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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A

(Amendment No. 1)



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|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the Quarterly Period Ended March 31, 2003, or



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For The Transition Period From  To
.



Commission file number: 0-13829



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PEMCO AVIATION GROUP, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 84-0985295                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                           |  |           
|------------------------------------------ |  | ----------
|1943 North 50thStreet, Birmingham,
Alabama |  | 35212     
|(Address of principal executive offices)   |  | (Zip Code)



205-592-0011

(Registrants telephone number, including area code)



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Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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.    x  Yes ̈No



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ̈Yes    x  No



Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date.



|                               |  |                           
|------------------------------ |  | --------------------------
|Class                          |  | Outstanding at May 7, 2003
|Common Stock, $.0001 par value |  | 4,046,680                 



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EXPLANATORY NOTE



The purpose of this Amendment No. 1 to this Quarterly Report on Form 10-Q is to restate the unaudited consolidated financial statements of
Pemco Aviation Group, Inc. and subsidiaries for the three months ended March 31, 2003, to reflect adjustments related to the amounts and timing of revenue recognition and contract loss accruals (see Note 1 to the Consolidated Financial Statements).



For the convenience of the reader, this Amendment No. 1 amends in its entirety
the original filing of this Quarterly Report on Form 10-Q. This Amendment No. 1 does not reflect events occurring after the May 13, 2003 original filing date of the companys Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2003, or modify or update those disclosures as set forth in that Quarterly Report on Form 10-Q in any way, except to reflect the effect of the restatement as noted above and described in Note 1 to the Consolidated Financial Statements. All
information contained in this Amendment No. 1 may be updated or supplemented by disclosures contained in the companys periodic reports filed with the SEC subsequent to the date of the original filing of the Quarterly Report on Form 10-Q.



The items of the companys Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2003 that have been amended and restated herein are as follows:



| | 1. | Part I, Item 1  Financial Statements have been restated.
| | -- | ---------------------------------------------------------



| | 2. | Part I, Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations has been revised.
| | -- | ------------------------------------------------------------------------------------------------------------------------



| | 3. | Part I, Item 4  Controls and Procedures has been revised.
| | -- | ----------------------------------------------------------



| | 4. | The certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 have been refiled.
| | -- | -----------------------------------------------------------------------------------------------



| | 5. | The certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, have been refiled.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------



-1-



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PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



ASSETS

(In Thousands)



|                                               |  |                          |         |   |                  |   |         |  
|---------------------------------------------- |  | ------------------------ | ------- | - | ---------------- | - | ------- | -
|                                               |  | March 31,2003Unaudited   |         |   | December 31,2002 |  
|                                               |  | (As Restated,See Note 1) |         |   |                  |  
|Current assets:                                |  |                          |         |   |                  |   |         |  
|Cash                                           |  | $                        | 2,370   |   |                  | $ | 2,795   |  
|Accounts receivable, net                       |  |                          | 28,866  |   |                  |   | 30,162  |  
|Inventories, net                               |  |                          | 21,273  |   |                  |   | 16,292  |  
|Deferred income taxes                          |  |                          | 12,744  |   |                  |   | 13,092  |  
|Prepaid expenses and other                     |  |                          | 408     |   |                  |   | 1,204   |  
|                                               |  |                          |         |   |                  |   |         |  
|Total current assets                           |  |                          | 65,661  |   |                  |   | 63,545  |  
|                                               |  |                          |         |   |                  |   |         |  
|Machinery, equipment and improvements at cost: |  |                          |         |   |                  |   |         |  
|Machinery and equipment                        |  |                          | 29,110  |   |                  |   | 28,193  |  
|Leasehold improvements                         |  |                          | 26,780  |   |                  |   | 22,426  |  
|Construction-in-process                        |  |                          | 1,577   |   |                  |   | 4,214   |  
|                                               |  |                          |         |   |                  |   |         |  
|                                               |  |                          | 57,467  |   |                  |   | 54,833  |  
|Less accumulated depreciation and amortization |  |                          | (30,934 | ) |                  |   | (30,193 | )
|                                               |  |                          |         |   |                  |   |         |  
|Net machinery, equipment and improvements      |  |                          | 26,533  |   |                  |   | 24,640  |  
|                                               |  |                          |         |   |                  |   |         |  
|Other non-current assets:                      |  |                          |         |   |                  |   |         |  
|Deposits and other                             |  |                          | 1,007   |   |                  |   | 933     |  
|Related party receivable                       |  |                          | 444     |   |                  |   | 425     |  
|Intangible pension asset                       |  |                          | 5,410   |   |                  |   | 5,410   |  
|Intangible assets, net                         |  |                          | 281     |   |                  |   | 315     |  
|                                               |  |                          |         |   |                  |   |         |  
|                                               |  |                          | 7,142   |   |                  |   | 7,083   |  
|                                               |  |                          |         |   |                  |   |         |  
|Total assets                                   |  | $                        | 99,336  |   |                  | $ | 95,268  |  
|                                               |  |                          |         |   |                  |   |         |  



The accompanying notes
are an integral part of these consolidated balance sheets.



-2-



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PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



LIABILITIES AND STOCKHOLDERS EQUITY

(In Thousands, except common share information)



|                                                                                                                                                    |  |                          |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                    |  | March 31,2003Unaudited   |         |   | December 31,2002 |  
|                                                                                                                                                    |  | (As Restated,See Note 1) |         |   |                  |  
|Current liabilities:                                                                                                                                |  |                          |         |   |                  |   |         |  
|Current portion of long-term debt                                                                                                                   |  | $                        | 1,110   |   |                  | $ | 1,103   |  
|Current portion of pension liability                                                                                                                |  |                          | 11,070  |   |                  |   | 10,341  |  
|Accounts payable                                                                                                                                    |  |                          | 2,471   |   |                  |   | 1,549   |  
|Accrued liabilities - payroll related                                                                                                               |  |                          | 9,743   |   |                  |   | 9,059   |  
|Accrued liabilities - other                                                                                                                         |  |                          | 9,780   |   |                  |   | 8,658   |  
|Customer deposits in excess of cost                                                                                                                 |  |                          | 8,294   |   |                  |   | 8,882   |  
|                                                                                                                                                    |  |                          |         |   |                  |   |         |  
|Total current liabilities                                                                                                                           |  |                          | 42,468  |   |                  |   | 39,592  |  
|                                                                                                                                                    |  |                          |         |   |                  |   |         |  
|Long-term debt                                                                                                                                      |  |                          | 18,323  |   |                  |   | 17,081  |  
|Long-term pension benefit liability                                                                                                                 |  |                          | 24,215  |   |                  |   | 25,341  |  
|Other long-term liabilities                                                                                                                         |  |                          | 1,852   |   |                  |   | 1,718   |  
|                                                                                                                                                    |  |                          |         |   |                  |   |         |  
|Total liabilities                                                                                                                                   |  |                          | 86,858  |   |                  |   | 83,732  |  
|                                                                                                                                                    |  |                          |         |   |                  |   |         |  
|Stockholders equity:                                                                                                                               |  |                          |         |   |                  |   |         |  
|Preferred Stock, $0.0001 par value, 5,000,000 shares authorized, none outstanding                                                                   |  |                          |         |   |                  |   |         |  
|Common stock, $0.0001 par value, 12,000,000 shares authorized, 4,394,854 and 4,379,494 issued at March 31, 2003 and December 31, 2002,
respectively |  |                          | 1       |   |                  |   | 1       |  
|Additional paid-in capital                                                                                                                          |  |                          | 9,933   |   |                  |   | 9,684   |  
|Retained earnings                                                                                                                                   |  |                          | 29,213  |   |                  |   | 28,520  |  
|Treasury stock, at cost  348,899 shares at March 31, 2003 and December 31, 2002                                                                    |  |                          | (6,788  | ) |                  |   | (6,788  | )
|Accumulated other comprehensive loss                                                                                                                |  |                          | (19,881 | ) |                  |   | (19,881 | )
|                                                                                                                                                    |  |                          |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                          |  |                          | 12,478  |   |                  |   | 11,536  |  
|                                                                                                                                                    |  |                          |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                          |  | $                        | 99,336  |   |                  | $ | 95,268  |  
|                                                                                                                                                    |  |                          |         |   |                  |   |         |  



The accompanying notes
are an integral part of these consolidated balance sheets.



-3-



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PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Net Income
per Common Share Information)



|                                              |  |                                |        |                                |   |       
|--------------------------------------------- |  | ------------------------------ | ------ | ------------------------------ | - | ------
|                                              |  | ThreeMonths EndedMarch 31,2003 |        | ThreeMonths EndedMarch 31,2002
|                                              |  | (As Restated,See Note 1)       |        |                               
|Net sales                                     |  | $                              | 35,669 |                                | $ | 36,045
|Cost of sales                                 |  |                                | 29,164 |                                |   | 27,687
|                                              |  |                                |        |                                |   |       
|Gross profit                                  |  |                                | 6,505  |                                |   | 8,358 
|                                              |  |                               
|Selling, general, and administrative expenses |  |                                | 5,170  |                                |   | 4,895 
|                                              |  |                                |        |                                |   |       
|Income from operations                        |  |                                | 1,335  |                                |   | 3,463 
|                                              |  |                               
|Interest                                      |  |                                | 219    |                                |   | 305   
|                                              |  |                                |        |                                |   |       
|Income before income taxes                    |  |                                | 1,116  |                                |   | 3,158 
|                                              |  |                               
|Income tax expense                            |  |                                | 423    |                                |   | 1,200 
|                                              |  |                                |        |                                |   |       
|Net income                                    |  | $                              | 693    |                                | $ | 1,958 
|                                              |  |                                |        |                                |   |       
|Net income per common share:                  |  |                                |        |                                |   |       
|Basic                                         |  | $                              | 0.17   |                                | $ | 0.48  
|Diluted                                       |  | $                              | 0.16   |                                | $ | 0.44  
|                                              |  |                               
|Weighted average common shares outstanding:   |  |                                |        |                                |   |       
|Basic                                         |  |                                | 4,036  |                                |   | 4,068 
|Diluted                                       |  |                                | 4,384  |                                |   | 4,437 



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



-4-



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PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)



|                                                                                            |  |                                |        |   |                                |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ------------------------------ | - | ------ | -
|                                                                                            |  | ThreeMonths EndedMarch 31,2003 |        |   | ThreeMonths EndedMarch 31,2002 |  
|                                                                                            |  | (As Restated,See Note 1)       |        |   |                                |  
|Cash flows from operating activities:                                                       |  |                                |        |   |                                |   |        |  
|Net income                                                                                  |  | $                              | 693    |   |                                | $ | 1,958  |  
|                                                                                            |  |                                |        |   |                                |   |        |  
|                                                                                            |  |                               
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |                                |        |   |                                |   |        |  
|Depreciation and amortization                                                               |  |                                | 740    |   |                                |   | 1,164  |  
|Provision for deferred income taxes                                                         |  |                                | 423    |   |                                |   | 1,013  |  
|Funding (over) under pension cost                                                           |  |                                | (398   | ) |                                |   | 346    |  
|Amortization of intangible asset                                                            |  |                                | 36     |   |                                |   | 47     |  
|Changes in assets and liabilities:                                                          |  |                                |        |   |                                |   |        |  
|Accounts receivable, net                                                                    |  |                                | 1,296  |   |                                |   | (2,851 | )
|Inventories                                                                                 |  |                                | (4,981 | ) |                                |   | 2,491  |  
|Prepaid expenses and other                                                                  |  |                                | 796    |   |                                |   | 663    |  
|Deposits and other                                                                          |  |                                | (95    | ) |                                |   | (1     | )
|Accounts payable and accrued liabilities                                                    |  |                                | 2,274  |   |                                |   | 2,949  |  
|                                                                                            |  |                                |        |   |                                |   |        |  
|Total adjustments                                                                           |  |                                | 97     |   |                                |   | 5,821  |  
|                                                                                            |  |                                |        |   |                                |   |        |  
|Net cash (used in) provided by operating activities                                         |  |                                | 784    |   |                                |   | 7,779  |  
|                                                                                            |  |                                |        |   |                                |   |        |  
|Cash flows from investing activities:                                                       |  |                                |        |   |                                |   |        |  
|Capital expenditures                                                                        |  |                                | (2,369 | ) |                                |   | (2,272 | )
|                                                                                            |  |                                |        |   |                                |   |        |  
|Net cash used in investing activities                                                       |  |                                | (2,369 | ) |                                |   | (2,272 | )
|                                                                                            |  |                                |        |   |                                |   |        |  
|Cash flows from financing activities:                                                       |  |                                |        |   |                                |   |        |  
|Proceeds from exercise of stock options                                                     |  |                                | 175    |   |                                |   | 495    |  
|Net change under revolving credit facility                                                  |  |                                | 1,393  |   |                                |   | (5,681 | )
|Borrowings under long-term debt                                                             |  |                                |        |   |                                |   | 613    |  
|Principal payments under long-term debt                                                     |  |                                | (408   | ) |                                |   | (684   | )
|                                                                                            |  |                                |        |   |                                |   |        |  
|Net cash provided by (used in) financing activities                                         |  |                                | 1,160  |   |                                |   | (5,257 | )
|                                                                                            |  |                                |        |   |                                |   |        |  
|Net decrease in cash                                                                        |  |                                | (425   | ) |                                |   | 250    |  
|                                                                                            |  |                                |        |   |                                |   |        |  
|Cash, beginning of period                                                                   |  |                                | 2,795  |   |                                |   | 927    |  
|                                                                                            |  |                                |        |   |                                |   |        |  
|Cash, end of period                                                                         |  | $                              | 2,370  |   |                                | $ | 1,177  |  
|                                                                                            |  |                                |        |   |                                |   |        |  
|Supplemental disclosure of cash flow information:                                           |  |                                |        |   |                                |   |        |  
|Cash paid during the period for:                                                            |  |                                |        |   |                                |   |        |  
|Interest                                                                                    |  | $                              | 178    |   |                                | $ | 263    |  
|                                                                                            |  |                                |        |   |                                |   |        |  



The accompanying notes
are an integral part of these consolidated statements



-5-



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PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Quarters Ended

March 31, 2003 and 2002



1. RESTATEMENT



Subsequent to the filing of the companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, the company determined that reserves for
losses on contracts-in-process were not timely identified and recorded in the appropriate period. In addition, certain revenue transactions were identified in the subsequent quarter that did not meet all of the criteria required for revenue
recognition pursuant to U.S. generally accepted accounting principles, Statement of Position 81-1 (SOP 81-1) Accounting for Performance of Construction-Type and Certain ProductionType Contracts, and related
authoritative guidance. Therefore, the company has restated this Quarterly Report on Form 10-Q as of and for the quarter ended March 31, 2003, for the effects of these transactions.



The effects of the restatement on the unaudited consolidated statements of operations for the three months ended March 31, 2003 are
presented below:



(In thousands, except per share information)



|                              |  |                                   |        |            |   |       
|----------------------------- |  | --------------------------------- | ------ | ---------- | - | ------
|                              |  | Three Months Ended March 31, 2003
|                              |  | As PreviouslyReported*            |        | AsRestated
|Net Sales                     |  | $                                 | 35,669 |            | $ | 35,669
|Gross Profit                  |  | $                                 | 7,442  |            | $ | 6,505 
|Net Income                    |  | $                                 | 1,273  |            | $ | 693   
|Net income per share, basic   |  | $                                 | 0.32   |            | $ | 0.17  
|Net income per share, diluted |  | $                                 | 0.29   |            | $ | 0.16  

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|* | As previously reported in the companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, filed with the Securities and Exchange Commission on May
13, 2003.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Specifically, the company identified transactions
for which the company provided products or services outside the scope of the original contract. These transactions included, but are not limited to, costs incurred related to customer-caused delays, errors in specifications and designs, change
orders, and other products or services provided for which written, executed agreements between the company and the customer were not obtained. Pursuant to SOP 81-1, such amounts in excess of the agreed-upon contract price and terms result in claims.
Further, certain of the criteria prescribed under SOP 81-1 for recognizing claim revenue were not satisfied at the time revenue was originally recorded. In accordance with SOP 81-1, revenue related to claims should be recognized when the conditions
prescribed are met and only to the extent contract costs have been incurred. Otherwise, revenue should be deferred until such time as payment has been received or awarded.



The company provides for losses on uncompleted contracts in the period in which management determines that the estimated total costs under
the contract will exceed the estimated total contract revenues. The adjustments to revenue recorded by the company during the second quarter related to these transactions reduced total estimated contract revenues, and therefore affected the
companys calculation of its provision for losses on uncompleted contracts as of March 31, 2003. Including the effect of the revenue adjustments in the companys reserve for contract loss calculations resulted in an increase to cost of
sales of approximately $937,000, and a corresponding increase to the reserve for contract losses, as of and for the three month period ended March 31, 2003.





-6-



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2. CONSOLIDATED FINANCIAL STATEMENTS



The interim consolidated financial statements have been prepared by Pemco
Aviation Group, Inc. (the company) following the requirements of the Securities and Exchange Commission for interim reporting, and are unaudited. In the opinion of management, all adjustments necessary for a fair presentation are
reflected in the interim financial statements. Such adjustments are of a normal and recurring nature. The results of operations for the period ended March 31, 2003 are not necessarily indicative of the operating results expected for the full year.
The interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the companys 2002 Annual Report on Form 10-K.



3. STOCK OPTIONS



The company uses the intrinsic value method for stock option grants to individuals defined as employees under which no compensation is recognized for
options granted at or above the fair market value of the underlying stock on the grant date. The company uses the fair value method for stock options granted for services rendered by non-employees in accordance with SFAS No. 123 Accounting for
Stock Based Compensation.



The following table
illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of FASB Statement No. 123, to stock-based employee compensation.



(In thousands except per share information)



|                                                                                       |  |                                |       |   |                                |   |       |  
|-------------------------------------------------------------------------------------- |  | ------------------------------ | ----- | - | ------------------------------ | - | ----- | -
|                                                                                       |  | ThreeMonths EndedMarch 31,2003 |       |   | ThreeMonths EndedMarch 31,2002 |  
|                                                                                       |  | (As Restated)                  |       |   |                                |  
|Net Income  as reported                                                               |  | $                              | 693   |   |                                | $ | 1,958 |  
|Stock based compensation under fair value method, net of tax effect using 38% tax rate |  |                                | (969  | ) |                                |   | (864  | )
|                                                                                       |  |                                |       |   |                                |   |       |  
|Net (loss) income  pro forma                                                          |  | $                              | (276  | ) |                                | $ | 1,094 |  
|                                                                                       |  |                                |       |   |                                |   |       |  
|Net income per share, basic  as reported                                              |  | $                              | 0.17  |   |                                | $ | 0.48  |  
|                                                                                       |  |                                |       |   |                                |   |       |  
|Net income per share, diluted  as reported                                            |  | $                              | 0.16  |   |                                | $ | 0.44  |  
|                                                                                       |  |                                |       |   |                                |   |       |  
|Net (loss) income per share, basic  pro forma                                         |  | $                              | (0.07 | ) |                                | $ | 0.27  |  
|                                                                                       |  |                                |       |   |                                |   |       |  
|Net (loss) income per share, diluted  pro forma                                       |  | $                              | (0.06 | ) |                                | $ | 0.25  |  
|                                                                                       |  |                                |       |   |                                |   |       |  



-7-



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4. INVENTORIES



Inventories as of March 31, 2003 and December 31, 2002 consist of the following:



(In Thousands)



|                                              |  |               |         |   |                  |   |         |  
|--------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                              |  | March 31,2003 |         |   | December 31,2002 |  
|Work in process                               |  | $             | 35,483  |   |                  | $ | 26,181  |  
|Finished goods                                |  |               | 2,486   |   |                  |   | 1,228   |  
|Raw materials and supplies                    |  |               | 2,566   |   |                  |   | 2,727   |  
|                                              |  |               |         |   |                  |   |         |  
|Total                                         |  |               | 40,535  |   |                  |   | 30,136  |  
|Less milestone payments and customer deposits |  |               | (19,262 | ) |                  |   | (13,844 | )
|                                              |  |               |         |   |                  |   |         |  
|                                              |  | $             | 21,273  |   |                  | $ | 16,292  |  
|                                              |  |               |         |   |                  |   |         |  



A portion of the above
inventory balances relates to U.S. Government contracts. The company receives progress payments on the majority of its government contracts where the company is the prime contractor. The title to all inventories on which the company receives these
payments is vested in the government to the extent of the progress payment balance.



5. NET INCOME PER SHARE



Basic Net Income Per Share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the periods.
Diluted Net Income Per Share was computed by dividing net income by the weighted average number of shares of common stock and the dilutive effects of the shares awarded under the companys Non-Qualified Stock Option Plan, based on the treasury
stock method using an average fair market value of the stock during the respective periods.



-8-



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The following table represents the net income per share calculations for the three-month and nine-month
periods ended March 31, 2003 and 2002:



(All numbers In
Thousands, except Income Per Share)



|                                |  |                                |       |                                |   |      
|------------------------------- |  | ------------------------------ | ----- | ------------------------------ | - | -----
|                                |  | ThreeMonths EndedMarch 31,2003 |       | ThreeMonths EndedMarch 31,2002
|                                |  | (As Restated)                  |       |                               
|Net income                      |  | $                              | 693   |                                | $ | 1,958
|Weighted average shares         |  |                                | 4,036 |                                |   | 4,068
|Basic net income per share      |  | $                              | 0.17  |                                | $ | 0.48 
|Dilutive securities: options    |  |                                | 348   |                                |   | 369  
|Diluted weighted average shares |  |                                | 4,384 |                                |   | 4,437
|Diluted net income per share    |  | $                              | 0.16  |                                | $ | 0.44 



Options to purchase
approximately 209,000 and 43,106 shares of common stock related to March 31, 2003 and 2002, respectively, were excluded from the computation of diluted net income per share because the option exercise price was greater than the average market price
of the shares.



6. DEBT



Debt as of March 31, 2003 and December 31, 2002 consists of the following:



(In Thousands)



|                                                                                                                   |  |               |        |   |                  |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                                   |  | March 31,2003 |        |   | December 31,2002 |  
|Revolving credit facility; Interest at LIBOR plus 2.50% (3.78% at March 31, 2003)                                  |  | $             | 12,266 |   |                  | $ | 10,873 |  
|Bank Term Loan; Interest at LIBOR plus 2.75% (4.03% at March 31, 2003)                                             |  |               | 4,750  |   |                  |   | 5,000  |  
|Airport Authority Term Loan; Interest at BMA plus 0.36% (1.40% at March 31, 2003)                                  |  |               | 2,237  |   |                  |   | 2,105  |  
|Capital Lease Obligations; Interest from 9.07% to 10.00%, collateralized by security interest in certain equipment |  |               | 180    |   |                  |   | 206    |  
|                                                                                                                   |  |               |        |   |                  |   |        |  
|Total long-term debt                                                                                               |  |               | 19,433 |   |                  |   | 18,184 |  
|Less portion reflected as current                                                                                  |  |               | (1,110 | ) |                  |   | (1,103 | )
|                                                                                                                   |  |               |        |   |                  |   |        |  
|Long term-debt, net of current portion                                                                             |  | $             | 18,323 |   |                  | $ | 17,081 |  
|                                                                                                                   |  |               |        |   |                  |   |        |  



The company maintains
a $20.0 million revolving credit facility, two term loans and a Letter of Credit in support of one of these term loans.



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The revolving credit facility has a 2-year term that began on December 16, 2002. The Bank Term Loan has a
term of 5 years that also began on December 16, 2002. The Airport Authority Term Loan was originated on November 26, 2002 and has a term of 15 years. The Letter of Credit supports the Airport Authority Term Loan and has a fee of 1.0% per year with a
5-year term.



Borrowing availability under the revolving
credit facility is tied to percentages of eligible accounts receivable and inventories. The company had borrowings of $12.3 million outstanding under the revolving credit facility at March 31, 2003. Remaining borrowing capacity available under the
facility at March 31, 2003, based upon the calculation that defines the borrowing base, totaled $7.7 million. All of the facilities have provisions for increases in the interest rate during any period when an event of default exists.



The amount outstanding under the Bank Term Loan at March 31, 2003 amounted
to $4.8 million and will be repaid in 60 monthly installments of $83,333 plus interest that commenced on January 31, 2003. The amount outstanding under the Airport Authority Term Loan at December 31, 2002 amounted to $2.1 million and is expected to
increase to $2.5 million. The Airport Authority Term Loan will be repaid over 14 annual installments of $178,000, assuming the entire $2.5 million available is drawn, commencing on September 30, 2004.



The revolving credit facility is due on December 15, 2004 and has been
classified as long-term. During most of 2002, and all of 2001, the company classified its revolving credit facility as a current liability, due to the Lockbox provisions with its lender, coupled with a subjective acceleration clause, per
the Financial Accounting Standards Boards Emerging Issues Task Force (EITF) Issue No. 95-22, notwithstanding the term of the credit agreement. The new revolving credit facility places the companys Lockbox under
its control, thereby eliminating the EITF requirement to classify the debt as current.



Schedule of debt maturing over the next five years at December 31:



(In Thousands)



|           |  |   |       
|---------- |  | - | ------
|2003       |  | $ | 1,110 
|2004       |  |   | 13,824
|2005       |  |   | 1,150 
|2006       |  |   | 1,140 
|2007       |  |   | 1,140 
|Thereafter |  |   | 1,069 
|           |  |   |       
|           |  | $ | 19,433
|           |  |   |       



A significant portion
of the 2004 maturity of debt listed above relates to the expiration of the 2-year term of the revolving credit facility that the company originated in December 2002. The company expects that it will renew the agreement for an additional 2-year term
on the first anniversary of its origination in December 2003 and continue to do so each year, although there can be no assurances in that regard. Notwithstanding this intended continuous renewal of the revolving credit facility, the company may
elect to pay down the facility out of proceeds from the results of operations, or other potential financing sources, prior to the scheduled maturity.



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The above loans are collateralized by substantially all of the assets of the company and have various
covenants which limit or prohibit the company from incurring additional indebtedness, disposing of assets, merging with other entities, declaring dividends, or making capital expenditures in excess of certain amounts in any fiscal year.
Additionally, the company is required to maintain various financial ratios and minimum net worth amounts.



Notwithstanding the covenants mentioned above which limit or prohibit the company from incurring additional indebtedness, the company does have certain
assets that are not covered by these limitations or prohibitions that could possibly be used to secure additional financing.



7. STOCKHOLDERS EQUITY



Holders of Stock Options under the companys Non-Qualified Stock Option Plan exercised options for approximately 16,000 and 5,000 shares,
respectively, of the companys common stock during the three months ended March 31, 2003 and 2002. The company recorded both the exercise price and a tax benefit totaling approximately $0.3 million and $0.7 million, respectively, to Additional
Paid In Capital during the first quarter of 2003 and 2002.



8. CONTINGENCIES



United States Government Contracts - The company, as a U.S. Government contractor and sub-contractor, is subject to audits, reviews, and investigations by the government related to its negotiation and performance of government
contracts and its accounting for such contracts. Failure to comply with applicable U.S. Government standards by a contractor may result in suspension from eligibility for award of any new government contracts and a guilty plea or conviction may
result in debarment from eligibility for awards. The government may, in certain cases, also terminate existing contracts, recover damages, and impose other sanctions and penalties. The company believes, based on all available information, that the
outcome of any U.S. Government audits, reviews, and investigations would not have a materially adverse effect on the companys consolidated results of operations, financial position, or cash flows.



A Significant Portion of the Companys Revenue is Derived From a Few
of its Customers- A small number of the companys customers account for a significant percentage of its revenues. The KC-135 program comprised 61.5% of the companys total revenues for both of the three-month periods ended March 31,
2003 and 2002. The companys three largest programs generated approximately 83.7% and 88.9% of its revenues during the first quarters of 2003 and 2002, respectively. Termination or a disruption of any of its significant customer contracts,
including by way of option years not being exercised, or the inability of the company to renew or replace any of these customer contracts when they expire, could materially harm the companys business and impair the value of its common stock.



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Litigation



Breach of Contract Lawsuit



On October 12, 1995, Falcon Air AB filed a Complaint in the United States District Court, Northern District of Alabama, alleging that the modification
of three 737 aircraft to Quick Change configuration by the company was defective, limiting the commercial use of the aircraft. The company has filed for a stay of proceedings to resolve certain matters filed before the 11th Circuit Court of Appeals
on October 31, 2001, specifically, the issue of whether arbitration is required where the contract calls for alternative dispute resolution. The consolidated appeals are scheduled to be argued in the 11thCircuit Court in December of 2002. The Supplemental Type Certificate (STC) Amendment, which is the subject of this case, has now been
received from the FAA, which should substantially diminish the value of Falcons claim. Management believes that the results of this lawsuit will not have a material impact on the business of the company.



Employment Lawsuit



On December 9, 1999, the company and its Pemco Aeroplex subsidiary were
served with a purported class action in the U.S. District Court, Northern District of Alabama, seeking declaratory, injunctive relief and other compensatory and punitive damages based upon alleged unlawful employment practices of race discrimination
and racial harassment by the companys managers, supervisors, and other employees. The complaint sought damages in the amount of $75 million. On July 27, 2000 the U.S. District Court determined that the group would not be certified as a class
and the plaintiffs withdrew their request for class certification. The Equal Employment Opportunity Commission (EEOC) subsequently entered the case purporting a parallel class action. The Court denied consolidation of the cases for trial
purposes. Nine plaintiffs elected to settle with the company prior to the trial. On June 28, 2002 a jury determined that there was no hostile work environment with regard to any of the 22 plaintiffs in the original case and granted verdicts for the
company. Plaintiffs motion for a new trial has been denied. A date has not been set for arguments on the motions filed in the parallel EEOC action. The company has taken effective remedial and corrective action, acted promptly in respect to
any specific complaint by any employee, and will vigorously defend this case.



Various claims alleging employment discrimination, including race, sex, age and disability, have been made against the company and its subsidiaries by current and former employees at its Birmingham and Dothan, Alabama
facilities in proceedings before the EEOC and before state and federal courts in Alabama. Workers compensation claims brought by employees of Pemco Aeroplex are also pending in Alabama state court. The company believes that no one of these
claims is material to the company as a whole and that such claims are more reflective of the general increase in employment-related litigation in the U.S., and Alabama in particular, than of any actual discriminatory employment practices by the
company or any subsidiary. Except for workers compensation benefits as provided by statute, the company intends to vigorously defend



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itself in all litigation arising from these types of claims. Management believes that the results of
these claims will not have a material impact on the future results of operations, financial condition or liquidity of the company.



The company and its subsidiaries are also parties to other non-employment related litigation.



Environmental Compliance In December 1997, the company
received an inspection report from the Environmental Protection Agency (EPA) documenting the results of an inspection at the Birmingham, Alabama facility. The report cited various violations of environmental laws. The company has taken
actions to correct the items raised by the inspection. On April 2, 1998, the company received a complaint and compliance order from EPA proposing penalties of $225,256. The company disagreed with the citations and contested the penalties. On
December 21, 1998, the company and the EPA entered into a Consent Agreement and Consent Order (CACO) resolving the compliant and compliance order. As part of the CACO, the company agreed to assess a portion of the Birmingham facility for
possible contamination by certain constituents, remediate such contamination as necessary, and pay a penalty of $95,000 over a three year period. The company made the final payment in November 2001. During 1999 the company drilled test wells and
took samples under its Phase I Site Characterization Plan. These samples were forwarded to the EPA in 1999. A Phase II Site Characterization Plan was submitted to the EPA in 2001 upon receiving the Agencys response to the 1999 samples. The
Phase II Site Characterization Plan (Plan) was approved in January 2003 and well installation has begun. The costs of the Phase II Site characterization Plan are expected to be $240,000, all of which should be incurred during 2003.
Management believes that the results of this claim will not have a material impact on the future results of operations, financial condition or liquidity of the company.



The company is required to comply with environmental regulations as the federal, state and local levels. These requirements
apply especially to the stripping, cleaning and painting of aircraft.



9.SEGMENT INFORMATION



The company has three reportable segments: Government Services Group (GSG), Commercial Services Group (CSG), and Manufacturing and Components Group (MCG). The GSG, located in Birmingham, Alabama, provides
aircraft maintenance and modification services for government and military customers. The CSG, located in Dothan, Alabama, provides commercial aircraft maintenance and modification services on a contract basis to the owners and operators of large
commercial aircraft and also distributes aircraft parts. The MCG, located in California, designs and manufactures a wide array of proprietary aerospace products including various space systems, such as guidance control systems and launch vehicles;
and aircraft cargo-handling systems.



The accounting policies
of the segments are the same as those described in the summary of significant accounting policies in the companys 2002 Annual Report on Form 10-K. The company evaluates performance based on total (external and inter-segment)



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revenues, gross profits and operating income. The company accounts for inter-segment sales and transfers
as if the sales or transfers were to third parties. The amount of intercompany profit is not material. The company does not allocate income taxes, interest income and interest expense to segments.



The companys reportable segments are strategic business units that
offer different products and services. They are managed separately because each business requires different operating and marketing strategies. The CSG and MCG segments may generate revenues from governmental entities and the Government Services
segment may generate revenues from commercial entities. Sales to governmental entities in the three-months ended March 31, 2003 and 2002 were $23.2 million, and $24.3 million, respectively.



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The following table presents information about segment profit or loss for the three months ended March 31, 2003 and 2002:



(In Thousands)



|                                                |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|----------------------------------------------- |  | --- | ------ | --- | - | ------ | --- |  | - | ------------ | - |  | - | ------ | -
|Three Months Ended March 31, 2003 (As Restated) |  | GSG |        | CSG |   |        | MCG |  |   | Consolidated |  
|Revenues from external domestic customers       |  | $   | 21,991 |     | $ | 9,326  |     |  | $ | 1,897        |   |  | $ | 33,214 |  
|Revenues from external foreign customers        |  |     |        |     |   | 2,326  |     |  |   | 129          |   |  |   | 2,455  |  
|Inter-company revenues                          |  |     | 98     |     |   | 44     |     |  |   | 132          |   |  |   | 274    |  
|                                                |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|Total segment revenues                          |  |     | 22,089 |     |   | 11,696 |     |  |   | 2,158        |   |  |   | 35,943 |  
|Elimination                                     |  |     |        |     |   |        |     |  |   |              |   |  |   | (274   | )
|                                                |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|Total Revenue                                   |  |     |        |     |   |        |     |  |   |              |   |  | $ | 35,669 |  
|                                                |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|Gross profit                                    |  |     | 6,550  |     |   | (19    | )   |  |   | (26          | ) |  |   | 6,505  |  
|Segment operating income (loss)                 |  |     | 3,244  |     |   | (1,671 | )   |  |   | (238         | ) |  |   | 1,335  |  
|Interest expense                                |  |     |        |     |   |        |     |  |   |              |   |  |   | 219    |  
|Income taxes                                    |  |     |        |     |   |        |     |  |   |              |   |  |   | 423    |  
|                                                |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|Net income                                      |  |     |        |     |   |        |     |  |   |              |   |  | $ | 693    |  
|                                                |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|Assets                                          |  | $   | 60,391 |     | $ | 32,274 |     |  | $ | 6,671        |   |  | $ | 99,336 |  
|Depreciation/amortization                       |  |     | 508    |     |   | 195    |     |  |   | 55           |   |  |   | 758    |  
|Capital Additions                               |  |     | 947    |     |   | 1,508  |     |  |   | 46           |   |  |   | 2,501  |  



|                                          |  |     |        |     |   |        |     |  |              |       |  |   |       
|----------------------------------------- |  | --- | ------ | --- | - | ------ | --- |  | ------------ | ----- |  | - | ------
|Three Months Ended March 31, 2002         |  | GSG |        | CSG |   |        | MCG |  | Consolidated
|Revenues from external domestic customers |  | $   | 22,220 |     | $ | 10,278 |     |  | $            | 3,277 |  | $ | 35,775
|Revenues from external foreign customers  |  |     |        |     |   | 85     |     |  |              | 185   |  |   | 270   
|Inter-company revenues                    |  |     |        |     |   |        |     |  |              |       |  |   |      
|                                          |  |     |        |     |   |        |     |  |              |       |  |   |       
|Total segment revenues                    |  |     | 22,220 |     |   | 10,363 |     |  |              | 3,462 |  |   | 36,045
|Elimination                               |  |     |        |     |   |        |     |  |              |       |  |   |      
|                                          |  |     |        |     |   |        |     |  |              |       |  |   |       
|Total Revenue                             |  |     |        |     |   |        |     |  |              |       |  | $ | 36,045
|                                          |  |     |        |     |   |        |     |  |              |       |  |   |       
|Gross profit                              |  |     | 7,062  |     |   | 598    |     |  |              | 698   |  |   | 8,358 
|Segment operating income (loss)           |  |     | 4,095  |     |   | (995   | )   |  |              | 363   |  |   | 3,463 
|Interest expense                          |  |     |        |     |   |        |     |  |              |       |  |   | 305   
|Income taxes                              |  |     |        |     |   |        |     |  |              |       |  |   | 1,200 
|                                          |  |     |        |     |   |        |     |  |              |       |  |   |       
|Net income                                |  |     |        |     |   |        |     |  |              |       |  | $ | 1,958 
|                                          |  |     |        |     |   |        |     |  |              |       |  |   |       
|Assets                                    |  | $   | 43,572 |     | $ | 23,130 |     |  | $            | 9,470 |  | $ | 76,172
|Depreciation/amortization                 |  |     | 593    |     |   | 191    |     |  |              | 95    |  |   | 879   
|Capital Additions                         |  |     | 1,108  |     |   | 1,164  |     |  |              |      |  |   | 2,272 



Due to the long-term nature of much of
the companys business, the Depreciation & Amortization amounts recorded in the Consolidated Statements of Operations will not directly match the change in Accumulated Depreciation and Amortization reflected on the companys
Consolidated Balance Sheets. This is a result of the capitalization of costs on long-term contracts into Work-in-Process.



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



INTRODUCTION



The following discussion should be read in conjunction with the companys consolidated financial statements and notes thereto included
herein.



Restatement



The company restated its consolidated financial statements for the quarterly period ended
March 31, 2003 to reflect adjustments related to the amounts and timing of revenue recognition and contract loss accruals (see Note 1 to the Consolidated Financial Statements). The following discussion of the financial condition and results of
operations of the company has been amended in its entirety to reflect changes resulting from this restatement.



Three months ended March 31, 2003



Versus three months ended March 31, 2002



The table below
presents major highlights from the three months ended March 31, 2003 and 2002.



(In $Millions)



|                    |  |      |      |      |   |        |  |       |   
|------------------- |  | ---- | ---- | ---- | - | ------ |  | ----- | --
|                    |  | 2003 |      | 2002 |   | Change | 
|Revenue             |  | $    | 35.7 |      | $ | 36.0   |  | (0.8  | )%
|Gross Profit        |  |      | 6.5  |      |   | 8.4    |  | (22.6 | )%
|Operating income    |  |      | 1.3  |      |   | 3.5    |  | (62.9 | )%
|Income before taxes |  |      | 1.1  |      |   | 3.2    |  | (65.6 | )%
|Net income          |  |      | 0.7  |      |   | 2.0    |  | (65.0 | )%
|EBITDA              |  |      | 2.1  |      |   | 4.3    |  | (51.2 | )%



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The Table below presents the highlights in Revenue by Operating Segment from the three months ended March 31, 2003 and
2002.



(In $Millions)



|             |  |      |   |  |      |   |  |        |   |  |          |   
|------------ |  | ---- | - |  | ---- | - |  | ------ | - |  | -------- | --
|             |  | 2003 |   |  | 2002 |   |  | Change |   |  | % Change |   
|GSG          |  | 22.1 |   |  | 22.2 |   |  | (0.1   | ) |  | (0.5     | )%
|CSG          |  | 11.7 |   |  | 10.4 |   |  | 1.3    |   |  | 12.5     | % 
|MCG          |  | 2.2  |   |  | 3.5  |   |  | (1.3   | ) |  | (37.1    | )%
|Eliminations |  | (0.3 | ) |  | (0.1 | ) |  | (0.2   | ) |  |          |   
|Total        |  | 35.7 |   |  | 36.0 |   |  | (0.3   | ) |  | (0.8     | )%



Without regard to operating segments,
the companys mix of business between government and commercial customers was approximately 36% commercial and 64% government in 2003 and 32% commercial and 68% government 2002.



The $0.1 million decrease in sales in the GSG was due primarily to a slight decrease in revenue, $0.2 million, in the KC-135 Programmed
Depot Maintenance (PDM) program offset, partially, by an increase in commercial sales of $0.1 million. During the fist quarter of 2003 the GSG delivered five PDM aircraft, two drop-in aircraft, and performed time and material based
services under the KC-135 PDM program versus delivering eight PDM, one drop-in aircraft and time and material based services during the same period in 2002. An increase in average revenue per aircraft delivered, the delivery of an additional drop-in
aircraft, and higher time and material service revenues mostly offset the lower volume of PDM aircraft deliveries in the first quarter of 2003 compared to the first quarter of 2002.



The increase in the CSG revenue of $1.3 million was due to increased revenue in commercial Maintenance, Repair, and Overhaul
(MRO). During the first quarter of 2003 CSG delivered 36 aircraft versus 22 aircraft delivered during the first quarter of 2002. During the first quarter of 2003 CSG delivered a greater proportion of aircraft with service checks that
required fewer hours, light checks than those delivered during the first quarter of 2002.



Revenue in the MCG decreased $1.3 million in the first quarter of 2003 versus the first quarter of 2002. Revenue at the Space Vector subsidiary decreased $1.0 million primarily as a result of lower work on a target
program. Revenue in the Pemco Engineers subsidiary decreased $0.3 million during the quarter primarily due to a drop in orders for replacement parts for cargo handling systems.



The company defines operating income as revenue less cost of sales, less selling, general, and administrative expenses (SG&A).



Cost of sales increased to $29.2 million during the first quarter of 2003 from
$27.7 million in the first quarter of 2002. Overall, the gross profit percentage of the company decreased during this same period to 18.2% in 2003 from 23.2% in 2002. The higher cost of sales during the first quarter of 2003 was principally a result
of the following:



Cost of Sales at the GSG were higher in the first quarter
of 2003 compared with the first quarter of 2002. These higher costs resulted from a change in the mix of business with more revenue coming from lower profit over and above sales. In addition, some of the PDM aircraft delivered had
abnormally high levels of required maintenance resulting in higher costs for those deliveries. Cost



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of sales at CSG increased primarily due to higher training and learning curve costs as the company began work on new
types of aircraft. Such costs included a $0.9 million charge for estimated losses on contracts-in-process. Cost of sales in MCG was lower primarily as a result of lower revenue during the first quarter of 2003 versus the first quarter of 2002.



SG&A increased from $4.9 million in the first quarter of 2002 to $5.2
million during the first quarter of 2003 primarily as a result of the company implementing an internal audit function, creating a corporate security function, and hiring an executive to manage the Manufacturing & Components Group.



Interest expense was $0.2 million in the first quarter of 2003 versus $0.3 million during the
same period in 2002. The decrease in interest expense is due principally to the reduction in interest rates reflected in the table below offset, partially, by an increase in the average borrowings during the first quarter of 2003 over the first
quarter of 2002.



The Table below presents the approximate average interest
rates on the companys interest rate sensitive borrowings for the three months ended March 31, 2003 and 2002.



|                            |  |      |   |  |      |  
|--------------------------- |  | ---- | - |  | ---- | -
|                            |  | 2003 |   |  | 2002 |  
|Revolving Credit Facility   |  | 3.78 | % |  | 5.25 | %
|Term Loan                   |  | 4.03 | % |  | 5.75 | %
|Airport Authority Term Loan |  | 1.40 | % |  |      |  



During the three months ended March
31, 2003 and 2002 the company recorded income taxes at an effective rate of 38%.



The company believes that Earnings Before Interest Taxes Depreciation and Amortization, more commonly referred to as EBITDA, is an important gauge used by its constituents, namely commercial banks, investment banks, other financial
institutions, and current and potential investors, to approximate its cash generation capability. The company has accordingly included EBITDA as part of this report. The Depreciation & Amortization amounts used in the EBITDA calculation are
those that were recorded in the Consolidated Statements of Operations in this Report. Due to the long-term nature of much of the companys business, the Depreciation & Amortization amounts recorded in the Consolidated Statements of
Operations will not directly match the change in Accumulated Depreciation and Amortization reflected on the companys Consolidated Balance Sheets. This is a result of the capitalization of costs on long-term contracts into Work-in-Process.



EBITDA does not represent cash flow from operations as defined by BAAP, is not
necessarily indicative of cash available to fund all cash needs, and should not be considered an alternative to net income under GAAP for purposes of evaluating the companys results of operations.



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The following is a reconciliation of EBITDA to net income for the three months ended March 31, 2003 and 2002:



(In $Millions)



|                            |  |      |     |      |   |    
|--------------------------- |  | ---- | --- | ---- | - | ---
|                            |  | 2003 |     | 2002
|Net Income                  |  | $    | 0.7 |      | $ | 2.0
|Interest                    |  |      | 0.2 |      |   | 0.3
|Taxes                       |  |      | 0.4 |      |   | 1.2
|Depreciation & Amortization |  |      | 0.8 |      |   | 0.8
|                            |  |      |     |      |   |    
|EBITDA                      |  | $    | 2.1 |      | $ | 4.3
|                            |  |      |     |      |   |    



LIQUIDITY AND CAPITAL RESOURCES



The table below presents the major indicators of financial condition and
liquidity.



(In $Thousands Except Long Term Debt to Equity)



|                                             |  |               |        |                  |   |        |  |   |       |  
|-------------------------------------------- |  | ------------- | ------ | ---------------- | - | ------ |  | - | ----- | -
|                                             |  | March 31,2003 |        | December 31,2002 |   | Change | 
|Cash                                         |  | $             | 2,370  |                  | $ | 2,795  |  | $ | (425  | )
|Working Capital                              |  |               | 23,193 |                  |   | 23,953 |  |   | (760  | )
|Revolving credit facility                    |  |               | 12,266 |                  |   | 10,873 |  |   | 1,393 |  
|Long term debt and capital lease obligations |  |               | 6,057  |                  |   | 6,208  |  |   | (151  | )
|Shareholders equity                         |  |               | 12,478 |                  |   | 11,536 |  |   | 942   |  
|Long term debt to equity                     |  |               | 1.47   |                  |   | 1.48   |  |   | (0.01 | )



The company maintains a defined
benefit pension plan (the Plan) that covers substantially all employees at its Birmingham and Dothan, Alabama facilities. The Plans assets consist primarily of stocks, bonds and cash equivalents. These assets are exposed to various
risks, such as interest rate, credit, and overall market volatility. As a result of unfavorable investment returns related to the Plan in 2001 and 2002 coupled with substantially lower interest rates, the Plan was under-funded by approximately $37.5
million at December 31, 2002. Under ERISA rules, the minimum required contribution in 2003 is approximately $10.3 million. During the first quarter of 2003, the company made contributions of $0.8 million to the plan. As of the date of this report,
the company has made an additional contribution of $1.8 million.



Operating
activities provided $0.8 million of cash for the three months ended March 31, 2003. Cash was used during the three months ended March 31, 2002 for $2.4 million of capital expenditures.



At March 31, 2003 the company had additional borrowing capacity of $7.7 million under its revolving line of credit and $0.4 million under
its arrangement with the Dothan-Houston County Airport Authority.



In January
2003 the company began projects to improve its information systems infrastructure. These projects include an upgrade to its enterprise software at GSG ($0.4 million); a conversion to the enterprise software ($1.3 million) and upgrades to hardware
($0.3 million) at CSG. These projects are expected to be completed during 2003.



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The company plans to finance its capital expenditures, working capital and liquidity requirements through the most
advantageous sources of capital available to the company at the time, which may include the sale of equity or debt securities through public offerings or private placements, the incurrence of additional indebtedness through secured or unsecured
borrowings and the reinvestment of proceeds from the disposition of assets. The company believes that its internally generated liquidity, together with access to external capital resources, will be sufficient to satisfy existing commitments and
plans for at least the next twelve months. The company could elect, or could be required, to raise additional funds during that period, and the company may need to raise additional capital in the future. Additional capital may not be available at
all, or may not be available on terms favorable to the company. Any additional issuance of equity or equity-linked securities may result in substantial dilution to the companys stockholders. The company is continually monitoring and
reevaluating its level of investment in all of its operations, as well as the financing sources available to achieve its goals in each business area.



COMMITMENTS AND CONTINGENCIES



Facility and Operating Leases



The companys manufacturing and service operations are performed principally on leased premises owned by municipal units or authorities. Remaining lease terms range
from eleven months to thirty-one years and provide for basic rentals, plus contingent rentals based upon a graduated percentage of sales. The company also leases vehicles and equipment under various leasing arrangements.



Future minimum rental payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of March 31, 2003 are as follows:



(In Thousands)



|                                        |  |            |        |                      |   |       |  |   |       
|--------------------------------------- |  | ---------- | ------ | -------------------- | - | ----- |  | - | ------
|Year Ending                             |  | Facilities |        | VehiclesAndEquipment |   | Total
|2003                                    |  | $          | 1,602  |                      | $ | 225   |  | $ | 1,827 
|2004                                    |  |            | 1,588  |                      |   | 185   |  |   | 1,773 
|2005                                    |  |            | 1,371  |                      |   | 149   |  |   | 1,520 
|2006                                    |  |            | 1,275  |                      |   | 87    |  |   | 1,362 
|2007                                    |  |            | 1,275  |                      |   | 11    |  |   | 1,286 
|Thereafter                              |  |            | 15,831 |                      |   |       |  |   | 15,831
|                                        |  |            |        |                      |   |       |  |   |       
|Total minimum future rental commitments |  | $          | 22,942 |                      | $ | 657   |  | $ | 23,599
|                                        |  |            |        |                      |   |       |  |   |       



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Repayment of Long Term Debt



Schedule of long term debt maturing over the next five years at March 31, 2003:



(In thousands)



|           |  |   |       
|---------- |  | - | ------
|2003       |  | $ | 1,110 
|2004       |  |   | 13,824
|2005       |  |   | 1,150 
|2006       |  |   | 1,140 
|2007       |  |   | 1,140 
|Thereafter |  |   | 1,069 
|           |  |   |       
|           |  | $ | 19,433
|           |  |   |       



A significant portion of the 2004
maturity of debt listed above relates to the expiration of the 2-year term of the revolving credit facility that the company originated in December 2002. The company expects that it will renew the agreement for an additional 2-year term on the first
anniversary of its origination in December 2003 and continue to do so each year, although there can be no assurances in that regard. Notwithstanding this intended continuous renewal of the revolving credit facility, the company may elect to pay down
the facility out of proceeds from the results of operations, or other potential financing sources, prior to the scheduled maturity.



The above loans are collateralized by substantially all of the assets of the company and have various covenants which limit or prohibit the company from incurring
additional indebtedness, disposing of assets, merging with other entities, declaring dividends, or making capital expenditures of certain amounts in any fiscal year. Additionally, the company is required to maintain various financial ratios and
minimum net worth amounts.



Notwithstanding the covenants mentioned above that
limit or prohibit the company from incurring additional indebtedness, the company does have certain assets that are not covered by these limitations that could possibly be used to secure additional financing.



TRADING ACTIVITIES



The company has not engaged in trading activities or in trading non-exchange traded contracts.



As of March 31, 2003 and 2001, the carrying amounts of the companys financial
instruments were estimated to approximate their fair values, due to their short-term nature, and variable or market interest rates. The company has not hedged its interest rate or foreign exchange risks through the use of derivative financial
instruments. See Quantitative and Qualitative Disclosures about Market Risk included in Item 3 of this Report.



RELATED PARTY TRANSACTIONS



The company had accruals of approximately $0.1 million and $0.5 million at March 31, 2003 and 2001, respectively, related to a severance agreement with its former
Chairman of the Board, Chief Executive Officer and major stockholder.



On April
23, 2002 the company loaned its current President and Chief Executive Officer (CEO) $425,000 under the terms of a Promissory Note. The Promissory Note carries a fixed interest rate of 5% per annum and is payable within 60 days of the CEOs
termination of employment with the company.



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CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The companys significant accounting policies are disclosed in Note 1 of Notes to Consolidated Financial Statements in the
companys 2002 10-K. The preparation of financial statements in conformity with generally accepted accounting principles requires that management use judgments to make estimates and assumptions that affect the amounts reported in the financial
statements. As a result, there is some risk that reported financial results could have been materially different had different methods, assumptions, and estimates been used.



The company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity as
used in the preparation of its consolidated financial statements.



Revenue
Recognition



Revenue at the companys GSS and CSS is derived
principally under contracts using the percentage-of-completion method as prescribed by Statement of Position 81-1 (SOP 81-1) Accounting for Performance of Construction-Type and Certain Production-Type Contracts. The nature of the
contract and the types of products and services provided are considered when determining the appropriate accounting for a particular contract. The companys contracts at the GSS and CSS generally have fixed price elements, time-and-material
elements, or commonly both. The GSS generally segments the basic and fixed price elements and the time-and-material elements for purposes of accumulating costs and recognizing revenue. For basic and fixed price elements of a contract, the GSS uses
the units-of-delivery method as the basis to measure progress toward completion, with revenue recorded based upon the unit sales value stated in the contract and costs of sales recorded based upon actual unit cost. Each aircraft is considered a unit
for purposes of recognizing revenue. For time-and-material elements of a contract, the GSS uses an output measure based upon units of work performed to measure progress toward completion, with revenue recorded based upon the stated hourly rates in
the contract and costs of sales recorded based upon estimated average costs. The company considers each hour chargeable to the customer as a unit of work performed. Revenue and costs of sales for time-and-material elements are recognized upon
completion of all performance obligations in accordance with the contract and acceptance by the customer. The CSS recognizes revenue and associated costs for both fixed price and time-and-material elements using units-of-delivery as the basis to
measure progress toward completion, and revenue is recorded based upon the unit sales value stated in the contract and costs of sales are recorded based upon actual unit cost.



The companys MCS derives a significant portion of its revenue from cost-reimbursement type contracts and from sales of precision parts
and components. Revenue on cost-reimbursable contracts is recognized to the extent of costs incurred plus a proportionate amount of estimated fee earned. For certain other fixed-price contracts revenue is recognized when performance milestones have
been achieved in accordance with contract terms. Revenue related to sales of individual components and parts is recognized upon delivery to the customer, and when the product price is fixed and determinable and collection of the resulting receivable
is reasonably assured.



Contract accounting requires judgment relative to
assessing risks and estimating contract revenues and costs. The company employs various techniques to project contract revenue and costs which inherently include significant assumptions and estimates. Contract revenues are a function of the terms of
the contract and often bear a relationship to contract costs. Contract costs include labor, material, an allocation of indirect costs, and in the case of certain government contracts, an allocation of general and administrative costs. Techniques for
estimating contract costs generally impact the companys proposal processes, including the determination of pricing for fixed price and time-and-material elements of contracts, the evaluation of profitability on contracts, and the timing and
amounts recognized for revenue and cost of sales. The company provides for losses on uncompleted contracts in the period in which management determines that the estimated total costs under the contract will exceed the estimated total contract
revenues. These estimates are reviewed periodically and any revisions are charged or credited to operations in the period in which the change is determined. An amount equal to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reasonably estimated. Judgment is required in determining the potential realization of claim revenue and estimating the amounts recoverable. Because of the significance of the judgments and estimates
required in these processes, it is likely that materially different amounts could result from the use of different assumptions or if the underlying conditions were to change. In addition, contracts accounted for under the percentage-of-completion,
units-of-delivery method may result in material fluctuations in revenue and profit margins depending on the timing of delivery and performance, the relative proportion of fixed price, time-and-material, and other types of contracts-in-process, and
costs incurred in their performance.



Deferred Taxes



The company records a valuation allowance to reduce its deferred tax assets to the amount
that is more likely than not to be realized. While the company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the company were to
determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the
company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.



Inventories



The company regularly estimates the degree of technological obsolescence in its inventories and provides inventory reserves on that basis.
Though the company believes it has adequately provided for any such declines in inventory value to date, any unanticipated change in technology or potential decertification due to failure to meet design specification could significantly affect the
value of the companys inventories and thereby adversely affect gross margins and results of operations. In addition, an inability of the company to accurately forecast its inventory needs related to its warranty and maintenance obligations
could adversely affect gross margin and results of operations.



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Pensions



The company maintains pension plans covering a majority of its employees and retirees, and postretirement benefit plans for retirees that include health care benefits and
life insurance coverage. For financial reporting purposes, net periodic pension and other postretirement benefit costs (income) are calculated based upon a number of actuarial assumptions including a discount rate for plan obligations, assumed rate
of return on pension plan assets, assumed annual rate of compensation increase for plan employees, and an annual rate of increase in the per capita costs of covered postretirement healthcare benefits. Each of these assumptions is based upon the
companys judgment, considering all known trends and uncertainties. Actual asset returns for the company pension plans significantly below the companys assumed rate of return would result in lower net periodic pension income (or higher
expense) in future years. Actual annual rates of increase in the per capita costs of covered postretirement healthcare benefits above assumed rates of increase would result in higher net periodic postretirement benefit costs in future years.



Contingencies



The company has been involved, and may continue to be involved, in various legal proceedings
arising out of the conduct of its business including litigation with customers, employment related lawsuits, purported class actions, and actions brought by governmental authorities. The company has, and will continue to, vigorously defend itself
and to assert available defenses with respect to these matters. Where necessary, the company has accrued an estimate of the probable cost of resolutions of these proceedings based upon consultation with outside counsel and assuming various
strategies. However, a settlement or an adverse resolution of one or more of these matters may result in the payment of significant costs and damages, that could have a material adverse effect on our business, financial condition, results of
operations, and cash flows.



BACKLOG



The following table presents the companys backlog (in thousands of dollars) at March
31, 2003 and March 31, 2002:



|                |  |      |         |      |   |        
|--------------- |  | ---- | ------- | ---- | - | -------
|Customer Type   |  | 2003 |         | 2002
|U.S. Government |  | $    | 98,722  |      | $ | 109,164
|Commercial      |  |      | 19,934  |      |   | 16,602 
|                |  |      |         |      |   |        
|Total           |  | $    | 118,656 |      | $ | 125,766
|                |  |      |         |      |   |        



The reduction in government backlog
was related to decreases in both the Government GSG and MCG. The GSG decreased backlog approximately $5.1 million year-over-year due primarily to the KC-135 contract. Backlog at Space Vector decreased $5.3 million during this same period due to the
unit nearing the completion of one of its existing contracts.



Total commercial
backlog increased $3.2 million. Backlog at the CSG increased $4.6 million



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while backlog at Pemco Engineers, of the MCG, decreased $1.4 million. The increase in backlog at the CSG is due primarily
to inputs of cargo conversion aircraft from one of its major customers. The decrease in Pemco Engineers backlog is a result of a downturn in conversion of aircraft for which the unit produces cargo-handling systems combined with a decrease in sales
of replacement parts for cargo-handling systems on aircraft in service.



Overall the mix of backlog shifted towards commercial during the two periods moving from 88.2% government and 11.8% commercial for the three months ended March 31, 2002 to 84.8% government and 15.2% commercial for the three months ended
March 31, 2003.



The company includes sub-contracts for government work in its
U.S. Government backlog category.



CONTINGENCIES



See Note 6 to the Consolidated Financial Statements.



The Companys Forward-Looking Statements May Prove to be Wrong.



Some of the information under the caption Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly Report contains forward-looking statements. These forward-looking statements include, but are not limited to, statements about the companys plans, objectives,
expectations and intentions, award or loss of contracts, the outcome of pending or future litigation, estimates of backlog and other statements contained in this Quarterly Report that are not historical facts. When used in this Quarterly Report, the
words expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions are generally intended to identify forward-looking statements. Because
these forward-looking statements involve risks and uncertainties, there are important factors, including the factors discussed under the caption Factors That May Affect Future Performance in the companys 2001 Annual Report on Form
10-K, that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. The company cautions readers not to place undue reliance on any forwardlooking statements, which speak only as of
the date on which they are made. The company does not undertake any obligation to update or revise any forward-looking statements.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



The company is exposed to market risk from changes in interest rates as part of its normal operations. The company maintains various debt instruments to finance its
business operations. The debt consists of fixed and variable rate debt. The variable rate debt is related to the companys revolving line of credit, term loans, and capital equipment acquisition facility as noted in Note 5 to the Consolidated
Financial Statements and bears interest at LIBOR 2.50% or 2.75%, depending upon the loan (3.78% and 4.03% at March 31, 2003). The company also has a variable rate term loan that bears interest at BMA plus 0.36% (1.40% at March 31, 2003). If LIBOR
increased by 1%, net income would have been reduced by approximately $45,000 during the quarter.



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Item 4. Controls and Procedures



(a) Evaluation of disclosure controls and procedures.



The company maintains disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that
information in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified and pursuant to the requirements of the Securities and Exchange Commissions rules and forms. Disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, include controls and procedures designed to ensure that information required to be disclosed by the company in the reports we file or submit under the Exchange Act is
accumulated and communicated to our Companys management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that any system of
controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.



Management carried out an evaluation, with the participation of the companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
companys disclosure controls and procedures as of December 31, 2003, the end of the period covered by the companys annual report on Form 10 K for fiscal year 2003. Based on that evaluation, the companys Chief Executive Officer and
Chief Financial Officer concluded that the companys disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2003.



(b) Changes in internal control over financial reporting.



In addition to managements evaluation of disclosure controls and procedures as discussed above, in connection with the audit of our
financial statements for the fiscal year ended December 31, 2003 and the restatement of our financial statements for the first three quarters of fiscal year 2003, we are continuing to review and enhance policies and procedures involving accounting,
information systems and monitoring. Our independent auditors identified the following reportable conditions that together constitute a material weakness in internal control over financial reporting involving the incorrect applications of generally
accepted accounting principles as a result of personnel in certain areas of the company who did not have a full understanding of pertinent accounting and financial reporting principles and as a result of the untimely resolution of errors. The
resulting reportable conditions were (i) the lack of appropriate analysis and support for revenue recognition matters; (ii) lack of appropriate analysis and support pertaining to estimates to complete certain contracts made in connection with
projecting losses on contracts in a current period; (iii) lack of appropriate analysis and support for inventory accounting matters; and (iv) lack of appropriate analysis and support for the reconciliation of intercompany transactions.



The company has taken steps to remediate the material weakness and will continue to take
actions through changes in the companys internal control over financial reporting, including:



| |  | re-evaluate and add staffing and level of expertise;
| | - | ----------------------------------------------------



| |  | increased training of its corporate and accounting staff to heighten awareness among corporate and accounting personnel of generally accepted accounting principles;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | establishing policies and procedures, including documentation, designed to enhance coordination and reporting procedures between management and the companys accounting staff
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | centralize review and monitoring of accounting issues; and
| | - | ----------------------------------------------------------



| |  | allocation of senior accounting personnel to provide additional on-site supervision of accounting functions.
| | - | ------------------------------------------------------------------------------------------------------------



Except as described above, there have been no other material changes in the companys
internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting.



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PART II OTHER INFORMATION



Item 1. Legal Proceedings



See Note 6 to the Consolidated Financial Statements.



Item 6. Exhibits and Reports on Form 8-K.



a. Exhibits



|   |  |                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------
|31 |  | Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|   | 
|32 |  | Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



b. Reports on Form
8-K



The company filed no reports on Form 8-K during the
quarter ended March 31, 2003.



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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the company has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.



|                      |  |                            |  |                                                                                                     
|--------------------- |  | -------------------------- |  | ----------------------------------------------------------------------------------------------------
|                      |  | PEMCO AVIATION GROUP, INC.
|                      |  |                           
|Dated: April 13, 2004 |  | By:                        |  | /s/ Ronald A. Aramini                                                                               
|                      |  |                            |  | Ronald A. Aramini, President and Chief Executive
Officer (Principal Executive Officer)              
|                      |  |                           
|Dated: April 13, 2004 |  | By:                        |  | /s/ John R. Lee                                                                                     
|                      |  |                            |  | John R. Lee, Sr. Vice President and Chief Financial
Officer (Principal Finance & Accounting Officer)





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