israel
Air Force Academy and earned a B.S. degree in Mathematics  and Computer  Science
from Tel Aviv University.

         Zivi R. Nedivi has been the Chief  Executive  Officer and a director of
the Company since June 22, 1995.  Mr. Nedivi was the founder,  President and CEO
of Kellstrom Industries,  Inc., an indirectly  wholly-owned  subsidiary of Rada,
from its  establishment  in 1990 until June 1995. From September 1994 until June
1995,  Mr.  Nedivi also served as  Corporate  Vice  President  of Rada, a public
company traded on the Nasdaq National Market which is engaged in the business of
avionics for the commercial and military aviation industries.  From October 1984
to September 1990, Mr. Nedivi was co-founder and General Manager of Maakav Ltd.,
a private  aviation  management  company  based in  Israel.  Maakav  represented
certain  American  companies  in  Israel,  including  companies  active  in  the
distribution of aircraft parts. From February 1986 until October 1990 Mr. Nedivi
was also  co-founder and director of NBC Aviation Inc., a private  company based
in Texas active in the sale of commercial jet engines and related components.  A
graduate of the Israel Air Force  Academy,  Mr.  Nedivi served in the Israel Air
Force as an F-15  fighter  pilot for seven years and held the rank of Major.  He
also served as a Human Engineering  Consultant to Israel Aircraft  Industries on
the Lavi fighter aircraft program.

         John S. Gleason joined the Company in July 1995 as its Chief  Financial
Officer and was appointed  Treasurer in August 1995 and Executive Vice President
in January 1997.  From January 1986 until July 1995,  Mr.  Gleason served as the
Vice President of Finance of IASI. Mr. Gleason was also  responsible for buying,
selling and leasing IASI's  commercial jet engines on a worldwide basis, as well
as the

                                      -20-



<PAGE>

<PAGE>



procurement of jet engine inventory consignment  arrangements.  Mr. Gleason is a
Florida and California CPA and earned a B.S.  degree in accounting  from Florida
Atlantic University in 1971.

         Fred von Husen joined the Company in January 1997 as its Executive Vice
President.  Mr. von Husen was IASI's President and Chief Executive Officer since
1987. Mr. von Husen has 32 years experience in the aviation  industry  primarily
in engine and aircraft  maintenance plus financial and organization  management.
Prior to joining IASI, he served as Vice  President of Operations and earlier as
Vice  President of Technical  Services at Aircal,  a passenger  airline based in
California.  Mr.  von Husen also  spent 17 years at United  Airlines  in various
positions including engine maintenance, engineering, and corporate planning.

         Anthony  Motisi  has been a Vice  President  since June 22,  1995.  Mr.
Motisi was the Vice President of Operations for Kellstrom Industries,  Inc. from
December 1994 until June 22, 1995 and Director of Sales and Marketing  from July
1993 until  December,  1994. In 1980, Mr. Motisi earned a B.S. degree in finance
from the University of Florida. Prior to joining Kellstrom Industries, Inc., Mr.
Motisi  held the  position of Manager of Engine  Parts  Sales at Aviation  Sales
Corporation.

         Donald  Reynolds  became Vice  President  of  Technical  Operations  in
January  1997.  Mr.  Reynolds  served in the same role at IASI since  1985.  Mr.
Reynolds is responsible for inventory management,  quality control,  purchasing,
outside  vendor  business,  shipping and receiving,  and all technical  services
activities.  Mr.  Reynolds  also spent 24 years with United  Airlines in various
positions including commercial airline engine maintenance,  production planning,
customer service and contract administration.

         Paul F. Steele has been a Vice  President of the Company since June 22,
1995. Mr. Steele was the Vice President of Purchasing for Kellstrom  Industries,
Inc. from  December  1994 until June 22, 1995 and a Director of Operations  from
November 1993 until December 1994. Prior to joining Kellstrom Industries,  Inc.,
Mr. Steele held the position of Vice President of Technical Sales at AGES Group,
a subsidiary of Volvo Flygmotor and supplier of commercial aircraft engines. Mr.
Steele graduated from Bolton Street College, Dublin.

         Thomas  McMillen became a director in October 1996. Mr. McMillen served
three  consecutive  terms in the U.S. House of  Representatives  from the Fourth
Congressional District of Maryland (1987 to 1993), and is currently Chairman and
CEO of Complete Wellness Centers, Inc., a physician practice management company.
He served as Chief  Administrative  Officer of  CliniCorp.,  Inc.,  an owner and
operator of  chiropractic  clinics,  from November 1993 to March 1994.  While in
Congress,  Mr.  McMillen  served on the  Transportation,  Aviation  &  Materials
Subcommittee  of the Science,  Space & Technology  Committee,  as well as on the
Energy and Commerce Committee. Mr. McMillen serves on the Boards of Directors of
a number of public companies,  including Integrated Communication Network, Inc.,
C.H.G. Inc., Commodore Applied Technologies, Inc. and Orion Acquisition Corp. I.
He is a member of the Board of Visitors of the University of Maryland  School of
Public  Affairs  and  is  National   Chairman  of  the  University  of  Maryland
President's  Club. He is an Advisory  Council Member of the Paul Nitze School of
Advanced  International  Studies of the Johns Hopkins University and is a member
of the Board of Directors of the  International  Visitors Center. He also serves
on the  Democratic  National  Committee's  Business  Council.  Since  1993,  Mr.
McMillen has, at the request of President  Clinton,  co-chaired the  President's
Council on Physical Fitness and Sports.  Mr. McMillen  received a B.S., Phi Beta
Kappa,  in  Chemistry  in 1974 from the  University  of Maryland  and was also a
Rhodes Scholar.

         Ian McDonald  joined the Company in January  1997 as Vice  President of
Sales. For ten years prior to joining the Company,  Mr. McDonald vas Senior Vice
President of AGES Group.  Earlier in his career,  Mr. McDonald was with Canadian
Airlines where he was manager of power plant maintenance, the airline's aircraft
engine and overhaul  operations.  In 1973 he received an Engineering  Technician
Certificate  from the City and Guilds of London,  part of Scotland's  Motherwell
Technical College.

                                      -21-



<PAGE>

<PAGE>




         David  Jan  Mitchell  has been a  director  of the  Company  since  its
inception in December 1993. From the Company's  inception until August 21, 1995,
Mr.  Mitchell was the Secretary of the Company.  Since August 1994, Mr. Mitchell
has served as a director of Holmes  Protection Group, a publicly traded security
alarm system  company,  and, since March 1995 has served as a director of Bogen.
Since  January  1991,  he has been the  President  of Mitchell & Company,  a New
York-based merchant banking company he founded. Mitchell & Company is engaged in
venture capital investments and financing.  Mr. Mitchell serves as a director of
several  private  companies,   including  Madah-Com,  an  Israeli-based  company
involved in sound  transmission  and First Home, a company  that markets  houses
developed for first time  homeowners.  Mr.  Mitchell also serves as President of
AmeriCash  LLC, a national  network of  Automated  Teller  Machines  in non-bank
locations.  Since  March  1992,  he has  been a  partner  of  Petherton  Capital
Corporation, a privately held real estate investment company.

         The Board is divided into two classes,  each of which serves for a term
of two years,  with only one class of directors  being elected in each year. The
term of office of the first class of  directors,  presently  consisting of David
Jan Mitchell and Thomas  McMillen,  will expire at the ensuing annual meeting of
stockholders, and the term of office of the second class of directors, presently
consisting  of Yoav  Stern  and  Zivi  R.  Nedivi,  will  expire  at the  second
succeeding  annual meeting of  stockholders.  In each case, a director will hold
office  until the next  annual  meeting  of  stockholders  at which his class of
directors is to be elected.

Compliance with Section 16(a) of the Exchange Act

         The Securities  Exchange Act of 1934, as amended (the "Exchange  Act"),
requires the Company's  executive  officers,  directors and beneficial owners of
more than 10% of a class of the  Company's  stock,  to file reports of ownership
and changes in  ownership  with the  Securities  and  Exchange  Commission  (the
"Commission")  and Nasdaq.  Based  solely upon a review of Forms 3, 4 and 5, and
amendments thereto, furnished to the Company during its most recent fiscal year,
there were individuals  subject to compliance  reporting  requirements under the
Exchange  Act who  failed to file on a timely  basis.  Zivi R.  Nedivi,  John S.
Gleason,  Paul F.  Steele,  David Jan  Mitchell,  Yoav Stern and Anthony  Motisi
failed to file on a timely basis a Form 5, each reporting one exempt transaction
during  fiscal year 1996.  Donald  Reynolds,  Fred von Husen,  Ian  McDonald and
Thomas  McMillen  each failed to file on a timely  basis a Form 3. Mr.  Mitchell
failed to file on a timely basis a Form 4 reporting one transaction.

                                      -22-



<PAGE>

<PAGE>



PART IV

Item 10.  Executive Compensation.

         The following table summarizes the  compensation for services  rendered
to the  Company by the Chief  Executive  Officer  and the  Company's  three most
highly  compensated  executive  officers  who earned  compensation  in excess of
$100,000 in 1996 (the "Named  Executives").  No other  executive  officer earned
compensation in excess of $100,000 in 1996. Prior to the KST  Acquisition,  none
of the Company's  executive  officers,  including the Chief  Executive  Officer,
received any compensation from the Company.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                        Annual Compensation                                                   Long Term Compensation
-----------------------------------------------------------------------   ----------------------------------------------------------
                                                                                          Awards                   Payouts
                                                                                          ------                   -------
(a)                    (b)               (c)          (d)             (e)           (f)             (g)            (h)       (i)
                                                                      Other                         Securities               All
Name                                                                  Annual        Restricted      Under-                   Other
and                                                                   Compen-       Stock           lying           LTIP     Compen-
Principal                               Salary        Bonus           sation        Award(s)        Options(#)      Payouts  sation
Position               Year             ($)(1)        ($)             ($)(2)         ($)                            ($)      ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                    <C>           <C>           <C>            <C>             <C>          <C>                <C>         <C>
Zivi R. Nedivi(3)
Chief Executive
Officer and            1995          97,500        183,809        14,849          0            49,000             0           0
President              1996         180,000        218,047             0          0           100,000             0       9,446(4)

John S. Gleason
Chief Financial
Officer, Executive     1995          68,750         58,061         1,213          0            30,000             0           0
Vice President         1996         150,000         60,557        10,819          0            50,000             0       1,224(5)
and
Treasurer

Paul F. Steele         1995          56,875         55,466        11,234          0            13,500             0           0
Vice President         1996         130,000         60,557             0          0            25,000             0      48,183(6)

Anthony Motisi
Vice President         1995          40,625         55,466         4,507          0            13,500             0           0
and Secretary          1996          78,000         48,466             0          0            25,000             0       4,562(7)
</TABLE>

(1) 1995 figures are  salaries  paid by  Kellstrom  commencing  on June 23, 1995
until December 31, 1995.

(2) Consisting of the use of a company vehicle and a premium allowance paid to a
nonqualified corporate benefit program on behalf of each executive.

(3) Mr. Nedivi owns an interest in Helix Capital Corporation, LLC (together with
related entities, "Helix"). Helix has entered into an engagement letter with the
Company  under  which  it  receives  a  retainer  and  is  entitled  to  certain
transaction fees under certain circumstances.  Mr. Nedivi receives no portion of
the  retainer  payments  to Helix, but it is anticipated  that he may  receive a
portion of any transaction fees received by Helix from the Company. See "Certain
Relationships and Related Transactions".

(4) Consisting of a $8,095 life insurance premium and a $1,351 holiday bonus.

(5) Consisting of a holiday bonus.

                                      -23-



<PAGE>

<PAGE>



(6) Consisting of a loan of $35,436 to the employee that was forgiven, a $11,448
life insurance premium and a $1,299 holiday bonus.

(7) Consisting of a $3,360 life insurance premium and a $1,202 holiday bonus.

                                      -24-



<PAGE>

<PAGE>



         The following table sets forth information  concerning  options granted
in the last fiscal year to the Named Executives.

                      Option/SAR Grants in Last Fiscal Year

                                Individual Grants
<TABLE>
<CAPTION>

          (a)                     (b)                  (c)                    (d)             (e)

                          Number of
                          Securities             % of Total
                          Underlying             Options Granted          Exercise or
                          Options                to Employees in          Base Price       Expiration
Name                      Granted(#)             Fiscal Year              ($/Sh)           Date
-------------------------------------------------------------------------------------------------------
<S>                        <C>                     <C>                     <C>                   <C> 
Zivi R. Nedivi             100,000                 43.9                    7.63            Sept. 2006

John S. Gleason             50,000                 21.9                    7.63            Sept. 2006

Paul F. Steele              25,000                  11                     7.63            Sept. 2006

Anthony Motisi              25,000                  11                     7.63            Sept. 2006


</TABLE>


         The  following  table sets forth  information  concerning  the value of
unexercised  stock  options  at the end of the 1996  fiscal  year for the  Named
Executives.

Aggregated  Option/SAR  Exercises  in  Last  Fiscal  Year  and  Fiscal  Year-End
Option/SAR Values
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------
          (a)                  (b)             (c)                 (d)                        (e)

                                                          Number of
                                                          Securities
                                                          Underlying              Value of Unexercised
                                                          Unexercised             In-the-Money
                              Shares                      Options at              Options at
                             Acquired                     FY-End (#)              FY-End ($)
                                on            Value
                             Exercise       Realized      Exercisable/            Exercisable/
Name                           (#)             ($)        Unexercisable           Unexercisable
---------------------------------------------------------------------------------------------------------------
<S>                             <C>             <C>          <C>                 <C>        
Zivi R. Nedivi                  0               0            16,333/132,667       55,124/185,251

John S. Gleason                 0               0             10,000/70,000       33,750/105,000

Paul F. Steele                  0               0             4,500/34,000        15,188/49,125

Anthony Motisi                  0               0              4,500/34000        15,188/49,125

</TABLE>


The Company had no long-term  incentive  plan awards  granted as of December 31,
1996.

                                      -25-



<PAGE>

<PAGE>




Compensation of Directors

         During 1996,  the Company paid Yoav Stern and Joram  Rosenfeld,  and in
each case  entities  controlled  by them,  an  aggregate  of $90,000  each,  for
services  rendered  by Yoav  Stern and Joram  Rosenfeld  as  Co-Chairmen  of the
Company's Board of Directors.


         The Company's  Chief  Executive  Officer  receives no  additional  cash
compensation  for  service as a  Director.  All  Directors  are  reimbursed  for
out-of-pocket  expenses  incurred in attending Board meetings.  During 1996, (a)
Messrs.  Stern and McMillen were granted options to purchase  100,000 and 30,000
shares of Common  Stock,  respectively,  under the  Company's  1996 Stock Option
Plan;  and (b) Mr.  Mitchell  was granted  options to purchase  2,250  shares of
Common Stock under the Company's  1995 Stock Option Plan. See "1995 Stock Option
Plan" and "1996 Stock Option Plan," below.

Employment Agreements

         The Company entered into a seven-year management  agreement,  effective
January 1, 1997, with East Shore Ventures,  Inc. (the  "Manager"),  of which Mr.
Nedivi is President and sole shareholder.  The agreement  provides for an annual
base fee of $240,000  and a bonus  payable on the  following  terms:  (i) if the
Company  achieves a target net income  level which may be adjusted  each year by
the Board (the  "Target"),  then the Manager  will  receive a bonus of $240,000;
(ii) if the actual net income for the Company in any year exceeds the Target for
such year,  the  Manager's  bonus will increase by a  corresponding  percentage,
provided  that the bonus may not  exceed  $360,000;  and (iii) if the actual net
income for the  Company  in any year is less than the Target for such year,  the
Manager's bonus will decrease by twice the corresponding  percentage (so that if
the actual net income for the Company is 50% or less of the  Target,  there will
be no bonus paid).  In addition,  the  management  agreement  provides  that Mr.
Nedivi will be paid  severance  of four months of the base fee if the  Manager's
services are terminated  without  cause,  provided that upon a change of control
Mr. Nedivi will be paid severance  equal to twelve months of his base salary.  A
change of  control  is  defined in the  contract  as (i) any  transaction  which
results in the  stockholders of the Company  immediately  before the transaction
ceasing to own at least 51% of the voting stock or of the entity  which  results
from the transaction,  (ii) a merger,  consolidation or other  transaction where
the  Company  is not the  surviving  entity  or  (iii) a  disposition  of all or
substantially  all  of the  assets  of  the  Company.  Under  the  terms  of the
management agreement,  the Company maintains a life insurance policy on the life
of Mr.  Nedivi  in the  amount  of $4  million,  which is  transferable  without
consideration to Mr. Nedivi after January 1, 1999. The management  agreement may
be terminated  by mutual  agreement  between the Company and the Manager,  or by
either party upon sixty (60) days written notice.

         The Company  entered  into a  five-year  employment  contract  with Mr.
Gleason,  effective  as of May 18, 1995 which was amended on February  14, 1997.
The amended contract  provides for an annual base salary of $190,000 and a bonus
payable on the following  terms: (i) if the Company achieves a target net income
level which may be adjusted each year by the Board (the "Gleason Target"),  then
Mr. Gleason will receive

                                      -26-



<PAGE>

<PAGE>



a bonus of  $90,000;  (ii) if the actual net income for the  Company in any year
exceeds the Gleason Target for such year, Mr. Gleason's bonus will increase by a
corresponding  percentage,  provided that the bonus may not exceed $135,000; and
(iii) if the  actual  net  income  for the  Company in any year is less than the
Gleason  Target for such year,  Mr.  Gleason's  bonus will decrease by twice the
corresponding  percentage  (so that if the actual net income for the  Company is
50% or less of the Gleason  Target,  there will be no bonus paid).  In addition,
the amended  employment  agreement provides for the grant of options (outside of
the  Company's  1996  Stock  Option  Plan) to  purchase  100,000  shares  of the
Company's  Common Stock subject to the approval of the Board of  Directors.  The
employment  agreement  provides that Mr.  Gleason will be paid severance of four
months of his base salary if employment is terminated  without  cause,  and that
upon a change of  control  (as  previously  defined)  Mr.  Gleason  will be paid
severance  equal to twelve  months of his base  salary.  Moreover,  the  amended
agreement provides that the Company will maintain a life insurance policy on the
life of Mr.  Gleason in the amount of $2 million which is  transferable  without
consideration  to Mr.  Gleason  after  January 1,  1999.  The  agreement  may be
terminated by mutual agreement between the Company and Mr. Gleason, or by either
party upon sixty (60) days written notice.

         The Company  entered  into a  five-year  employment  contract  with Mr.
Steele,  effective as of January 1, 1996, providing for an annual base salary of
$130,000.  Effective  January 1, 1997, Mr. Steele's annual base salary increased
to $160,000.  The  agreement  also provides for a bonus payable on the following
terms:  (i) if the  Company  achieves  a target net  income  level  which may be
adjusted  each year by the Board (the  "Steele  Target"),  then Mr.  Steele will
receive a bonus of $50,000; (ii) if the actual net income for the Company in any
year exceeds the Steele Target for such year,  Mr.  Steele's bonus will increase
by a corresponding  percentage,  provided that the bonus may not exceed $75,000;
and (iii) if the actual net income for the  Company in any year is less than the
Steele  Target for such year,  Mr.  Steele's  bonus will  decrease  by twice the
corresponding  percentage  (so that if the actual net income for the  Company is
50% or less of the Steele Target,  there will be no bonus paid). If Mr. Steele's
employment is terminated  without cause, the employment  agreement provides that
Mr. Steele will be paid (i) to the extent not already paid,  his salary  through
the date of such termination, (ii) a cash lump sum for any vacation days accrued
but unused as of the date of termination and (iii) an amount equal to six months
of Mr. Steele's base salary,  provided that if termination is due to a change of
control (as  previously  defined),  Mr.  Steele will be paid an amount  equal to
eight months of his base  salary.  The  agreement  may be  terminated  by mutual
agreement between the Company and Mr. Steele, or by either party upon sixty (60)
days written notice.

         The Company entered into an amended and restated  five-year  employment
contract with Mr.  Motisi on January 30, 1996,  providing for annual base salary
of $75,000. Effective January 1, 1997, Mr. Motisi's annual base salary increased
to $100,000.  The  agreement  also provides for a bonus payable on the following
terms:  (i) if the  Company  achieves  a target net  income  level  which may be
adjusted  each year by the Board (the  "Motisi  Target"),  then Mr.  Motisi will
receive a bonus of $40,000; (ii) if the actual net income for the Company in any
year exceeds the Motisi Target for such year,  Mr.  Motisi's bonus will increase
by a corresponding percentage, provided that the

                                      -27-



<PAGE>

<PAGE>



bonus may not exceed $60,000; and (iii) if the actual net income for the Company
in any year is less than the Motisi  Target for such year,  Mr.  Motisi's  bonus
will decrease by twice the  corresponding  percentage (so that if the actual net
income for the  Company is 50% or less of the  Motisi  Target,  there will be no
bonus paid).  If Mr.  Motisi's  employment  is  terminated  without  cause,  the
employment agreement provides that Mr. Motisi will be paid (i) to the extent not
already paid, his salary through the date of such termination,  (ii) a cash lump
sum for any vacation days accrued but unused as of the date of  termination  and
(iii) an amount equal to six months of Mr.  Motisi's base salary,  provided that
if termination is due to a change of control (as previously defined), Mr. Motisi
will be paid an amount equal to eight months of Mr.  Motisi's  base salary.  The
agreement  may be  terminated  by mutual  agreement  between the Company and Mr.
Motisi, or by either party upon sixty (60) days written notice.

1995 Stock Option Plan

         On May 10, 1995,  the Board adopted the 1995 Stock Option Plan,  and on
June 22, 1995, the Company's  stockholders  approved the 1995 Stock Option Plan.
The purpose of the 1995 Stock  Option Plan is to advance  the  interests  of the
Company by providing an additional incentive to attract and retain qualified and
competent key employees, officers, directors and independent contractors for the
Company  and its  subsidiaries.  The 1995 Stock  Option  Plan  provides  for the
granting  of options to purchase or  acquire,  in the  aggregate,  up to 250,000
shares of Common Stock,  with no  individual  to be granted  options to purchase
more than  100,000  shares of Common Stock during the ten year period from April
1994 through the tenth anniversary thereof. Options granted pursuant to the 1995
Stock  Option  Plan  may  be  either   incentive   stock  options   ("ISOs")  or
non-qualified  options ("NQSOs").  Shares of the Common Stock subject to options
may be from  shares  held in the  Company's  treasury  or  from  authorized  and
unissued shares.

         The 1995 Stock  Option Plan is  administered  by either the Board,  the
Compensation  Committee of the Board or another committee,  if any, appointed by
the Board  (references in this discussion to the "Committee"  include the Board,
the Compensation  Committee or another  committee  appointed by the Board to the
extent any of the  foregoing  administers  the 1995 Stock Option Plan unless the
context otherwise requires).  If the 1995 Stock Option Plan is administered by a
Committee (other than the Board or the Compensation  Committee),  such Committee
will consist of at least two persons,  each of whom is a "disinterested  person"
within the meaning of Section  16(b) of the  Exchange  Act,  and if the Board so
determines,  an "outside  director"  within the meaning of Section 162(m) of the
Internal Revenue Code. The authority of the Committee will include,  among other
things,  determining  the  persons to whom  options are  granted,  the period of
exercisability,  the designation of options as ISOs or NQSOs and the other terms
and provisions thereof.

         Options may be granted only to key employees,  officers,  directors and
independent  contractors  of the Company or any  subsidiary  corporation  of the
Company,  whether now existing or  subsequently  formed or  acquired,  provided,
however, that ISOs may only be granted to key employees.

         The exercise price for each share subject to an option will not be less
than the  fair  market  value of the  Common  Stock  on the date the  option  is
granted. However,

                                      -28-



<PAGE>

<PAGE>



the exercise  price per share of an ISO granted to any employee who, on the date
of the grant,  possesses more than 10% of the total combined voting power of all
classes of stock of the Company (or of any  subsidiary  or parent  corporation),
will not be less  than  110% of the fair  market  value of the  shares of Common
Stock on the date the ISO is granted.

1996 Stock Option Plan

         The 1996 Stock  Option  Plan was  adopted by the Board on July 10, 1996
and approved by the Company's  Stockholders  on August 28, 1996.  The 1996 Stock
Option Plan is administered by the Board of Directors of the Company.  The Board
of Directors determines, among other things, the recipients of grants, whether a
grant will consist of ISOs,  NQSO's or stock  appreciation  rights  ("SARs") (in
tandem with an option or free-standing) or a combination thereof, and the number
of shares to be subject to such  options.  ISOs may be granted  only to officers
and key  employees  of the  Company  and its  subsidiaries.  Nonqualified  stock
options and SARs may be granted to such  officers  and  employees  as well as to
agents and directors of and consultants to the Company, whether or not otherwise
employees of the Company.

         The Plan  provides for the  granting of ISOs to purchase the  Company's
Common  Stock at not less than the fair  market  value on the date of the option
grant and the granting of nonqualified options and SARs with any exercise price.
SARs  granted  in tandem  with an  option  have the same  exercise  price as the
related  option.  The total number of shares with  respect to which  options and
SARs may be granted  under the Plan is currently  1,100,000.  The Plan  contains
certain limitations  applicable only to ISOs granted  thereunder.  To the extent
that the aggregate fair market value,  as of the date of grant, of the shares to
which  ISOs  become  exercisable  for the first time by an  optionee  during the
calendar  year exceeds  $100,000,  the option will be treated as a  nonqualified
option. In addition, if an optionee owns more than 10% of the total voting power
of all classes of the Company's  stock at the time the  individual is granted an
ISO,  the  option  price per share  cannot be less than 110% of the fair  market
value per share and the term of the ISO cannot  exceed five years.  No option or
SAR may be granted  under the Plan after July 9, 2006,  and no option or SAR may
be outstanding for more than ten years after its grant.

         Upon the  exercise of an option,  the holder  must make  payment of the
full exercise price.  Such payment may be made in cash,  check or, under certain
circumstances,  in shares of any class of the  Company's  Common  Stock,  or any
combination  thereof.  SARs, which give the holder the privilege of surrendering
such rights for the  appreciation  in the Common  Stock  between the time of the
grant and the  surrender,  may be  settled,  in the  discretion  of the Board or
committee,  as the case may be, in cash,  Common  Stock,  or in any  combination
thereof.  The  exercise of an SAR  granted in tandem with an option  cancels the
option to which it relates with respect to the same number of shares as to which
the SAR was  exercised.  The exercise of an option  cancels any related SAR with
respect  to the same  number of shares as to which  the  option  was  exercised.
Generally,  options and SARs may be exercised  while the recipient is performing
services  for the Company and within  three  months  after  termination  of such
services.

                                      -29-



<PAGE>

<PAGE>



         The Plan may be terminated at any time by the Board of Directors, which
may also amend the Plan, except that without  stockholder  approval,  it may not
increase the number of shares subject to the Plan or change the class of persons
eligible to receive options under the Plan.

                                      -30-



<PAGE>

<PAGE>



Item 11.  Security Ownership of Certain Beneficial Owners and Management.

         The  following  table  sets  forth certain  information as of March 25,
1997  regarding  the  beneficial  ownership of the Company's Common Stock by (i)
each stockholder known to the Company to beneficially own more than five percent
(5%) of such Common Stock,  (ii) each  director and executive  officer and (iii)
all directors and executive officers as a group:
<TABLE>
<CAPTION>
                                                                                             Percentage
                                                                        Number of           Beneficially
Principal Stockholders                                                    Shares              Owned(%)
----------------------                                                  ----------           ---------
<S>                                                                      <C>                 <C> 
Yoav Stern(1)                                                            186,250             2.48
98 Battery Street
Suite 600
San Francisco, CA 94111

David Jan Mitchell                                                        75,137             1.00
850 Third Avenue, 10th Floor
New York, NY 10022

Estate of Joram D. Rosenfeld(1)                                          107,500             1.43
c/o Exodus
360 East 88th Street, #41B
New York, NY 10128

Zivi R. Nedivi(1)(2)                                                     217,651             2.90
14000 N.W. 4 Street
Sunrise, FL 33325

John S. Gleason(3)                                                        31,000              .41
14000 N.W. 4 Street
Sunrise, FL 33325
</TABLE>

                                      -31-



<PAGE>

<PAGE>

<TABLE>
<S>                                                   <C>                 <C>
Paul F. Steele(4)                                      6,600              .09
14000 N.W. 4 Street
Sunrise, FL 33325

Anthony Motisi(4)                                      7,500              .10
14000 N.W. 4 Street
Sunrise, FL 33325

Delaware Management Company, Inc.(5)                 413,900             5.52
2005 Market Street
Philadelphia, PA 19103

Jeffrey Schwartz(6)                                  435,858             5.81
660 Madison Avenue
20th Floor
New York, NY 10021

Karen Finerman(6)                                    435,858             5.81
660 Madison Avenue
20th Floor
New York, NY 10021

All Officers and Directors                           524,138             6.96
as a Group (10 persons)(7)
</TABLE>

(1)  Each of Messrs.  Stern and Nedivi and the Estate of Joram  Rosenfeld may be
     deemed to be a member of a group for the  purposes  of Section  13(d) under
     the Exchange  Act by virtue of a  stockholders'  agreement  entered into by
     Messrs.  Stern, Nedivi and Rosenfeld on August 24, 1995. Each party thereto
     agreed  not to sell,  encumber  or  otherwise  dispose  of the stock of the
     Company  beneficially  owned by him except in accordance  with the terms of
     said  agreement.  As  members  of a group,  each may be deemed to share the
     voting  power with  respect to the  shares  owned by all three,  or 511,401
     shares, which represents 6.82% of the shares outstanding.  In addition,  on
     January 15, 1996,  Messrs.  Nedivi,  Rosenfeld  and Stern each  contributed
     capital to Helix Capital  Corporation,  LLC in the form of promissory notes
     secured by (a) in the case of Mr.  Nedivi,  181,818 shares of Common Stock,
     (b) in the case of Mr. Stern, among other collateral,  Mr. Stern's interest
     in a certain  Stock Escrow  Agreement,  dated as of April 11, 1994,  by and
     among the Company, Mr. Stern, Mr. Rosenfeld and certain other parties named
     therein  (the "Escrow  Agreement"),  entered  into in  connection  with the
     Company's  initial public offering,  including without  limitation  156,250
     shares of Common Stock deposited into escrow by Mr. Stern pursuant  thereto
     and (c) in the  case of the Mr.  Rosenfeld,  among  other  collateral,  Mr.
     Rosenfeld's  interest  (now held by the Estate of Joram  Rosenfeld)  in the
     Escrow  Agreement,  including  without  limitation  97,500 shares of Common
     Stock deposited in escrow by Mr.  Rosenfeld  pursuant  thereto.  The Escrow
     Agreement terminates on April 11, 1997. Helix Capital  Corporation,  LLC is
     controlled by Messrs. Nedivi, Stern and the Estate of Joram Rosenfeld.

(2)  16,333 shares are issuable upon the exercise of options to purchase  Common
     Stock, which options are exercisable within 60 days.

(3)  10,000 shares are issuable upon the exercise of options to purchase  Common
     Stock, which options are exercisable within 60 days.

(4)  4,500 shares are issuable  upon the exercise of options to purchase  Common
     Stock, which options are exercisable within 60 days.

(5)  According to a Schedule 13G filed February 12, 1997 by Delaware  Management
     Company, Inc.   ("Management")  and  Delaware  Management  Holdings,   Inc.
     ("Holdings"),  Management is an investment  advisor,  the parent company of
     which is Holdings.

(6)  Following  is  information  included  in a  Schedule  13D filed  jointly on
     January  21,  1997  by  Jeffrey  Schwarz,  Karen  Finerman,  Bedford  Falls
     Investors,   L.P.   ("Bedford"),   Metropolitan   Capital  Advisors,   L.P.
     ("Metropolitan L.P."),  Metropolitan Capital Advisors, Inc. ("Metropolitan,
     Inc."),  Metropolitan Capital Partners II, L.P.  ("Metropolitan  Partners")
     and KJ Advisors, Inc. ("KJ"): Metropolitan Inc. is the sole general partner
     of Metropolitan L.P., which is in turn the sole general partner of Bedford.
     KJ is the sole general  partner of  Metropolitan  Partners.  Bedford is the
     beneficial owner of 353,840 shares of Common Stock,  50,625 of which may be
     acquired upon exercise of currently exercisable warrants; Metropolitan L.P.
     is the beneficial owner of the shares of Common Stock owned by Bedford,  as
     general  partner  of  Bedford,  and  has  purchased  currently  exercisable
     warrants  to  purchase  4,375  shares of Common  Stock.  Metropolitan  Inc.
     beneficially  owns  358,215  shares of Common  Stock as general  partner of
     Metropolitan L.P. KJ  Advisors  beneficially  owns 38,018  shares of Common
     Stock, of which 4,375 shares may be acquired upon the exercise of currently
     exercisable  warrants, as general partner of Metropolitan  Partners,  which
     beneficially owns such shares. Jeffrey Schwarz may be deemed the beneficial
     owner  of  396,233  shares  of  Common  Stock as a  result  of his  being a
     director,  executive officer and stockholder of each of Metropolitan,  Inc.
     and KJ.  Mr.  Schwarz  may  also  be  deemed  the  beneficial  owner  of an
     additional  39,625  shares of Common  Stock by virtue of his  position as a
     director, executive officer and stockholder of a corporation which, through
     an affiliate,  may be deemed to have  beneficial  ownership over securities
     held by a foreign investment entity. Accordingly, Mr. Schwarz may be deemed
     to be the  beneficial  owner of a total of 435,858  shares of Common Stock,
     70,000 of which may be  acquired  upon  exercise of  currently  exercisable
     warrants.  Jeffrey Schwarz does not  beneficially  own any shares of Common
     Stock for his own  account.  Karen  Finerman  may be deemed the  beneficial
     owner  of  435,858  shares  of  Common  Stock as a  result  of her  being a
     director,  executive  officer  and/or  stockholder  of each of the entities
     described in the Schedule 13D which directly or indirectly serve as general
     partners,  or  investment  advisors  to the owners of Common  Stock.  Karen
     Finerman  does not  beneficially  own any shares of Common Stock other than
     through such positions.

(7)  35,333 shares are issuable upon the exercise of options to purchase  Common
     Stock, which options are exercisable within 60 days.

                                      -32-



<PAGE>

<PAGE>



Item 12.  Certain Relationships and Related Transactions.

         On August 24, 1995,  the Company  entered  into an  agreement  with Mr.
Nedivi pursuant to which Mr. Nedivi purchased  181,818 shares of Common Stock at
a purchase  price of  $1,000,000.  Mr.  Nedivi has  agreed  not to  directly  or
indirectly,  offer, sell, transfer,  assign, hypothecate or otherwise dispose of
any  interest in any of the shares (or solicit any offers to buy,  purchase,  or
otherwise acquire or take a pledge of any of the shares) until April 11, 1997.

         During 1996,  the Company paid Yoav Stern and Joram  Rosenfeld,  and in
each case  entities  controlled  by them,  an  aggregate  of $90,000  each,  for
services  rendered  by Yoav  Stern and Joram  Rosenfeld  as  Co-Chairmen  of the
Company's Board of Directors.

         The Company  has engaged a Helix  entity,  in which  Messrs.  Stern and
Nedivi own a  majority  interest  to act as the  Company's  exclusive  financial
advisor with  respect to merger and  acquisition  transactions  and as principal
financial  adviser  with  respect to other  transactions  for an initial term of
eighteen months. Under the terms of the agreement, the Helix entity will receive
a monthly  retainer of $25,000 and a success fee to be determined by the Company
on a per transaction basis, not to fall below 2% of the aggregate  consideration
paid in connection with the applicable  transaction.  In addition,  the terms of
the engagement  letter will provide for an insurance  policy in the amount of $3
million on the life of Mr. Stern which is transferable without  consideration to
Mr. Stern after two years.  Payments under the engagement  letter are in lieu of
fees  payable to Mr.  Stern as  Chairman  of the Board.  It is  expected  that a
substantial  portion  of the  retainer  will be paid by the Helix  entity to Mr.
Stern.  As a result of ownership  interests held by Messrs.  Stern and Nedivi in
the  Helix  entity,  it  is  anticipated  that  a  substantial  portion  of  the
transaction fees, if any, paid by the Company to the Helix entity will, in turn,
be distributed to Messrs. Stern and Nedivi.

         On February  25, 1997 The Board of  Directors  of the Company  approved
loans in the aggregate amount of $530,000,  to certain officers and directors of
the Company for the purposes of  purchasing  shares of Common  Stock.  The loans
will be unsecured  and payable  over four years for  employees or five years for
directors at an interest rate based on the "Applicable Federal Rate" at the time
of the loan  (6.1%  per  annum at  February  25,  1997).  Interest  will be paid
annually by officers and will accrue and be paid at maturity by  directors.  The
loans will provide for mandatory prepayment if the officer or director sells any
shares of the  Company's  Common Stock.  As of February 25, 1997,  the Board has
approved loans to the following individuals:

Name                               Principal Amount
----                               ----------------
Zivi R. Nedivi                        $150,000
Yoav Stern                            $150,000
John Gleason                           $50,000
Ian McDonald                           $50,000
Thomas McMillen                        $50,000


                                      -33-



<PAGE>

<PAGE>



David Jan Mitchell                     $50,000
Anthony Motisi                         $15,000
Fred von Husen                         $15,000



         See also "Employment Agreements."

                                     PART V

Item 13.  Exhibits and Reports on Form 8-K.

(a) The following financial statements are filed as part of this Form 10-KSB:

Kellstrom Industries, Inc. Financial Statements:
------------------------------------------------


Independent Auditor's Report

Balance Sheets at December 31, 1996 and December 31, 1995
Statements of Earnings for the years
  ended December 31, 1996 and
  December 31, 1995

Statements of  Stockholders'  Equity for
 the years ended December  31, 1996 and
  December 31, 1995

Statements of Cash Flows for years ended
  December 31, 1996 and December 31, 1995

Notes to Financial Statements

International Aircraft Support Combined Financial Statements:
--------------------------------------------------------------
1996
----
Independent Auditor's Report
Combined Balance Sheet at December 31, 1996
Combined Statement of Income and Equity for the
  year ended December 31, 1996
Combined Statement of Cash Flows for the year
  ended December 31, 1996
Notes to Combined Financial Statements

1995
----
Independent Auditor's Report
Combined Balance Sheet at December 31, 1995
Combined Statement of Income and Equity for the

                                      -34-



<PAGE>

<PAGE>



  year ended December 31, 1995
Combined Statement of Cash Flows for the year
  ended December 31, 1995
Notes to Combined Financial Statements

(b)      The following exhibits are filed as part of this Form 10-KSB:

Exhibit No.       Description
------------------------------
3.1      The Company's Restated Certificate of Incorporation.(1)

3.2      The Company's By-laws.(1)

3.3      Certificate  of  Designations  setting  forth the terms of the Series A
         Junior  Participating  Cumulative  Preferred Stock, par value $.001 per
         share (incorporated by reference to Exhibit 1 to Registration Statement
         on Form 8-A filed with the Commission on January 16, 1997).

10.2     Letter Agreement among each of the Stockholders of the Registrant,  the
         Company, and GKN Securities Corp. (without schedules).(2)

10.3     Asset Purchase  Agreement,  dated February 15, 1995,  among ITAC,  Rada
         Electronic   Industries   Limited,   Tasco  Electronics  Inc.  and  the
         Company.(3)

10.4*    Management  Agreement,  dated  January  1,  1997,  between  East  Shore
         Ventures, Inc. and the Company.

10.5*    Employment  Agreement,  dated January 30, 1996,  between Anthony Motisi
         and the Company.

10.6*    Employment Agreement, dated January 1, 1996, between Paul F. Steele and
         the Company.

10.7*    Employment Agreement,  dated May 18, 1995, between John Gleason and the
         Company.(3)

10.8*    Amendment  No. 1 to  Employment  Agreement,  dated  February  14, 1997,
         between John Gleason and the Company.

10.9     Stockholders  Agreement  dated  August 24,  1995 among Zivi R.  Nedivi,
         Joram D. Rosenfeld and Yoav Stern.(4)

10.10    Amendment,  dated January 15, 1996,  to  Stockholders  Agreement  dated
         August 24, 1995,  among Zivi R.  Nedivi,  Joram D.  Rosenfeld  and Yoav
         Stern.

10.11    Stock Purchase Agreement dated August 24, 1995, between the Company and
         Zivi R. Nedivi.(4)

10.12*   Employment  Agreement,  dated October 25, 1996,  between Fred von Husen
         and the Company.

10.13    Asset  Purchase  Agreement,  dated  October 28, 1996,  by and among the
         Company, a wholly owned subsidiary of the Company and IASI.(5)

10.14    Securities  Purchase Agreement dated as of January 15, 1997 between the
         Company and The Equitable Life Assurance Society of the United States.

10.15    Amendment No. 1 to Securities  Purchase  Agreement  dated  February 14,
         1997 between the Company and The Equitable  Life  Assurance  Society of
         the United States.

10.16    Warrant  dated  January 15, 1997 between the Company and The  Equitable
         Life Assurance Society of the United States.

                                      -35-



<PAGE>

<PAGE>



10.17    Note  Purchase  Agreement  dated as of January 9, 1997 by and among the
         Company and the Purchasers listed on Schedule I thereto.

10.18    Amendment No. 1 to the Note Purchase  Agreement  dated January 15, 1997
         by and among the  Company  and the  Purchasers  listed  on  Schedule  I
         thereto.

10.19    Form of  warrant  between  the  Company  and the  Purchasers  listed on
         Schedule I to the Note Purchase Agreement.

10.20    Revolving Loan  Agreement  dated as of December 23, 1996 by and between
         the Company and Barnett Bank, N.A.

10.21    Letter  Agreement  dated December 24, 1996 by and between Helix Capital
         Corporation LLC and the Company, as amended.

10.22    Rights  Agreement,  dated  January 14, 1997, by and between the Company
         and Continental Stock Transfer and Trust Company.(6)

10.23*   1995 Stock Option Plan of the Company.(7)

10.24*   1996 Stock Option Plan of the Company.

23.1     Consent of Ernst & Young LLP.

23.2     Consents of KPMG Peat Marwick LLP.

--------
(1)      Incorporated by reference to Amendment No. 1 to Registration  Statement
         on Form S-1, Number 33-75750, filed with the Commission April 1, 1994.

(2)      Incorporated by reference to Registration Statement on Form S-1, Number
         33- 75750, filed with the Commission February 25, 1994.

(3)      Incorporated  by  reference  to the Current  Report on Form 8-K/A filed
         with the Commission on March 14, 1994.

(4)      Incorporated  by  reference  to the Annual  Report on Form 10-KSB filed
         with the Commission on March 30, 1996.

(5)      Incorporated  by reference to the Current Report on Form 8-K filed with
         the Commission on January 23, 1997.

(6)      Incorporated by reference to  Registration  Statement on Form 8-A filed
         with the Commission on January 16, 1997.

(7)      Incorporated  by reference to the Proxy  Statement of the Company filed
         with the  Commission  on May 12,  1995 in  connection  with the Special
         Meeting of Shareholders of Kellstrom Industries, Inc. on June 22, 1995.

*        Compensatory plan or agreement.

(b)      Reports on Form 8-K:

                                      -36-



<PAGE>

<PAGE>



                  No reports on Form 8-K were filed  during the last  quarter of
                  the Company's fiscal year ended December 31, 1996.

                                      -37-



<PAGE>

<PAGE>


                                   SIGNATURES

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

Date: March 31, 1997                    KELLSTROM INDUSTRIES, INC.
                                                (Registrant)

                                           By: /s/ Zivi R. Nedivi
                                               -----------------------------
                                           Title: Chief Executive Officer and
                                           President

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this report has been signed by the following persons on behalf by the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

      Signature                                    Title                                        Date
------------------                          ----------------------                         --------------
<S>                                          <C>                                           <C>
/s/ Zivi R. Nedivi                          Chief Executive Officer                        March 31, 1997
-----------------------                     President and Director
Zivi R. Nedivi                              (principal executive officer)
                                            

/s/ Yoav Stern                              Chairman of the Board                          March 31, 1997
-----------------------
Yoav Stern

/s/ John S. Gleason                         Chief Financial Officer,                       March 31, 1997
-----------------------                     Executive Vice President
John S. Gleason                             and Treasurer (principal
                                            financial and accounting officer)
                                            

/s/ David Jan Mitchell                      Director                                       March 31, 1997
-----------------------
David Jan Mitchell

/s/ Thomas McMillen                         Director                                       March 31, 1997
-----------------------
Thomas McMillen

</TABLE>

                                      -38-

<PAGE>

<PAGE>

The following Financial Statements are attached hereto:

<TABLE>
<CAPTION>

-------------------------------------------------
                                                                                                                   Page
                                                                                                                   ----
<S>                                                                                                                <C>
Kellstrom Industries, Inc. Financial Statements:
Independent Auditor's Report.....................................................................................    F-1
Balance Sheets at December 31, 1996 and December 31, 1995........................................................    F-2
Statements of Earnings for the years
  ended December 31, 1996 and
  December 31, 1995..............................................................................................    F-3
Statement of Stockholders' Equity for
  the years ended December 31, 1996 and
  December 31, 1995..............................................................................................    F-4
Statements of Cash Flows for years ended
  December 31, 1996 and December 31, 1995........................................................................    F-5
Notes to Financial Statements....................................................................................    F-7

International Aircraft Support Combined Financial Statements:
-------------------------------------------------------------
1996
----
Independent Auditor's Report.....................................................................................    F-32
Combined Balance Sheet at December 31, 1996......................................................................    F-33
Combined Statement of Income and Equity for the
  year ended December 31, 1996...................................................................................    F-34
Combined Statement of Cash Flows for the year
  ended December 31, 1996........................................................................................    F-35
Notes to Combined Financial Statements...........................................................................    F-36

1995
----
Independent Auditor's Report.....................................................................................    F-44
Combined Balance Sheet at December 31, 1995.....................................................................     F-45
Combined Statement of Income and Equity for the
  year ended December 31, 1995...................................................................................    F-46
Combined Statement of Cash Flows for the year
  ended December 31, 1995........................................................................................    F-47
Notes to Combined Financial Statements...........................................................................    F-48
</TABLE>



<PAGE>

<PAGE>



                          Independent Auditors' Report


The Board of Directors and Stockholders
Kellstrom Industries, Inc.:

We have audited the accompanying balance sheets of Kellstrom Industries, Inc. as
of  December  31,  1996  and  1995,  and the  related  statements  of  earnings,
stockholders'  equity,  and cash  flows  for each of the  years in the  two-year
period  ended   December  31,  1996.   These   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  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 financial  statements  referred to above present fairly, in
all material respects,  the financial position of Kellstrom Industries,  Inc. as
of December 31, 1996 and 1995,  and the results of its  operations  and its cash
flows for each of the years in the two-year  period ended  December 31, 1996, in
conformity with generally accepted accounting principles.


                                                           KPMG PEAT MARWICK LLP


Ft. Lauderdale, Florida
March 10, 1997


                                      F-1

<PAGE>

<PAGE>

ITEM I FINANCIAL STATEMENTS


                           KELLSTROM INDUSTRIES, INC.
                                 BALANCE SHEETS


<TABLE>
<CAPTION>


                                                                                         December 31
                                                                               ------------------------------------
                                                                                    1996                 1995
                                                                               --------------       ---------------

<S>                                                                         <C>                  <C>
                     Assets

Current Assets:
    Cash and cash equivalents                                                   $     154,254         $     210,871
    Trade receivables, net of allowances for returns and
       doubtful accounts of $150,000 and $125,531
       for 1996 and 1995 respectively                                               4,023,298             3,319,025
    Inventory                                                                      15,723,370            11,852,019
    Prepaid expenses and other current assets                                         588,286               236,582
    Deferred tax asset (Note 8)                                                        57,176                70,469
    Investment in securities  (Note 3)                                              1,829,532                    --
                                                                                -------------         -------------
           Total current assets                                                 $  22,375,916         $  15,688,966

Property, plant and equipment, net  (Note 4, 6, 7)                                        2,943,077             1,738,677
Intangible assets, net                                                              3,618,862             3,921,624
Investment in warrants (Note 3)                                                            --               200,000
Deferred tax asset  (Note 8)                                                          306,079               288,000
Other assets                                                                          376,791                80,296
                                                                                -------------         -------------
           Total Assets                                                         $  29,620,725         $  21,917,563
                                                                                =============         =============
      Liabilities and Stockholders' Equity
Current Liabilities:
    Short-term notes payable (Note 6)                                           $   5,157,302         $   2,251,000
    Current maturities of long-term debt and capital lease obligation (Note 6)        211,068                97,915
    Accounts payable                                                                1,651,405             2,167,214
    Accrued expenses (Note 5)                                                       1,290,393               858,733
    Income taxes payable                                                              157,212               643,732
    Deferred tax liability  (Note 8)                                                  173,379                    --
                                                                                -------------         -------------
           Total current liabilities                                            $   8,640,759         $   6,018,594
Long-term debt and capital lease obligations, less current maturities               2,819,225             2,760,223
                                                                                -------------         -------------
           Total Liabilities                                                    $  11,459,984         $   8,778,817

Stockholders' Equity (Note 9):
    Preferred stock, $ .001 par value; 1,000,000 shares authorized;
           none issued                                                                     --                    --
    Common stock, $ .001 par value; 20,000,000 shares authorized;
           3,315,308 shares and 2,881,818 shares issued and outstanding
           in 1996 and 1995 respectively                                                3,315                 2,882
    Additional paid-in capital                                                     14,871,559            12,769,565
    Retained earnings                                                               3,012,642               366,299
    Unrealized gain on investment securities, net                                     273,225                    --
                                                                                -------------         -------------
           Total Stockholders' Equity                                           $  18,160,741         $  13,138,746
                                                                                -------------         -------------
           Total Liabilities and Stockholders' Equity                           $  29,620,725         $  21,917,563
                                                                                =============         =============
</TABLE>

                 See accompanying notes to financial statements

                                      F-2


<PAGE>

<PAGE>

                           KELLSTROM INDUSTRIES, INC.
                             STATEMENTS OF EARNINGS


<TABLE>
<CAPTION>

                                                                  Years Ended December 31
                                                            ---------------------------------
                                                                1996                  1995
                                                            -------------         -----------

<S>                                                         <C>                   <C>        
Net revenues                                                $ 24,921,587          $ 8,579,017

Cost of goods sold                                           (16,235,159)          (5,378,053)
Selling, general and administrative expenses                  (3,491,457)          (1,482,048)
Depreciation and amortization                                   (441,854)            (202,331)
                                                            -------------         -----------

Operating income                                            $  4,753,117          $ 1,516,585

SPAC operating costs and expenses                                     --             (389,361)
Investment advisory expenses                                          --             (720,795)
                                                            -------------         -----------

Income before interest and income taxes                     $  4,753,117          $   406,429

Interest income                                                   18,001              370,756
Interest expense                                                (662,528)            (145,304)
                                                            -------------         -----------


    Income before income taxes                              $  4,108,590          $   631,881

Income taxes (Note 8)                                         (1,462,247)            (257,442)
                                                            -------------         -----------

    Net income                                              $  2,646,343          $   374,439
                                                            =============         ===========


    Net income per share                                    $       0.45          $      0.14
                                                            =============         ===========

Weighted average number of common shares outstanding           8,147,455            2,741,195
                                                             ============         ===========
</TABLE>



                 See accompanying notes to financial statements

                                       F-3
<PAGE>

<PAGE>

                           KELLSTROM INDUSTRIES, INC.
                       STATEMENT OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>

                                          Common Stock       Preferred Stock                Retained   Net unrealized
                                      -------------------   -----------------  Additional   Earnings      gain on         Total
                                      Number                Number               paid-in  (accumulated   investment   stockholders'
                                      of shares    Amount   of shares  Amount    capital    deficit)     securities      equity
                                      ---------   -------   ---------  ------    -------    -------      ----------      ------
<S>                                   <C>         <C>       <C>        <C>     <C>         <C>           <C>           <C>
Balances, December 31,1994            2,220,215   $ 2,220        --      --     $9,232,814 $    (8,410)         --     $ 9,226,894
Reclassify common stock
 whose redemption rights
 have expired                           429,785       430        --      --      2,155,733        --            --       2,156,163

Issuance of common stock
 and warrants to investment banker
 in lieu of fees for financial
 advisory services provided
 with respect to the Acquisition         50,000        50        --      --        381,200        --            --         381,250

Purchase of common stock
 by company President
 (@ $5.50 per share)                    181,818       182        --      --        999,818        --            --       1,000,000

Net income                                   --      --          --      --          --        374,439          --         374,439
                                     --------------------- ------------------  -----------   ---------- -------------- -------------
Balances, December 31,1995            2,881,818    $2,882        --      --    $12,769,565   $ 366,299          --     $13,138,746


Exercise of warrants                    433,490       433        --      --      2,101,994         --            --       2,102,427

Unrealized gain on investment
  securities, net                            --      --          --      --           --          --     $   273,225       273,225

Net income                                   --      --          --      --           --     2,646,343          --       2,646,343

                                      --------------------- ------------------ -----------  ---------- -------------- -------------
Balances, December 31,1996            3,315,308     $3,315       --      --    $14,871,559  $3,012,642   $   273,225   $18,160,741
                                      ===================== ================== ===========  ========== ============== =============

</TABLE>




                 See accompanying notes to financial statements

                                       F-4

<PAGE>

<PAGE>


                           KELLSTROM INDUSTRIES, INC.
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                                                       Years Ended December 31
                                                                                                 -----------------------------------
                                                                                                      1996                 1995
                                                                                                 -------------         -------------
<S>                                                                                            <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income                                                                                       $  2,646,343          $    374,439

Adjustments to reconcile net income to net cash used
    in operating activities:
          Depreciation and amortization                                                          $    441,854          $    202,331
          Acquisition expenses paid through issuance of common stock                                      ---               381,250
          Amortization of deferred financing costs                                                     30,172                 4,132
          Deferred income taxes                                                                        12,285              (358,469)

Changes in operating assets and liabilities:
         Increase in trade receivables, net                                                          (704,273)           (1,062,397)
         Increase in inventory                                                                     (3,871,351)           (7,616,960)
         Increase in prepaid expenses and other current assets                                       (351,704)             (121,284)
         Increase in other assets                                                                    (255,655)               (4,763)
         Decrease in accounts payable                                                                (515,809)             (366,250)
         Increase in accrued expenses                                                                 431,661               551,457
         (Decrease) Increase in income taxes payable                                                 (486,519)              540,587
                                     Net cash used in operating activities                       $ (2,622,996)         $ (7,475,927)
                                                                                                 -------------         -------------

CASH FLOWS FROM INVESTING ACTIVITIES:

U S  Government securities sold                                                                  $        ---          $ 10,786,209
Treasury bills sold                                                                                       ---               594,518
Investment in securities                                                                           (1,200,000)                  ---
Purchase of KST assets, net of cash acquired                                                              ---            (5,790,800)
Purchase of property, plant and equipment                                                          (1,372,244)             (262,974)
Other                                                                                                  31,753                   ---
                                                                                                 -------------         -------------

                                      Net cash (used in) provided by investing
                                        activities                                               $ (2,540,491)         $  5,326,953
                                                                                                 -------------         -------------

CASH FLOWS FROM FINANCING ACTIVITIES:

Debt proceeds                                                                                    $ 27,577,960          $  2,250,000
Debt repayment, including capital lease obligations                                               (24,499,503)             (943,560)
Common stock issued                                                                                 2,102,427             1,000,000
Other                                                                                                 (74,014)              (18,951)
                                                                                                 -------------         -------------

                                      Net cash provided by financing activities                  $  5,106,870          $  2,287,489
                                                                                                 -------------         -------------

NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS                                               $    (56,617)         $    138,515

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD                                                          210,871                72,356
                                                                                                 -------------         -------------
CASH & CASH EQUIVALENTS, END OF PERIOD                                                           $    154,254          $    210,871
                                                                                                 =============         =============
</TABLE>

                                   (continued)
                 See accompanying notes to financial statements
                                       F-5


<PAGE>

<PAGE>


                           KELLSTROM INDUSTRIES, INC.
                            STATEMENTS OF CASH FLOWS
                                   (continued)



<TABLE>
<CAPTION>

                                                                                                       Years Ended December 31
                                                                                                 -----------------------------------
                                                                                                      1996                 1995
                                                                                                 -------------         -------------
<S>                                                                                            <C>                     <C>
Supplemental disclosures of non-cash investing and financing activities:
                  KST assets acquired for notes payable                                               --               $  2,230,000
                                                                                                 -------------         =============

                  Issuance of common stock for acquisition expenses                                   --               $    381,250
                                                                                                 -------------         =============
                  Unrealized gain on investment securities, net                                  $     273,225         $          0
                                                                                                 =============         =============

Supplemental disclosures of cash flow  information:
                 Cash paid during the period for:

                  Interest                                                                        $    558,083         $    155,144
                                                                                                 =============         =============

                  Income taxes                                                                    $  1,936,481         $     26,680
                                                                                                 =============         =============


Supplemental disclosures of purchase of KST assets, net of liabilities:
                  Cash                                                                                                 $    209,200
                  Receivables                                                                                             2,256,628
                  Warrants                                                                                                  200,000
                  Inventory                                                                                               4,235,059
                  Prepaid expenses                                                                                           87,146
                  Property, plant and equipment                                                                           1,522,586
                  Goodwill                                                                                                4,060,477
                  Other assets                                                                                               64,491
                                                                                                                      --------------
                             Total assets                                                                              $ 12,635,587

                  Accrued expenses                                                                                     $    310,303
                  Accounts payable                                                                                        2,533,464
                  Notes payable                                                                                           1,561,820
                                                                                                                       -------------
                             Total liabilities                                                                         $  4,405,587
                                                                                                                       =============
                             Net acquisition cost                                                                      $  8,230,000

                  Less discounted present value of note given to seller                                                   2,230,000
                                                                                                                       -------------

                  Cash paid to seller at closing                                                                       $  6,000,000

                  Less cash acquired                                                                                        209,200
                                                                                                                       -------------

                             Net cash used in acquisition                                                              $  5,790,000
                                                                                                                       =============
</TABLE>

                 See accompanying notes to financial statements

                                       F-6



<PAGE>

<PAGE>




                           KELLSTROM INDUSTRIES, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         DESCRIPTION OF BUSINESS - Kellstrom  Industries,  Inc. (the  "Company")
         (formerly known as Israel Tech  Acquisition  Corp.) was incorporated in
         Delaware  on  December  28,  1993 as a  Specified  Purpose  Acquisition
         Company  ("SPAC"),  the objective of which was to consummate an initial
         public  offering  and then enter into a  business  combination  with an
         operating  business.  On June 22,  1995,  the Company  consummated  the
         acquisition of all of the assets of Kellstrom Industries,  Inc. ("KST")
         and  immediately  changed its name to  Kellstrom  Industries,  Inc. The
         Company   engages   in   the   purchasing,    refurbishing,    (through
         subcontractors),  leasing, marketing and distributing of commercial jet
         engines and jet engine  parts.  The Company's  customers  include major
         domestic and international airlines, engine manufacturers,  engine part
         distributors and dealers and overhaul service suppliers  throughout the
         world. The Company enables customers to reduce their engine maintenance
         costs by  providing  Federal  Aviation  Administration-approved  engine
         parts on a timely basis and at competitive prices.

         REVENUE  RECOGNITION  - Revenue  is  recognized  upon  shipment  of the
         product  to  the  customer  net of an  estimated  allowance  for  sales
         returns.

         CASH  EQUIVALENTS  - The  Company  considers  all  highly  liquid  debt
         instruments with original maturities of three months or less to be cash
         equivalents.

         INVENTORIES  -  Inventories  are stated at the lower of cost or market.
         Cost  is   determined   using  the  specific   identification   method.
         Inventories  is made up  primarily of new,  refurbished  and as removed
         engines and engine parts.

         PROPERTY,  PLANT AND  EQUIPMENT -  Property,  plant and  equipment  are
         stated at cost. Machinery and equipment under capital leases are stated
         at the lesser of fair value or present value of minimum lease payments.
         Depreciation  on property,  plant and  equipment is  calculated  on the
         straight-line   method  over  the  following  estimated  useful  lives:
         building  - 25  years,  machinery  and  equipment  - 3 to 10 years  and
         furniture and fixtures - 7 years.  Machinery  and equipment  held under
         capital  leases are  amortized  straight  line over the  shorter of the
         lease term or the estimated useful life indicated above.

                                       F-7



<PAGE>

<PAGE>



         GOODWILL - Goodwill, which represents the excess of purchase price over
         fair value of net assets  acquired,  is  amortized  on a  straight-line
         basis over the expected  periods to be  benefitted,  generally 15 to 20
         years. The Company assesses the recoverability of this intangible asset
         by determining  whether the  amortization of the goodwill  balance over
         its  remaining  life  can  be  recovered  through  undiscounted  future
         operating cash flows of the acquired operation.  The amount of goodwill
         impairment,  if any, is measured based on projected  discounted  future
         operating  cash flows using a discount  rate  reflecting  the Company's
         average cost of funds. The assessment of the recoverability of goodwill
         will be  impacted  if  estimated  future  operating  cash flows are not
         achieved.  Accumulated  amortization  was $409,863 at December 31, 1996
         and $138,853 at December 31, 1995.

         INCOME  TAXES - Income  taxes  are  accounted  for  under the asset and
         liability  method.  Deferred tax assets and  liabilities are recognized
         for the future tax consequences attributable to differences between the
         financial statement carrying amounts of existing assets and liabilities
         and  their  respective  tax  bases and  operating  loss and tax  credit
         carryforwards.  Deferred tax assets and  liabilities are measured using
         enacted tax rates  expected to apply to taxable  income in the years in
         which those  temporary  differences  are  expected to be  recovered  or
         settled.  The effect on deferred tax assets and liabilities of a change
         in tax rates is  recognized  in income in the period that  includes the
         enactment date.

         FINANCIAL  INSTRUMENTS  - The  fair  value  of  financial  instruments,
         consisting of investments in cash and cash equivalents,  trade accounts
         receivables,   investments,   other  current  assets,   trade  accounts
         payables,   notes  payable  to  banks,   accrued  expenses,   and  debt
         instruments,  is based on interest  rates  available to the Company and
         comparisons  to quoted  prices.  At  December  31,  1996 and 1995,  the
         carrying  amounts  reported in the balance  sheet equal or  approximate
         fair values.

         COMMITMENTS  AND  CONTINGENCIES  - During 1996 the Company entered into
         two separate  agreements  to purchase  two aircraft  engines at a total
         purchase  price of  $4,150,000.  The Company is committed to purchasing
         the engines  upon  successful  completion  of certain  inspections.  At
         December 31, 1996, the purchase had not yet been consummated.

         The Company records liabilities for loss contingencies, including those
         arising from claims, assessments,  litigation, fines and penalties, and
         other  sources when it is probable  that a liability  has been incurred
         and the amount of the liability can be reasonably estimated.

         USE OF  ESTIMATES  -  Management  of the  Company  has made a number of
         estimates  and  assumptions  relating  to the  reporting  of assets and
         liabilities and the disclosure of contingent  assets and liabilities to
         prepare these financial

                                       F-8



<PAGE>

<PAGE>



         statements in conformity with generally accepted accounting principles.
         Actual results could differ from those estimates.

         EARNINGS  PER SHARE - Net  earnings  per common  and common  equivalent
         share are computed by dividing  net  earnings by the  weighted  average
         number of common and common  equivalent shares  outstanding  during the
         period.  Common  equivalent  shares assume the exercise of all dilutive
         stock  options and  warrants.  Primary and fully  diluted  earnings per
         common and common equivalent share are essentially the same.  Quarterly
         and   year-to-date   computations   of  per  share   amounts  are  made
         independently; therefore, the sum of per share amounts for the quarters
         may not equal per share amounts for the year.

         LONG-LIVED  ASSETS  TO  BE  DISPOSED  OF  -  The  Company  adopted  the
         provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived
         Assets and for Long-Lived  Assets to Be Disposed Of on January 1, 1995.
         This Statement requires that long-lived assets and certain identifiable
         intangibles  be reviewed for impairment  whenever  events or changes in
         circumstances  indicate that the carrying amount of an asset may not be
         recoverable.  Recoverability  of assets to be held and used is measured
         by a comparison  of the carrying  amount of an asset to future net cash
         flows  expected  to be  generated  by the  asset.  If such  assets  are
         considered to be impaired,  the impairment to be recognized is measured
         by the amount by which the  carrying  amount of the  assets  exceed the
         fair value of the assets.  Assets to be disposed of are reported at the
         lower of the carrying amount or fair value less costs to sell. Adoption
         of this  Statement  did not have a  material  impact  on the  Company's
         financial position, results of operations, or liquidity.

         STOCK  OPTIONS  -  Effective  January  1,  1996,  the  Company  adopted
         Statement of Financial  Accounting  Standards No. 123,  "Accounting for
         Stock-Based  Compensation."  As provided for in Statement  No. 123, the
         Company has elected to continue to apply the  provisions of APB No. 25,
         "Accounting   for  Stock  Issued  to  Employees"   in  accounting   for
         stock-based compensation. The disclosures required by the new Statement
         are included in the "Employee Stock Option Plans" footnote.

         RECLASSIFICATIONS  - Certain 1995 financial statement amounts have been
         reclassified to conform with 1996 presentation.

2.       KST ACQUISITION

         On June 22,  1995,  the  Company  acquired  substantially  all of KST's
         right,  title and interest in and to all of the assets and  liabilities
         of  the  commercial   jet  aircraft   engine  part   distribution   and
         refurbishing  business  of KST of every kind,  nature and  description,
         whether  real,  personal,   or  mixed,   tangible  or  intangible.   In
         consideration   therefor,   the  Company  paid  $9,000,000,   of  which
         $6,000,000  was paid in cash and the remaining  $3,000,000  was paid in
         the form of an unsecured,

                                       F-9



<PAGE>

<PAGE>



         non-interest bearing note (see Note 6).  Additionally,  Rada Electronic
         Industries, Inc. ("Rada"), the indirect parent of KST prior to the June
         22,  1995  acquisition,   will  pay  the  Company  an  annual  $200,000
         consulting  fee  for the  five  years  following  the  closing  of such
         acquisition.  The Company recognized  consulting fee income of $182,000
         from Rada for 1995 and  $200,000  for 1996.  The  acquisition  has been
         accounted  for using the purchase  method.  Accordingly,  the Company's
         Statements of Operations  for the twelve months ended December 31, 1995
         only reflect the  operations  of KST from June 22, 1995 to December 31,
         1995. A Pro Forma  Financial  Statement of  Operations - Unaudited  has
         been provided in Note 15(b) to report the results of operations for the
         year ended December 31, 1995 as though the  acquisition had occurred at
         the beginning of the period being reported.

3.       INVESTMENTS

         Upon  consummation of the acquisition of the assets of KST, the Company
         received  warrants to purchase  400,000  shares of common stock of Rada
         (the "Rada  Warrants")  at $3.00 per share,  commencing on July 1, 1995
         and  expiring  on or  before  July 1,  2000.  The  Rada  Warrants  were
         originally recorded at their fair value on the date of the acquisition.
         The Company  classifies  these  warrants as  "available  for sale".  At
         December  31, 1995 the fair value of the  warrants  approximated  their
         carrying  cost.  As a  result,  there  was no  unrealized  gain or loss
         reflected in the statement of  shareholder's  equity.  In December 1996
         the Company exercised the Rada Warrants upon payment of $1,200,000.  As
         a result  of  certain  antidilution  provisions  contained  in the Rada
         Warrant, the Company received 464,643 shares of Rada, representing 5.6%
         of the outstanding shares of Rada at the time of exercise.  The Company
         classifies the shares of Rada as "available for sale".  At December 31,
         1996,  the cost,  gross  unrealized  holding  gains,  gross  unrealized
         holding losses and fair value for the shares was $1,400,000,  $429,532,
         $0, and $1,829,532 respectively.

4.       PROPERTY, PLANT, AND EQUIPMENT, NET

         The components of property, plant, and equipment are summarized below:
<TABLE>
<CAPTION>
                                                                   1996                       1995
---------------------------------------------------------------------------------------------------
<S>                                                      <C>                        <C>           
Land                                                     $      422,600             $      422,600
Building                                                      1,807,192                    763,929
Machinery and Equipment                                         715,038                    299,956
Furniture and Fixtures                                          222,052                    158,126
---------------------------------------------------------------------------------------------------
                                                              3,166,882                  1,644,611
Accumulated Depreciation                                       (223,805)                   (56,661)
---------------------------------------------------------------------------------------------------
                                                              2,943,077                  1,587,950
Construction in Progress                                              0                    150,727
---------------------------------------------------------------------------------------------------
                                                         $    2,943,077             $    1,738,677
                                                         ==============             ==============

</TABLE>



                                       F-10



<PAGE>

<PAGE>






5.       ACCRUED EXPENSES
<TABLE>
<CAPTION>

                                                                   1996                         1995
-----------------------------------------------------------------------------------------------------
<S>                                                      <C>                          <C>           
Employee bonuses                                         $      422,000               $      366,668
Acquisition expenses                                            122,674                      296,197
Accrued Interest                                                111,147                         ----
Customer Deposits                                               436,500                         ----
Other                                                           198,072                      195,868
-----------------------------------------------------------------------------------------------------
                                                       $      1,290,393               $      858,733
                                                       ================               ==============
</TABLE>



6.       DEBT AND CAPITAL LEASE OBLIGATIONS

         Debt at December 31, 1996 and 1995 consists of the following:

                                                       1996             1995
--------------------------------------------------------------------------------
First mortgage note bearing interest at
10.49% payable in monthly installments of
$20,238, including interest, with final
payment of $20,238 due May 2005; secured by
real property with depreciated cost of
$1,167,698 in 1995 and $2,175,265 in 1996.       $1,194,277       $  643,768

                                    
Borrowings under revolving line of credit,
interest, at prime+1% (9.5% at December 31,
1995), and at prime-1/8% (8.125% at December
31, 1996) is payable monthly; the revolving
line of credit expires in April 1998.             5,157,302            1,000

Non-interest bearing note payable in
semi-annual installments of $125,000,
including interest, with final payment of
$1,775,000 due June 1999. The note was
discounted using an interest rate of 9% The
note was paid in full subsequent to year end.     1,830,150        2,205,625



                                      F-11




<PAGE>

<PAGE>




Term loan bearing interest at prime+1% (9.5%
at December 31, 1995) secured by a specific
jet engine. Interest on the note is payable
monthly. Principal is due upon the earlier of
the sale of the acquired jet engine (or its
parts) or November 1996.                                  0        2,250,000

Capital lease obligations                             5,866            8,745
--------------------------------------------------------------------------------

Total long-term debt and capital lease
obligations                                       8,187,595        5,109,138

Less short-term notes payable                    (5,157,302)      (2,251,000)

Less current installments on long-term debt and
capital lease obligations                          (211,068)         (97,915)
--------------------------------------------------------------------------------

Long-term debt and capital lease obligations,
excluding current installments                   $2,819,225       $2,760,223
                                                 ==========       ==========



Upon the  consummation  of the  acquisition by the Company of the assets of KST,
the Company assumed the mortgage note in the amount of $666,820. Subsequently, a
$750,000 construction loan was added to this mortgage note in 1996. The mortgage
note is secured by a first mortgage on the Company's land and building.

As part of the  purchase of the assets of KST,  the Company  issued an unsecured
non-interest  bearing note in the amount of  $3,000,000.  The note is payable in
eight equal semi-annual payments of $125,000 with the remaining $2,000,000 to be
paid on the fourth  anniversary  of the  acquisition  in cash or, under  certain
circumstances,  in whole or in part by the  issuance  of  additional  shares  of
Common Stock which for such purpose  shall be valued at the higher of the market
price per share at such time or $5.00 per  share.  The note is  discounted  at a
rate of 9%.

On December 23, 1996 the Company  entered into a Revolving Loan Agreement with a
total commitment of $15,000,000 with Barnett Bank, N.A. This agreement  replaced
the  lines of  credit  the  Company  had  established  with  BankAtlantic.  This
agreement,  which bears  interest at 1/8% below the bank's prime rate (8.125% at
December 31, 1996),  expires in April  1998 and is secured by substantially all
the Company's assets.  Interest is payable monthly. No compensatory balances are
required under the  agreement.  At December 31, 1996, the Company had $9,842,698
available under the agreement.

                                      F-12


<PAGE>

<PAGE>




         Debt maturities  (excluding  capital lease obligations) for each of the
five years  subsequent  to December 31, 1996 are as follows:  1997,  $5,364,791;
1998, $197,558; 1999, $1,835,227; 2000, $167,856; 2001, $186,336; and thereafter
$429,961.

7.       LEASES

The Company is obligated  under two capital leases for certain office  equipment
that expire in December 1997 and February  1999,  respectively.  At December 31,
1996 and 1995,  the gross  amount of office  equipment  and related  accumulated
amortization recorded under capital leases were as follows:

                                                        1996             1995
-------------------------------------------------------------------------------
Office Equipment                                     $10,878          $10,878
Less accumulated
amortization                                          (4,998)          (2,823)
-------------------------------------------------------------------------------
                                                     $ 5,880          $ 8,055
================================================================================

Amortization  of assets held under capital leases is included with  depreciation
expense.

The Company also has several  operating  leases,  primarily  for  transportation
equipment and  facilities,  that expire over the next one to three years.  These
leases  generally  require  the  Company  to pay  all  executory  costs  such as
maintenance  and  insurance  and provide  for early  termination  at  stipulated
values. Rental payments for the transportation equipment include minimum rentals
plus contingent  rentals based on mileage.  Rental expense for operating  leases
during 1996 and 1995 consisted of the following:

                                                    1996                  1995
--------------------------------------------------------------------------------
Minimum rentals                                   $66,437               $30,778
Contingent rentals                                  4,007                     0
--------------------------------------------------------------------------------
Rental expense                                    $70,444               $30,778
================================================================================




Future  minimum lease  payments  under  operating  lease  agreements  and future
minimum capital lease payments as of December 31, 1996 are:

                                      F-13


<PAGE>

<PAGE>


<TABLE>
<CAPTION>

Year ending December 31:                                                               Capital            Operating
                                                                                        Leases             Leases
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>               <C>    
1997                                                                                           4,370             $77,643
1998                                                                                           2,150              18,813
1999                                                                                             360                 744
-------------------------------------------------------------------------------------------------------------------------
Total minimum lease payments                                                                  $6,880            $ 97,200
Less amount representing interest                                                             (1,014)
-------------------------------------------------------------------------------------------------------------------------
Present value of minimum lease payments                                                        5,866
Less current installments                                                                     (3,579)
-------------------------------------------------------------------------------------------------------------------------
Obligations under capital leases, excluding current                                           $2,287
installments                                                                                  ======
</TABLE>


8.       INCOME TAXES

The actual tax expense  differs  from the  "expected"  tax expense for the years
ended  December  31,  1996 and  1995  (computed  by  applying  the U.S.  federal
corporate tax rate of 34% to income before income taxes), as follows:
<TABLE>
<CAPTION>

                                                                        1996                        1995
---------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                    <C>     
Computed "expected" tax expense                                          $1,396,921             $214,840
State income tax, net of federal benefit                                     98,411               24,398
Reorganization costs                                                            ---               14,705
Other                                                                       (33,085)               3,499
---------------------------------------------------------------------------------------------------------
Actual tax expense                                                       $1,462,247             $257,442
                                                                         ==========             ========
</TABLE>



Income tax expense for the years ended  December 31, 1996 and 1995 is summarized
as follows:
<TABLE>
<CAPTION>
                                                                         1996                      1995
--------------------------------------------------------------------------------------------------------
<S>                                                                <C>                         <C>     
Current:

         Federal                                                   $1,299,550                  $525,766
         State                                                        150,412                    90,145
--------------------------------------------------------------------------------------------------------
                                                                    1,449,962                   615,911
Deferred                                                               12,285                  (358,469)
--------------------------------------------------------------------------------------------------------
         Total                                                     $1,462,247                  $257,442
                                                                   ==========                  ========

</TABLE>



                                      F-14



<PAGE>

<PAGE>



The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 are presented below:
<TABLE>
<CAPTION>

                                                                         1996                      1995
--------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                       <C>     
Deferred tax assets:
         Acquisition costs                                           $214,174                  $312,064
         Bad debts                                                     54,586                    47,237
         Inventory                                                     90,491                       ---
         Other                                                          4,004                      (832)
--------------------------------------------------------------------------------------------------------
Total gross deferred tax assets                                       363,255                   358,469
Less valuation allowance                                                    0                         0
--------------------------------------------------------------------------------------------------------
Deferred tax assets                                                  $363,255                  $358,469
--------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
         Inventory                                                  $(17,071)                        $0
         Unrealized gain on                                         (156,308)                         0
         investment securities
--------------------------------------------------------------------------------------------------------
Deferred tax liabilities                                            (173,379)                         0
--------------------------------------------------------------------------------------------------------
Net Deferred tax assets                                              $189,876                  $358,469
                                                                     ========                  ========
</TABLE>




The  Company's  management  believes  that it is more  likely  than not that the
results of future operations will generate  sufficient taxable income to realize
the deferred tax asset.

9.       STOCKHOLDERS' EQUITY

The Company is authorized to issue 1,000,000 shares of preferred stock with such
designations,  voting and other rights and preferences as may be determined from
time to time by the Board of Directors.

The Company is authorized to issue 20,000,000 shares of Common Stock,  $.001 par
value.  At December 31, 1995 and 1996,  the Company had  2,881,818 and 3,315,308
shares, respectively, of Common Stock outstanding.

                                      F-15



<PAGE>

<PAGE>



Upon  consummation of the acquisition of the assets of KST, in consideration for
services  provided by its investment  bankers in connection with the acquisition
of KST, the Company  issued 50,000  shares of the  Company's  Common Stock and a
warrant to purchase an additional  300,000 shares of the Company's  Common Stock
at a stated price of $5.00. The expense recognized by the Company as a result of
the issuance of the shares and warrants was  determined  based on the fair value
of the shares and warrants on the closing date of the acquisition.

At December 31, 1996 and 1995, the Company had 4,576,510 and 4,910,000 warrants,
respectively,  outstanding.  Each warrant entitles the holder to the purchase of
one share of the Company's  common stock at an average stated price of $5.08 and
$5.00 respectively.  These warrants are exercisable at various times principally
commencing  on June 22,  1995 and  expiring  on or before  April 11,  2001.  The
Company has reserved 5,000,000 common shares for the exercise of these warrants.
See Note 14.

At December  31, 1996 and 1995,  the Company had 200,000 unit  purchase  options
outstanding.  Each unit purchase  option  entitles the holder to the purchase of
one Unit for $7.62 per unit.  Each unit  consists of one share of the  Company's
Common Stock and two  redeemable  common  stock  purchase  warrants.  These unit
purchase  options are  exercisable  commencing on April 11, 1995 and expiring on
April 11, 1999.  As of December 31, 1996 none of the unit  purchase  options had
been exercised.

10.      EMPLOYEE STOCK OPTION PLANS

The 1995  Stock  Option  Plan  provides  for the  granting  of stock  options to
purchase  up to  250,000  shares  of  Common  Stock  to key  employees,  with no
individual  granted options to purchase more than 100,000 shares of Common Stock
during the ten-year  period  commencing  on June 22, 1995, at a price which will
not be less than the fair  market  value of  Common  Stock on the date of grant.
These options will be exercisable at such times, in such amounts and during such
intervals  as  determined  on the date of  grant.  However,  no  option  will be
exercisable  during the first six months after the date of grant or more than 10
years after the date of grant. In 1995 the Company granted 235,000 stock options
at an exercise price of $5.00; all of which provide that such options fully vest
over a period of three years from the date of grant.

The 1996 Stock Option Plan provides for the granting of incentive  stock options
to purchase shares of Common Stock at not less than the fair market value on the
date of the option  grant and the  granting  of  nonqualified  options and stock
appreciation  rights  ("SARs") with any exercise  price.  SARs granted in tandem
with an option have the same  exercise  price as the related  option.  The total
number of shares with respect to which options and SARs may be granted under the
Plan is  currently  1,100,000.  No option or SAR may be  granted  under the Plan
after July 9, 2006,  and no option or SAR may be  outstanding  for more than ten
years after its grant.

                                      F-16



<PAGE>

<PAGE>



The following table summarizes the status of the company's stock option plans:
<TABLE>
<CAPTION>

                                                                             Weighted Average Option
                                                          Shares                    Exercise Price
                                                         -------              --------------------
<S>                                                      <C>                         <C>  
Outstanding at January 1, 1996                            235,000                    $5.000
Granted                                                   373,000                     7.625
Exercised                                                       -                      -
Expired or Canceled                                             -
----------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996                          608,000                     6.610

At December 31, 1996
Exercisable options                                        78,333                     5.00
Shares Available for Future Grant                         742,000
</TABLE>


The  weighted  average  per share  fair  values  of  options  granted  under the
Company's  stock  option  plans  during  1996 and 1995  were  $4.02  and  $2.48.
respectively. Had the fair value of the grants under these plans been recognized
as compensation expense over the vesting period of the awards, the Company's net
earnings and earnings per share would have reflected the pro forma amounts shown
below:
<TABLE>
<CAPTION>

                                                          1996            1995
                                                          ----            ----
<S>                                                    <C>              <C>     
Net earnings - as reported                             $2,646,343       $374,439
         - pro forma                                   2,260,098        284,456
Earnings per share - as reported                          0.45            0.14
         - pro forma                                      0.40            0.13
</TABLE>

The fair value of each option  grant is estimated on the date of grant using the
Black-  Scholes   option-pricing  model  with  the  following  weighted  average
assumptions for 1996 and 1995: dividend yield of 0%; expected volatility of 20%;
a risk-free  interest  rate of 6.59%;  and an expected  holding  period 5 years.
Increased pro forma compensation expense in 1996 is the result of the additional
options  granted  and  further  vesting of 1995 grants  during  1996.  Pro forma
expense for 1997 is expected to increase over 1996 for the same reasons.

                                      F-17



<PAGE>

<PAGE>



11.      BUSINESS AND CREDIT CONCENTRATIONS

The  Company's  business is impacted by the general  economic  conditions of the
commercial aviation industry. Airlines and other operators recognize the need to
cut  costs,  shift  inventory  requirements,  and  conserve  capital  to sustain
profitability.  The Company's  industry is also subject to regulation by various
governmental  agencies  with  responsibilities  over civil  aviation.  Increased
regulations imposed by organizations such as the Federal Aviation Administration
may  significantly   affect  industry   operations.   Accordingly  economic  and
regulatory  changes in the marketplace  may  significantly  affect  management's
estimates and future performance.

Five of the Company's  customers (each  individually  accounting for over 10% of
trade  receivables  and/or  revenues at December 31, 1995 and December 31, 1996)
collectively  account  for 94% and 96%  (1995)  and 64% and 55%  (1996) of trade
receivables and revenues, respectively.

The Company  estimates an allowance  for doubtful  accounts  based on the credit
worthiness of its customers as well as general economic conditions. Consequently
an adverse  change in those factors  could effect the Company's  estimate of its
bad debts.

12.      OTHER MATTERS

At December 31, 1996 there were no material legal  proceedings  pending  against
the Company or any of its  property.  However,  the Company may become  party to
various claims,  legal actions and complaints  arising in the ordinary course of
business.  While any  proceeding  or litigation  has an element of  uncertainty,
management  believes that the  disposition of any matter that may arise will not
have a  material  impact on the  financial  condition,  liquidity  or results of
operations of the Company.

13.      RELATED PARTY TRANSACTIONS

During  1996,  the Company paid Yoav  Stern  and Joram D. Rosenfeld, and in each
case  entities  controlled  by them,  an  aggregate of $90,000 each for services
rendered by Yoav Stern and Joram D.  Rosenfeld as  Co-Chairmen  of the Company's
Board of Directors.

On December  24,  1996,  the Company  engaged  Helix  Capital  Corporation,  LLC
("Helix"),  in which Yoav Stern, Chairman, and Zivi Nedivi,  President and Chief
Executive Officer,  own a majority interest,  to act as the Company's  exclusive
financial  advisor with respect to merger and  acquisition  transactions  and as
principal  financial  advisor with respect to other  transactions for an initial
term of  eighteen  months  beginning  January  1,  1997.  Under the terms of the
agreement, Helix will receive a monthly retainer $25,000 and a success fee to be
determined by the Company on a per  transaction  basis,  not to fall below 2% of
the aggregate consideration paid in connection with the applicable transaction.

                                      F-18



<PAGE>

<PAGE>




14.      SUBSEQUENT EVENTS

On January 15,  1997,  the  Company  through its 100%  subsidiary,  IASI,  Inc.,
completed the acquisition of substantially all of the assets and assumed certain
of the liabilities of International Aircraft Support, L.P., a California limited
partnership,  for a cash  purchase  consideration  of $26.5  million  and issued
warrants,  with an  expiration  date of two years  from  January  15,  1997,  to
purchase  500,000 shares of the Company's  Common Stock at $9.25 per share.  The
acquisition  was  financed  through  the  issuance  of  $15  million  in  senior
subordinated  debt  and  warrants,  along  with  the  proceeds  of a $6  million
subordinated  bridge loan and warrants ("Bridge Loan") with the balance from the
Company's  working  capital.  The  acquisition  will be accounted  for using the
purchase  method of  accounting  for  business  combinations.  The Company  also
assumed IASI's existing debt including  IASI's Union Bank of California  various
credit  facilities that totaled  approximately $20 million as of the date of the
acquisition. The Bridge Loan matures on April 15, 1997. The interest rate on the
Bridge Loan is 10% and,  additionally,  75,000  warrants that are exercisable at
$10 and expire on April 15,  2000 were issued to the Bridge  Loan  lenders.  The
interest rate on the $15 million  senior  subordinated  debt is 11.75%,  payable
quarterly.  Additionally,  305,660  warrants  were issued to this  lender,  such
warrants are  exercisable  at $10 and expire on January 15,  2004.  Principal on
this debt is payable in three equal annual  installments  beginning  January 15,
2002. See Note 15(c) for certain pro forma information.

On January 17, 1997, the Company's Board of Directors declared a dividend of one
preferred share purchase right (a "Right") for each outstanding  share of Common
Stock.  Each right entitles the  registered  holder to purchase from the Company
one  one-hundredth  of a share  of  Series  A  Junior  Participating  Cumulative
Preferred Stock ("Series Preferred Stock") at an exercise price of $80.

The Rights are not  exercisable,  or  transferable  apart from the Common Stock,
until the earlier to occur of (i) ten days following a public  announcement that
a person or group of affiliated or associated  persons have acquired  beneficial
ownership of 20% or more of the outstanding  Common Stock of the Company or (ii)
ten business  days (or such later date, as defined)  following the  commencement
of, or announcement of an intention

                                      F-19


<PAGE>

<PAGE>



to make,  a tender  offer or exchange  offer,  the  consummation  of which would
result in the  beneficial  ownership  by a person or group of 19% or more of the
outstanding Common Stock of the Company. Furthermore, if the Company enters into
a consolidation,  merger, or other business combination,  as defined, each Right
would entitle the holder upon exercise to receive, in lieu of shares of Series A
Preferred Stock,  that number of shares of common stock of the acquiring company
having a value of two times the  exercise  price of the Right,  as defined.  The
Rights contain antidilutive provisions,  are redeemable at the Company's option,
subject  to certain  defined  restrictions,  for $.01 per  Right,  and expire on
January 14, 2007.

As a result of the  Rights  dividend,  the Board  designated  200,000  shares of
preferred  stock as Series A Preferred  Stock.  Series A Preferred  Stockholders
will be entitled to a preferential  cumulative quarterly dividend of the greater
of $1.00 per share or 100 times the per share dividend declared on the Company's
Common  Stock.  The Series A Preferred  Stock has a liquidation  preference,  as
defined. In addition, each share will have 100 votes and will vote together with
the shares.

On February 4, 1997 the Company called its publicly traded warrants (the "Public
Warrants")  pursuant  to their  terms.  There  were  4,166,510  Public  Warrants
outstanding at December 31, 1996. The Company  received  proceeds of $22,961,950
from the exercise of Public  Warrants  during the period from October 1, 1996 to
March 21, 1997.

On February 25, 1997,  the Board of Directors of the Company  approved  loans in
the  aggregate  amount of  $530,000 to certain  officers  and  directors  of the
Company for the purposes of purchasing shares of common stock. The loans will be
unsecured  and payable over four years for employees or five years for directors
at an interest  rate based on the  applicable  federal  rate,  as defined by the
agreement,  at the time of the loan.  The interest rate at February 25, 1997 was
6.1% per annum.  Interest  will be paid annually by officers and will accrue and
be paid at maturity by directors.

15.      SUPPLEMENTAL FINANCIAL DATA

    (a)  QUARTERLY DATA - UNAUDITED
<TABLE>
<CAPTION>

                                                                               Quarters
                                              ---------------------------------------------------------------------------
                                                     First              Second             Third            Fourth
-------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                <C>               <C>               <C>       
Revenue:
 1996                                                  $5,270,995         $5,917,832        $6,462,088        $7,270,672

 1995                                                           0            153,888         3,286,480         5,138,649
-------------------------------------------------------------------------------------------------------------------------
Earnings from continuing
operations:                                            $  516,707         $  828,409        $  662,133        $  639,094
 1996

 1995                                                    (112,323)          (479,400)          214,738           751,424
-------------------------------------------------------------------------------------------------------------------------
Net earnings:
 1996                                                  $  516,707         $  828,409        $  662,133        $  639,094

 1995                                                    (112,323)          (479,400)          214,738           751,424
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      F-20



<PAGE>

<PAGE>
<TABLE>
<CAPTION>

                                                                                     Quarters
                                                      -------------------------------------------------------------------
                                                            First              Second             Third            Fourth
-------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                <C>               <C>               <C> 
Earnings per common share for continuing operations:
 1996                                                        $.09               $.13              $.11              $.11

 1995                                                        (.04)              (.18)              .06               .13
-------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per common share:
 1996                                                    $    .09           $    .13          $    .11              $.11

1995                                                         (.04)              (.18)              .06               .13

=========================================================================================================================
</TABLE>


    (b)  PRO FORMA STATEMENT OF OPERATIONS - UNAUDITED

The Company  acquired  substantially  all of the assets and operations of KST on
June 22, 1995 (see Note 2). Accordingly, the Company's Statement of Earnings for
the year ended  December 31, 1995  reflects the  operations  of the SPAC for the
period of January 1, 1995 through June 22, 1995 along with the operations of the
acquired  company from June 22, 1995  ("Acquisition  Date") through December 31,
1995.

Subsequent to the Acquisition  Date, the operations that were unique to the SPAC
were  no  longer  needed  and  have  accordingly  been   discontinued.   Certain
significant  expense  items  that are  directly  related  to these  unique  SPAC
activities will not recur in future periods including acquisition expenses, SPAC
operating  costs and expenses and SPAC  interest  expenses.  Also,  the interest
income that was realized by the trust fund (into which proceeds of the Company's
initial  public  offering  were placed  pending the  consummation  of a business
combination)  will no longer occur,  although the Company expects to continue to
invest excess cash in interest-bearing accounts and securities.

Pro forma Statements of Earnings have been provided herein to report the results
of operations  for the year ended  December 31, 1995 as though the companies had
combined at the beginning of the period being reported.

                                      F-21



<PAGE>

<PAGE>


                          KELLSTROM INDUSTRIES, INC.
                  ACTUAL and PRO FORMA STATEMENTS OF EARNINGS
                                  (Unaudited)


<TABLE>
<CAPTION>

                                                                Years Ended December 31
                                                             -----------------------------
                                                                  1996            1995
                                                             -------------   -------------
                                                                               Pro Forma
                                                               Actual          Combined
                                                             -------------   -------------
<S>                                                          <C>             <C>         
Net revenues                                                 $ 24,921,587    $ 14,708,178

Cost of goods sold                                            (16,235,159)     (9,546,394)
Selling, general and administrative expenses                   (3,491,457)     (2,382,172)
Depreciation and amortization                                    (441,854)       (350,904)
                                                             ------------    ------------

    Operating income                                         $  4,753,117    $  2,428,708

Interest income                                                    18,001         192,721
Interest expense                                                 (662,528)       (310,362)
                                                             ------------    ------------

    Income before income taxes                               $  4,108,590    $  2,311,067

Income taxes                                                   (1,462,247)       (866,650)
                                                             ------------    ------------

    Net income                                               $  2,646,343    $  1,444,417
                                                             ============    ============

    Net income per share                                     $       0.45    $       0.30
                                                             ============    ============

Weighted average number of shares outstanding                   8,147,455       7,188,095
                                                             ============    ============
</TABLE>





        Unaudited--See accompanying notes to financial statements and to
                    pro forma combined statement of earnings

                                      F-22



<PAGE>

<PAGE>


                           KELLSTROM INDUSTRIES, INC.
                    PRO FORMA COMBINED STATEMENT OF EARNINGS
                                  (Unaudited)

<TABLE>
<CAPTION>

                                                                                    Year Ended December 31, 1995
                                                                 -------------------------------------------------------------------
                                                                           HISTORICAL                    PRO FORMA      PRO FORMA
                                                                       ITAC            KST             ADJUSTMENTS(A)    COMBINED
                                                                 ------------------------------        --------------   ----------
<S>                                                              <C>               <C>               <C>               <C>         
Net revenues                                                     $  8,579,017      $  6,111,079      $     18,082      $ 14,708,178

Cost of goods sold                                                 (5,378,053)       (4,168,341)                         (9,546,394)

Selling, general and administrative expenses                       (1,482,048)         (924,478)            4,587        (2,382,172)
                                                                                                          (90,000)
                                                                                                          109,767

Depreciation and amortization                                        (202,331)          (57,054)           33,912          (350,904)
                                                                                                         (124,731)
                                                                                                             (700)
                                                                 ------------      ------------      ------------      ------------
    Operating income                                             $  1,516,585      $    961,206      $    (49,083)     $  2,428,708

SPAC operating costs and expenses                                    (389,361)               --           389,361                --
Investment advisory expenses                                         (720,795)          (13,823)          734,618                --
                                                                 ------------      ------------      ------------      ------------
    Operating income                                             $    406,429      $    947,383      $  1,074,896      $  2,428,708

Interest income                                                       370,756            23,154          (201,189)          192,721
Interest expense                                                     (145,304)         (132,609)           61,093          (310,362)
                                                                                                            1,584
                                                                                                          (95,126)
                                                                 ------------      ------------      ------------      ------------
    Income before income taxes                                   $    631,881      $    837,928      $    841,258      $  2,311,067

Income taxes                                                         (257,442)         (439,699)         (169,509)         (866,650)
                                                                 ------------      ------------      ------------      ------------

    Net income                                                   $    374,439      $    398,229      $    671,749      $  1,444,417
                                                                 ============      ============      ============      ============

    Net income per share                                         $       0.14                                          $       0.30
                                                                 ============                                          ============

Weighted average number of common shares outstanding                2,741,195                                             7,188,095
                                                                 ============                                          ============
</TABLE>





        Unaudited--See accompanying notes to financial statements and to
                    pro forma combined statement of earnings


                                      F-23

<PAGE>

<PAGE>


                           KELLSTROM INDUSTRIES, INC.

NOTES TO PRO FORMA COMBINED STATEMENT OF EARNINGS--UNAUDITED

(A)   For  purposes  of  presenting  the  pro  forma   combined   statement  of
       earnings, the following adjustments have been made:

<TABLE>
<CAPTION>

                                                                                                    Year Ended
                                                                                                 December 31, 1995
                                                                                                 -----------------
<S>                                                                                              <C>
Increase (decrease) in income:

Increase in consulting income relating to consulting agreement with Rada                         $          18,082
Marketing, management and director fees charged to Kellstrom by its former parent and affiliates             4,587
Annual $90,000 payments to the Co-Chairmen of the Board for the period from Jan 1 - June 22                (90,000)
Elimination of 1994 expenses reflected in 1995 selling, general and administrative expenses                109,767
Decrease in amortization expense resulting from write-off of existing goodwill                              33,912
Amortization of goodwill                                                                                  (124,731)
Depreciation of building                                                                                      (700)
Elimination of all ITAC S. G. & A. expenses since all business activities will be conducted
     by Kellstrom after the Acquisition                                                                    389,361
Elimination  of all  acquisition  expense since it is  non-recurring                                       734,618
Decrease  in  interest  income  resulting  from  the  sale  of  U.S.  Government securities               (201,189)
Elimination  of interest  charged to  Kellstrom  by its former parent company                               61,093
Elimination of all ITAC interest  expenses since all business activities will be conducted
     by Kellstrom after the Acquisition                                                                      1,584
Imputed interest on $2,230,000 note payable to Rada issued at 9%                                           (95,126)
                                                                                                 -----------------
                                                                                                 $         841,258
Tax effect of pro forma adjustments                                                                       (169,509)
                                                                                                 -----------------
    Net adjustment                                                                               $         671,749
                                                                                                 =================
</TABLE>

Management and director fees paid by Kellstrom to its former parent have been
eliminated as such fees were allocated to Kellstrom on a basis other than one
deemed reasonable by management.
In the future, these services will be provided by the Co-Chairmen of the Board
and as such, an adjustment to income has been included in the pro forma
adjustments to reflect their compensation of $90,000 each per year.

                                      F-24


<PAGE>

<PAGE>

    (c) PRO FORMA FINANCIAL INFORMATION -- UNAUDITED

Set forth below is the unaudited pro forma combined  balance sheet  information,
at December 31, 1996,  assuming that the acquisition of substantially all of the
assets and certain of the liabilities of International  Aircraft  Support,  L.P.
had been  consummated at December 31, 1996 and that the Public Warrants had been
exercised  at that  date and the  unaudited  pro  forma  combined  statement  of
earnings for the year ended December 31, 1996,  assuming that the acquisition of
substantially  all of the assets and certain of the liabilities of International
Aircraft Support, L.P. had been consummated at the beginning of the period being
reported and that the  proceeds of the exercise of the Public  Warrants had been
applied to reduce indebtedness of the Company at January 1, 1996.


                                      F-25


<PAGE>

<PAGE>


                           KELLSTROM INDUSTRIES, INC.
                        PRO FORMA COMBINED BALANCE SHEET
                               DECEMBER 31, 1996
                                  (Unaudited)

                                     Assets

<TABLE>


<S>                                                                      <C>        
Current Assets:
   Cash and cash equivalents                                             $   157,854
   Trade receivables, net of allowances for returns and
      doubtful accounts of $168,622                                        7,688,538
   Inventory                                                              33,310,539
   Engines under operating leases, net                                     8,853,978
   Notes receivable                                                        1,124,950
   Prepaid expenses and other current assets                                 679,989
   Investment in securities                                                1,829,532
                                                                         -----------
          Total current assets                                           $53,645,380



Property, plant and equipment, net                                         3,017,942
Intangible assets, net                                                    17,420,228
Other assets                                                               3,430,100
                                                                         -----------
          Total Assets                                                   $77,513,650
                                                                         ===========

                             Liabilities and Equity

Current Liabilities:

   Short-term notes payable                                              $ 5,045,438
   Current maturities of long-term debt and capital lease obligations      6,299,344
   Accounts payable                                                        3,019,488
   Accrued expenses                                                        4,523,193
   Income taxes payable                                                      157,212
   Deferred tax liability                                                    173,379
                                                                         -----------
          Total current liabilities                                      $19,218,054

Long-term debt and capital lease obligations, less current maturities     16,598,725
                                                                         -----------
          Total Liabilities                                              $35,816,779


Stockholders' Equity:

    Preferred stock, $ .001 par value; 1,000,000 shares
         authorized; none issued                                                 --
    Common stock, $ .001 par value; 20,000,000 shares authorized;
         7,481,818 shares issued and outstanding                               7,482
    Additional paid-in capital                                            38,403,522
    Retained earnings                                                      3,012,642
    Net unrealized gain on investment securities                             273,225
                                                                         -----------
          Total Stockholders' Equity                                     $41,696,871
                                                                         -----------
          Total Liabilities and Stockholders' Equity                     $77,513,650
                                                                         ===========

</TABLE>

     Unaudited -- See accompanying notes to pro forma combined balance sheet

                                      F-26


<PAGE>

<PAGE>



                           KELLSTROM INDUSTRIES, INC.
                        PRO FORMA COMBINED BALANCE SHEET
                               DECEMBER 31, 1996
                                  (Unaudited)


<TABLE>
<CAPTION>

                                                                                     HISTORICAL         PRO FORMA       PRO FORMA
                                                                               KELLSTROM       IASI    ADJUSTMENTS(A)    COMBINED
                                                                            -------------------------  -------------   -------------
<S>                                                                         <C>           <C>           <C>            <C>
                      Assets

Current Assets:

        Cash and cash equivalents                                        $    154,254  $      3,600  $ 20,832,550  c   $    157,854
                                                                                                       (1,209,784) d
        Trade receivables, net of allowances for returns and                                          (19,622,766) e
           doubtful accounts of $150,000 for Kellstrom and
           $18,622 for IASI                                                 4,023,298     3,711,669       (46,429) a      7,688,538
        Inventory                                                          15,723,370    21,969,313    (4,382,144) b     33,310,539
        Engines under operating leases, net                                         0    12,903,284    (4,049,306) b      8,853,978
        Notes receivable                                                           --     2,251,847    (1,126,897) b      1,124,950
        Prepaid expenses and other current assets                             645,462        46,735       (12,208) b        679,989
        Investment in securities                                            1,829,532            --            --         1,829,532
                                                                         ------------  ------------  ------------      ------------

               Total current assets                                      $ 22,375,916  $ 40,886,448  $ (9,616,984)     $ 53,645,380

Property, plant and equipment, net                                          2,943,077        74,865                       3,017,942
Intangible assets, net                                                      3,618,862       324,509    13,801,366  b     17,420,228
                                                                                                         (324,509) b
Other assets                                                                  682,870         7,000     2,740,230  d      3,430,100
                                                                         ------------  ------------  ------------      ------------
               Total Assets                                              $ 29,620,725  $ 41,292,822  $  6,600,103      $ 77,513,650
                                                                         ============  ============  ============      ============


        Liabilities and Equity

Current Liabilities:
        Short-term notes payable                                         $  5,157,302  $  5,900,550  $  6,000,000  b   $  5,045,438
                                                                                                        3,822,852  b
                                                                                                      (15,835,266) e
        Current maturities of long-term debt and capital lease obligations    211,068     6,088,276                       6,299,344
        Accounts payable                                                    1,651,405     1,414,512       (46,429) a      3,019,488
        Accrued expenses                                                    1,290,393     3,330,037       (97,237) b      4,523,193
        Income taxes payable                                                  157,212            --            --           157,212
        Deferred tax liability                                                173,379             0                         173,379
                                                                         ------------  ------------  ------------      ------------

               Total current liabilities                                 $  8,640,759  $ 16,733,375  $ (6,156,080)     $ 19,218,054

Long-term debt and capital lease obligations, less current maturities       2,819,225     2,567,000    15,000,000  b     16,598,725
                                                                                                       (3,787,500) e
                                                                         ------------  ------------  ------------      ------------

               Total Liabilities                                         $ 11,459,984  $ 19,300,375  $  5,056,420      $ 35,816,779

Equity:
        Preferred stock, $ .001 par value; 1,000,000 shares
               authorized; none issued                                             --            --                              --
        Common stock, $ .001 par value; 20,000,000 shares authorized;
               3,315,308 shares issued and outstanding                          3,315            --         4,167  c          7,482
        Additional paid-in capital / Contributed capital                   14,871,559     5,398,129    (5,398,129) b     38,403,522
                                                                                                        1,173,134  b
                                                                                                       20,828,383  c
                                                                                                        1,530,446  d
        Retained earnings / Accumulated earnings                            3,012,642    16,594,318   (16,594,318) b      3,012,642
        Net unrealized gain on investment securities                          273,225            --            --           273,225
                                                                         ------------  ------------  ------------      ------------

               Total Equity                                              $ 18,160,741  $ 21,992,447  $  1,543,683      $ 41,696,871
                                                                         ------------  ------------  ------------      ------------
  
               Total Liabilities and Equity                              $ 29,620,725  $ 41,292,822  $  6,600,103      $ 77,513,650
                                                                         ============  ============  ============      ============

</TABLE>



    Unaudited -- See accompanying notes to pro forma financial statements

                                      F-27


<PAGE>

<PAGE>


                           KELLSTROM INDUSTRIES, INC.

NOTES TO PRO FORMA COMBINED BALANCE SHEET--UNAUDITED

(A)   For purposes of presenting  the pro forma  combined  balance  sheet, the
       following adjustments have been made:


<TABLE>
<CAPTION>


                                                                                December 31, 1996
                                                                                -----------------

<S>                                                                         <C>
a. Elimination of inter-company balances:

Reduction in accounts receivable:
        Kellstrom accounts receivable from IASI                                  $    (40,600)
        IASI accounts receivable from Kellstrom                                        (5,829)
                                                                                 ------------
                                                                                 $    (46,429)
                                                                                 ============

Reduction in accounts payable
        Kellstrom accounts payable to IASI                                       $     (5,829)
        IASI accounts payable to Kellstrom                                            (40,600)
                                                                                 ------------
                                                                                 $    (46,429)
                                                                                 ============


b. Acquisition of IASI assets:
        Revaluation  of  inventory  acquired (due to change in intended use)     $ (4,382,144)
        Revaluation  of engines acquired (under operating leases)
          (due to change in intended use)                                          (4,049,306)
        Elimination of IASI notes  receivable                                      (1,126,897)
        Elimination of prepaid  insurance                                             (12,208)
        Excess of Purchase Price over Fair Value of Net Assets Acquired            13,801,366
        Elimination of IASI goodwill                                                 (324,509)
        Bank note payable incurred                                                  3,822,852
        Elimination of some IASI accrued expenses                                     (97,237)
        Bridge loan debt incurred                                                   6,000,000
        Subordinated debt incurred                                                 15,000,000
        Elimination of IASI contributed capital                                    (5,398,129)
        Elimination of IASI accumulated earnings                                  (16,594,318)
        Additional  paid-in capital from warrants issued                            1,173,134
                                                                                 ------------
                                                                                 $          0
                                                                                 ============

c. Exercise balance of warrants:
        Common stock issued                                                             4,167
        Additional paid-in capital received                                        20,828,383
                                                                                 ------------
                                                                                 $ 20,832,550
                                                                                 ============

d. Prepayment of finance charge on  acquisition  debt:
      Additional paid-in capital from warrants issued                               1,530,446
      Finance charge paid in cash                                                   1,209,784
                                                                                 ------------
                                                                                 $  2,740,230
                                                                                 ============

e. Use of proceeds from exercise of warrants:
      Reduction of bridge loans and line of credit financing                      (15,835,266)
      Reduction of subordinated notes                                              (3,787,500)
                                                                                 ------------
                                                                                 $(19,622,766)
                                                                                 ============



</TABLE>



                                      F-28



<PAGE>




<PAGE>


                           KELLSTROM INDUSTRIES, INC.
                    PRO FORMA COMBINED STATEMENT OF EARNINGS
                                  (Unaudited)


<TABLE>
<CAPTION>

                                                                       Year Ended
                                                                   December 31, 1996
                                                                       Pro Forma
                                                                       Combined
                                                                   -----------------



<S>                                                                <C>              
Net revenues                                                       $      47,291,200

Cost of goods sold                                                       (30,951,057)
Selling, general and administrative expenses                              (4,542,415)
Depreciation and amortization                                             (2,045,686)
                                                                   -----------------

    Operating income                                               $       9,752,042

Interest income                                                               61,278
Interest expense                                                          (3,307,986)
                                                                   -----------------

    Income before income taxes                                      $      6,505,334

Income taxes                                                              (2,315,248)
                                                                   -----------------
    Net income                                                      $      4,190,086
                                                                   =================

    Net income per share                                                        0.53
                                                                   =================

Weighted average number of shares outstanding                              7,952,470
                                                                   =================
</TABLE>


       See accompanying notes to pro forma combined statement of earnings



                                      F-29


<PAGE>
<PAGE>

                          KELLSTROM INDUSTRIES, INC.
                    PRO FORMA COMBINED STATEMENT OF EARNINGS
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                            Year Ended December 31, 1996
                                                        ------------------------------------------------------------------
                                                                    HISTORICAL                PRO FORMA          PRO FORMA
                                                           KELLSTROM           IASI          ADJUSTMENTS (A)      COMBINED
                                                        ------------------------------       ---------------     ---------
<S>                                                      <C>                <C>               <C>               <C>          
Net revenues                                             $ 24,921,587      $ 22,863,747     $  (494,134)       $ 47,291,200
                                                         ------------      ------------     -----------        ------------
Cost of goods sold                                        (16,235,159)      (15,083,516)        367,618         (30,951,057)

Selling, general and administrative expenses               (3,491,457)       (1,744,434)        693,476          (4,542,415)
Depreciation and amortization                                (441,854)         (937,716)         23,952          (2,045,686)

                                                                                               (690,068)
                                                         ------------      ------------     -----------        ------------
Operating income                                         $  4,753,117      $  5,098,081     $   (99,156)       $  9,752,042

Interest income                                                18,001            43,277                              61,278 
Interest expense                                             (662,528)       (1,066,418)        942,515          (3,307,986)
                                                                                             (2,521,555)
Expenses related to sale of business                              --           (234,866)        234,866              --
                                                         ------------      ------------     -----------        ------------
    Income before income taxes                           $  4,108,590      $  3,840,074     $(1,443,330)       $  6,505,334 

Income taxes                                               (1,462,247)           (3,075)       (849,926)         (2,315,248)
                                                         ------------      ------------     -----------        ------------
    Net income                                           $  2,646,343      $  3,836,999     $(2,293,256)       $  4,190,086
                                                         ============      ============     ===========        ============
    Net income per share                                 $       0.45                                          $       0.53
                                                         ============                                          ============
Weighted average number of common shares outstanding        8,147,455                                             7,952,470
                                                         ============                                          ============

</TABLE>

Unaudited -- See accompanying notes to pro forma combined statement of earnings



                                      F-30


<PAGE>

<PAGE>


                           KELLSTROM INDUSTRIES, INC.

NOTES TO PRO FORMA COMBINED STATEMENT OF EARNINGS

(A)   For  purposes  of  presenting  the  pro  forma   combined   statement  of
       operations, the following adjustments have been made:


<TABLE>
<CAPTION>


                                                                                         Twelve Months Ended
                                                                                          December 31, 1996
                                                                                         -------------------
<S>                                                                                     <C>
Increase (decrease) in income:

Decrease in net revenues  from  inter-company  sales                                     $         (494,134)
Decrease in cost of goods  sold  from  inter-company  sales                                         367,618 
Decrease  in IASI selling, general and administrative expenses due to elimination of
  pension  plan and  bonus  program  and  consolidation  of  insurance  policies                    693,476
Elimination  of  IASI  goodwill   amortization  expense                                              23,952
Amortization of goodwill  related to acquisition                                                   (690,068)
Reduction of bank interest  expense -  exercise  of  warrants                                       942,515
Interest  expense on acquisition  debt                                                           (2,521,555)
Elimination of expenses related to the sale of IASI                                                 234,866
                                                                                         -------------------
                                                                                         $       (1,443,330)
Tax effect of pro forma adjustments                                                                (849,926)
                                                                                         -------------------
    Net adjustment                                                                       $       (2,293,256)
                                                                                         ===================

</TABLE>




                                      F-31



<PAGE>

<PAGE>




                         Report of Independent Auditors

The Board of Directors
International Aircraft Support

We have  audited  the  accompanying  combined  balance  sheet  of  International
Aircraft  Support  (the  "Company")  as of December  31,  1996,  and the related
combined statements of income and retained earnings, and cash flows for the year
then ended.  These combined  financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
combined financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion,  the combined  financial  statements  referred to above  present
fairly,  in all  material  respects,  the  financial  position of  International
Aircraft  Support as of December 31, 1996, and the results of its operations and
its cash flows for the year then ended in  conformity  with  generally  accepted
accounting principles.


                                               KPMG PEAT MARWICK LLP


San Francisco, California
February 21, 1997



                                      F-32


<PAGE>

<PAGE>


                         International Aircraft Support
                             Combined Balance Sheet

                                December 31, 1996


<TABLE>
<S>                                                                <C>         
                        ASSETS

Current assets:
    Cash                                                           $      3,600
    Accounts receivable, net of allowance for doubtful
       accounts of $18,622                                            3,711,669
    Inventory                                                        21,969,313
    Notes receivable from related parties                             2,251,847
    Other current assets                                                 46,735
                                                                   ------------
       Total current assets                                          27,983,164

Jet aircraft engines held for lease, net of
    accumulated depreciation of $3,861,190                           12,903,284

Property and equipment:
    Furniture and equipment                                             317,588
    Trucks and automobiles                                               41,997
    Leasehold improvements                                               26,501
                                                                   ------------
                                                                        386,086
    Accumulated depreciation and amortization                          (311,221)
                                                                   ------------
                                                                         74,865

Goodwill, net of accumulated amortization of $163,678                   324,509
Other assets                                                              7,000
                                                                   ------------
       Total assets                                                $ 41,292,822
                                                                   ============

                             LIABILITIES AND EQUITY
Current liabilities:
    Revolving line of credit                                       $  4,000,000
    Engine line of credit                                             1,900,550
    Current portion of notes payable                                  6,088,276
    Accounts payable and accrued liabilities                          3,439,967
    Consignments payable                                              1,258,032
    Other current liabilities                                            46,550
                                                                   ------------
       Total current liabilities                                     16,733,375

    Notes payable, less current portion                               2,567,000
                                                                   ------------
       Total liabilities                                             19,300,375
                                                                   ------------
Commitments and contingencies

Equity:
    Contributed capital                                               5,398,129
    Retained earnings                                                16,594,318
                                                                   ------------
                                                                     21,992,447
                                                                   ------------
       Total liabilities and equity                                $ 41,292,822
                                                                   ============
</TABLE>

See accompanying notes to combined financial statements.


                                      F-33



<PAGE>

<PAGE>


                         International Aircraft Support
               Combined Statement of Income and Retained Earnings

                          Year ended December 31, 1996


<TABLE>
<S>                                                             <C>
Revenues, including consignment parts sales of $2,289,107         $ 22,863,747

Operating expenses:
   Direct labor and materials, including consignment parts cost
   of $ 1,793,270                                                   13,662,392
   Indirect labor and operating                                      1,421,124
   Depreciation and amortization                                       937,716
   General and administrative                                        1,744,434
                                                                  ------------
       Total operating expenses                                     17,765,666

Income from operations                                               5,098,081

Other (income) expense:
Interest expense                                                     1,066,418
Expenses related to sale of business                                   234,866
Other income                                                           (43,277)
                                                                  ------------
Income before income taxes                                           3,840,074

Provision for income taxes                                               3,075
                                                                  ------------
Net income                                                           3,836,999

Retained earnings at beginning of year                              12,757,319
                                                                  ------------
Retained earnings at end of year                                  $ 16,594,318
                                                                  ============
</TABLE>




See accompanying notes to combined financial statements.




                                      F-34


<PAGE>

<PAGE>



                         International Aircraft Support
                        Combined Statement of Cash Flows

                          Year ended December 31, 1996

<TABLE>
<S>                                                               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

   Net income                                                        $ 3,836,999
   Adjustments to reconcile net income to net cash provided
     by operating activities:
         Depreciation and amortization                                   937,716
         Decrease in accounts receivable, net                            275,795
         Increase in inventory, net                                   (1,940,775)
         Decrease in other assets                                         64,387
         Increase in accounts payable and accrued liabilities          1,666,442
         Increase in consignments payable                                472,351
         Increase in other liabilities                                    38,587
                                                                     -----------
          Net cash provided by operating activities                    5,351,502

CASH FLOWS FROM INVESTING  ACTIVITIES:
   Additions of property and equipment                                    (6,328)
   Purchase of jet aircraft engine held for lease and overhaul costs  (5,950,542)
                                                                     -----------
          Net cash used in investing activities                       (5,956,870)

NET CASH FLOWS FROM FINANCING ACTIVITIES
   Loan to shareholder                                                (1,500,000)
   Net borrowings on lines of credit                                   1,612,550
   Proceeds from borrowings on notes payable                           6,300,000
   Principal payments on notes payable                                (6,328,720)
                                                                     -----------
          Net cash provided by financing activities                       83,830

Decrease in cash                                                        (521,538)
Cash at beginning of year                                                525,138
                                                                     -----------
Cash at end of year                                                  $     3,600
                                                                     ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest                               $ 1,049,977
                                                                     ===========

Noncash transaction:  transfer of engine held for lease to inventory
   at book value                                                     $   314,282
                                                                     ===========
</TABLE>


See accompanying notes to combined financial statements.




                                      F-35


<PAGE>

<PAGE>


                         International Aircraft Support

                     Notes to Combined Financial Statements

                                December 31, 1996

1. BASIS OF PRESENTATION

The combined financial statements include the accounts of International Aircraft
Support, Inc. and International Aircraft Support, L.P. (collectively referred to
as "International Aircraft Support" or the "Company"). All material intercompany
balances and transactions have been eliminated.

International  Aircraft  Support,  Inc.  was acquired by IASI,  Inc.,  an entity
wholly-owned  by General  William  Lyon,  on February 15, 1990.  IASI,  Inc. was
merged  into  International   Aircraft  Support,  Inc.  on  February  26,  1990.
Accordingly,  International  Aircraft  Support,  Inc. is wholly-owned by General
William Lyon. The acquisition was accounted for as a purchase.

International Aircraft Support, L.P. (the "Partnership") is a California limited
partnership  formed in 1990.  International  Aircraft  Support,  Inc.  is the 5%
managing  general  partner of the  Partnership,  Air/Lyon,  Inc. is a 5% general
partner and Air/Lyon  Associates L.P. is the sole 90% limited partner.  Air/Lyon
Associates L.P. is a California limited partnership comprised of Air/Lyon, Inc.,
general partner,  and General William Lyon, limited partner.  Air/Lyon,  Inc. is
wholly-owned by General William Lyon.  Effective  August 1, 1990, the operations
of International Aircraft Support, Inc. were transferred to the Partnership.

The Company  provides jet aircraft engine  maintenance  support to owners and/or
operators of commercial jet aircraft  engines.  The Company's  services include:
complete  engine  sales and  leasing,  engine  part  sales,  engine  maintenance
monitoring  and technical  support  services.  Customers of the Company  consist
primarily of airlines, commercial jet engine repair shops, air freight operators
and aircraft leasing companies.

Partnership  losses are  allocated  in  reverse  order of  previously  allocated
profits  and then in  proportion  to  capital  accounts  until  capital  account
balances are zero, with any remaining  losses  allocated to the general partners
in  proportion  to their  ownership  interests.  Profits are first  allocated in
reverse  order of  previously  allocated  losses and then in  proportion  to the
partners'  ownership  interests.  Preferred returns are a special  allocation of
profits  calculated  at  prime  plus  .5% on the  partners'  unreturned  capital
contributions.




                                      F-36


<PAGE>

<PAGE>


                         International Aircraft Support
               Notes to Combined Financial Statements (continued)


2. ACCOUNTING POLICIES

INVENTORY

Inventory,  consisting  primarily of new and used jet aircraft  engine parts, is
stated at the lower of cost or market.  Market is based on net realizable value.
Appropriate  consideration  is given to  deterioration,  obsolescence  and other
factors in evaluating net realizable value.  Engine parts are acquired primarily
by purchasing engines and disassembling them into their component parts.  Engine
costs are then allocated to the individual  parts using the relative sales value
method.  The costs of  refurbishing  individual  parts are included in the total
cost of each part using the specific  identification  method.  Costs  related to
procurement,   storage  and  refurbishment  activities  are  also  allocated  to
inventory costs.

PROPERTY AND EQUIPMENT

Property and  equipment is stated at cost and  includes  expenditures  for major
replacements and improvements.  Depreciation is computed using the straight-line
or double  declining  balance method over the estimated  useful service lives of
the assets,  which range from five to seven years.  Leasehold  improvements  are
depreciated  using the straight  line method over the shorter of the useful life
of the improvement or the remaining term of the lease.  Repairs  and maintenance
costs are expensed as incurred.

The Company leases jet aircraft  engines to airlines and air freight  operators.
Depreciation  of engines is computed  based upon flight hours,  flight cycles or
both over the  estimated  useful  service  lives of the  engines,  allowing  for
estimated  salvage value.  The costs  associated with major engine overhauls are
accrued based upon usage. During the year ended December 31, 1996,  depreciation
for engines totaled $879,776.  Overhaul costs of $1,736,261 were incurred during
1996.

GOODWILL

Goodwill arising from the acquisition of International Aircraft Support, Inc. by
IASI,  Inc.  totaled  $488,187 and is being  amortized  using the  straight-line
method over 20 years.

REVENUE RECOGNITION

Revenue  generated from complete  engine sales is recognized  upon acceptance of
the equipment by the customer.  Parts sales revenue is recognized  upon shipment
of the related item to the customer. Technical services and leasing revenues are
recognized over the term of the related agreements.




                                      F-37


<PAGE>

<PAGE>


                         International Aircraft Support
               Notes to Combined Financial Statements (continued)

CONSIGNMENT REVENUE AND COSTS

Consignment  revenue  and costs  represent  the sales of engine  parts which the
Company does not own. The Company routinely takes possession of engines which it
does not own, has the engines  disassembled  and the parts overhauled as needed.
The Company then inventories the parts at the Company's  warehouse and sells the
parts to third parties.  The Company is responsible for the costs to disassemble
the engine,  overhaul,  warehouse and sell the parts. Certain of these costs are
allocated to the parts and recovered  from the parts sales prior to the owner of
the parts participating in the sale proceeds.  At December 31, 1996, the Company
had incurred  $774,931 of  refurbishment  costs,  which are included in accounts
receivable,  that had not been recovered.  These costs are fully reimbursable to
the  Company  upon the  termination  of their  services  under  the terms of the
consignment agreements.

CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

The   financial   instruments   which   potentially   subject   the  Company  to
concentrations of credit risk are accounts receivable.  Concentrations of credit
risk with respect to accounts receivable that consist principally of receivables
from  airlines,  commercial jet engine repair shops,  air freight  operators and
aircraft leasing companies located  throughout the world, are limited due to the
initial and  continuing  credit  evaluation  of all  customers  who are extended
credit.

Approximately  44% of the  Company's  total  revenue  relates to five  recurring
customers which are significant  participants in the aviation industry. In 1996,
one customer accounted for more than 10% of revenues.

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  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of notes receivable from related parties  approximates  their
fair value due to  short-term  maturity.  Management  estimates  or believes the
carrying value of the Company's  long-term debt  approximates its fair value due
to periodic adjustments in floating interest rates.




                                      F-38


<PAGE>

<PAGE>


                         International Aircraft Support
               Notes to Combined Financial Statements (continued)

3. ACCOUNTS RECEIVABLE

Accounts  receivable  at December  31,  1996,  consists of  $2,923,782  in trade
account  receivables,  $774,931 of consignment repair receivables and $31,578 of
unbilled work-in-process,  net of a $18,622 allowance for doubtful accounts. The
majority of unbilled work-in-process relates to technical support services which
were not complete as of December 31, 1996.  Subsequent to December 31, 1996, all
year-end work-in-process was completed and invoiced

4. INVENTORY

Inventory at December 31, 1996,  consists primarily of new and used jet aircraft
engine  parts.  All  inventory  is held  for  sale  and,  accordingly,  has been
classified as a current asset in the combined balance sheet.  Historically,  the
period  required to sell the jet aircraft engine parts is  substantially  longer
than one year.  As a result,  management  anticipates  that a portion of the jet
aircraft  engine parts  inventory at December 31, 1996,  will not be sold during
1997 and such amount  could be  significant.  Inventory  at December  31,  1996,
consists of new and used jet aircraft  engine  parts  totaling  $13,416,595  and
$7,017,542,  respectively.  During  1996,  the  Company  sold  new and  used jet
aircraft engine parts with a cost basis approximating  $10,630,334.  Included in
inventory at December 31, 1996, is $1,532,542  of  capitalized  costs related to
the procurement, storage and refurbishment of aircraft engine parts.

During 1996, the Company  purchased for their parts inventory a new model PW4060
engine for cash of $2,755,687  and a Prime +1% interest  bearing note payable to
the Union Bank of California (the Bank) of $3,000,000.  This engine is currently
awaiting teardown to piece parts.

In addition, the company purchased a CFM 56-3B1 aircraft engine and a CFM 56-3B2
core module for  $3,200,000.  This was financed  through the  Company's  line of
credit  ($758,000)  and the  Engine  line of credit  ($2,442,000).  These are in
inventory as piece parts as of December 31, 1996.

5. AIRCRAFT ENGINES HELD FOR LEASE

Aircraft  engines held for lease,  stated at cost,  consist of the  following at
December 31, 1996:

  Model PW4060 aircraft engine, leased                        $   8,686,777
  Model JT9D-7A aircraft engine                                   3,803,526
  Model JT8D-217A aircraft engine, leased                         1,774,171
  Model JT8D-219 aircraft engine, leased                          2,500,000
                                                              -------------
                                                                 16,764,474
Accumulated depreciation                                         (3,861,190)
                                                              -------------
                                                              $  12,903,284
                                                              =============

Aircraft  engines  are  normally  leased  for  periods  of less  than one  year.
Generally,  the lessee is  responsible  for rental  payments  based on in-flight
usage of the engine as well as a daily or monthly base lease charge.




                                      F-39


<PAGE>

<PAGE>

                         International Aircraft Support

               Notes to Combined Financial Statements (continued)


5. AIRCRAFT ENGINES HELD FOR LEASE (continued)

During 1994,  the Company  entered into a longterm  lease with a German  carrier
involving the model PW4060 aircraft  engine.  The lease expires on July 29, 2000
and provides for minimum annual amounts of $559,200, plus a usage fee per flight
hour. The lessee has an option to terminate this lease after July 29, 1997, with
a 90-day prior notice to the Company. This lease also gives the lessee an option
to purchase the engine for a defined amount.

During 1995,  the Company  entered into a lease  agreement for the model JT9D-7A
aircraft  engine  with an air freight  operator.  The lease term for this engine
expired on October 24,  1996,  and as of  December  31, 1996 this engine was not
leased.

During 1996, the Company  entered into a lease agreement for the model JT8D-217A
with a domestic carrier.  The lease was for a period of 90 days (beginning March
15,  1996),  with the lessee  having the  option  for three  successive  180 day
periods. At December 31, 1996, the lessee had exercised this option up.

On November 26, 1996, the Company  entered into a lease  agreement for the model
JT8D-219 with a Scandinavian  carrier. The lease was for a minimum period of six
months.  This provides for minimum monthly amounts of $39,000,  plus a usage fee
per flight hour.

During the year ended  December 31, 1996,  leasing  income  totaled  $1,881,686,
including $961,196 for usage fees.

6. LINES OF CREDIT

The Company has a revolving line of credit with the Bank, with interest  payable
monthly at the Bank's  prime rate (8.25% at December  31,  1996) plus 1/2%.  The
line is secured by a general  security  agreement  on  accounts  receivable  and
inventory.  Borrowings  are  available  through  the line's due date of June 30,
1997, and may not exceed the lower of $7,000,000 or eligible accounts receivable
and  inventory.  The balance on the line of credit at  December  31,  1996,  was
$4,000,000.

The  Company  also has an  engine  line of  credit  with  availability  of up to
$4,000,000 with interest  payable monthly at the Bank's prime rate plus 1%. This
engine line of credit is secured by any engine  purchased  with amounts drawn on
the line of credit. Borrowings are available through the line's due date of June
30, 1997,  and may not exceed the lower of 90% of the actual  purchase  price of
the aircraft  engine to be financed or the maximum credit  available at the time
of the  advance.  As of  December  31,  1996,  the balance on the engine line of
credit is  $1,900,550,  which is  secured  by the  residual  parts  from a model
PW2000, from a CFM56 engine and a CFM56 module.




                                      F-40


<PAGE>

<PAGE>


                         International Aircraft Support
               Notes to Combined Financial Statements (continued)

7. NOTES PAYABLE

Notes payable consist of the following at December 31, 1996:

<TABLE>
<S>                                                                               <C>
   Note payable secured by model PW4060 aircraft engine held for lease, monthly
   principal payments due of $35,000 plus interest at prime plus 0.5%, with the
   unpaid balance due September 30, 1997.                                           $1,985,000

   Note payable secured by a model PW4060 aircraft engine parts, and proceeds of
   sale of aircraft engine parts, monthly minimum principal payments due of
   $100,000 plus interest at prime plus 1.0%, with the unpaid balance due
   November 30, 1997.                                                                3,000,000

   Note payable  secured by an automobile,  monthly principal payments of $672
   plus interest at 10.0% with the unpaid
   balance due in October, 1997.                                                         5,276

   Note payable secured by model JT8D-219 aircraft engine held for lease monthly
   principal payments due of $36,500 plus interest of prime plus 0.75%, with the
   unpaid balance due November 30, 1998.                                             2,200,000

   Note payable secured by model JT8D-217A aircraft engine held for lease,
   monthly principal payments of $30,000, plus interest at prime plus 0.5%, with
   the unpaid balance due May 31, 1999.                                                890,000

   Note payable secured by model JT9D-7A aircraft engine held for lease, monthly
   principal payments due of $25,000 plus interest at prime plus 0.5%, with the
   unpaid balance due August 31, 1999.                                                 575,000
                                                                                    ----------
                                                                                     8,655,276

   Less:  current portion                                                            6,088,276
                                                                                    ----------
                                                                                    $2,567,000
                                                                                    ==========

The  future  principal  payments  due under the terms of notes  payable  and the
Company's lines of credit subsequent to December 31, 1996, are as follows:

Years ending December 31

1997                                                                               $ 6,088,276
1998                                                                                 2,397,000
1999                                                                                   170,000
                                                                                   -----------
Total                                                                              $ 8,655,276
                                                                                   ===========
</TABLE>


The prime rate averaged  approximately  8.38% during the year ended December 31,
1996, and was 8.25% at December 31, 1996.




                                      F-41


<PAGE>

<PAGE>


                         International Aircraft Support
               Notes to Combined Financial Statements (continued)

8. INCOME TAXES

Effective  January 1,  1991,  International  Aircraft  Support,  Inc.  elected S
corporation status.  Accordingly,  a provision has not been provided for federal
income taxes on the earnings of  International  Aircraft  Support,  Inc. for the
year ended December 31, 1996, as its income is taxed at the shareholder's  level
for federal  income tax  purposes.  A provision  has been  provided for State of
California  franchise  taxes  equal  to 1.5% of the  earnings  of  International
Aircraft Support, Inc. for the year ended December 31, 1996.

A provision  has not been  provided  for federal and state  income  taxes on the
earnings of International Aircraft Support,  L.P., a partnership,  as its income
and losses  are taxed at the  partner  level for  federal  and state  income tax
purposes.

9. EMPLOYEE BENEFIT PLANS

The Company has a defined  contribution Money Purchase Pension Plan (the "Plan")
which provides retirement and other benefits for most full-time employees. Under
the Plan, the Company is required to contribute amounts equal to 10% of eligible
employees' compensation, up to $150,000 in covered compensation per employee per
year. For the period ended December 31, 1996, the Company accrued  contributions
of $87,833 to the Plan. Historically, the Company has not contributed amounts to
the Plan in excess of the  maximum  amount  deductible  for  federal  income tax
purposes.

10. COMMITMENTS AND CONTINGENCIES

The  Company  conducts  its  operations  in leased  facilities  and the lease is
accounted for as an operating lease. The lease requires monthly rent payments of
approximately  $21,000 and expires January 31, 1999. Facility rent expense,  net
of sublease income, was $226,659 for the year ended December 31, 1996.

During 1994, the Company, as lessor, entered into an engine lease agreement with
a European carrier whereby the Company will provide an aircraft parts purchasing
credit to the  lessee for any  additional  costs  incurred  by the lessee due to
European tax laws  associated  with the lease.  As of December  31,  1996,  this
purchasing credit was not material.

The loan agreements for the revolving line of credit,  the engine line of credit
and the notes payable (see Note 7) contain certain convenants which restrict the
distribution  of cash or the  payment of  dividends  and  require the Company to
maintain certain levels of net worth and profitability.




                                      F-42


<PAGE>

<PAGE>




                         International Aircraft Support
               Notes to Combined Financial Statements (continued)

11.  RELATED PARTY TRANSACTIONS

During June 1996, the Company issued a promissory note for $1,500,000 to William
Lyon at 0% interest. As a part of purchase by Kellstrom, this note was repaid on
January 15, 1997 (see Note 12). Also, the Company  issued,  in prior years,  two
promissory  notes  totaling  $600,000 at 6% interest to  companies  under common
ownership. These notes are unsecured and are due upon demand. As of December 31,
1996,  accrued  interest on these  notes was  $151,847.  The Company  recognized
$42,258 of interest income on the notes during 1996.

The Company  participates  in an insurance  program for  essentially  all of its
insurance needs, other than employee benefits, with companies affiliated through
common ownership. Payments for such services during 1996 totaled $165,577.

During July 1995, the Company purchased from an affiliate certain aircraft parts
for $400,000  (purchase price). In accordance with the agreement,  the affiliate
guaranteed the recovery of the Company's  purchase  price plus accrued,  imputed
interest  compounded  annually at the prime rate.  As of December 31, 1996,  the
parts  were held on  consignment  by a third  party  located in  Florida.  As of
December  31,  1996,  related  parts with a costs  basis of  $376,860  remain in
inventory.

12.  SUBSEQUENT EVENTS

On January 15, 1997,  Kellstrom  Industries,  Inc.  (Kellstrom) through its 100%
subsidiary,  IASI, Inc.,  purchased  substantially all of the assets and assumed
certain of the liabilities of International  Aircraft  Support,  L.P. for a cash
purchase   consideration  of  $26.5  million.  In  addition,   the  Partners  of
International Aircraft Support,  L.P., were issued warrants,  with an expiration
date of two years from January 15, 1997, to purchase 500,000 shares of Kellstrom
at  $9.25 per share.  The  combined financial statements do not include accruals
for  future  decisions,  activities  and transactions or adjustments relating to
decisions  regarding the  Company's operations and assets that might result from
the subsequent event.



                                      F-43

<PAGE>

<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors
International Aircraft Support
 
We  have  audited  the  accompanying  combined  balance  sheet of International
Aircraft  Support  (the  'Company') as  of December  31, 1995,  and the  related
combined statements of  income  and equity,  and cash  flows for  the year  then
ended.  These  financial  statements  are  the  responsibility  of the Company's
management.  Our  responsibility  is  to express  an opinion  on these financial
statements based on our audit.
 
We conducted our audit 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 audit provides a reasonable basis for our opinion.
 
In our  opinion, the  combined financial  statements referred  to above  present
fairly,  in  all  material  respects, the  financial  position  of International
Aircraft Support as of December 31, 1995, and the results of its operations  and
its  cash flows for  the year then  ended in conformity  with generally accepted
accounting principles.
 
March 21, 1996

                                           Ernst & Young LLP
 

                                         F-44<PAGE>

<PAGE>



                         International Aircraft Support

                             Combined Balance Sheet

                                December 31, 1995
<TABLE>
<S>                                                                               <C>     
                               ASSETS
   CURRENT ASSETS:
   Cash                                                                           $525,000
   Accounts receivable net of allowance
    for doubtful accounts of $42,000                                             3,987,000
   Inventory                                                                    19,757,000
   Other current assets                                                            111,000
                                                                               -----------
   TOTAL CURRENT ASSETS                                                         24,380,000


   Jet aircraft engines held for lease,
    net of accumulated depreciation of $2,981,000                                8,147,000

   Property and equipment:
   Furniture and equipment                                                         311,000
   Trucks and automobiles                                                           42,000
   Leasehold improvements                                                           27,000
                                                                               -----------
                                                                                   380,000

   Accumulated depreciation and amortization                                      (277,000)
                                                                               -----------
                                                                                   103,000
   Goodwill, net of accumulated amortization                                       348,000
    of $140,000

   OTHER ASSETS                                                                    716,000
                                                                               -----------

   TOTAL ASSETS                                                                $33,694,000
                                                                               ===========
</TABLE>




                                      F-45



<PAGE>

<PAGE>






<TABLE>

<S>                                                                             <C>       
                       LIABILITIES AND EQUITY

CURRENT LIABILITIES:
   Revolving line of credit                                                     $2,600,000
   Engine line of credit                                                         1,688,000
   Current portion of notes payable                                              5,869,000
   Accounts payable and accrued liabilities                                      1,773,000
   Consignments payable                                                            786,000
   Other current liabilities                                                         8,000
                                                                               -----------
      TOTAL CURRENT LIABILITIES                                                 12,724,000

Long Term Liabilities:
   Notes payable, less current portion                                           2,815,000
                                                                               -----------
   TOTAL LIABILITIES                                                            15,539,000

Commitments and contingencies
   Equity                                                                        5,398,000
   Contributed capital                                                          12,757,000
                                                                               -----------
   Accumulated earnings                                                         18,155,000
                                                                               -----------
   TOTAL LIABILITIES AND EQUITY                                                $33,694,000
                                                                               ===========

</TABLE>


See accompanying notes.

                                      F-46



<PAGE>

<PAGE>



                         INTERNATIONAL AIRCRAFT SUPPORT

                     COMBINED STATEMENT OF INCOME AND EQUITY

                          YEAR ENDED DECEMBER 31, 1995
<TABLE>

<S>                                                                             <C>       
Revenues, including consignment parts sales                                    $22,135,000
 of $2,956,000:

Operating expenses:
   Direct labor and materials, including consignment                            13,342,000
   parts cost of $2,463,000
   Indirect labor and operating                                                  1,360,000
   Depreciation and amortization                                                 1,021,000
   General and administrative                                                    1,737,000
                                                                               -----------
                                                                                17,460,000
   Income from operations                                                        4,675,000
   Interest expense                                                              1,423,000
   Amortization of intangibles                                                      25,000
   Other income                                                                     89,000
                                                                               -----------

   Income before income taxes                                                    3,316,000

   Provision for income taxes                                                        2,000
                                                                               -----------

   NET INCOME                                                                    3,314,000

   EQUITY AT BEGINNING OF YEAR                                                  14,841,000
                                                                               -----------

   EQUITY AT END OF YEAR                                                       $18,155,000
                                                                               ===========
</TABLE>


See accompanying notes.

                                      F-47



<PAGE>

<PAGE>



                         INTERNATIONAL AIRCRAFT SUPPORT

                        COMBINED STATEMENT OF CASH FLOWS

                          YEAR ENDED DECEMBER 31, 1995
<TABLE>

<S>                                                                              <C>       
OPERATING ACTIVITIES
   Net income                                                                    $3,314,000
   Adjustments  to  reconcile  net  income  to net cash  provided  by  operating
    activities:
   Depreciation and amortization                                                  1,046,000
   Decrease in accounts receivable, net                                           5,151,000
   Decrease in inventory, net                                                     2,221,000
   Increase in other assets                                                         (97,000)
   Decrease in accounts payable and accrued liabilities                          (1,648,000)
   Increase in consignments payable                                                 273,000
   Decrease in other liabilities                                                    (92,000)
                                                                                 ----------
Net cash provided by operating activities                                        10,168,000

Investing activities
   Dispositions of property and equipment, net                                       27,000
   Change in jet aircraft engine held for lease                                    (449,000)
                                                                                 -----------
   Net cash used in investing activities                                           (422,000)

FINANCING ACTIVITIES
   Net borrowings on lines of credit                                               (371,000)
   Proceeds from borrowings on notes payable                                      1,200,000
   Principal repayments on notes payable                                        (10,054,000)
                                                                                 -----------
   Net cash used in financing activities                                         (9,225,000)

Net change in cash                                                                  521,000
Cash at beginning of year                                                             4,000
                                                                                 ----------
Cash at end of year                                                                $525,000
                                                                                 ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Cash paid during the year for interest                                        $1,426,000
                                                                                 ==========
</TABLE>





See accompanying notes.




                                      F-48



<PAGE>

<PAGE>



                         INTERNATIONAL AIRCRAFT SUPPORT

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                                DECEMBER 31, 1995

1. BASIS OF PRESENTATION

The combined financial statements include the accounts of International Aircraft
Support, Inc. and International Aircraft Support, L.P. (collectively referred to
as "International Aircraft Support" or the "Company"). All material intercompany
balances and transactions have been eliminated.

International  Aircraft  Support,  Inc.  was acquired by IASI,  Inc.,  an entity
wholly-owned  by General  William  Lyon,  on February 15, 1990.  IASI,  Inc. was
merged  into  International   Aircraft  Support,  Inc.  on  February  26,  1990.
Accordingly,  International  Aircraft Support,  Inc. is wholly-owned  by General
William Lyon. The acquisition was accounted for as a purchase.

International Aircraft Support, L.P. (the "Partnership") is a California limited
partnership  formed in 1990.  International  Aircraft  Support,  Inc.  is the 5%
managing  general  partner of the  Partnership,  Air/Lyon,  Inc. is a 5% general
partner and Air/Lyon  Associates L.P. is the sole 90% limited partner.  Air/Lyon
Associates L.P. is a California limited partnership comprised of Air/Lyon, Inc.,
general partner,  and General William Lyon, limited partner.  Air/Lyon,  Inc. is
wholly-owned by General William Lyon.  Effective  August 1, 1990, the operations
of International Aircraft Support, Inc. were transferred to the Partnership.

Partnership  losses are  allocated  in  reverse  order of  previously  allocated
profits  and then in  proportion  to  capital  accounts  until  capital  account
balances are zero, with any remaining  losses  allocated to the general partners
in  proportion  to their  ownership  interests.  Profits are first  allocated in
reverse  order of  previously  allocated  losses and then in  proportion  to the
partners'  ownership  interests.  Preferred returns are a special  allocation of
profits  calculated  at  prime  plus  .5% on the  partners'  unreturned  capital
contributions.

The Company  provides jet aircraft engine  maintenance  support to owners and/or
operators of commercial jet aircraft  engines.  The Company's  services include:
complete  engine  sales and  leasing,  engine  part  sales,  engine  maintenance
monitoring  and technical  support  services.  Customers of the Company  consist
primarily of airlines, commercial jet engine repair shops, air freight operators
and aircraft leasing companies.

2. ACCOUNTING POLICIES

Inventory

Inventory,  consisting  primarily of new and used jet aircraft  engine parts, is
stated at the lower of cost or market.  Market is based on net realizable value.
Appropriate  consideration  is given to  deterioration,  obsolescence  and other
factors in evaluating net realizable value.  During 1995,  $151,000 of estimated
costs related to obsolete inventory was written-off as direct

                                      F-49



<PAGE>

<PAGE>



materials expense. Engine parts are acquired primarily by purchasing engines and
disassembling  them into their component parts.  Engine costs are then allocated
to the  individual  parts using the relative  sales value  method.  The costs of
refurbishing  individual parts are included in the total cost of each part using
the specific  identification  method.  Overhead  costs  related to  procurement,
storage and refurbishment activities are also allocated to inventory costs.

PROPERTY AND EQUIPMENT

Property and  equipment is stated at cost and  includes  expenditures  for major
replacements and improvements.  Depreciation is computed using the straight-line
or double  declining  balance method over the estimated  useful service lives of
the assets,  which  range from three to ten years.  Leasehold  improvements  are
depreciated using the  straight-line  method over the shorter of the useful life
of the  improvement or the remaining term of the lease.  Repairs and maintenance
costs are expensed as incurred.

The Company leases jet aircraft engines to airlines.  Depreciation of engines is
computed  based upon  flight  hours,  flight  cycles or both over the  estimated
useful service lives of the engines,  allowing for estimated  salvage value. The
costs  associated  with major  engine  overhauls  are accrued  based upon usage.
During the year ended  December  31,  1995,  depreciation  for  engines  totaled
$980,000. Overhaul costs of $817,000 were incurred during 1995.

GOODWILL

Goodwill arising from the acquisition of International Aircraft Support, Inc. by
IASI,  Inc.  totaled  $488,000 and is being  amortized  using the  straight-line
method over 20 years.

REVENUE RECOGNITION

Revenue  generated from complete  engine sales is recognized  upon acceptance of
the equipment by the customer.  Parts sales revenue is recognized  upon shipment
of the related item to the customer. Technical services and leasing revenues are
recognized over the term of the related agreements.

CONSIGNMENT REVENUE AND COSTS

Consignment  revenue  and costs  represent  the sales of engine  parts which the
Company does not own. The Company routinely takes possession of engines which it
does not own, has the engines  disassembled  and the parts overhauled as needed.
The Company then inventories the parts at the Company's  warehouse and sells the
parts to third parties.  The Company is responsible for the costs to disassemble
the engine,  overhaul,  warehouse and sell the parts. Certain of these costs are
allocated to the parts and recovered  from the parts sales prior to the owner of
the parts participating in the sale proceeds.  At December 31, 1995, the Company
had incurred  $961,000 of  refurbishment  costs,  which are included in accounts
receivable,  that had not been recovered.  These costs are fully reimbursable to
the  Company  upon the  termination  of their  services  under  the terms of the
consignment  agreements.  Additionally,  on  certain  consignment  engines,  the
consignor  has the  option to require  the  Company to  purchase  any  consigned
inventory below a specific sales threshold. As of December 31, 1995, this option
had

                                      F-50



<PAGE>

<PAGE>



not been exercised and the Company's total outstanding purchase commitment was
approximately $176,000.

CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

The   financial   instruments   which   potentially   subject   the  Company  to
concentrations  of credit  risk are  primarily  cash  investments  and  accounts
receivable. The Company performs a periodic evaluation of the credit standing of
the financial  institution  in which its cash is maintained.  Concentrations  of
credit risk with  respect to accounts  receivable  that consist  principally  of
receivables  from  airlines,  commercial  jet engine repair  shops,  air freight
operators and aircraft  leasing  companies  located  throughout  the world,  are
limited due to the initial and continuing credit evaluation of all customers who
are extended credit.

Approximately  59% of the  Company's  total  revenue  relates  to six  recurring
customers which are significant participants in the aviation industry.

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  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying  value of cash  approximates  its fair value due to its  short-term
maturity.  The carrying value of the Company's  long-term debt  approximates its
fair value due to periodic adjustments in floating interest rates.

3. ACCOUNTS RECEIVABLE

Accounts  receivable  at December  31,  1995,  consists of  $2,921,000  in trade
account receivables,  $961,000 of consignment repair receivables and $147,000 of
unbilled work-in-process,  net of a $42,000 allowance for doubtful accounts. The
majority of unbilled work-in-process relates to technical support services which
were not complete as of December 31, 1995.  Subsequent to December 31, 1995, all
year-end work-in-process was completed and invoiced.

4. INVENTORY

Inventory at December 31, 1995,  consists primarily of new and used jet aircraft
engine  parts.  All  inventory  is held  for  sale  and,  accordingly,  has been
classified as a current asset in the combined balance sheet.  Historically,  the
period  required to sell the jet aircraft engine parts is  substantially  longer
than one year.  As a result,  management  anticipates  that a portion of the jet
aircraft  engine parts  inventory at December 31, 1995,  will not be sold during
1996 and such amount  could be  significant.  Inventory  at December  31,  1995,
consists of new and used jet aircraft  engine  parts  totaling  $12,839,000  and
$6,918,000, respectively. During 1995, the

                                      F-51


<PAGE>

<PAGE>



Company  sold  new  and  used  jet  aircraft  engine  parts  with a  cost  basis
approximating  $10,172,000.  Included in  inventory  at December  31,  1995,  is
$1,491,000 of capitalized overhead costs related to the procurement, storage and
refurbishment of aircraft engine parts.

During  1995,  the Company  purchased  for their parts  inventory  two new model
PW2000 engines for cash of $4,200,000 and a noninterest  bearing note payable to
the seller of  $3,700,000.  The note  payable to the  seller was  discounted  by
$238,000 based upon an imputed interest rate of 7.75% and the related cost basis
of the engine purchased was adjusted for the discount (see Note 7). In addition,
the Company purchased a JT9D-7A engine for their parts inventory, for cash and a
note payable to the seller of $347,000, bearing interest at 10% (see Note 7).

5. AIRCRAFT ENGINES HELD FOR LEASE

Aircraft  engines held for lease,  stated at cost,  consist of the  following at
December 31, 1995:

Model PW4060 aircraft engine, leased                                  $7,433,000
Model JT9D-7A aircraft engine, leased                                  3,789,000
                                                                      ----------

Accumulated depreciation                                               3,075,000
                                                                      ----------
                                                                      $8,147,000
                                                                      ==========


Aircraft  engines  are  normally  leased  for  periods  of less  than one  year.
Generally,  the lessee is  responsible  for rental  payments  based on in-flight
usage of the engine as well as a daily or  monthly  base  lease  charge.  During
1994,  the  Company  entered  into a  long-term  lease with a  European  carrier
involving the model PW4060 aircraft  engine.  The lease expires on July 29, 2000
and provides for minimum annual amounts of $559,000, plus a usage fee per flight
hour. The lessee has an option to terminate this lease after July 29, 1997, with
a 90-day prior notice to the Company. This lease also gives the lessee an option
to purchase the engine for a defined  amount.  During 1995, the Company  entered
into a lease agreement for the model JT9D-7A aircraft engine. The lease term for
this engine expires on October 24, 1996.

During the year ended December 31, 1995, leasing income totaled $1,818,000.

6. LINES OF CREDIT

The Company has a revolving  line of credit with a bank,  with interest  payable
monthly at the bank's prime rate (8.5% at December 31, 1995) plus 1/2%. The line
is secured by a general security agreement on accounts receivable and inventory.
Borrowings  are available  through the line's due date of June 30, 1996, and may
not  exceed  the  lower  of  $6,000,000  or  eligible  accounts  receivable  and
inventory.  The  balance  on the  line of  credit  at  December  31,  1995,  was
$2,600,000.

The Company also has an engine line of credit which was modified  during 1995 to
increase the amount of availability to $4,000,000 with interest  payable monthly
at the bank's  prime rate plus 1%.  This engine line of credit is secured by any
engine  purchased  with  amounts  drawn on the line of  credit.  Borrowings  are
available  through the line's due date of June 30, 1996,  and may not exceed the
lower of 90% of the actual purchase price of the aircraft engine to be

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financed or the  maximum  credit  available  at the time of the  advance.  As of
December 31, 1995, the balance on the engine line of credit is  $1,688,000,  and
is secured by engine model PW2000 aircraft engine parts.

7. NOTES PAYABLE

Notes payable consist of the following at December 31, 1995:

Note payable secured by a model PW4060
aircraft engine held for lease, monthly
principal payments due of $35,000 plus
interest at prime plus 0.5%, with unpaid
balance due September 30, 1997.                                       $2,405,000

Note payable secured by model PW4000 aircraft
engine parts, bearing interest at an imputed
rate of 5.5% (net of unamortized discount of
$41,000), with the unpaid balance due June 9,
1996.                                                                  1,959,000

Notes payable secured by model PW2000
aircraft engine parts, bearing interest at an
imputed rate of 7.75% (net of unamortized
discount of $170,000), with the unpaid
balance due December 27, 1996.                                         2,836,000

Notes payable secured by automobiles, monthly
principal payments of $631 plus interest at
10.0% with unpaid balance due in October,
1997.                                                                     12,000

Note payable secured by model JT8D-9A and
JT9D-7A aircraft engine parts, monthly
principal payments due of $25,000, plus
interest at prime plus 0.5%, with unpaid
balance due August 31, 1999                                           $1,125,000


Note payable secured by model JT9D-7A
aircraft engine parts with principal plus
interest at 10% due June 13, 1996, paid in
full in March 1996.                                                      347,000
                                                                      ----------
                                                                       8,684,000
Less current portion                                                   5,869,000
                                                                      ----------
                                                                      $2,815,000
                                                                      ==========


The  future  principal  payments  due under the terms of notes  payable  and the
Company's lines of credit subsequent to December 31, 1995, are as follows:

Years ending December 31
-------------------------



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1996                                                          $5,869,000
1997                                                           2,290,000
1998                                                             300,000
1999                                                             225,000
                                                              ----------
Total                                                         $8,684,000
                                                              ==========


The prime rate averaged  approximately  8.83% during the year ended December 31,
1995, and was 8.5% at December 31, 1995.

8. INCOME TAXES

Effective  January 1,  1991,  International  Aircraft  Support,  Inc.  elected S
corporation status.  Accordingly,  a provision has not been provided for federal
income taxes on the earnings of  International  Aircraft  Support,  Inc. for the
year ended December 31, 1995, as its income is taxed at the shareholder's  level
for federal  income tax  purposes.  A provision  has been  provided for state of
California  franchise  taxes  equal  to 1.5% of the  earnings  of  International
Aircraft Support, Inc. for the year ended December 31, 1995.

A provision  has not been  provided  for federal and state  income  taxes on the
earnings of International Aircraft Support,  L.P., a partnership,  as its income
and losses  are taxed at the  partner  level for  federal  and state  income tax
purposes.

9. EMPLOYEE BENEFIT PLANS

The Company has a defined  contribution Money Purchase Pension Plan (the "Plan")
which provides retirement and other benefits for most full-time employees. Under
the Plan, the Company is required to contribute amounts equal to 10% of eligible
employees' compensation, up to $150,000 in covered compensation per employee per
year. For the period ended December 31, 1995, the Company accrued  contributions
of $94,000 to the Plan. Historically, the Company has not contributed amounts to
the Plan in excess of the  maximum  amount  deductible  for  federal  income tax
purposes.

10.   COMMITMENTS AND CONTINGENCIES

The  Company  conducts  its  operations  in leased  facilities  and the lease is
accounted for as an operating lease. The lease requires monthly rent payments of
approximately  $18,000 and expires  January 31, 1996.  Facility rent expense was
$215,000 for the year ended December 31, 1995.

During 1994, the Company, as lessor, entered into an engine lease agreement with
a European carrier whereby the Company will provide an aircraft parts purchasing
credit to the  lessee for any  additional  costs  incurred  by the lessee due to
European tax laws associated with the lease.

As of December 31, 1995, this purchasing credit was not material.

The loan agreements for the revolving line of credit,  the engine line of credit
and the notes payable (see Note 7) contain certain  covenants which restrict the
distribution  of cash or the  payment of  dividends  and  require the Company to
maintain certain levels of net worth and profitability.

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11.   RELATED PARTY TRANSACTIONS

Included in other  assets at December  31, 1995,  are two  unsecured  promissory
notes totaling $600,000 from companies affiliated through common ownership.  The
promissory  notes are due upon  demand and bear  interest  at 6% per annum.  The
Company  recognized  $40,000 of interest  income on the promissory  notes during
1995.  Repayment  from the  affiliates  is not  expected  in the next year;  the
promissory  notes  may  ultimately  become  an  obligation  of the  owner of the
affiliates which is the owner of the Company.

The Company  participates  in an insurance  program for  essentially  all of its
insurance needs, other than employee benefits, with companies affiliated through
common ownership. Payments for such services during 1995 totaled $145,000.

On July 1995, the Company purchased from an affiliate certain aircraft parts for
$400,000  (purchase  price).  In accordance  with the  agreement,  the affiliate
guaranteed the recovery of the Company's  purchase  price plus accrued,  imputed
interest compounded annually at the prime rate. Currently, the parts are held on
consignment  by a third party  located in  Florida.  As of  December  31,  1995,
related engine parts with a costs basis of $390,000 remain in inventory.

During  1995,  the Company  entered  into an agreement  with  Air/Lyon,  Inc. to
provide a debt repayment guarantee of up to $1,240,000 for an affiliated entity.

12.   SUBSEQUENT EVENTS

On February 1996, the Company  purchased a CFM 53-3B1  aircraft engine and a CFM
56-382 core module for $3,200,000.  In accordance  with the purchase  agreement,
the seller agreed to repurchase approximately $3,400,000 worth of parts from the
engine and module.  The engine and module are in the process of being  torn-down
by the seller on behalf of the Company.

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