<PAGE>

                     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  [FEE REQUIRED]

                   For the fiscal year ended December 31, 1998

                                       OR

(    ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934  [NO FEE REQUIRED]

                         Commission File Number: 0-29028

                           AVIATION DISTRIBUTORS, INC.
                 (Name of small business issuer in its charter)
<TABLE>
<CAPTION>
<S>                                                            <C>
             DELAWARE                                                                33-0715685
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>

<TABLE>
<CAPTION>

<S>                                                                      <C>
      ONE  CAPITAL DRIVE
   LAKE FOREST, CALIFORNIA                                                  92630
(Address of Principal Executive Office)                                  (Zip Code)
</TABLE>

         ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 586-7558


           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<CAPTION>
                                                                                        NAME OF EACH EXCHANGE
                 TITLE OF EACH CLASS                                                    ON WHICH REGISTERED:
                 <S>                                                                    <C>
                             NONE                                                       NONE
</TABLE>

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                         COMMON STOCK -- $.001 PAR VALUE
                                (TITLE OF CLASS)



Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes No X

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-KSB. X



<PAGE>



Revenues of the registrant for the fiscal year ended December 31, 1998 were
$28,433,000.

The aggregate market value of the Common Stock held by non-affiliates of the
registrant on March 31, 1999 was approximately $1,504,000, based upon the
average of the bid and asked prices of the Common Stock, as reported by the
Bloomberg Financial Markets.

The number of shares of the Common Stock of the registrant outstanding as of
March 31, 1999 was 3,122,000.

                Transitional Small Business Disclosure Format (check one):

                           Yes                        No               X        


Documents incorporated by reference:

Items 10, 11, 12 and 13 of Part III are incorporated by reference from a portion
of the Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1999 Annual Meeting of Stockholders
and are incorporated by reference into Part III hereof.




<PAGE>



                                     PART I

All statements, other than statements of historical fact, included in this Form
10-KSB, including without limitation the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," are, or may be deemed to be, "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). Such forward-looking statements involve assumptions, known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Aviation Distributors, Inc. (the
"Company" or "ADI") to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements contained in this Form 10-KSB. Such potential risks and uncertainties
include, without limitation, competitive pricing and other pressures from other
aviation parts suppliers, aviation industry and economic conditions generally
and in the Company's primary markets, availability of capital, and other risk
factors detailed herein and in other of the Company's filings with the
Securities and Exchange Commission. The forward-looking statements are made as
of the date of this Form 10-KSB and the Company assumes no obligation to update
the forward-looking statements or to update the reasons actual results could
differ from those projected in such forward-looking statements. Therefore,
readers are cautioned not to place undue reliance on these forward-looking
statements.

ITEM 1.      DESCRIPTION OF BUSINESS

INTRODUCTION

The Company is a supplier of new and overhauled aircraft parts to major
commercial airlines worldwide. The Company locates, acquires and supplies parts
for all major aircraft. Additionally, the Company engages in consignment and
marketing agreements with major commercial airlines, distributors and OEMs which
allows the Company to offer a wide range of parts for sale without certain risks
and financing costs associated with owned inventory. Aircraft parts offered by
the Company include those manufactured by Airbus, Boeing, General Electric,
Lockheed, McDonnell Douglas, Pratt & Whitney and Rolls Royce.

The Company's sales have decreased from $39.0 million in 1997 to $28.4 million
in 1998 due to a shortage in cash availability during 1998 resulting from cash
requirements relating to the class action lawsuits and government investigations
and due to management spending significant time in addressing the lawsuits and
investigations, which took their time and focus away from increasing sales and
negotiating large transactions. Management believes the Company's revenues will
increase in 1999 from 1998 levels as cash availability improves due to less cash
being required for legal expenses since the class action lawsuit was settled in
the first quarter of 1999. See "Item 3 - Legal Proceedings." Historically, the
Company's sales have increased from $21.3 million in 1995, to $23.9 million in
1996 and $39.0 million in 1997. Of 1995 sales, approximately $6.5 million
resulted from the sale of two whole aircraft (with engines) to Royal Jordanian
Airlines, which is located in the Middle East. Excluding the whole aircraft
transaction, sales in 1995 would have been $14.8 million. If the opportunity
exists, the Company may purchase and sell whole aircraft in the future.

INDUSTRY OVERVIEW AND TRENDS

The worldwide aircraft parts market is highly fragmented and parts are supplied
by many types of suppliers, including airlines, OEMs and numerous distributors,
fixed base operators, FAA-certified facilities, traders and brokers. The Canaan
Group Ltd., a management consulting firm specializing in the aircraft and
aerospace industry, estimated that aircraft parts inventories valued at $45
billion existed in May 1995, with a carrying cost of $10 billion annually and
that 80% of such inventories were owned by airlines. The Company believes that a
portion of such inventory is available for marketing, consignment and purchase.
The Company also believes that, based on other significant market trends, its
target market will continue to grow.


                                       1

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MARKET GROWTH. According to Boeing's 1998 Market Outlook, the worldwide fleet of
commercial aircraft and cargo jet aircraft is expected to grow from 12,300
airplanes at the end of 1997 to 26,200 airplanes by 2017. For the industry as a
whole, load factors reached record levels in 1997. This contributed to record
profits for the world airlines for the fifth year in a row, particularly those
in Europe and the United States. Airlines will increase airplane size only
moderately in the next decade. Available seat-kilometers (ASK), are projected to
grow by more than 60%. As in the previous decade, the majority of ASK growth
will be supplied by adding more flights. The Company believes such increase in
the number of airplanes and the increase in the number of flights is an
indication that aircraft will be flown more often and will need standard service
checks more frequently. The Company believes that these factors have resulted
and will continue to result in increased demand for aircraft parts worldwide.

REDUCTION IN AIRLINE INVENTORIES. Historically, airlines have controlled the
majority of the aircraft parts inventory. Today, many airlines are beginning to
reduce the size of their parts inventories in an effort to reduce
inventory-carrying costs. These inventory reductions have increased reliance by
many airlines on after-market suppliers to provide parts that are difficult to
obtain from manufacturers on a timely basis, if at all. Manufacturers' lead-time
for delivery of aircraft parts averages 30 to 60 days. As airlines continue to
demand time-responsive inventory procurement processes, responsibility for
inventory storage and handling has shifted to suppliers such as the Company. The
Company believes that its access to a large inventory of aircraft parts and its
ability to deliver such parts to its customers quickly and at a competitive
price enable it to provide the services sought by airlines in an effective
manner.

INCREASE IN CONSIGNMENT AND MARKETING BUSINESS. To reduce the high costs
associated with excess aircraft parts inventory, many airlines are selling their
parts inventories through consignment and marketing agreements with suppliers
such as the Company. Such agreements enable an airline to distribute its
inventory to a large number of prospective inventory buyers while enabling
suppliers such as the Company to offer an extensive aircraft parts inventory to
its customers with a relatively low capital cost.

REDUCTION IN NUMBER OF SUPPLIERS. In an attempt to increase quality and service,
reduce purchasing costs and streamline purchasing decisions, some airlines have
begun to form relationships with a few preferred suppliers. Over the last few
years, airlines have begun to reduce the number of aircraft parts suppliers with
which they do business. In the majority of cases to date, where the Company had
an established relationship with an airline, the Company was one of the parts
suppliers selected. The Company believes that due to its focus on cultivating
relationships with its customers and its reputation for service, quality and
reliability, airlines will continue to select the Company as one of their
preferred aircraft parts suppliers.

INCREASED EMPHASIS ON TRACEABILITY. Regulatory agencies have increased
documentation requirements for aircraft parts because of concern regarding
unapproved parts. In order for suppliers to trace all aircraft parts back to
their original source, suppliers have invested in sophisticated information
systems technology. The Company has developed and intends to maintain and
upgrade its information systems technology to ensure that all aircraft parts
bought and sold by the Company comply with applicable regulatory requirements.

BUSINESS STRATEGY

The Company's primary objectives are to be a leading quality supplier of
aircraft parts to airlines worldwide and to increase income from its business
through the application of a comprehensive business strategy combining various
customer service, marketing, operating and growth objectives. The Company's
marketing approach includes direct marketing to airlines and manufacturers,
advertising in trade directories and attending industry trade shows and
conferences. Although the Company concentrates the majority of its marketing
efforts on commercial airlines servicing the passenger market, it also seeks to
foster business from commercial airlines servicing the cargo market, as well as
overhaul facilities and OEMs.

                                       2

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CUSTOMER SERVICE. The Company intends to continue to market and develop its
ability to deliver parts quickly to customers at a preferred price and continue
its emphasis on implementing creative solutions to locate and deliver
hard-to-find aircraft parts. Additionally, the Company plans to continue to
cultivate relationships with its customers to assure that it retains its
position on its customers' preferred list of aircraft parts suppliers. The
Company has historically incurred high levels of selling and administrative
expenses, primarily travel and entertainment associated with establishing and
maintaining customer relationships. A key component of the Company's business
strategy is to implement a program to effectively contain such expenses.

EMPHASIS ON QUALITY. The Company will continue to emphasize its reputation for
quality, including its track record of consistently meeting FAA regulations by
maintaining and, if necessary, introducing safeguards to ensure the quality of
its aircraft parts. In addition, in October 1996 the Company became a full
distributor under the National Aerospace and Defense Contractors Accreditation
Program of the Performance Review Institute. Such safeguards include employing
three FAA-licensed Airframe and Powerplant Inspectors and contracting with three
FAA-licensed Designated Airworthiness Representatives and an outside quality
assurance consultant. Each of these specialists verifies the airworthiness of
aircraft parts bought and sold by the Company.

In March 1998, the Company attained its ISO 9002 Certification. The Company has
since undergone two surveillance audits, which resulted in the retention of the
certification. The Company is among a select group in its industry to have
achieved this status, which is a well-recognized symbol of quality operating
standards.

FOCUS ON MAJOR COMMERCIAL AIRLINES. The Company plans to continue targeting
major commercial airlines worldwide, many of which are currently customers of
the Company. Such airlines generally have larger aircraft fleets, which generate
a greater demand for aircraft parts than smaller airlines. Consequently,
relationships with major commercial airlines enable the Company to expend fewer
resources to generate comparable sales volume and corresponding revenue with
margins of profitability comparable to similar sales to several smaller
airlines. Additionally, major commercial airlines typically have greater
financial resources than smaller airlines, resulting in reduced credit risk to
the Company and a greater likelihood of timely payment. The Company's
relationships with major commercial airlines also provide the Company with
increased access to such airlines' aircraft parts inventories.

INCREASE ACCESS TO INVENTORY. The Company plans to increase its accessible
inventory by pursuing new consignment and marketing agreements with airlines,
manufacturers and overhaul facilities and purchasing large items, such as
engines and whole aircraft, that can be broken down and sold as smaller parts
for significantly more than the "as - is" value. The Company will seek to secure
aircraft parts where it believes demand is greater than supply. Presently, the
Company believes that demand exceeds supply in the aircraft parts market for
aircraft models over five years old.

GLOBAL EXPANSION. The Company's goal is to service customers domestically and
worldwide and to become a major aircraft parts supplier for the fastest-growing
markets, particularly Europe. For the year ended December 31, 1998, 57.8% of the
Company's sales were to international customers. The Company plans to continue
to take advantage of the growing international market through the use of its
multilingual sales staff and by maintaining existing relationships and
establishing new relationships in the following regions: Pacific Rim/Far
East/South Pacific, Europe, Latin/South America, Middle East/Africa and North
America.

PRODUCTS AND SERVICES

GENERAL. The Company is in the business of selling a broad range of aircraft
parts from its owned inventory, on behalf of airlines and manufacturers pursuant
to consignment and marketing agreements, and from inventory owned by outside
parties and located by the Company at the time of receiving a customer order
(outside sourcing). For the year ended December 31, 1998, sales from
Company-owned inventory, pursuant to consignment and marketing agreements, and
pursuant to outside sourcing represented approximately 14%, 1% and 85%,
respectively, of the Company's net sales.

The Company's access to an extensive inventory is a result of its worldwide
relationships with airlines, manufacturers and suppliers of aircraft parts,
numerous consignment and marketing agreements with airlines and manufacturers,
and owned inventory of new and overhauled aircraft parts.

The general categories of aircraft parts are as follows: (i) rotable; (ii)
repairable; and (iii) expendable.

A rotable is a part that is removed periodically as dictated by an operator's
maintenance procedures or on an as-needed basis and is typically repaired or
overhauled and re-used an indefinite number of times. A subset of rotables is
life-limited parts. A life-limited rotable has a designated number of allowable
flight hours and/or cycles (one take-off and landing generally constitutes one
cycle) after which it is rendered unusable.

                                       3

<PAGE>

A repairable is similar to a rotable except that it can only be repaired a
limited number of times before it must be discarded. Typically, rotable and
repairable parts must be removed from an airplane and rebuilt or checked based
upon the number of hours in flight. Rotable and repairable parts must be
repaired at FAA-approved repair facilities.

An expendable is generally a part that is used and not thereafter repaired for
further use. Consequently, all expendable inventory is new. Expendable inventory
cannot be used for less than its useful life and then transferred to a new
airplane; once an expendable part is removed from an airplane, it must be
discarded.

Currently, the Company supplies aircraft parts for Boeing 737, 747, and 767
series, Airbus 300 series, McDonnell Douglas 80, DC and MD series aircraft.
These aircraft parts represent a significant portion of the aircraft parts used
by major airlines, which represent the majority of the Company's current
customers. Although not required by the FAA to do so, the Company maintains on
staff three FAA-licensed Airframe and Powerplant Inspectors and contracts with
three FAA-licensed Designated Airworthiness Representatives, whose
responsibilities are to verify the airworthiness of aircraft parts bought and
sold by the Company. The Company believes that its strict adherence to FAA and
manufacturer guidelines has contributed to the Company's reputation in the
industry. The Company does not repair aircraft parts, and therefore is generally
not subject to the risks associated with the repair business.

Each sales person employed by the Company is responsible for making an appraisal
of a particular aircraft part's value and makes such appraisal based on industry
experience and practice after considering current manufacturers' list price, the
condition of the part, the part's availability and lead time to manufacture the
part. The Company's return policy permits customers to return parts within 10
days of receipt, although, in certain instances the Company may accept returned
parts beyond the 10 day period. Additionally, the Company's terms to customers
are generally 30 days, the Company may extend payment terms in certain
circumstances.

The Company's owned inventory at December 31, 1998 is stored in the Company's
California warehouse. Any party who has entered into a marketing agreement with
the Company, owns and is responsible for storing the inventory to which the
Company has access pursuant to such marketing agreement. The Company ships all
inventory to customers via national or international courier services. If an
aircraft part sought by a customer exists in the Company's owned inventory, or
exists in inventory on consignment, or inventory available through exclusive
marketing agreements (together, the "Accessible Inventory"), such part is
generally shipped to the customer the day the order is placed. The turn-around
time is generally up to one week from the time the order is placed if the
Company has to acquire a part from an outside party.

The Company, on an opportunistic basis, purchases for resale high-price items,
such as engines and whole aircraft, which may be sold intact or broken down for
sale of component parts.

CLIENT SERVICES. Client services are conducted through the Company's
California-based multilingual direct sales force, whose primary responsibility
is to sell aircraft parts and manage customers. Sales personnel travel
extensively to develop strong personal relationships with the Company's
customers, improve communications and remain current on regional market data.
Salespeople are assigned to specific airlines and are supported by a group of
regional agents who assist in countries such as Brazil, Chile, India, Israel,
Korea, Pakistan, and Turkey where local representation is critical to purchase
order processing and timely payment.

                                       4

<PAGE>


Each sales representative is supported by additional personnel who research and
locate parts ordered by the Company's customers. The Company's sales staff,
through its knowledge of the industry and its relationships throughout the
world, is able to develop and implement creative solutions to locate and deliver
hard-to-find aircraft parts, a quality that the Company believes sets it apart
from its competitors.

Upon the Company's receipt from a customer of a telephone or fax inquiry for a
specific aircraft part, the Company first checks its owned inventory for
availability of the part, then checks the Accessible Inventory. If the part is
not owned or part of the Accessible Inventory, the Company will attempt to
source the part through cultivated industry contacts or the Inventory Locator
Service ("ILS"), a domestic, industry-wide database of aircraft parts. Even if
the aircraft part is within the Company's owned or Accessible Inventory, the
Company attempts to achieve full market value for each part sold by researching
alternate sources for availability and competing prices for the part prior to
quoting the end user.

Management plans to continue to grow the core business of sourcing aircraft
parts to end-users and to enhance the Company's relationships with existing
customers. This should allow new relationships to grow and increase the exposure
of its sales staff to the needs and desires of the customers. Coincident with
the growth of the core business, potential marketing and consignment
opportunities may expand the Company's "Accessible Inventory".

CONSIGNMENT AND MARKETING BUSINESS. In addition to supplying parts from owned
inventory, the Company has supplied parts through (i) consignment agreements,
pursuant to which the Company takes actual possession of a vendor's inventory,
and (ii) exclusive marketing agreements, pursuant to which the Company markets
vendors' inventory which remains in the vendors' possession. Through consignment
or marketing agreements with an aircraft parts supplier, the Company is able to
distribute its aircraft parts to a larger number of prospective inventory
buyers. This allows the Company's vendors to maximize the value of their
inventory while at the same time freeing up resources that can be focused on
their core business. Consignment and marketing arrangements also enable the
Company to offer for sale aircraft parts from a much larger inventory at minimal
capital cost to the Company.

When an inquiry is made with respect to a particular aircraft part, the Company
will query its inventory databases for availability before researching market
value. A party who has entered into a consignment or marketing agreement with
the Company (the "Contract Party") typically establishes an asking price for
each aircraft part subject to the agreement, but may allow the Company to lower
such price to assure a sale. If the Company feels it must offer a part for below
the price established by the Contract Party, it will first seek the Contract
Party's permission. In most instances, the Contract Party has entered into the
relationship with the Company because it believes the Company has the expertise
necessary to attract the best price for each aircraft part. Further, the Company
is paid a percentage of the sales price as compensation for its consignment and
marketing services. Consequently, the Contract Party, understanding that the
Company's own best interest is in achieving the highest price possible for the
sale of the part, will usually give consideration to a recommendation by the
Company to sell a particular aircraft part at a price below the Contract Party's
established price.

The Company has had consignment and marketing agreements with airlines and OEMs.
No single consignment or marketing agreement has been material to the Company as
a whole. Although the Company had no marketing or consignment agreements at
December 31, 1998, the Company is considering potential future consignment and
marketing agreements.

INVENTORY PURCHASES. The Company acquires aircraft parts by bidding on the
inventory of, (i) airlines that are eliminating certain portions of their parts
inventory due to retirement of an aircraft type from their fleet, downsizing of
operations, or the dissolution of their businesses and, (ii) OEMs and overhaul
facilities who seek to sell excess inventory. Management believes that its
primary source of aircraft parts for acquisition during the next few years will
be from such purchases. The Company also purchases specific items from time to
time, such as engines and whole aircraft, on an opportunistic basis.

                                       5

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SYSTEMS

Due to concerns regarding unapproved aircraft parts, regulatory authorities have
increased the level of documentation required for aircraft parts. This
requirement has, in turn, been extended by end users to the suppliers of the
parts. The sophistication required to track the history of an inventory
consisting of thousands of aircraft parts is considerable and has required
aircraft parts suppliers to invest significantly in information systems
technology. The high cost of increased technology has made entry into and
survival in the aircraft parts supply market increasingly difficult and
expensive. However, the Company has previously invested in systems technology
and intends to continue to maintain and improve its information systems to allow
it to effectively compete in the aircraft parts supply market.

The most commonly used database available in the aircraft part supply industry
is ILS. ILS is an inventory locating service that assists in searching for and
locating aircraft parts. Once a potential purchaser locates a part owned by the
Company or available through the Company's Accessible Inventory, the purchaser
contacts the Company to confirm price, condition and availability information.
As of December 31, 1998, the Company listed approximately 275,000 items on ILS.
Additionally, ILS is one of the tools used by the Company to locate aircraft
parts that are not in the Company's accessible inventory.

The Company also uses a software package called "Quick Quote." This computer
database creates requests for quote sheets, quotations, sales orders, purchase
orders, repair order and invoices. Quick Quote also provides extensive
part-number databases and inventory control. The system, specifically designed
for the aircraft parts industry, is comprehensive and can originate and complete
a transaction without additional software. The Company also uses advanced
methods of electronic data exchange including Spec 2000, AIRS and BComm.

The Company has purchased a new software package which will replace "Quick
Quote" and the Company's current accounting package. This new system is an
integrated accounting and business management software package. It will create
requests for quote sheets, quotations, sales orders, purchase orders, repair
orders and invoices. This database will provide improved extensive part number
databases, improved inventory controls and additional linkage between accounting
and sales. The Company plans to implement the new software package in 1999 as
part of the Year 2000 implementation.

COMPETITION

The aircraft parts supply industry is highly competitive. The Company encounters
substantial competition from (i) direct competitors, such as The Ages Group, The
Memphis Group, AAR Corp. and Aviation Sales Company, and (ii) indirect
competitors, such as OEMs, which include aircraft manufacturers such as Boeing,
Airbus and McDonnell Douglas, as well as component manufacturers such as Bendix,
Menasco and Goodrich. Competition is generally based on availability of product,
reputation, customer service, price and lead-time. Although many of the
Company's competitors have access to substantially greater financial and other
resources than the Company, the Company believes that by focusing on service,
product integrity and the cultivation of relationships with customers worldwide,
it is well equipped to compete effectively in its industry.

GOVERNMENT REGULATION

Both domestic and foreign entities regulate products sold by the Company. The
following discussion summarizes the required regulatory approvals and clearances
relating to the Company's products and highlights the Company's specific efforts
to conform to such requirements.

The FAA is charged with regulating the manufacture, repair and operation of all
aircraft and aircraft equipment operated within the United States. The FAA
monitors safety by promulgating regulations regarding proper maintenance of
aircraft and aircraft equipment. Similar regulations exist in foreign countries.
All aircraft and aircraft equipment must be monitored on a continual basis and
periodically inspected in order to ensure proper condition and maintenance.
Regulatory agencies specify maintenance, repair and inspection procedures for
aircraft and aircraft equipment. These procedures must be performed by certified
technicians in approved repair facilities on set schedules. All parts must
conform to prescribed regulations and be certified prior to installation on an
aircraft. When necessary, the Company uses FAA and/or Joint Aviation Authority
certified repair shops to repair or certify parts for distribution. Because
regulations are subject to modification, the Company carefully monitors the FAA
and industry trade organizations in order to assess any potentially adverse
impact on the Company caused by changes in regulations applicable to its
operations.

                                       6

<PAGE>


Documentation of spare parts is of paramount importance in the aircraft parts
industry. To ensure that all parts are properly documented and thus traceable to
their original source, the Company requires that its suppliers comply with all
documentation requirements set forth by regulatory agencies. Documentation may
include: (i) an invoice or purchase order from an approved supplier, (ii) a
"teardown" report noting actions taken during the last repair, (iii) a signed
maintenance release from a certified airline or repair facility that repaired
the aircraft spare part and a statement from an inspector verifying that the
part was repaired in accordance with proper workmanship, and using proper
materials and methods.

EMPLOYEES

As of March 31, 1999, the Company had 40 full-time and two part-time employees
in the United States. As of such date, the Company also has agents in Brazil,
Chile, India, Israel, Korea, Pakistan, and Turkey. None of the Company's
employees are covered by a collective bargaining agreement. The Company
considers its relations with its employees to be good.


ITEM 2.      DESCRIPTION OF PROPERTY

In February 1998, the Company leased a 36,079 square foot facility at One
Capital Drive, Lake Forest, California 92630 as its principal executive offices
and primary warehouse for $29,500 per month. The facility has approximately
14,293 square feet allocated to office space and 21,786 square feet of
warehouse. The lease expires January 31, 2005, with an option to extend the term
of the lease for one five-year period at the then market rate for the equivalent
space. The Company believes that its facility is adequately covered by
insurance.

On October 27, 1997, the Company exercised its option to extend for one year its
lease of a 9,500 square foot facility in Mascot, New South Wales, Australia,
located near the Sydney airport. The facility was used primarily for warehouse
space. The lease expired February 28, 1999.

 In December 1997, the Company sold its facility in Irvine, California, which
formerly housed the Company's corporate headquarters and consisted of 16,000
square feet, 9,200 of which was used for warehouse space, with the remaining
space used for sales administration and accounting offices.


ITEM 3.      LEGAL PROCEEDINGS

In October 1997, the Company, its founder, its directors, certain of its
officers, a former officer and director, its former auditor and its underwriter
were named as defendants in three civil suits filed as class actions on behalf
of individuals claiming to have purchased ADI Common Stock during the period
from March 1997 to September 1997, and seeking damages for violation of Federal
securities laws. The suits were filed in the United States District Court for
the Central District of California and are captioned as follows: (i) NGUYEN V.
AVIATION DISTRIBUTORS, INC., ET AL., U.S. District Court, Central District of
California, Case No. SACV 97-795 (ANx); (ii) ALAN GREEN V. AVIATION
DISTRIBUTORS, INC., ET AL., U.S. District Court, Central District of California,
Case No. SACV 97-801 GLT (EEx); and (iii) SHARON TATE V. AVIATION DISTRIBUTORS,
INC., ET AL., U.S. District Court, Central District of California, Case No. 
SACV 97-838 (Eex).

In April 1998, the Company entered into a settlement in principal that is
memorialized in a Memorandum of Understanding (the "M.O.U.") with counsel for
the plaintiffs to settle the suits. Terms of the settlement include cash
consideration of $740,000 and 210,000 shares of the Company's common stock, of
which the Company will issue 80,000 shares and the Company's founder, Osamah S.
Bakhit will contribute 130,000 shares. Included in legal settlement expense for
the year ended December 31, 1997 is a $620,000 charge, of which $480,000 is
attributable to the issuance of 80,000 shares of common stock and $140,000
represents the Company's portion of the cash portion of the settlement. The
Federal Court approved the final settlement agreement on March 15, 1999.

Both a Federal grand jury and the Securities and Exchange Commission have 
commenced investigations into the allegations referred to above. The 
investigations are continuing and the Company is unable, at this time, to 
evaluate the possible outcome of the investigations or their impact on the 
Company. See "Management Discussion and Analysis of Financial Condition and 
Results of Operations - Legal Settlement Expenses; and Liquidity and Capital 
Resources" and Note 9 of Notes to Consolidated Financial Statements.

The Company is involved in certain legal and administrative proceedings and
threatened legal and administrative proceedings arising in the normal course of
its business. While the outcome of such proceedings and threatened proceedings
cannot be predicted with certainty, management believes the ultimate resolution
of these matters individually or in the aggregate will not have a material
adverse effect on the Company.

                                       7


<PAGE>


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

None.

                                     PART II


ITEM 5.      MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

From March 3, 1997 to September 2, 1997, the Company's Common Stock was quoted
on the Nasdaq SmallCap Market under the symbol "ADIN." Effective September 2,
1997, trading in the Company's Common Stock was halted by Nasdaq, and on October
1, 1997 the Company's Common Stock was delisted from the Nasdaq SmallCap Market
based on a failure to comply with the requirements for audited financial
statements. The Company's request for the grant of an exception to the
requirement for audited financial statements until new audited financial
statements were completed was denied by the Nasdaq Listing Qualifications Panel.

Since January 20, 1998, sporadic trading in the Company's Common Stock has been
reported in the over-the-counter-market in the "pink sheets."

The following table sets forth, for the period from January 20, 1998 through
March 31, 1999, the high and low sales prices for the common stock, as reported
in the over-the-counter market. The prices represent quotations between dealers,
without adjustment for retail markup, mark down or commission, and do not
necessarily represent actual transactions.

COMMON STOCK PRICE

<TABLE>
<CAPTION>
                                  High              Low
       1998
       -----
   <S>                           <C>               <C>
    1st Quarter                     7                3
    2nd Quarter                   6 1/4             .95
    3rd Quarter                   2 1/8            5/16
    4th Quarter                  1 7/16            3/16

       1999
    1st Quarter                   1 1/4            9/32
</TABLE>


The Company has not paid any cash dividends on its Common Stock since its
incorporation and anticipates that, for the foreseeable future, earnings, if
any, will be retained for use in its business. As of March 31, 1999, the
approximate number of record holders of the Company's Common Stock was 32,
however, the Company believes the number of non-objecting beneficial owners is
approximately 240 persons.


ITEM  6.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
             RESULTS OF OPERATIONS

The following discussion includes the operations of the Company for each of the
periods discussed. This discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the related notes
thereto, which are included elsewhere in this document. This discussion contains
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Although the Company believes that the expectations reflected in
such forward looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. Such forward looking statements
involve risks and uncertainties and actual results could differ from those
described herein and future results may be subject to numerous factors, many of
which are beyond the control of the Company.

GENERAL

The Company is a supplier of new and overhauled aircraft parts to major
commercial airlines worldwide. The Company locates, acquires and supplies parts
for all major aircraft. Additionally, the Company engages in consignment and
marketing agreements with major commercial airlines, distributors and OEMs,
which allow the Company to offer a wide range of parts for sale without certain
risks and financing costs associated with owned inventory. The Company was
established in October 1988, incorporated in California in February 1992 and
reincorporated in Delaware in July 1996.

                                       8

<PAGE>


The Company's sales have decreased from $39.0 million in 1997 to $28.4 million
in 1998 due to a shortage in cash availability during 1998 resulting from cash
requirements relating to the class action lawsuits and government investigations
and due to management spending significant time in addressing the lawsuits and
investigations, which took their time and focus away from increasing sales and
negotiating large transactions. Management believes the Company's revenues will
increase in 1999 due to less cash required for legal expenses since the class
action lawsuit was settled in the first quarter of 1999. Historically, the
Company's sales have increased from $21.3 million in 1995, to $23.9 million in
1996 and $39.0 million in 1997. Of 1995 sales, approximately $6.5 million
resulted from the sale of two whole aircraft (with engines) to Royal Jordanian
Airlines, which is located in the Middle East. Excluding the whole aircraft
transaction, sales in 1995 would have been $14.8 million. If the opportunity
exists, the Company may sell whole aircraft in the future.

OVERVIEW

Net sales consist primarily of gross sales, net of allowance for returns and
other adjustments. Cost of sales consists primarily of product costs, freight
charges and an inventory provision for damaged and obsolete products. Product
costs consist of the acquisition costs of the products and costs associated with
repairs, maintenance and certification.

Net sales and gross profit depend in large measure on the volume and timing of
sales orders received during the period and the mix of aircraft parts contained
in the Company's inventory. The timing of bulk inventory purchases can impact
sales and gross profit. In general, bulk inventory purchases allow the Company
to obtain large inventories of aircraft parts at a lower cost than can
ordinarily be obtained by purchasing such parts on an individual basis. Thus,
these bulk purchases allow the Company to seek larger gross margins on its sale
of aircraft parts since the cost of purchase is reduced.

RESULTS OF OPERATIONS

The following table sets forth certain information relating to the Company's
operations for the years ended December 31, 1997 and 1998 (dollars in
thousands):
 
<TABLE>
<CAPTION>
                                                                  1997                       1998
                                                        ------------------------   ------------------------
<S>                                                     <C>         <C>            <C>         <C>    
Net distributed services and inventory sales               $37,851      97.1%         $28,186      99.1%
Net sales on consignment and marketing agreements            1,113       2.9              247       0.9
                                                        ----------- ------------   ----------- ------------
      Net sales                                             38,964     100.0           28,433     100.0
Cost of sales                                               29,609      76.0           22,597      79.5
                                                        ----------- ------------   ----------- ------------

      Gross profit                                           9,355      24.0            5,836      20.5
Selling and administrative expenses                          6,528      16.7            7,593      26.7
Non recurring expenses                                         968       2.5            1,311       4.6
Legal settlement expense                                       620       1.6                -         -
                                                        ----------- ------------   ----------- ------------

      Income (loss) from operations                          1,239       3.2           (3,068)    (10.8)
Interest expense, net                                          821       2.1            2,297       8.1
Other (income) expense                                        (117)     (0.2)             144       0.5
Provision for income taxes                                     131       0.3              287       1.0
                                                        ----------- ------------   ----------- ------------
      Net income (loss)                                     $  404       1.0 %      $  (5,796)     (20.4)%
                                                        ----------- ------------   ----------- ------------
                                                        ----------- ------------   ----------- ------------
</TABLE>



NET DISTRIBUTED SERVICES AND INVENTORY SALES. Net distributed services 
represents sales of aircraft parts purchased at the time of sale through 
outside parties (outside sourcing). Inventory sales represent sales of the 
Company's owned inventory. Net distributed services and inventory sales 
decreased from $37.9 million for the year ended December 31, 1997 to $28.2 
million for the year ended December 31, 1998, a decrease of $9.7 million or 
25.6%. This decrease was primarily due to a shortage in cash availability 
during 1998 resulting from cash requirements relating to the class action 
lawsuits and government investigations and due to management spending 
significant time in addressing the lawsuits and investigations, which took 
their time and focus away from increasing sales and negotiating large 
transactions. The Company had several large transactions during 1997 that 
contributed approximately $8.2 million of distributed services and inventory 
sales compared to $2.4 million of large transactions in the 1998 period, a 
decrease of $5.8 million.

                                       9
<PAGE>


Sales from distributed services represented approximately 79.7% and 85.0% of
total distributed services and inventory sales for the years ended December 31,
1997 and 1998, respectively. Sales of the Company's owned inventory represented
approximately 20.3% and 14.0% of total distributed services and inventory sales
for the years ended December 31, 1997 and 1998, respectively. The decrease was
primarily due to some large sales in the 1997 period from Company-owned
inventory for approximately $4.1 million compared to $1.2 million of large sales
in the 1998 period from Company-owned inventory.


NET SALES ON CONSIGNMENT AND MARKETING AGREEMENTS. Net sales on consignment and
marketing agreements represent revenue, including commission, from sales of
inventory held on consignment and sales of inventory obtained through marketing
agreements with larger airlines. These types of sales decreased from $1.1
million for the year ended December 31, 1997 to $247,000 for the year ended
December 31, 1998, a decrease of $853,000 or 77.5%. The decrease was a result of
management's decision to terminate a consignment agreement and a marketing
agreement during 1997 and terminate another marketing agreement during 1998.
Currently the Company does not have any active marketing or consignment
agreements.

NET SALES. Net sales decreased by $10.5 million, or 27.0%, primarily due to
fewer large transactions during 1998, a shortage of cash availability due to the
class action lawsuits and government investigations and due to management's
focus on generating additional capital and addressing the lawsuits and
investigations instead of focusing on increasing sales and negotiating large
sales transactions. Management believes it was able to maintain the majority of
its "core" business and if the Company had a better cash position and less legal
issues then it would have been able to complete additional large sales
transactions and increase its "core" business to allow the net sales for 1998 to
be equal or greater than 1997 net sales. See "Net distributed services and
inventory sales."

The sales by region data presented below should be read in conjunction with the
Consolidated Financial Statements, including the Notes thereto included
elsewhere in this document. The following data consists of sales by region for
the years ended December 31, 1997 and 1998:


<TABLE>
<CAPTION>
AREA                                                                     1997             1998
--------------------------------------------------------------------- --------------   --------------
<S>                                                                   <C>              <C>
Pacific Rim                                                                       %                %
                                                                             19.5             17.9
Europe                                                                                  
                                                                             21.2             17.4
Latin/South America                                                                     
                                                                             12.0             16.1
Africa/Middle East                                                                      
                                                                              3.8              6.4
Domestic                                                                                
                                                                             43.5             42.2
                                                                      --------------   --------------
                                                                                  %                %
                                                                            100.0            100.0
                                                                      --------------   --------------
                                                                      --------------   --------------
</TABLE>

The Company's sales to international customers for the years ended December 31,
1997, 56.5%, and December 31, 1998, 57.8%, remained relatively consistent.


COST OF SALES. Cost of sales decreased from $29.6 million for the year ended
December 31, 1997 to $22.6 million for the year ended December 31, 1998, a
decrease of $7.0 million or 23.7%. This decrease was primarily the result of the
27.0% decrease in net sales. As a percentage of net sales, cost of sales
increased from 76.0% in 1997 to 79.5% in 1998 due to improved pricing on
inventory parts during 1997 as a result of certain large transactions resulting
in some high gross margins. See "Net sales."

GROSS PROFIT. Gross profit decreased from $9.4 million, or 24.0% of net sales
for the year ended December 31, 1997 to $5.8 million or 20.5% of net sales for
the year ended December 31, 1998. The decrease in the gross profit was a result
of the decrease in net sales and the decrease in the gross profit margin. The
gross profit margin primarily decreased because the lack of capital decreased
the ability of the sales people to negotiate and shop for the best purchase
price. There were also certain large transactions during 1997 resulting in some
high gross margins. See "Net sales" and "Cost of sales."

SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
consisted primarily of compensation, commission expense, professional fees,
consulting expense and travel expense. The Company's selling and administrative
expenses increased from $6.5 million for the year ended December 31, 1997 to
$7.6 million for the year ended December 31, 1998, an increase of $1.1 million
or 16.9%. This increase was principally due to higher bank charges related to
the new credit facility entered into by the Company in June 1997, increases in
professional fees and consulting expense and increases in facility rent when the
Company moved its headquarters in February of 1998.

                                       10

<PAGE>


NONRECURRING EXPENSES. The Company incurred $968,000 and $1.3 million during
1997 and 1998, respectively, of expenses related to its investigation of
allegations concerning its previously issued financial statements, restatement
of those financial statements, class action lawsuits and investigations by a
Federal grand jury and the Securities and Exchange Commission. See "Item 3 Legal
Proceedings". These expenses primarily consist of legal, accounting and
consulting fees. The amount charged to operations for compensation to plaintiffs
in settlement of the class action suits was charged to legal settlement expenses
during 1997(see below).


LEGAL SETTLEMENT EXPENSE. In October 1997, the Company, its founder, its
directors, certain officers, a former officer and director, its former auditor
and its underwriter were named as defendants in three civil suits filed as class
actions on behalf of individuals claiming to have purchased ADI Common Stock
during the period from March 1997 to September 1997.

In April 1998, the Company entered into a settlement in principal that is
memorialized in a Memorandum of Understanding (the "M.O.U.") with counsel for
the plaintiffs to settle the suits. Terms of the settlement include cash
consideration of $740,000 and 210,000 shares of the Company's common stock, of
which the Company will issue 80,000 shares and the Company's founder, Osamah S.
Bakhit will contribute 130,000 shares. Included in legal settlement expense for
the year ended December 31, 1997 is a $620,000 charge, of which $480,000 is
attributable to the issuance of 80,000 shares of common stock and $140,000
represents the Company's portion of the cash portion of the settlement. The
Federal Court approved the final settlement agreement on March 15, 1999. See
"Item 3 - Legal Proceedings".


INCOME (LOSS) FROM OPERATIONS. The Company incurred a loss of $3.1 million from
operations for the year ended December 31, 1998. Loss from operations for the
1998 period, excluding the non-recurring expenses, would have been $1.8 million.
The income from operations for the 1997 period, excluding the non recurring
expenses and the legal settlement expense, would have been $2.8 million. The
decrease in operating income is due to a decrease in net sales, gross profit and
the increase in selling and administrative expenses. See "Net distributed
services and inventory sales," "Net sales on consignment and marketing
agreements," "Gross profit" and "Selling and administrative expenses."

INTEREST EXPENSES, NET. Net interest expense increased from $821,000, or 2.1% of
net sales for the year ended December 31, 1997 to $2.3 million, or 8.1% of net
sales for the year ended December 31, 1998. The increase in interest expense was
partly due to an increase in borrowings under the Company's line of credit
during the 1998 period. The increase was also due to approximately $470,000
interest incurred on the note payable for the purchase of the CFM56 engine
during the year. The Company was also over-advanced on the line of credit, which
resulted in BNY Financial Corporation charging the Company interest ranging from
9.5% to 13.5% per month, plus additional penalties and fees.

PROVISION FOR INCOME TAXES. The Company had a provision for income taxes during
1998 due to the Company increasing the reserve for the deferred tax asset.


YEAR 2000 COMPLIANCE

The Company has analyzed its Year 2000 compliance issues and developed solutions
and contingency plans. Management's future estimate of costs to become year 2000
compliant is between $100,000 and $200,000, which includes the implementation of
a new software system or an upgrade of the current systems. Management plans to
implement the new software system purchased for approximately $100,000 in 1997.
The Company does not separately track the internal costs incurred for the Y2K
project. The Company estimated its future costs by assessing compensation and
fringe benefits of internal employees working on the Y2K issues and fees of
certain outside consultants.

Management has developed a specific project plan that it expects to complete 
by August 1, 1999.  The project team is in the process of completing the 
installation of hardware and software, which will provide year 2000 
compliance and provide a new integrated database to manage the business 
systems of the Company.  Data transfer and file structure for the purchased 
software are being loaded and tested for specific application to the 
Company's needs.  Outside consultants with experience and expertise in the 
software purchased by the Company have been engaged to assist in the 
implementation.  Historical data is being transferred to the new software and 
tested for accuracy.  Training programs have been developed and the training 
has begun for the new software.  All testing to-date has been satisfactory.

If the new system is not running by August 1999 then the Company's first
contingency plan is to upgrade the current systems to be Y2K compliant. If
neither the new system nor the upgraded systems are running at December 31, 1999
then the current systems will begin to fail and the information will not be
accurate. The Company will have to resort to performing manual invoices and a
manual purchasing and perpetual inventory systems. A manual process could slow
down the Company's operations and the Company may not meet customer delivery
expectations.

                                       11

<PAGE>


The Company is confirming Y2K readiness with its major suppliers and customers.
This will allow the Company to determine the reliable sources of aircraft parts
and which companies will be ready to purchase aircraft parts in year 2000.
Although the Company has many suppliers it purchases parts from there is no
assurance that a critical supplier may not be Y2K compliant resulting in a
material impact on the Company's operations.

As a distributor and re-seller of goods manufactured by other companies, the
Company will do all that it reasonably can to ensure that any transactions for
goods supplied to the Company and shipped to customers will not suffer from the
change of date. However, there is no assurance that the Company's year 2000
remediation efforts will prevent all potential consequences.


LIQUIDITY AND CAPITAL RESOURCES

Since 1994 the Company has been financed primarily with its cash flow from
financing activities. The Company had cash and cash equivalents of $80,000 as of
December 31, 1997. The Company had restricted cash of $1.1 million and $8,000 as
of December 31, 1997 and 1998, respectively.

The Company's operating activities used $8.1 million in 1997, principally
related to increases in inventories, an increase in receivables from sales
growth and extended sales terms. In 1998, operations used $3.0 million, with the
principal uses being the $5.8 million loss and net reductions of $2.2 million in
inventory purchase notes payable, offset by $3.8 million reductions in accounts
and notes receivable.

In 1997, investing activities used $304,000, consisting of a $1.0 million
increase in restricted cash and $376,000 of equipment purchases, net of $1.1
million of cash proceeds from the sale of the Company's former corporate
headquarters facility. In 1998, investing activities provided net cash of
$880,000 principally relating to a decrease in restricted cash due to a
certificate of deposit that was used as collateral on a letter of credit issued
to a vendor that was utilized in the second quarter of 1998.

Financing activities provided cash of $8.5 million in 1997 and $2.0 million in
1998. Net increases in line of credit borrowings were $3.7 million and $2.7
million, respectively. In 1997, the Company raised $5.3 million in its initial
public offering and had a $923,000 net increase in long-term debt.

As of December 31, 1998 the Company had a working capital deficit of $2.6
million. This was primarily due to the decrease in accounts receivable as a
result of the decrease in net sales and an increase in the borrowings on the
line of credit resulting from the cash requirements for the shareholder lawsuits
and the government investigations. See "Item 3 - Legal Proceedings."

The Company's Credit Facility provides for working capital loans of up to $15.0
million with interest at the Bank of New York Alternate Base Rate (7.75 percent
at December 31, 1998) plus one percent subject to an availability calculation
based on the eligible borrowing base. The eligible borrowing base includes
certain receivables and inventories of the Company. The terms of the credit
agreement provide for a facility non-use fee of 0.25% per annum of the
difference between the facility amount and the average monthly balance. The
Credit Facility matures on June 24, 2000.

BNY Financial Corporation has a fully perfected security interest against all
assets of the Company, except restricted cash, in addition to a personal
guarantee from the Company's founder and secured by 1 million shares of common
stock pledged by the Company's founder.

The Credit Facility provides for the repayment of all debt and/or termination of
the Credit Facility (i) in the event the Company voluntarily files under the
federal bankruptcy laws or fails to dismiss, within 30 days, any petition filed
against it in any involuntary case under such bankruptcy laws, (ii) if the
lender believes the prospect of payment or performance of the indebtedness is
impaired, or (iii) upon a change of control. The $15.0 million Credit Facility
has certain financial covenants that require the Company to have a tangible net
worth of at least $3.0 million beginning December 31, 1998, and that tangible
net worth shall increase by $250,000 per quarter starting in 1998, to not make
capital expenditures in any fiscal year in an amount in excess of $750,000, the
ratio of EBITDA of the Company excluding interest income less taxes paid to all
cash interest expenses of the Company plus all principal payments made by the
Company to be less than two to one, and shall not at any time at the end of any
month permit its working capital to be less than $4.0 million.

As of December 31, 1998, the Company was in default on certain covenants. On
April 30, 1999, the financial institution issued the Company a waiver of the
covenants that were in default and modified certain covenants for 1999.

                                       12

<PAGE>


In October 1998 the Company assigned all tax refunds from governmental agencies
to BNY and issued 126,600 warrants to purchase common stock of the Company at
$2.50 per share. At December 31, 1998 the Company has recorded a tax receivable
representing over-paid taxes on the 1996 Federal and State tax returns of
$393,000. In February 1999 the Company reduced the exercise price of the
warrants from $2.50 to $1.00 per share.

On February 9, 1999 the Company amended its line of credit with BNY to increase
the maximum loan amount to $20,000,000, add a $500,000 purchase order advance
line, increase its unused line fee to 0.5% and increase its receivables advance
rate for insured international receivables from 80% to 90%. The Company's
permitted monthly overhead expense was reduced to an amount equal to or below
$425,000 per month. The Company incurred a $50,000 fee for amending the line of
credit.

The Company's long-term debt consists of the following: (i) note payable of $1.3
million at December 31, 1998 to a financial institution, due in monthly
installments of $166,250 (principal and interest) to August 1999 with an
interest rate of 9.5 percent; (ii) note payable of $626,000 at December 31, 1998
to a corporation, secured by specific inventory, an imputed interest rate of 9.5
percent and was settled in the first quarter of 1999 by offsetting transactions
made with the corporation against the amount due Aviation Distributors, Inc.;
and (iii) notes payable for $17,700.

In February 1998, the Company borrowed $2,140,000 from BNY Financial Corporation
to purchase an aircraft engine. The note was due on April 27, 1998, and has an
interest rate of Prime plus three percent plus other fees. The Company did not
pay the required amount on the note in March 1998 and did not pay off the note
by April 27, 1998. As a result, the Company incurred a $100,000 default penalty
in March 1998. The bank further extended this note to June 30, 1998 for a
$100,000 fee. The Company did not pay the balance of this note by June 30, 1998.
The balance of the note, $776,000, was incorporated within the line of credit
with BNY in the last quarter of 1998.

The Company's operations are financed under a credit facility BNY Financial
Corporation, a subsidiary of, the Bank of New York. This facility is an asset
based line of credit secured by account receivable and inventory and is the
primary source for the Company to finance its operations and growth. Because of
the non-recurring costs associated with the re-auditing of the Company's
financial statements and the ongoing federal investigations, the Company has
used its asset base to meet these obligations. As a result, the Company may need
to increase its capital base in order to continue to meet its growth objectives.
There can be no assurance that such additional capital will be available on a
timely basis or at acceptable terms.

ITEM 7.  FINANCIAL STATEMENTS

The financial statements listed in the accompanying Index to Financial
Statements are attached hereto and filed as a part of this Report under Item 13.















                                       13


<PAGE>





                           AVIATION DISTRIBUTORS, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S>                                                                                                       <C>
Report of Independent Certified Public Accountants    .  .  .  .  .  .  .  .  .  . .  .  .  .  .  .  .  . F-2

Consolidated Balance Sheets as of December 31, 1997 and 1998.  .  .  .  .  .  .  . .  .  .  .  .  .  .  . F-3

Consolidated Statements of Operations for the Years ended December 31, 1997 and 1998. .  .  .  .  .  .  . F-4

Consolidated Statements of Stockholders' Equity (Deficit)
   for the years ended December 31, 1997 and 1998 .  .  .  .  .  .  .  .  .  .   .  . .  .  .  .  .  .  . F-5

Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1998. .  .  .  .  .  .  . F-6

Notes to Consolidated Financial Statements  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . F-7
</TABLE>







                                      F-1

<PAGE>



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
Aviation Distributors, Inc.

We have audited the accompanying consolidated balance sheets of Aviation 
Distributors, Inc. as of December 31, 1997 and 1998, and the related 
consolidated statements of operations, stockholders' equity (deficit) and 
cash flows for the years 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 audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial position of Aviation
Distributors, Inc. as of December 31, 1997 and 1998, and the consolidated
results of their operations and their consolidated cash flows for the years then
ended in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $5,795,772 for the year ended December 31,
1998, and, as of that date, the Company's current liabilities exceeded its
current assets by $2,556,818 and its total liabilities exceeded its total assets
by $2,093,837. These factors, among others, as discussed in Note 2 to the
consolidated financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

/s/ GRANT THORNTON LLP

Irvine, California
May 3, 1999







                                      F-2

<PAGE>


        AVIATION DISTRIBUTORS, INC. 
        CONSOLIDATED BALANCE SHEETS 

<TABLE>
<CAPTION>

                                                                                  December 31, 
                                                                   ---------------------------------------
                             ASSETS                                        1997                  1998
                                                                           ----                  ----
        CURRENT ASSETS:
<S>                                                                <C>                     <C>            
                Cash and cash equivalents . . . . . . . . . .   . .$      80,218           $           -  
                Restricted cash   . . . . . . . . . . . . . .   . .    1,103,444                   8,171  
                Accounts receivable, net of allowance for                                                 
                 doubtful accounts of $300,000 and $620,000                                               
                 at December 31, 1997 and 1998, respectively. . .      7,875,366               4,767,470  
                Other receivables . . . . . . . . . . . . . .   . .      216,956                  69,238  
                Inventories . . . . . . . . . . . . . . . . . . . .    9,384,573               9,356,386  
                Prepaid expenses  . . . . . . . . . . . . . .   . .      344,283                 529,965  
                Income tax receivable . . . . . . . . . . . .   . .      392,979                 392,979  
                Current portion of notes receivable . . . . .   . .    1,781,172               1,276,750  
                Deferred tax asset  . . . . . . . . . . . . .   . .      293,000                 101,000  
                                                                      ----------              ----------
                     Total current assets . . . . . . . . . .   .     21,471,991              16,501,959  
                                                                      ----------              ----------
        PROPERTY AND EQUIPMENT . . . . . . . . . . . . .             . 1,030,100               1,001,622  
                Less - accumulated depreciation . . . . . . .   . .      337,908                 355,715  
                                                                      ----------              ----------
                                                                         692,192                 645,907  
                                                                      ----------              ----------
        Notes receivable from founder . . . . . . . . . . . . . . . . . .408,718                 408,718  
        Other assets . . . . . . . . . . . . . . . . . .                 179,512                  29,351  
        Notes receivable, net of current portion . . . .               1,272,071                       -  
                                                                      ----------              ----------
                                                                       1,860,301                 438,069  
                                                                    $ 24,024,484            $ 17,585,935  
                                                                      ----------              ----------
                                                                      ----------              ----------

                   LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 

        CURRENT LIABILITIES:                                                                              
                Checks issued not yet presented for payment . . . .    $ 984,031               $ 377,986  
                Accounts payable  . . . . . . . . . . . . . .   . .    2,882,044               3,120,953  
                Accrued liabilities . . . . . . . . . . . . .   . .      770,432                 838,446  
                Line of credit  . . . . . . . . . . . . . . .   . .    9,289,188              12,791,538  
                Current portion of long-term debt . . . . . .   . .    3,133,352               1,911,057  
                Current portion of capital lease obligations  . . .       19,698                  18,797  
                                                                      ----------              ----------
                     Total current liabilities  . . . . . . .   . .   17,078,745              19,058,777  
                                                                      ----------              ----------
        Long-term debt, net of current portion . . . . .               2,582,826                   9,672  
                                                                      ----------              ----------
        Capital lease obligations, net of current portion. . . .          14,674                  30,323  
                                                                      ----------              ----------
        Other long-term liability  . . . . . . . . . . .                 480,000                 480,000  
                                                                      ----------              ----------
        Deferred tax liability . . . . . . . . . . . . .                  93,000                 101,000  
                                                                      ----------              ----------
        STOCKHOLDERS' EQUITY (DEFICIT):                                                                   
                Preferred stock, par value of $.01, 3,000,000                                             
                 shares authorized; none issued and outstanding                -                       -  
                Common stock, par value of $.01, 10,000,000                                               
                 shares authorized; 3,165,000 shares issued;                                               
                 3,165,000 and 3,122,000 outstanding at 
                 December 31, 1997 and 1998, respectively . . . . .       31,650                  31,650  
                Additional paid in capital  . . . . . . . . . . . .    5,658,099               5,658,099  
                Accumulated deficit . . . . . . . . . . . . . . . .   (1,914,510)             (7,710,282)  
                Treasury stock, 43,000 shares at cost . . . . . . .            -                 (73,304)  
                                                                      ----------              ----------
                     Total stockholders' equity (deficit) . . . . .    3,775,239              (2,093,837)  
                                                                      ----------              ----------
                                                                    $ 24,024,484            $ 17,585,935  
                                                                      ----------              ----------
</TABLE>



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


                                      F-3
<PAGE>



            AVIATION DISTRIBUTORS, INC.
       CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                            ----------------------------
                                                                 1997            1998
                                                                 ----            ----
<S>                                                         <C>              <C>      
NET DISTRIBUTED SERVICES AND INVENTORY SALES ............   $ 37,851,114     $28,185,451
NET SALES ON CONSIGNMENT AND
 MARKETING AGREEMENTS ...................................      1,112,845         247,120
                                                              ----------      ----------

TOTAL NET SALES .........................................     38,963,959      28,432,571
COST OF SALES ...........................................     29,608,994      22,596,436
                                                              ----------      ----------

        Gross profit ....................................      9,354,965       5,836,135
SELLING AND ADMINISTRATIVE EXPENSES .....................      6,528,256       7,593,018
LEGAL SETTLEMENT EXPENSE ................................        620,000              --
NON-RECURRING EXPENSES ..................................        968,052       1,311,153
                                                              ----------      ----------

        Income (loss) from operations ...................      1,238,657      (3,068,036)
OTHER (EXPENSE) INCOME:
        Interest expense ................................     (1,255,483)     (2,560,930)
        Interest income .................................        434,290         263,796
        Gain (loss) on disposal of assets ...............         79,772        (148,666)
        Other income ....................................         38,256           5,064
                                                              ----------      ----------
        Income (loss) before provision
         for income taxes ...............................        535,492      (5,508,772)
PROVISION FOR INCOME TAXES ..............................        131,000         287,000
                                                              ----------      ----------

        NET INCOME (LOSS) ...............................   $    404,492    $ (5,795,772)
                                                              ----------      ----------
                                                              ----------      ----------

        Basic net income (loss) per share ...............   $       0.14    $      (1.85)
                                                              ----------      ----------
                                                              ----------      ----------

        Diluted net income (loss) per share .............   $       0.14    $      (1.85)
                                                              ----------      ----------
                                                              ----------      ----------

Basic weighted average shares outstanding ...............      2,910,000       3,140,000
Effect of dilutive stock options ........................         43,108              --
                                                              ----------      ----------
Diluted weighted average shares outstanding .............      2,953,108       3,140,000
                                                              ----------      ----------
                                                              ----------      ----------
</TABLE>


                                      F-4


<PAGE>

                           AVIATION DISTRIBUTORS, INC.
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                                                                                                     
                                     Common stock            Treasury stock                                               Total
                               ------------------------   -------------------        Additional                       stockholders'
                                  Number                    Number                      paid          Accumulated         equity
                               of shares        Amount    of shares     Amount       in capital         deficit         (deficit)
<S>                            <C>             <C>        <C>           <C>         <C>               <C>              <C>      
Balance at January 1, 1997  . . 1,785,000      $17,850        -         $     -     $  389,150         $(2,319,002)     $(1,912,002)

  Initial public offering . . . 1,380,000       13,800        -               -      5,268,949                   -        5,282,749

    Net income . . . . . .              -            -        -               -              -             404,492          404,492 
                                ---------       ------    ------        -------      ---------           ---------        ---------
Balance at December 31, 1997. . 3,165,000       31,650        -               -      5,658,099          (1,914,510)       3,775,239

    Purchase of treasury stock .        -            -    43,000        (73,304)             -                   -          (73,304)

    Net loss . . . . . . . . . .        -            -        -               -              -          (5,795,772)      (5,795,772)
                                ---------       ------    ------        -------      ---------           ---------        ---------
Balance at December 31, 1998 . .3,165,000      $31,650    43,000       $(73,304)    $5,658,099         $(7,710,282)     $(2,093,837)
                                ---------       ------    ------        -------      ---------           ---------        ---------
                                ---------       ------    ------        -------      ---------           ---------        ---------
</TABLE>

                                      F-5

<PAGE>

                          AVIATION DISTRIBUTORS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                           Year Ended December 31,
                                                                                           -----------------------
                                                                                           Restated
                                                                                            1997           1998
                                                                                            ----           -----
<S>                                                                                       <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
         Net income (loss) .............................................................  $   404,492    $(5,795,772)
         Adjustments to reconcile net income (loss) to net cash
             used in operating activities:
             Principal payments on note receivable .....................................    1,619,140      1,776,493
             Borrowings on notes payable related to inventory purchases ................    3,730,175      2,423,586
             Principal payments on notes payable
                related to inventory purchases .........................................   (3,365,506)    (4,552,354)
             Reduction in amount due on notes payable
                related to inventory purchases in exchange for
                reduction in accounts receivable .......................................           -      (1,057,573)
             Legal settlement ..........................................................      (80,000)             -
             Principal payments on note payable 
                related to legal settlement ............................................     (820,000)             -
             Loss (gain) on disposition of property and equipment.......................      (79,772)       148,666
             Depreciation and amortization .............................................      281,550        327,606
             Changes in assets and liabilities:
                    Accounts receivable, net ...........................................   (3,484,887)     3,107,896
                    Other receivables ..................................................    (150,684)        147,718
                    Inventories ........................................................  (6,517,817)         28,187
                    Prepaid expenses ...................................................    (274,559)       (185,682)
                    Income tax receivable...............................................    (392,979)              -
                    Deferred tax asset..................................................      93,000         192,000 
                    Other assets........................................................     (11,715)        150,161
                    Accounts payable....................................................      37,246         238,909
                    Accrued liabilities.................................................     393,388          68,014
                    Other long term liability...........................................     480,000               -
                    Deferred tax liability..............................................       7,000           8,000
                                                                                          ----------      ------------
                      Net cash used in operating activities.............................  (8,131,928)     (2,974,145)
                                                                                          ----------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
         Purchases of property and equipment............................................    (376,398)       (214,841)
         Proceeds from the sale of property and equipment...............................   1,112,050               -
         Decrease (Increase) in restricted cash.........................................  (1,039,986)      1,095,273
                                                                                          ----------      ------------
                  Net cash provided by (used in) investing activities...................    (304,334)        880,432
                                                                                          ----------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
         Borrowings on lines of credit..................................................  43,103,511      31,249,446
         Principal payments on lines of credit.......................................... (39,397,798)    (28,523,015)
         Borrowings on long-term debt...................................................     519,800               -
         Principal payments of long-term debt...........................................  (1,443,491)         (6,916)
         Principal payments of capital lease obligations................................     (18,867)        (26,671)
         Checks issued not yet presented for payment....................................     453,591        (606,045)
         Acquisition of treasury stock..................................................           -         (73,304)
         Net proceeds from initial public offering......................................   5,282,749               -
                                                                                           ----------      ------------
                  Net cash provided by financing activities.............................   8,499,495       2,013,495
                                                                                          ----------      ------------
Net increase (decrease) in cash and cash equivalents....................................      63,233         (80,218)
Cash and cash equivalents at beginning of period........................................      16,985          80,218
                                                                                          ----------      ------------
Cash and cash equivalents at end of period..............................................     $80,218      $        -
                                                                                          ----------      ------------
                                                                                          ----------      ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
         Cash paid during the period for:
                  Interest..............................................................  $1,323,206      $ 2,572,895
                                                                                          ----------      ------------
                                                                                          ----------      ------------
                  Income taxes..........................................................    $399,203      $    84,615
                                                                                          ----------      ------------
                                                                                          ----------      ------------
</TABLE>


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




                                      F-6




<PAGE>

                           AVIATION DISTRIBUTORS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF BUSINESS

Aviation Distributors, Inc. ("ADI") and its subsidiary (the "Company")
established operations in 1988, incorporated in the state of California in 1992
and reincorporated in the state of Delaware in 1996. The Company is a supplier,
distributor and broker of commercial aircraft parts and supplies. The Company's
customers are located worldwide.

For the years ended December 31, 1997 and 1998, approximately 56.5% and 57.8%
respectively, of the Company's net sales were export sales. These export sales
by region were approximately as follows:

<TABLE>
<CAPTION>
                                                                                              DECEMBER 31,   
                                                                                           -----------------
                                                                                           1997         1998
                                                                                           ----         ----
<S>                                                                                        <C>          <C>  
Pacific Rim  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  19.5%        17.9%
Europe .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  21.2         17.5
Latin/South America.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  12.0         16.1
Africa/Middle East .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .   3.8          6.3
                                                                                           ----         ----
                                                                                           56.5%        57.8%
                                                                                           ----         ----
                                                                                           ----         ----
</TABLE>

ACCOUNTING 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 periods.
Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary ADI Consignment and Sales, Inc. The
Company's subsidiary is a non-operating entity; therefore, there were no
significant intercompany transactions.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt instruments with a maturity of less
than 90 days to be cash equivalents.

RESTRICTED CASH

Restricted cash consists of short-term certificates of deposits held as security
for letters of credit issued on behalf of the Company by financial institutions.

INVENTORIES

Inventories, which consist primarily of aircraft parts, are stated at the lower
of cost or market with cost determined on a specific identification or first-in,
first-out basis. Expenditures required for the rectification of parts are
capitalized as inventory cost as incurred and are expensed with cost of sales as
the parts are sold. Inventory received from a vendor in exchange for Company
owned inventory is recorded at the historical cost of the items surrendered,
after any necessary reduction for impairment. Inventory received in settlement
of receivables is recorded at the lower of the receivable balance or the fair
value of the items received.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation expense is provided using
the straight-line method over the useful lives of the assets, ranging from five
to thirty years. Expenditures for repairs and maintenance are expensed as
incurred. Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. The carrying amounts of assets
sold or retired are removed from their accounts in the year of disposal, and any
resulting gain or loss is reflected in operations.



                                      F-7

<PAGE>



                           AVIATION DISTRIBUTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

FINANCIAL INSTRUMENTS

At December 31, 1998 and 1997, the carrying value of the Company's financial
instruments (cash and cash equivalents, accounts receivable, notes receivable,
lines of credit, other liabilities due in less than one year and notes payable)
approximated their fair values due to the relatively short maturity of the
instruments or because the interest rates on the instruments are comparable to
market rates.

REVENUE RECOGNITION

Sales of aircraft parts are recognized as revenues when the product is shipped
and title has passed to the customer. The Company provides an allowance for
estimated product returns. Distributed services sales represent sales of
aviation parts obtained from outside sources at the point of sale, whereas
inventory sales represent sales from Company owned inventory. Net sales on
consignment and marketing agreements represent revenue related to inventories
owned by others in which the Company has entered into exclusive marketing and/or
consignment agreement to sell the third party parts.

For the year ended December 31, 1998, sales from Company owned inventory,
pursuant to consignment and marketing agreements and pursuant to outside
sourcing represented approximately 14%, 1% and 85%, respectively of the
Company's net sales. For the year ended December 31, 1997, sales from Company
owned inventory, pursuant to consignment and marketing agreements and pursuant
to outside sourcing represented approximately 20%, 3% and 77%, respectively of
the Company's net sales.

INCOME TAXES

The Company accounts for income taxes using the liability method prescribed by
Statement of Financial Accounting Standards (SFAS") No. 109, "Accounting for
Income Taxes."

BASIC AND DILUTED NET INCOME (LOSS) PER SHARES

Basic net income (loss) per share is based upon the weighted average number of
common shares outstanding. Diluted net income (loss) per share is based on the
assumption that all convertible shares and stock options were converted or
exercised, unless such assumption would be antidilutive. Dilution is computed by
applying the treasury stock method. Under this method, options and warrants are
assumed to be exercised at the beginning of the period (or at the time of
issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period.

STOCK BASED COMPENSATION

The Company has elected to continue to account for stock-based compensation
plans under the intrinsic value method. The impact of applying the fair value
method discussed in SFAS No. 123 in 1997 and 1998 is immaterial to the financial
statements of the Company; therefore, pro forma information is not presented.

NEW ACCOUNTING PRONOUNCEMENTS

In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
applies only to publicly held business entities. A reportable segment, referred
to as an operating segment, is a component of an entity about which separate
financial information is produced internally, that is evaluated by the chief
operation decision-maker to assess performance and allocate resources. SFAS 131
is effective for financial statements issued for periods beginning after
December 15, 1997. Because the Company operates in only one segment, the
adoption of SFAS 131 did not have a material effect on disclosures in the
Company's financial statements.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1997 financial statements to
conform to the current year presentation.


                                      F-8

<PAGE>

                        AVIATION DISTRIBUTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 2  - REALIZATION OF ASSETS

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, the Company sustained a substantial loss
from operations in 1998; has used, rather than provided, cash in its operations;
and has deficits in working capital and stockholders' equity at December 31,
1998. In addition, the Company is in an over advance position on its line of
credit, which limits its ability to obtain additional operating capital from its
primary lender. Also, as discussed in note 9, the impact on the Company of
certain governmental investigations cannot be determined at this time.

In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheets, are dependent upon continued operations of the Company. This in turn is
dependent upon the Company's ability to meet its financing requirements on a
continuing basis, to maintain present financing, and to succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.

Management has taken steps to revise its operating and financial requirements,
which it believes are sufficient to provide the Company with the ability to
continue in existence. Ongoing expenses have been reduced by salary reductions,
headcount reductions and other cost saving measures implemented. To further
reduce ongoing expenses, the Australian warehouse and European sales office were
closed, relocating the inventory and the sales function to California. The class
action lawsuits have been settled. As a result, management expects the
nonrecurring and abnormal expenses caused by the lawsuits and other legal issues
to decline by more than $1 million. Settlement of legal issues will also allow
management to concentrate on managing, improving and expanding the business. The
financial structure of the bank loan has been modified to include a purchase
order advance line. Parallel discussions are in process to obtain a bridge loan,
subordinated loan and/or equity financing. Management believes that new
financing will allow an improvement in vendor relations, which in turn will
improve financial flexibility.

NOTE 3  - AIRCRAFT TRANSACTIONS:

During 1995, the Company purchased commercial aircraft and engines which were
subsequently sold in exchange for a note receivable (see Note 5) secured by an
irrevocable letter of credit provided by the customer. The Company purchased the
aircraft through proceeds from a note payable (see Note 8) to a financial
institution which is secured by the customer note receivable (see Note 11).

NOTE 4 - NOTES RECEIVABLE:

Notes receivable consist of the following:

<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,        
                                                                                      -----------------------
                                                                                      1997               1998
                                                                                      ----               ----
<S>                                                                                   <C>              <C>    
Notes receivable from a corporation, secured by an Irrevocable Letter of Credit,
  due in monthly installments of $166,250 (principal and interest) to August
  1999 with an interest rate of 9.5 percent (see Notes 4 and 8)   .  .  .  .  .  .  . $3,053,243       $1,276,750

         Less - Current portion  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  1,781,172        1,276,750
                                                                                      ----------       ------------
                                                                                      $1,272,071       $         - 
                                                                                      ----------       ------------
                                                                                      ----------       ------------
</TABLE>




                                      F-9

<PAGE>


                        AVIATION DISTRIBUTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



NOTE 5 - NOTES RECEIVABLE FROM FOUNDER:

Mr. Osamah S. Bakhit is the founder of the Company and is currently a consultant
for the Company. The Company loaned $328,718 to Mr. Bakhit in December 1995 and
$80,000 in December 1996. The loans are in the form of notes, bearing interest
at 6 percent, payable in quarterly installments aggregating $102,180. Interest
on the notes has been paid through June 1998 and the Board of Directors of the
Company had approved the deferral of principal and interest payments to December
31, 1999.

NOTE 6 - PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
Property and equipment, at cost, consists of the following:
                                                                                            DECEMBER 31,     
                                                                                      -----------------------
                                                                                      1997               1998
                                                                                      ----               ----
<S>                                                                                   <C>             <C>        
Computer equipment and software.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .   $   510,775     $   321,495
Furniture and fixtures.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .       266,929         369,318
Leasehold improvements.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .       115,783         164,910
Machinery and equipment  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .        91,162         100,448
Autos  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .        45,451          45,451
                                                                                      ------------    --------------
                                                                                       $1,030,100     $ 1,001,622
                                                                                      ------------    --------------
                                                                                      ------------    --------------
</TABLE>

NOTE 7 - LINE OF CREDIT:

At December 31, 1998, the Company's Credit Facility provided for working capital
loans of up to the lesser of $15,000,000 (facility amount) or the advance rate
against qualified accounts receivable and inventory, with interest at the Bank
of New York Alternate Base Rate (7.75 percent at December 31, 1998) plus one
percent. Based on the advance rate formula, the Company was over advanced by
approximately $249,000 at December 31, 1998. The borrowing rate is subject to a
premium of 0.50 percent per annum when the facility is over advanced. The terms
of the credit agreement provide for a facility non-use fee of 0.25 percent per
annum of the difference between the facility amount and the average monthly
balance.

BNY Financial Corporation has a fully perfected security interest against all
assets of the Company, except restricted cash, in addition to a personal
guarantee from the Company's founder and secured by 1 million shares of common
stock pledged by the Company's founder. The Credit Facility matures on June 24,
2000. See Note 14 regarding subsequent amendment.

The credit facility has general financial covenants related to the Company's
financial condition. At December 31, 1998, the Company was in default on certain
covenants. On April 30, 1999, the financial institution issued the Company a
waiver of the covenants that were in default and modified certain covenants for
1999.

In October 1998, the Company assigned all tax refunds from governmental agencies
to BNY as a pledge of additional collateral and issued 126,600 warrants to BNY
to purchase common stock of the Company at $2.50 per share, expiring on October
31, 2003. In February 1999, the Company reduced the exercise price of the
warrants from $2.50 to $1.00 per share. The estimated value of the warrants is
immaterial to the financial statements of the Company. At December 31, 1998 the
Company had a tax receivable representing over-paid taxes on the 1996 Federal
and State tax returns of approximately $393,000.


                                      F-10

<PAGE>



NOTE 8 - LONG-TERM DEBT:

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,        
                                                                                      ------------------------

                                                                                      1997               1998
                                                                                      ----               ----
<S>                                                                                   <C>            <C>
Note payable to a financial institution, due in monthly installments of $166,250
  (principal and interest) to August 1999, secured by a
  note receivable (see Note 5), with an interest rate of 9.5 percent.  .  .  .  .  .  $3,053,243     $1,276,750

Non-interest bearing note payable to a corporation, secured by specific
  inventory, with an imputed interest rate of 9.5 percent, net of discount of
  $79,343 at December 31, 1998. Amounts owed under this note are payable in
  November 1999. The Company is attempting to settle these amounts by 
  offsetting amounts due against certain receivables owed to the Company 
  by the Corporation  .  .  .  .  .  .  .  .  .  . . . . . . . . . . . . . . . . . .   2,638,317        626,277

Note payable to a corporation, secured by an automobile, due in
  monthly installments of $485, (principal and interest) to
  July 2001, with an interest rate of 8.15 percent.  .  .  .  .  .  .  .  .  .  .  .      17,663         13,511

Note payable to a corporation, secured by equipment, due in monthly installments
  of $347 (principal and interest) to February 2000, with
  an interest rate of 24 percent.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .       6,955          4,191 
                                                                                      ----------      -----------
                                                                                       5,716,178      1,920,729
Less - Current portion .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .   3,133,352      1,911,057
                                                                                      ----------      -----------
                                                                                      $2,582,826      $   9,672
                                                                                      ----------      -----------
                                                                                      ----------      -----------
</TABLE>


Future annual principal payments on long-term debt at December 31, 1998 are as
follows:

<TABLE>
<CAPTION>

                                YEAR ENDING
                                DECEMBER 31,
                                <S>                                                     <C>
                                    1999.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  $1,911,057
                                    2000.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .       5,984
                                    2001.  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .       3,688
                                                                                        --------------
                                                                                        $1,920,729
                                                                                        --------------
                                                                                        --------------
</TABLE>


                                      F-11

<PAGE>



                        AVIATION DISTRIBUTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 9 - COMMITMENTS AND CONTINGENCIES:

The Company leases equipment and facilities under noncancelable operating and
capital leases. As of December 31, 1998, the annual minimum lease commitments
are:

<TABLE>
<CAPTION>

                      YEAR ENDING
                      DECEMBER 31,                              CAPITAL     OPERATING
                      ------------                              -------     ---------

                      <S>                                       <C>         <C>
                      1999.  .  .  .  .  .  .  .  .  .  .  .    $24,311     $  396,401
                      2000.  .  .  .  .  .  .  .  .  .  .  .     13,718        410,974
                      2001.  .  .  .  .  .  .  .  .  .  .  .     10,893        426,996
                      2002.  .  .  .  .  .  .  .  .  .  .  .      9,804        422,678
                      2003.  .  .  .  .  .  .  .  .  .  .  .        717        433,295
                      Thereafter.  .  .  .  .  .  .  .  .  .          -        527,408
                                                                ---------   ------------
                                                                 59,443     $2,617,752
                                                                ---------   ------------
                                                                ---------   ------------

                      Less - Amount representing interest.  .    10,323
                                                                --------- 
                                                                 49,120

                      Less - Current portion .  .  .  .  .  .    18,797
                                                                --------- 
                                                                $30,323
                                                                --------- 
                                                                --------- 
</TABLE>

Rent expense for the years ended December 31, 1997 and 1998 was $123,610 and
$449,967, respectively.

The Company supplies certain parts to its customers through various consignment
agreements, under which the Company takes possession of a vendor's inventory,
and through exclusive marketing agreements, under which the Company markets the
vendors' inventory, which remains in the vendors' possession. These agreements
are generally entered into on a long-term basis. There were no consignment
agreements or marketing agreements in effect at December 31, 1998.

The Company neither manufacturers nor repairs aircraft parts and requires that
all of the parts that it sells are properly documented and traceable to their
original source. Although the Company has never been subject to product
liability claims, there is no guarantee that the Company would not be subject to
liability from its potential exposure relating to faulty aircraft parts in the
future. The Company maintains liability insurance to protect from such claims,
but there can be no assurance that such coverage will be adequate to fully
protect the Company from any liabilities it might incur. An insurance loss above
the Company's policy limit could have a material adverse effect upon the
Company's financial condition.

EMPLOYMENT CONTRACTS

The Company has contracts with certain key employees and the Company's founder.
The contracts provide for all normal employee benefits, incentive compensation
under the Executive Incentive Compensation Plan and options to purchase shares
of common stock at an option price of $5 per share. The agreements expire from
April 1, 1999 to December 31, 2001 and will automatically renew for an
additional term ranging from three to five years unless cancelled upon 90 days
written notice.

CLASS ACTION LAWSUITS AND GOVERNMENT INVESTIGATIONS

In August 1997, the Company's former independent auditors withdrew their
previously issued reports on the Company's financial statements for the years
ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996
and resigned as the Company's auditors. These actions were the result of their
investigation of allegations regarding certain of the Company's accounting and
financing practices. The lack of required financial information resulted in the
subsequent halt in trading and delisting of the Company's common stock on the
Nasdaq SmallCap market in September 1997.

In October 1997, three separate class action lawsuits were filed against the
Company, its founder, directors and certain current and former officers and
directors, and others. In February 1998, a motion was approved to consolidate
all three class action lawsuits in Federal court.

                                      F-12

<PAGE>


                        AVIATION DISTRIBUTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



In April 1998, the Company entered into a settlement in principle, which is
memorialized in a Memorandum of Understanding (the M.O.U."), with counsel for
the plaintiffs to settle the suits. Terms of the settlement include cash
consideration of $740,000 and 210,000 shares of the Company's common stock, of
which the Company will issue 80,000 shares and the Company's founder, Osamah S.
Bakhit, will contribute 130,000 shares. Included in legal settlement expense for
the year ended December 31, 1997 is a $620,000 charge, of which $480,000 is
attributable to the issuance of 80,000 shares of common stock and $140,000
represents the Company's portion of the cash consideration. The Federal Court
approved this settlement agreement on March 15, 1999.

Both a Federal grand jury and the Securities and Exchange Commission have
commenced investigations into the allegations referred to above. The
investigations are continuing and the Company is unable, at this time, to
evaluate the possible outcome of the investigations or their impact on the
Company.

NOTE 10 - ALLOWANCE FOR DOUBTFUL ACCOUNTS

For the years ended December 31, 1997 and 1998, activity with respect to the
Company's allowance for doubtful accounts is summarized as follows:

<TABLE>
<CAPTION>

                  YEAR ENDING
                  DECEMBER 31,                                           1997             1998
                  ------------                                           ----             ----

                  <S>                                                  <C>               <C>     
                  Beginning balance.  .  .  .  .  .  .  .  .  .  .  .  $ 410,500         $ 300,000
                  Charged to expense  .  .  .  .  .  .  .  .  .  .  .    222,713           828,504
                  Amounts written off .  .  .  .  .  .  .  .  .  .  .   (333,213)         (508,504)
                                                                       ----------        ---------

                  Ending balance.  .  .  .  .  .  .  .  .  .  .  .  .  $ 300,000         $ 620,000
                                                                       ----------        ---------
                                                                       ----------        ---------

</TABLE>


NOTE 11 - CONCENTRATION OF CREDIT RISK:

Substantially all of the Company's sales are to airlines, other aircraft
operators and other aircraft parts suppliers. Concentrations of credit risk with
respect to trade accounts receivable are generally diversified due to the large
number of customers and their dispersion worldwide. The Company also performs
credit evaluations on its customers throughout the year. As a result of an
aircraft sale that was taken on terms (see Note 4), the note receivable from one
customer accounted for approximately 12.7 percent and 7.3 percent of total
assets at December 31, 1997 and 1998, respectively.

The Company distributes products in the United States and abroad to commercial
airlines, air cargo carriers, distributors, maintenance facilities and other
aerospace companies. The Company's credit risk consists of accounts receivable
denominated in U.S. dollars from customers in the aircraft industry. The Company
performs periodic credit evaluations of its customers' financial condition and
provides an allowance for doubtful accounts as required. The Company has
purchased insurance to reduce the risk of collection of a portion of amounts
receivable from qualifying foreign customers. The Company, at times, offers
extended payments terms of up to one year on its receivables.

The Company had one customer that represented 10.9 percent of net sales at
December 31, 1998. The Company had two customers that represented 16.9 percent
and 12.8 percent of accounts receivable at December 31, 1997.

                                      F-13

<PAGE>

                        AVIATION DISTRIBUTORS, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 12 - INCOME TAXES:

The components of the provision for income taxes consist of the following:


<TABLE>
<CAPTION>

                                                                         1997              1998
                                                                         ----              ---- 
                  <S>                                                  <C>             <C>
                  Current:
                    Federal.  .  .  .  .  .  .  .  .  .  .  .  .  .     $ 28,000       $   50,000
                    State  .  .  .  .  .  .  .  .  .  .  .  .  .  .        3,000           37,000
                                                                       ---------        ---------
                                                                          31,000           87,000
                                                                       ---------        ---------

                  Deferred:
                    Federal.  .  .  .  .  .  .  .  .  .  .  .  .  .       85,000          159,000
                    State  .  .  .  .  .  .  .  .  .  .  .  .  .  .       15,000           41,000
                                                                       ---------        ---------
                                                                         100,000          200,000
                                                                       ---------        ---------
                                                                       $ 131,000        $ 287,000
                                                                       ---------        ---------
                                                                       ---------        ---------
</TABLE>

The reconciliation of income tax expense computed at the U.S. Federal statutory
rate to income tax expense is as follows:

<TABLE>
<CAPTION>

                                                                         1997              1998
                                                                         ----              ----

                  <S>                                                  <C>           <C>          
                  Tax at U.S. Federal statutory rates.  .  .  .  .  .  $ 173,000     $ (1,873,000)
                  State income taxes, net of federal effect.  .  .  .     31,000         (331,000)
                  Change in valuation allowance.  .  .  .  .  .  .  .   (100,000)       2,310,000
                  Permanent differences  .  .  .  .  .  .  .  .  .  .     33,000           20,000
                  Other, net .  .  .  .  .  .  .  .  .  .  .  .  .  .     (6,000)         161,000
                                                                       -----------   -------------
                                                                       $ 131,000      $   287,000
                                                                       -----------   -------------
                                                                       -----------   -------------
</TABLE>

Deferred income taxes arise as a result of differences in the methods used to
determine income for financial reporting versus income for tax reporting
purposes. Significant components of the Company's deferred tax assets and
liabilities are as follows:

<TABLE>
<CAPTION>
                                                                         1997              1998
                                                                         ----              ----

                  <S>                                                  <C>             <C>        
                  Depreciation.  .  .  .  .  .  .  .  .  .  .  .  .  .  $ (93,000)      $ (101,000)
                                                                       -----------      -----------
                    Gross deferred tax liabilities .  .  .  .  .  .  .    (93,000)        (101,000)
                                                                       -----------   -------------
                  Inventory reserve .  .  .  .  .  .  .  .  .  .  .  .     90,000           59,000
                  Allowance for doubtful accounts  .  .  .  .  .  .  .    120,000          249,000
                  Operating accruals and capitalized inventory costs      194,000          252,000
                  Legal settlement  .  .  .  .  .  .  .  .  .  .  .  .    256,000          256,000
                  Net operating loss carryforwards .  .  .  .  .  .  .    256,000        2,218,000
                                                                       -----------      -----------
                    Gross deferred tax assets.  .  .  .  .  .  .  .  .    916,000        3,034,000
                                                                       -----------      -----------

                    Deferred tax assets valuation allowance .  .  .  .   (623,000)      (2,933,000)
                                                                       -----------      -----------

                                                                      $   200,000      $         -
                                                                       -----------      -----------
                                                                       -----------      -----------
</TABLE>

The Company has federal and state net operating loss carryforwards of
approximately $5,828,000 and $2,596,000, respectively, which expire between
years 2001 and 2013.

                                      F-14

<PAGE>



NOTE 13 - STOCK BASED COMPENSATION PLANS

On July 10, 1996, the Company adopted the Aviation Distributors, Inc. 1996 Stock
Option and Incentive Plan (the "Plan") which provides for the issuance of up to
a maximum of 264,500 shares of the Company's common stock to employees,
non-employee directors and independent contractors at the sole discretion of the
board of directors. The Plan provides for the issuance of incentive stock
options and non-qualified stock options. Options issued under the Plan may be
accompanied by stock appreciation rights, as defined. Additionally, the Plan
provides for the issuance of restricted stock, dividend equivalents and other
stock and cash based awards and loans to participants in connection with the
options or other plan provisions at the discretion of the board of directors.

On July 16, 1996, the Company's board of directors granted 150,000 options under
the Plan at an exercise price of $7.00 per share (estimated fair market value at
date of grant). On February 28, 1997, the Company's board of directors approved
a resolution changing the exercise price to the offering price of the Common
Stock in the Company's initial public offering, which was $5.00 per share.


The following is a summary of the Company's stock option plan:

<TABLE>
<CAPTION>

                                                                                         WEIGHTED AVERAGE
                                                                        SHARES            EXERCISE PRICE
                                                                        ------            --------------

                  <S>                                                   <C>              <C>    
                  Outstanding at December 31, 1995.  .  .  .  .  .  .        -                $     -
                  Granted .  .  .  .  .  .  .  .  .  .  .  .  .  .  .    150,000                  5.00
                                                                        ----------            --------

                  Outstanding at December 31, 1996.  .  .  .  .  .  .    150,000                  5.00
                  Granted .  .  .  .  .  .  .  .  .  .  .  .  .  .  .     30,000                  5.00
                  Forfeited  .  .  .  .  .  .  .  .  .  .  .  .  .  .    (16,600)                 5.00
                                                                        ----------            --------
                  Outstanding at December 31, 1997.  .  .  .  .  .  .    163,400                  5.00
                  Granted    .  .  .  .  .  .  .  .  .  .  .  .  .  .     80,000                  5.00
                  Forfeited  .  .  .  .  .  .  .  .  .  .  .  .  .  .    (12,700)                 5.00
                                                                        ----------            --------
                  Outstanding at December 31, 1998.  .  .  .  .  .  .    230,700              $   5.00
                                                                        ----------            --------
                                                                        ----------            --------
</TABLE>

<TABLE>
<CAPTION>

                                                                         1997                  1998
                                                                         ----                  ----

<S>                                                                    <C>                   <C>   
                  Exercisable at the end of the year.  .  .  .  .  .   73,723                97,542

Weighted average fair value of options granted  .   .  .  .  .  .  .   $ 0.96                $ 2.13
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black Scholes method. The following assumptions were used for grants in 1997 and
1998: risk-free rate of 5.5 percent; no expected dividend yield; expected
volatility of zero and 52 percent, respectively; and an expected life of 3 to 4
years.

NOTE 14 - SUBSEQUENT EVENT

On February 9, 1999 the Company amended its Credit Facility with BNY to increase
the maximum loan amount to $20,000,000, increase its unused line fee to 0.5%,
increase its receivables advance rate and extend the loan expiration date to
June 21, 2002. This is based on the requirement that the Company reduce its
monthly overhead expenses to an amount equal to or below $425,000 per month. The
Company incurred a $50,000 fee for amending the Credit Facility.

                                      F-15

<PAGE>


                                    PART III


ITEM 8.      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
             COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

<TABLE>
<CAPTION>

EXECUTIVE                        AGE          TITLE
---------                        ---          -----
<S>                              <C>          <C>
Saleem S. Naber                  69           Chief Executive Officer, President and Director
Gary L. Joslin                   62           Chief Financial Officer and Director
Osamah S. Bakhit                 49           Founder, Marketing and Sales Advisor
Jeffrey G. Ward                  39           Executive Vice President
Elizabeth Morgan                 35           Vice President - Marketing
Steven J. Mangione               35           Vice President - Finance and Controller
Bruce H. Haglund                 47           Secretary, Director, Chairman of the Audit Committee
Daniel C. Lewis                  49           Director and Member of the Audit Committee
William T. Walker, Jr.           67           Director and Member of the Audit Committee
</TABLE>

SALEEM S. NABER, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR. Mr. Naber, who
became Chief Executive Officer, President and a Director of the Company in April
1998, has 40 years of experience in the aerospace industry, exclusively with
Lucas Aerospace and Western Gear Corporation, acquired by Lucas in 1988. His
responsibilities with Lucas ranged from Design Engineer of Precision Products to
President of Lucas Western, Inc., the $400 million U.S. division of Lucas. Mr.
Naber's most recent post was Managing Director of Lucas Aerospace, Aircraft
Systems Division. Mr. Naber received a Bachelor of Science degree in Electrical
Engineering from the University of California - Berkeley and pursued
post-graduate courses at the University of Southern California and the
University of California - Los Angeles. Mr. Naber is also a member of the
Executive Committee of the Company.

GARY L. JOSLIN, CHIEF FINANCIAL OFFICER AND DIRECTOR. Mr. Joslin, who became
Chief Financial Officer and Director in April 1998, served as a management and
financial consultant prior to joining ADI. Previously, he served as a senior
financial executive in the wholesale and retail segments of the building
materials and equipment industry for companies ranging in size from $70 million
to $450 million, including Prime Source, Inc. He also served in numerous
financial positions with Wickes Companies, a multi-billion-dollar conglomerate
involved in retailing, wholesaling, and manufacturing. Mr. Joslin holds a
Bachelor of Science degree in Accounting from California State University - Long
Beach and is a licensed CPA. Mr. Joslin is also a member of the Executive
Committee of the Company.

OSAMAH S. BAKHIT, MARKETING AND SALES ADVISOR. Mr. Bakhit, the founder of the
Company, was Chief Executive Officer, President, Chairman and a Director of the
Company from its inception until his resignation as an officer and Director of
the Company in November 1997. He is no longer an executive officer of the
Company, but works full-time as a marketing and sales advisor. Mr. Bakhit has
over 16 years of aircraft experience. Prior to forming the Company in 1988, Mr.
Bakhit was CEO of Bakhit Enterprises, a company that purchased heavy
construction vehicles and material for General Enterprise Company. Mr. Bakhit
worked for General Enterprise Company in Amman, Jordan, where he managed overall
construction operations. His duties included supervising the construction of
Queen Alia International Airport in Jordan. Mr. Bakhit attended the University
of California, Irvine.

JEFFREY G. WARD, EXECUTIVE VICE PRESIDENT. Mr. Ward has over 16 years of
aircraft experience and currently oversees and lends leadership to the extensive
sales team at ADI. Prior to joining the Company in 1993, Mr. Ward was a sales
representative for System Industries. He was a sales consultant to the aerospace
industry with key accounts including the U.S. military and major aerospace
manufacturers. Prior to System Industries, Mr. Ward was a sales representative
for Eastman Kodak Company. Mr. Ward also served in the United States Marine
Corps for seven years as a naval aviator. Mr. Ward has a B.A. in Economics and
German from University of Virginia. Mr. Ward is also a member of the Executive
Committee of the Company.

ELIZABETH MORGAN, VICE PRESIDENT - MARKETING. Ms. Morgan has 13 years of
experience in aircraft parts sales. Ms. Morgan is responsible for the operations
and sales of the Company's consignment sales and marketing agreements. Prior to
joining the Company in 1994, Ms. Morgan was the Director of Marketing for
Pacific Airmotive, a division of UNC. In addition, Ms. Morgan has worked for
several other companies in aircraft sales.

                                      14

<PAGE>


STEVEN J. MANGIONE, VICE PRESIDENT - FINANCE AND CONTROLLER. Mr. Mangione, who
became Vice President Finance and Controller, in April 1999, has over 12 years
of experience in accounting and tax services and business consulting. He
received a Bachelor of Science in Business Administration and Accounting from
the University of Hartford in Connecticut, and graduated magna cum laude. From
1988 to 1993 he worked for Arthur Andersen, LLP, where he supervised audit
engagements and prepared and reviewed financial reports. Mr. Mangione opened his
own consulting practice in 1993 and has consulted for many of Orange County
California's large publicly traded companies as well as many small start-up
companies. He is a licensed CPA and member of the American Institute of
Certified Public Accountants and California Society of Certified Public
Accountants.

BRUCE H. HAGLUND, SECRETARY AND DIRECTOR. Mr. Haglund has served as General
Counsel of the Company since 1992 and has served as Secretary and a director of
the Company from June 1996 to present. He has served as a Director of the
Company since 1989. Mr. Haglund is a principal in the law firm of Gibson,
Haglund & Johnson in Orange County, California where he has been engaged in the
private practice of law since 1980. He is also a member of the Boards of
Directors of Metalclad Corporation, HydroMaid International, Inc., Renaissance
Golf Products, Inc., Santa Barbara Restaurant Group and VitriSeal, Inc. Mr.
Haglund has a J.D. from the University of Utah College of Law. Mr. Haglund is
also the Chairman of the Audit Committe of the Board and a member of the
Executive Committee of the Company.

DANIEL C. LEWIS, DIRECTOR. Mr. Lewis became a director of the Company in March
1997. Mr. Lewis currently serves as President of Booz-Allen & Hamilton, Inc.
("Booz-Allen") where he heads the firm's worldwide operations. At Booz-Allen,
Mr. Lewis is a member of the Commercial Leadership Team, Operating Council, and
is a former Director of the company. Prior to joining Booz-Allen, Mr. Lewis was
a materials manager in Warner-Lambert's consumer products group. Prior to
Warner-Lambert, Mr. Lewis was with Sundstrand working in the machine tool and
aerospace business. Mr. Lewis has a B.S. in Industrial Supervision and a B.A. in
Applied Science from Purdue University and an M.B.A. from Fairleigh Dickinson
University. Mr. Lewis is also a member of the Audit Committee of the Board.

WILLIAM T. WALKER, JR., DIRECTOR. Mr. Walker became a director of the Company in
March 1997. Mr. Walker founded Walker Associates, a corporate finance consulting
firm for investment banking, in 1985 and has participated in or been
instrumental in completing over $250 million in public and private offerings
since its inception. Prior to forming Walker Associates, Mr. Walker served as
executive Vice President, Manager of Investment Banking, Member of the Board and
Executive Committee and Chairman of the Underwriting Committee for Bateman
Eichler Hill Richards, a New York Stock Exchange Member firm. Mr. Walker is also
a member of the Board of Directors of Fortune Petroleum Corporation and
Go-Video, Inc., both public companies traded on the American Stock Exchange. Mr.
Walker attended Stanford University. Mr. Walker is also a member of the Audit
Committee of the Board.

COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT

Section 16 (a) of the Securities Exchange Act requires the Company's officers,
Directors, and persons who own more than 10% of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the SEC and NASDA. Officers, Directors, and greater than 10%
beneficial owners are required by SEC regulation to furnish the Company with
copies of all Section 16 (a) forms they file. The Company believes that all
filing requirements were complied with applicable to its Officers, Directors,
and greater than 10% beneficial owners.

ITEM 9.      EXECUTIVE COMPENSATION

The Company incorporates herein by reference the information concerning
executive compensation contained in the 1999 Proxy Statement.


ITEM 10.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Company incorporates herein by reference the information concerning security
ownership of certain beneficial owners and management contained in the 1999
Proxy Statement.


ITEM 11.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
             FINANCIAL DISCLOSURE

The Company incorporates herein by reference the information concerning changes
in and disagreements with accountants on accounting and financial disclosure
contained in the 1999 Proxy Statement.

                                      15

<PAGE>


ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company incorporates herein by reference the information concerning certain
relationships and related transactions contained in the 1999 Proxy Statement.

                                     PART IV

ITEM  13.  EXHIBITS AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report on Form 10-KSB:

         1. Financial Statements for the periods ended December 31, 1997 and
1998:

                           Independent Auditors' Reports
                           Balance Sheets
                           Statements of Operations
                           Statements of Stockholders' Equity
                           Statements of Cash Flows
                           Notes to Financial Statements

         2.  Exhibits

The following exhibits are being filed with this Annual Report on Form 10-KSB
and/or are incorporated by reference therein in accordance with the designated
footnote references:

<TABLE>
<CAPTION>
<S>           <C>

          3.1 Amended and Restated Certificate of Incorporation of the Registrant. (1)
          3.2 Bylaws, as amended, of the Registrant. (1)
          3.3 Amendment to Amended and Restated Certificate of Incorporation of the Registrant. (1)
          4.1 Specimen Common Stock Certificate. (1)
          9.1 Voting Trust Agreement, dated November 17, 1997, by and among Osamah Bakhit, Aviation Distributors, Inc.,
              and Dirk O. Julander, as trustee. (2)
         10.2 1996 Stock Option and Incentive Plan. (1)
         10.3 Aircraft Purchase Agreement, dated August 8, 1995, by and between Alia The Royal Jordanian Airlines and
              Aviation Distributors, Inc. (1)
         10.4 Credit and Security Agreement, dated June 25, 1997, by and between
              Aviation Distributors, Inc. and BNY Financial Corporation. (3)
         10.5 Secured and Guaranteed Promissory Note, dated February 24, 1998,
              by and between Aviation Distributors, Inc. and BNY Financial
              Corporation. (3)
         10.6 Amended and Restated Employment Agreement, dated as of July 16, 1996, 
              by and between Osamah S. Bakhit and Aviation Distributors, Inc. (1)
         10.7 Employment Agreement, dated as of July 16, 1996, by and between 
              Mark W. Ashton and Aviation Distributors, Inc. (1)
         10.8 Employment Agreement, dated as of July 16, 1996, by and between 
              Jeffrey G. Ward and Aviation Distributors, Inc. (1)
         10.9 Commercial Lease, dated June 11, 1996, by and between Francis 
              De Leone and Aviation Distributors, Inc. (1)
        10.10 Amendment to Employment Agreement, dated November 17, 1997, by and 
              between Osamah S. Bakhit and Aviation Distributors, Inc. (3)
        10.11 Amendment to Employment Agreement, dated November 17, 1997, by and
              between Mark W. Ashton and Aviation Distributors, Inc. (3)
        10.12 Lease, dated as of July 9, 1997, by and between Olen Properties Corp. 
              and Aviation Distributors, Inc. (3)
        10.13 Amended and Restated Promissory Note from Osamah S. Bakhit to 
              Aviation Distributors, Inc., dated as of  December 31, 1995. (1)
        10.14 Settlement Agreement dated as of November 1, 1996. (1)
        10.15 Form of Indemnity Agreement. (1)
        10.33 Promissory Note between Aviation Distributors, Inc. and 
              Osamah S. Bakhit, dated December 31, 1996. (1)
</TABLE>


         (1) Filed with the Company's Registration Statement on Form SB-2 dated
             March 3, 1997. 
         (2) Filed with the Company's Current Report on Form 8-K dated August 
             29, 1997.
         (3) Filed with the Company's Form 10-KSB dated April 20, 1998.

                                       16

<PAGE>


(b)  Reports on Form 8-K.

<TABLE>
<CAPTION>

          DATE OF REPORT/FILING DATE               ITEM REPORTED
          --------------------------               -------------
          <S>                                      <C>                                                           
          August 29, 1997/September 8, 1997        Change in Registrant's Certifying
                                                   Accountant (Withdrawal of Reports on
                                                   Financial Statements; Resignation of
                                                   Arthur Andersen LLP). No financial
                                                   statements were filed.
                                                  
          August 29, 1997/September 17, 1997       Financial Statements and Exhibits (Letter
                                                   from Arthur Andersen LLP). No financial
                                                   statements were filed.
                                                  
          October 1, 1997/October 14, 1997         Other Events (Delisting by Nasdaq). No
                                                   financial statements were filed.
                                                  
          November 19, 1997/November 19, 1997      Change in Registrant's Certifying Account
                                                   (Appointment of Grant Thornton LLP);
                                                   Other Events (Resignation of Osamah S.
                                                   Bakhit as Chairman, CEO; Transfer of
                                                   Bakhit Shares to Voting Trust). No
                                                   financial statements were filed.
</TABLE>


                            SUPPLEMENTAL INFORMATION

An annual report and an information statement shall be furnished to the security
holders of the Company subsequent to the filing of this Form 10-KSB. The Company
shall furnish copies of the annual report to security holders and the proxy
statement to the Securities and Exchange Commission when it is sent to the
security holder.



                                       17
<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 report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                         AVIATION DISTRIBUTORS, INC.

                                         By: /s/       SALEEM S. NABER          
                                             ------------------------------
                                                       Saleem S. Naber
                                                       Chief Executive Officer
Date:  May 11, 1999

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

SIGNATURES                                   TITLE                                      DATE
----------                                   -----                                      ----


<S>                                         <C>                                       <C> 
/s/        SALEEM S. NABER                  Chief Executive Officer                   May 11, 1999
---------------------------------
           Saleem S. Naber                  President and Director
                                           (Principal Executive Officer)


/s/        GARY L. JOSLIN                   Chief Financial Officer                   May 11, 1999
---------------------------------
           Gary L. Joslin                   and Director (Principal
                                            accounting officer)


/s/       BRUCE H. HAGLUND                  Director                                  May 11, 1999
---------------------------------
          Bruce H. Haglund
</TABLE>






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