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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 September 30, 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 November 3, 2003
|Common Stock, $.0001 par value |  | 4,042,146                      



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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 and nine months ended September 30, 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 November 5, 2003 original filing date of the companys Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 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 September 30, 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------



Page 2



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PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



ASSETS

(In thousands)



|                                               |  |                            |         |   |                  |   |         |  
|---------------------------------------------- |  | -------------------------- | ------- | - | ---------------- | - | ------- | -
|                                               |  | September 30,2003Unaudited |         |   | December 31,2002 |  
|                                               |  | (As Restated,See Note 1)   |         |   |                  |  
|Current assets:                                |  |                            |         |   |                  |   |         |  
|Cash                                           |  | $                          | 1,813   |   |                  | $ | 2,795   |  
|Accounts receivable, net                       |  |                            | 31,758  |   |                  |   | 30,162  |  
|Inventories, net                               |  |                            | 27,898  |   |                  |   | 16,292  |  
|Deferred income taxes                          |  |                            | 9,042   |   |                  |   | 13,092  |  
|Prepaid expenses and other                     |  |                            | 1,946   |   |                  |   | 1,204   |  
|                                               |  |                            |         |   |                  |   |         |  
|Total current assets                           |  |                            | 72,457  |   |                  |   | 63,545  |  
|                                               |  |                            |         |   |                  |   |         |  
|Machinery, equipment and improvements at cost: |  |                            |         |   |                  |   |         |  
|Machinery and equipment                        |  |                            | 30,820  |   |                  |   | 28,193  |  
|Leasehold improvements                         |  |                            | 27,486  |   |                  |   | 22,426  |  
|Construction-in-process                        |  |                            | 600     |   |                  |   | 4,214   |  
|                                               |  |                            |         |   |                  |   |         |  
|                                               |  |                            | 58,906  |   |                  |   | 54,833  |  
|Less accumulated depreciation and amortization |  |                            | (32,954 | ) |                  |   | (30,193 | )
|                                               |  |                            |         |   |                  |   |         |  
|Net machinery, equipment and improvements      |  |                            | 25,952  |   |                  |   | 24,640  |  
|                                               |  |                            |         |   |                  |   |         |  
|Other non-current assets:                      |  |                            |         |   |                  |   |         |  
|Deposits and other                             |  |                            | 1,141   |   |                  |   | 933     |  
|Related party receivable                       |  |                            | 455     |   |                  |   | 425     |  
|Intangible pension asset                       |  |                            | 5,410   |   |                  |   | 5,410   |  
|Intangible assets, net                         |  |                            | 244     |   |                  |   | 315     |  
|                                               |  |                            |         |   |                  |   |         |  
|                                               |  |                            | 7,250   |   |                  |   | 7,083   |  
|                                               |  |                            |         |   |                  |   |         |  
|Total assets                                   |  | $                          | 105,659 |   |                  | $ | 95,268  |  
|                                               |  |                            |         |   |                  |   |         |  



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



Page 3



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PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS EQUITY

(In thousands, except common share information)



|                                                                                                                                                             |  |                            |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                             |  | September 30,2003Unaudited |         |   | December 31,2002 |  
|                                                                                                                                                             |  | (As Restated,See Note 1)   |         |   |                  |  
|Current liabilities:                                                                                                                                         |  |                            |         |   |                  |   |         |  
|Current portion of long-term debt                                                                                                                            |  | $                          | 1,275   |   |                  | $ | 1,103   |  
|Current portion of pension liability                                                                                                                         |  |                            | 8,271   |   |                  |   | 10,341  |  
|Accounts payable                                                                                                                                             |  |                            | 3,108   |   |                  |   | 4,258   |  
|Accrued liabilities - payroll related                                                                                                                        |  |                            | 10,728  |   |                  |   | 7,816   |  
|Accrued liabilities - other                                                                                                                                  |  |                            | 9,946   |   |                  |   | 7,192   |  
|Customer deposits in excess of cost                                                                                                                          |  |                            | 12,132  |   |                  |   | 8,882   |  
|                                                                                                                                                             |  |                            |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                    |  |                            | 45,460  |   |                  |   | 39,592  |  
|                                                                                                                                                             |  |                            |         |   |                  |   |         |  
|Long-term debt                                                                                                                                               |  |                            | 20,433  |   |                  |   | 17,081  |  
|Long-term pension benefit liability                                                                                                                          |  |                            | 19,529  |   |                  |   | 25,341  |  
|Other long-term liabilities                                                                                                                                  |  |                            | 1,808   |   |                  |   | 1,718   |  
|                                                                                                                                                             |  |                            |         |   |                  |   |         |  
|Total liabilities                                                                                                                                            |  |                            | 87,230  |   |                  |   | 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, 4,042,146 and 4,030,595 outstanding at September 30, 2003 and December 31,
2002, respectively |  |                            | 1       |   |                  |   | 1       |  
|Additional paid-in capital                                                                                                                                   |  |                            | 10,043  |   |                  |   | 9,684   |  
|Retained earnings                                                                                                                                            |  |                            | 35,309  |   |                  |   | 28,520  |  
|Treasury stock, at cost  359,723 and 348,899 shares at September 30, 2003 and December 31, 2002, respectively                                               |  |                            | (7,043  | ) |                  |   | (6,788  | )
|Accumulated other comprehensive loss                                                                                                                         |  |                            | (19,881 | ) |                  |   | (19,881 | )
|                                                                                                                                                             |  |                            |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                   |  |                            | 18,429  |   |                  |   | 11,536  |  
|                                                                                                                                                             |  |                            |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                   |  | $                          | 105,659 |   |                  | $ | 95,268  |  
|                                                                                                                                                             |  |                            |         |   |                  |   |         |  



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



Page 4



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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 EndedSeptember 30,2003 |        |   | ThreeMonths EndedSeptember 30,2002
|                                              |  | (As Restated,See Note 1)           |        |   |                                   
|Net sales                                     |  | $                                  | 44,095 |   |                                    | $ | 35,400
|Cost of sales                                 |  |                                    | 31,438 |   |                                    |   | 29,097
|                                              |  |                                    |        |   |                                    |   |       
|Gross profit                                  |  |                                    | 12,657 |   |                                    |   | 6,303 
|                                              |  |                                   
|Selling, general, and administrative expenses |  |                                    | 6,563  |   |                                    |   | 4,810 
|                                              |  |                                    |        |   |                                    |   |       
|Income from operations                        |  |                                    | 6,094  |   |                                    |   | 1,493 
|                                              |  |                                   
|Interest                                      |  |                                    | 224    |   |                                    |   | 326   
|Insurance recovery                            |  |                                    | (527   | ) |                                    |   |       
|                                              |  |                                    |        |   |                                    |   |       
|Income before income taxes                    |  |                                    | 6,397  |   |                                    |   | 1,167 
|Income tax expense                            |  |                                    | 2,430  |   |                                    |   | 443   
|                                              |  |                                    |        |   |                                    |   |       
|Net income                                    |  | $                                  | 3,967  |   |                                    | $ | 724   
|                                              |  |                                    |        |   |                                    |   |       
|Net income per common share:                  |  |                                    |        |   |                                    |   |       
|Basic                                         |  | $                                  | 0.98   |   |                                    | $ | 0.19  
|Diluted                                       |  | $                                  | 0.91   |   |                                    | $ | 0.17  
|                                              |  |                                   
|Weighted average common shares outstanding:   |  |                                    |        |   |                                    |   |       
|Basic                                         |  |                                    | 4,043  |   |                                    |   | 3,778 
|Diluted                                       |  |                                    | 4,368  |   |                                    |   | 4,205 



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



Page 5



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PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except net income
per common share information)



|                                              |  |                                   |         |   |                                   |   |         |  
|--------------------------------------------- |  | --------------------------------- | ------- | - | --------------------------------- | - | ------- | -
|                                              |  | NineMonths EndedSeptember 30,2003 |         |   | NineMonths EndedSeptember 30,2002 |  
|                                              |  | (As Restated,See Note 1)          |         |   |                                   |  
|Net sales                                     |  | $                                 | 127,017 |   |                                   | $ | 113,367 |  
|Cost of sales                                 |  |                                   | 96,735  |   |                                   |   | 89,476  |  
|                                              |  |                                   |         |   |                                   |   |         |  
|Gross profit                                  |  |                                   | 30,282  |   |                                   |   | 23,891  |  
|                                              |  |                                  
|Selling, general, and administrative expenses |  |                                   | 19,189  |   |                                   |   | 15,383  |  
|                                              |  |                                   |         |   |                                   |   |         |  
|Income from operations                        |  |                                   | 11,093  |   |                                   |   | 8,508   |  
|                                              |  |                                  
|Interest                                      |  |                                   | 673     |   |                                   |   | 861     |  
|Insurance recovery                            |  |                                   | (527    | ) |                                   |   |         |  
|Litigation, net                               |  |                                   |         |   |                                   |   | (1,480  | )
|                                              |  |                                   |         |   |                                   |   |         |  
|Income before income taxes                    |  |                                   | 10,947  |   |                                   |   | 9,127   |  
|Income tax expense                            |  |                                   | 4,158   |   |                                   |   | 3,468   |  
|                                              |  |                                   |         |   |                                   |   |         |  
|Net income                                    |  | $                                 | 6,789   |   |                                   | $ | 5,659   |  
|                                              |  |                                   |         |   |                                   |   |         |  
|Net income per common share:                  |  |                                   |         |   |                                   |   |         |  
|Basic                                         |  | $                                 | 1.68    |   |                                   | $ | 1.42    |  
|Diluted                                       |  | $                                 | 1.55    |   |                                   | $ | 1.28    |  
|                                              |  |                                  
|Weighted average common shares outstanding:   |  |                                   |         |   |                                   |   |         |  
|Basic                                         |  |                                   | 4,041   |   |                                   |   | 3,976   |  
|Diluted                                       |  |                                   | 4,376   |   |                                   |   | 4,422   |  



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



Page 6



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PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                            |  |                                   |         |   |                                   |   |         |  
|------------------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | --------------------------------- | - | ------- | -
|                                                                                            |  | NineMonths EndedSeptember 30,2003 |         |   | NineMonths EndedSeptember 30,2002 |  
|                                                                                            |  | (As Restated,See Note 1)          |         |   |                                   |  
|Cash flows from operating activities:                                                       |  |                                   |         |   |                                   |   |         |  
|Net income                                                                                  |  | $                                 | 6,789   |   |                                   | $ | 5,659   |  
|                                                                                            |  |                                   |         |   |                                   |   |         |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |                                   |         |   |                                   |   |         |  
|Depreciation and amortization                                                               |  |                                   | 2,761   |   |                                   |   | 3,143   |  
|Provision for deferred income taxes                                                         |  |                                   | 4,158   |   |                                   |   | 3,101   |  
|Funding in excess of pension cost                                                           |  |                                   | (7,882  | ) |                                   |   | 401     |  
|Amortization of intangible asset                                                            |  |                                   | 123     |   |                                   |   | 141     |  
|Changes in assets and liabilities:                                                          |  |                                   |         |   |                                   |   |         |  
|Related party receivable                                                                    |  |                                   | (30     | ) |                                   |   |         |  
|Accounts receivable, net                                                                    |  |                                   | (1,596  | ) |                                   |   | (10,297 | )
|Inventories                                                                                 |  |                                   | (11,606 | ) |                                   |   | (674    | )
|Prepaid expenses and other                                                                  |  |                                   | (742    | ) |                                   |   | (647    | )
|Deposits and other                                                                          |  |                                   | (260    | ) |                                   |   | (998    | )
|Accounts payable and accrued liabilities                                                    |  |                                   | 7,851   |   |                                   |   | 10,269  |  
|                                                                                            |  |                                   |         |   |                                   |   |         |  
|Total adjustments                                                                           |  |                                   | (7,223  | ) |                                   |   | 4,439   |  
|                                                                                            |  |                                   |         |   |                                   |   |         |  
|Net cash (used in) provided by operating activities                                         |  |                                   | (434    | ) |                                   |   | 10,098  |  
|                                                                                            |  |                                   |         |   |                                   |   |         |  
|Cash flows from investing activities:                                                       |  |                                   |         |   |                                   |   |         |  
|Capital expenditures                                                                        |  |                                   | (4,072  | ) |                                   |   | (5,542  | )
|                                                                                            |  |                                   |         |   |                                   |   |         |  
|Net cash used in investing activities                                                       |  |                                   | (4,072  | ) |                                   |   | (5,542  | )
|                                                                                            |  |                                   |         |   |                                   |   |         |  
|Cash flows from financing activities:                                                       |  |                                   |         |   |                                   |   |         |  
|Proceeds from exercise of stock options                                                     |  |                                   | 252     |   |                                   |   | 1,096   |  
|Purchase of treasury stock                                                                  |  |                                   | (255    | ) |                                   |   | (6,690  | )
|Net change under revolving credit facility                                                  |  |                                   | 3,965   |   |                                   |   | 1,061   |  
|Borrowings under long-term debt                                                             |  |                                   | 395     |   |                                   |   | 1,192   |  
|Principal payments under long-term debt                                                     |  |                                   | (833    | ) |                                   |   | (1,824  | )
|                                                                                            |  |                                   |         |   |                                   |   |         |  
|Net cash provided by (used in) financing activities                                         |  |                                   | 3,524   |   |                                   |   | (5,165  | )
|                                                                                            |  |                                   |         |   |                                   |   |         |  
|Net decrease in cash                                                                        |  |                                   | (982    | ) |                                   |   | (609    | )
|                                                                                            |  |                                   |         |   |                                   |   |         |  
|Cash, beginning of period                                                                   |  |                                   | 2,795   |   |                                   |   | 927     |  
|                                                                                            |  |                                   |         |   |                                   |   |         |  
|Cash, end of period                                                                         |  | $                                 | 1,813   |   |                                   | $ | 318     |  
|                                                                                            |  |                                   |         |   |                                   |   |         |  
|Supplemental disclosure of cash flow information:                                           |  |                                   |         |   |                                   |   |         |  
|Cash paid during the period for:                                                            |  |                                   |         |   |                                   |   |         |  
|Interest                                                                                    |  | $                                 | 440     |   |                                   | $ | 735     |  
|                                                                                            |  |                                   |         |   |                                   |   |         |  



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



Page 7



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PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Quarters Ended

September 30, 2003 and 2002



1. RESTATEMENT



Subsequent to the filing of the companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, the company determined
that certain revenue transactions 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. In addition, the company determined that reserves for losses on contracts-in-process were not timely identified and recorded in the appropriate
period. Therefore, the company has restated this Quarterly Report on Form 10-Q as of and for the quarter ended September 30, 2003, for the effects of these transactions. This restatement has also been reflected in the companys Amendment No. 1
to Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2003 and June 30, 2003.



The effects of the restatement on the unaudited consolidated statements of operations for the three and nine months ended September 30, 2003 are presented
below:



(In thousands, except per share information)



|                              |  |                                      |        |                                     |   |                        |  |            |         |  |   |        
|----------------------------- |  | ------------------------------------ | ------ | ----------------------------------- | - | ---------------------- |  | ---------- | ------- |  | - | -------
|                              |  | Three Months EndedSeptember 30, 2003 |        | Nine Months EndedSeptember 30, 2003
|                              |  | As PreviouslyReported*               |        | AsRestated                          |   | As PreviouslyReported* |  | AsRestated
|Net Sales                     |  | $                                    | 43,946 |                                     | $ | 44,095                 |  | $          | 128,296 |  | $ | 127,017
|Gross Profit                  |  | $                                    | 12,453 |                                     | $ | 12,657                 |  | $          | 32,146  |  | $ | 30,282 
|Net Income                    |  | $                                    | 3,840  |                                     | $ | 3,967                  |  | $          | 7,943   |  | $ | 6,789  
|Net income per share, basic   |  | $                                    | 0.95   |                                     | $ | 0.98                   |  | $          | 1.97    |  | $ | 1.68   
|Net income per share, diluted |  | $                                    | 0.88   |                                     | $ | 0.91                   |  | $          | 1.82    |  | $ | 1.55   

---

|* | As previously reported in the companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the Securities and Exchange
Commission on November 5, 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 reversed approximately $1.4 million in revenue related to such
transactions during the second quarter. Related to one transaction, the company reversed $528,000 of revenue, of which approximately $300,000 was recognized prematurely and approximately $228,000 was improperly recognized. Of the $300,000 recognized
prematurely, $150,000 should have been, and after the restatement adjustment was, recognized during the third quarter. Related to another transaction, the company reversed $900,000 of revenue during the second quarter, and reversed a charge to bad
debt expense of equal amount associated with this revenue during the third quarter. Additionally, the company provides for losses on uncompleted



Page 8



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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 related to these transactions reduced total estimated contract revenues, and therefore affected the companys calculation of its provision for losses on uncompleted contracts. Including the effect of these revenue
adjustments in the companys reserve for contract loss calculations resulted in an increase to cost of sales of approximately $937,000, $640,000 and $1,141,000, and a corresponding increase to the reserve for contract losses, as of and for the
three month periods ended March 31, 2003, June 30, 2003 and September 30, 2003, respectively. The accrual of these loss provisions during the first and second quarters resulted in an adjustment to decrease cost of sales previously reported during
the second and third quarters by approximately $937,000 and $640,000, respectively, upon delivery of the aircraft.



In addition to the restatements described in the preceding paragraph, the company recorded other charges to cost of sales in the third quarter totaling
approximately $344,000 related to warranty expense, bad debt expense, and other contract loss provisions, all of which were originally charged to cost of sales during the fourth quarter.



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 September 30, 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/A.



3. STOCK OPTIONS



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.



Page 9



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The company uses the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees, for stock option grants to individuals defined as employees. Accordingly, no compensation expense is recognized for options granted at or above the fair market value of the underlying stock on
the grant date. The following table illustrates what the effect on net income and earnings per share would have been if the company had applied the fair value recognition provisions of FASB Statement No. 123 to stock options granted to employees.



(In thousands except per share information)



|                                                                                       |  |                                    |       |   |                                    |   |      |                                   |  |   |                                   |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ---------------------------------- | ----- | - | ---------------------------------- | - | ---- | --------------------------------- |  | - | --------------------------------- | - |  | - | ------ | -
|                                                                                       |  | ThreeMonths EndedSeptember 30,2003 |       |   | ThreeMonths EndedSeptember 30,2002 |   |      | NineMonths EndedSeptember 30,2003 |  |   | NineMonths EndedSeptember 30,2002 |  
|                                                                                       |  | (As Restated)                      |       |   |                                    |   |      | (As Restated)                     |  |   |                                   |  
|Net Income  as reported                                                               |  | $                                  | 3,967 |   |                                    | $ | 724  |                                   |  | $ | 6,789                             |   |  | $ | 5,659  |  
|Stock based compensation under fair value method, net of tax effect using 38% tax rate |  |                                    | (182  | ) |                                    |   | (136 | )                                 |  |   | (1,339                            | ) |  |   | (1,149 | )
|                                                                                       |  |                                    |       |   |                                    |   |      |                                   |  |   |                                   |   |  |   |        |  
|Net income  pro forma                                                                 |  | $                                  | 3,785 |   |                                    | $ | 588  |                                   |  | $ | 5,450                             |   |  | $ | 4,510  |  
|                                                                                       |  |                                    |       |   |                                    |   |      |                                   |  |   |                                   |   |  |   |        |  
|Net income per share, basic  as reported                                              |  | $                                  | 0.98  |   |                                    | $ | 0.19 |                                   |  | $ | 1.68                              |   |  | $ | 1.42   |  
|                                                                                       |  |                                    |       |   |                                    |   |      |                                   |  |   |                                   |   |  |   |        |  
|Net income per share, diluted  as reported                                            |  | $                                  | 0.91  |   |                                    | $ | 0.17 |                                   |  | $ | 1.55                              |   |  | $ | 1.28   |  
|                                                                                       |  |                                    |       |   |                                    |   |      |                                   |  |   |                                   |   |  |   |        |  
|Net income per share, basic  pro forma                                                |  | $                                  | 0.94  |   |                                    | $ | 0.16 |                                   |  | $ | 1.35                              |   |  | $ | 1.13   |  
|                                                                                       |  |                                    |       |   |                                    |   |      |                                   |  |   |                                   |   |  |   |        |  
|Net income per share, diluted  pro forma                                              |  | $                                  | 0.87  |   |                                    | $ | 0.14 |                                   |  | $ | 1.25                              |   |  | $ | 1.02   |  
|                                                                                       |  |                                    |       |   |                                    |   |      |                                   |  |   |                                   |   |  |   |        |  



4.
INVENTORIES



Inventories as of September 30, 2003 and
December 31, 2002 consist of the following:



(In thousands)



|                                              |  |                   |         |   |                  |   |         |  
|--------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                              |  | September 30,2003 |         |   | December 31,2002 |  
|Work in process                               |  | $                 | 41,214  |   |                  | $ | 26,181  |  
|Finished goods                                |  |                   | 2,206   |   |                  |   | 2,347   |  
|Raw materials and supplies                    |  |                   | 8,078   |   |                  |   | 4,153   |  
|                                              |  |                   |         |   |                  |   |         |  
|Total                                         |  |                   | 51,498  |   |                  |   | 32,681  |  
|Less reserves                                 |  |                   | (2,766  | ) |                  |   | (2,545  | )
|Less milestone payments and customer deposits |  |                   | (20,834 | ) |                  |   | (13,844 | )
|                                              |  |                   |         |   |                  |   |         |  
|                                              |  | $                 | 27,898  |   |                  | $ | 16,292  |  
|                                              |  |                   |         |   |                  |   |         |  



The company receives
deposits from certain customers based on milestones in the maintenance process. The title to all inventory on which the company receives these payments is vested in the customer to the extent of the deposit balance.



Page 10



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5. GOVERNMENT CLAIMS



The company, as a U.S. Government contractor, utilizes the U.S.
Governments Request for Equitable Adjustment (REA) process as provided by the Federal Acquisition Regulation when it seeks to recover costs from the Government due to Government caused delays, errors in specifications and designs, contract
terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. The company recognizes revenue on these claims if: (1) there is a legal basis for the claim, (2) the additional costs
are caused by circumstances that were unforeseen at the contract date, (3) the costs associated with the claim are identifiable or otherwise determinable in view of the work performed, and (4) the evidence supporting the claim is objective and
verifiable. The amount of revenue recognized is managements most reliable estimate of the amount it will be able to realize based upon the claim. During the second quarter of 2003, the company recognized $1.4 million of revenue associated with
claims pertaining to two of its contracts with the U.S. Government.



6. INSURANCE RECOVERY



During the third quarter of 2003, the company settled an insurance claim related to a fire at the companys Dothan, Alabama facility in January 2002. As a result of this claim, the company received $2.8 million and recognized a gain of
$1.2 million, which is included in Cost of Sales ($0.7 million) and other income ($0.5 million) in the accompanying unaudited consolidated statements of operations.



7. 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.



Page 11



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The following table represents the net income per share calculations for the three-month and nine-month
periods ended September 30, 2003 and 2002:



(In thousands,
except income per share)



|                                |  |                                    |       |                                    |   |                                   |  |                                   |       |  |   |      
|------------------------------- |  | ---------------------------------- | ----- | ---------------------------------- | - | --------------------------------- |  | --------------------------------- | ----- |  | - | -----
|                                |  | ThreeMonths EndedSeptember 30,2003 |       | ThreeMonths EndedSeptember 30,2002 |   | NineMonths EndedSeptember 30,2003 |  | NineMonths EndedSeptember 30,2002
|                                |  | (As Restated)                      |       |                                    |   | (As Restated)                     |  |                                  
|Net income                      |  | $                                  | 3,967 |                                    | $ | 724                               |  | $                                 | 6,789 |  | $ | 5,659
|Weighted average shares         |  |                                    | 4,043 |                                    |   | 3,778                             |  |                                   | 4,041 |  |   | 3,976
|Basic net income per share      |  | $                                  | 0.98  |                                    | $ | 0.19                              |  | $                                 | 1.68  |  | $ | 1.42 
|Dilutive securities: options    |  |                                    | 325   |                                    |   | 427                               |  |                                   | 335   |  |   | 446  
|Diluted weighted average shares |  |                                    | 4,368 |                                    |   | 4,205                             |  |                                   | 4,376 |  |   | 4,422
|Diluted net income per share    |  | $                                  | 0.91  |                                    | $ | 0.17                              |  | $                                 | 1.55  |  | $ | 1.28 



Options to purchase
approximately 217,000 and 0 shares of common stock at September 30, 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.



8. DEBT



Debt as of September 30, 2003 and December 31, 2002 consisted of the
following:



(In thousands)



|                                                                                                                   |  |                   |        |   |                  |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                                   |  | September 30,2003 |        |   | December 31,2002 |  
|Revolving credit facility; interest at LIBOR plus 2.75% (3.89% at September 30, 2003)                              |  | $                 | 14,838 |   |                  | $ | 10,873 |  
|Bank Term Loan; interest at LIBOR plus 3.00% (4.14% at September 30, 2003)                                         |  |                   | 4,250  |   |                  |   | 5,000  |  
|Treasury Stock Term Loan; Interest at LIBOR plus 3.00% (4.14% at September 30, 2003)                               |  |                   |        |   |                  |   |        |  
|Airport Authority Term Loan; interest at BMA plus 0.36% (1.33% at September 30, 2003)                              |  |                   | 2,500  |   |                  |   | 2,105  |  
|Capital Lease Obligations; interest from 9.07% to 10.00%, collateralized by security interest in certain equipment |  |                   | 120    |   |                  |   | 206    |  
|                                                                                                                   |  |                   |        |   |                  |   |        |  
|Total long-term debt                                                                                               |  |                   | 21,708 |   |                  |   | 18,184 |  
|Less portion reflected as current                                                                                  |  |                   | (1,275 | ) |                  |   | (1,103 | )
|                                                                                                                   |  |                   |        |   |                  |   |        |  
|Long term-debt, net of current portion                                                                             |  | $                 | 20,433 |   |                  | $ | 17,081 |  
|                                                                                                                   |  |                   |        |   |                  |   |        |  



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



Page 12



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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 Treasury Stock Term Loan began on May 22, 2003 and has a term of 55 months. 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 $14.8 million outstanding under the revolving credit facility at September 30, 2003. Remaining borrowing capacity available under the facility at September 30, 2003, based upon the calculation that defines the borrowing base, totaled
$5.2 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 September 30, 2003 was $4.3 million and is being repaid in 60 monthly installments of $83,333 plus
interest that commenced on January 31, 2003. The Treasury Stock Term Loan did not have an outstanding balance at September 30, 2003. The loan will be repaid, if drawn, in equal monthly installments over 43 months commencing on May 22, 2004. The
amount outstanding under the Airport Authority Term Loan at September 30, 2003 was $2.5 million and will be repaid over 14 annual installments of approximately $180,000 commencing on September 30, 2004.



As of September 30, 2003, principal maturities of debt were as follows:



(In thousands)



|           |  |   |       
|---------- |  | - | ------
|Current    |  | $ | 1,275 
|1-3 years  |  |   | 17,223
|3-5 years  |  |   | 1,610 
|Thereafter |  |   | 1,600 
|           |  |   |       
|           |  | $ | 21,708
|           |  |   |       



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 that limit or prohibit the company from
incurring additional



Page 13



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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 that 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.



9. STOCKHOLDERS EQUITY



Holders of Stock Options under the companys Non-Qualified Stock Option Plan exercised options for 5,663 shares of the companys common stock
during the three months ended September 30, 2003 and options for 18,430 shares during the same period of 2002. The company recorded both the exercise price and a tax benefit to Additional Paid-In Capital, totaling approximately $90 thousand during
the third quarter of 2003 and $300 thousand in 2002. During the nine months ended September 30, 2003, holders of Stock Options under the companys Non-Qualified Stock Option Plan exercised options for 22,375 shares of the companys common
stock, adding with its associated tax benefit, approximately $360 thousand to Additional Paid-In Capital. During the same period ended September 30, 2002 holders of Stock Options exercised options for 85,573 shares of the companys common
stock, adding with its associated tax benefit, approximately $1.1 million to Additional Paid-In Capital.



10. 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 approximately 70% and
56% of the companys total revenues for the nine-month periods ended September 30, 2003 and 2002, respectively. The companys two largest programs generated approximately 83% and 80% of its revenues during the nine-month periods ended



Page 14



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September 30, 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.



Litigation



Breach of Contract Lawsuits



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 District Court released the case to
alternative dispute resolution until the company requested reinstatement of the case September 13, 2001. Reinstatement was denied, and the company filed an appeal with the 11thCircuit Court of Appeals for determination on certain procedural issues October 31, 2001. The parties have subsequently entered into arbitration and discovery
is in its initial stages. Management believes that the results of this claim will not have a material impact on future results of operations, financial condition or liquidity of the company.



Employment Lawsuits



In December 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. 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. Nine plaintiffs elected to settle with the company prior to
the trial. On December 13, 2002 the Court granted the company Summary Judgment in the EEOC case. That judgment has now been appealed to the 11thCircuit Court of Appeals and all briefs filed. The company has taken effective remedial and corrective action, acted promptly in respect to any specific complaint by an employee, and will vigorously
defend this case. Management believes that the results of this claim will not have a material impact on future results of operations, financial condition or liquidity of the company.



Various claims alleging employment discrimination, including race, sex, age and disability, have been made against the
company and its subsidiaries by current and former



Page 15



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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 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 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 complaint 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 been completed. The costs of the Plan are expected to be approximately $515,000, of which the company has incurred approximately $265,000 as of September 30, 2003. The company has recorded a liability related to the Plan for the balance of
approximately $250,000, which is included in accrued liabilities  other on the consolidated balance sheets. Management believes that the results of the Plan 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 at the federal, state and local levels. These requirements apply especially to the stripping, cleaning and painting of aircraft.



11. SEGMENT INFORMATION



The company has three reportable segments: Government Services Segment (GSS),



Page 16



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Commercial Services Segment (CSS), and Manufacturing and Components Segment
(MCS). The GSS, located in Birmingham, Alabama, provides aircraft maintenance and modification services for government and military customers. The CSS, 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 MCS, 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/A. The company evaluates performance based on total (external and inter-segment) 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 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 CSS and MCS segments may generate revenues from governmental entities and the GSS segment may generate revenues from commercial entities.



Page 17



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The following table presents information about segment profit or loss for the three months ended
September 30, 2003 and 2002:



(In thousands)



|                                                    |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|--------------------------------------------------- |  | --- | ------ | --- | - | ------ | --- |  | - | ------------ | - |  | - | ------- | -
|Three Months Ended September 30, 2003 (As Restated) |  | GSS |        | CSS |   |        | MCS |  |   | Consolidated |  
|Revenues from external domestic customers           |  | $   | 34,138 |     | $ | 7,757  |     |  | $ | 1,621        |   |  | $ | 43,516  |  
|Revenues from external foreign customers            |  |     |        |     |   | 473    |     |  |   | 106          |   |  |   | 579     |  
|Inter-company revenues                              |  |     | 6      |     |   | 563    |     |  |   | 140          |   |  |   | 709     |  
|                                                    |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Total segment revenues                              |  |     | 34,144 |     |   | 8,793  |     |  |   | 1,867        |   |  |   | 44,804  |  
|Elimination                                         |  |     |        |     |   |        |     |  |   |              |   |  |   | (709    | )
|                                                    |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Total Revenue                                       |  |     |        |     |   |        |     |  |   |              |   |  | $ | 44,095  |  
|                                                    |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Gross profit                                        |  |     | 14,221 |     |   | (1,292 | )   |  |   | (272         | ) |  |   | 12,657  |  
|Segment operating income (loss)                     |  |     | 8,534  |     |   | (1,865 | )   |  |   | (575         | ) |  |   | 6,094   |  
|Interest expense                                    |  |     |        |     |   |        |     |  |   |              |   |  |   | 224     |  
|Insurance claim                                     |  |     |        |     |   |        |     |  |   |              |   |  |   | (527    | )
|Income taxes                                        |  |     |        |     |   |        |     |  |   |              |   |  |   | 2,430   |  
|                                                    |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Net income                                          |  |     |        |     |   |        |     |  |   |              |   |  | $ | 3,967   |  
|                                                    |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Assets                                              |  | $   | 70,114 |     | $ | 30,004 |     |  | $ | 5,541        |   |  | $ | 105,659 |  
|Depreciation/amortization                           |  |     | 656    |     |   | 286    |     |  |   | 57           |   |  |   | 999     |  
|Capital Additions                                   |  |     | 292    |     |   | 158    |     |  |   | 11           |   |  |   | 461     |  



|                                          |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|----------------------------------------- |  | --- | ------ | --- | - | ------ | --- |  | - | ------------ | - |  | - | ------ | -
|Three Months Ended September 30, 2002     |  | GSS |        | CSS |   |        | MCS |  |   | Consolidated |  
|Revenues from external domestic customers |  | $   | 19,355 |     | $ | 9,302  |     |  | $ | 2,904        |   |  | $ | 31,561 |  
|Revenues from external foreign customers  |  |     |        |     |   | 3,756  |     |  |   | 83           |   |  |   | 3,839  |  
|Inter-company revenues                    |  |     | 9      |     |   |        |     |  |   | 28           |   |  |   | 37     |  
|                                          |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|Total segment revenues                    |  |     | 19,364 |     |   | 13,058 |     |  |   | 3,015        |   |  |   | 35,437 |  
|Elimination                               |  |     |        |     |   |        |     |  |   |              |   |  |   | (37    | )
|                                          |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|Total Revenue                             |  |     |        |     |   |        |     |  |   |              |   |  | $ | 35,400 |  
|                                          |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|Gross profit                              |  |     | 5,690  |     |   | 262    |     |  |   | 351          |   |  |   | 6,303  |  
|Segment operating income (loss)           |  |     | 2,606  |     |   | (1,058 | )   |  |   | (55          | ) |  |   | 1,493  |  
|Interest expense                          |  |     |        |     |   |        |     |  |   |              |   |  |   | 326    |  
|Income taxes                              |  |     |        |     |   |        |     |  |   |              |   |  |   | 443    |  
|                                          |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|Net income                                |  |     |        |     |   |        |     |  |   |              |   |  | $ | 724    |  
|                                          |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|Assets                                    |  | $   | 54,308 |     | $ | 25,548 |     |  | $ | 7,484        |   |  | $ | 87,340 |  
|Depreciation/amortization                 |  |     | 464    |     |   | 217    |     |  |   | 75           |   |  |   | 756    |  
|Capital Additions                         |  |     | 389    |     |   | 834    |     |  |   |              |   |  |   | 1,223  |  



Page 18



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The following table presents information about segment profit or loss for the nine months ended September 30, 2003 and
2002:



(In thousands)



|                                                   |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|-------------------------------------------------- |  | --- | ------ | --- | - | ------ | --- |  | - | ------------ | - |  | - | ------- | -
|Nine Months Ended September 30, 2003 (As Restated) |  | GSS |        | CSS |   |        | MCS |  |   | Consolidated |  
|Revenues from external domestic customers          |  | $   | 90,404 |     | $ | 28,401 |     |  | $ | 4,945        |   |  | $ | 123,750 |  
|Revenues from external foreign customers           |  |     |        |     |   | 2,960  |     |  |   | 307          |   |  |   | 3,267   |  
|Inter-company revenues                             |  |     | 107    |     |   | 1,155  |     |  |   | 780          |   |  |   | 2,042   |  
|                                                   |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Total segment revenues                             |  |     | 90,511 |     |   | 32,516 |     |  |   | 6,032        |   |  |   | 129,059 |  
|Elimination                                        |  |     |        |     |   |        |     |  |   |              |   |  |   | (2,042  | )
|                                                   |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Total Revenue                                      |  |     |        |     |   |        |     |  |   |              |   |  | $ | 127,017 |  
|                                                   |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Gross profit                                       |  |     | 34,372 |     |   | (2,888 | )   |  |   | (1,202       | ) |  |   | 30,282  |  
|Segment operating income (loss)                    |  |     | 19,931 |     |   | (6,848 | )   |  |   | (1,990       | ) |  |   | 11,093  |  
|Interest expense                                   |  |     |        |     |   |        |     |  |   |              |   |  |   | 673     |  
|Insurance claim                                    |  |     |        |     |   |        |     |  |   |              |   |  |   | (527    | )
|Income taxes                                       |  |     |        |     |   |        |     |  |   |              |   |  |   | 4,158   |  
|                                                   |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Net income                                         |  |     |        |     |   |        |     |  |   |              |   |  | $ | 6,789   |  
|                                                   |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Assets                                             |  | $   | 70,114 |     | $ | 30,004 |     |  | $ | 5,541        |   |  | $ | 105,659 |  
|Depreciation/amortization                          |  |     | 1,862  |     |   | 882    |     |  |   | 168          |   |  |   | 2,912   |  
|Capital Additions                                  |  |     | 1,935  |     |   | 2,347  |     |  |   | 62           |   |  |   | 4,344   |  



|                                          |  |     |        |     |   |        |     |  |              |       |  |   |         |  
|----------------------------------------- |  | --- | ------ | --- | - | ------ | --- |  | ------------ | ----- |  | - | ------- | -
|Nine Months Ended September 30, 2002      |  | GSS |        | CSS |   |        | MCS |  | Consolidated |      
|Revenues from external domestic customers |  | $   | 67,044 |     | $ | 32,663 |     |  | $            | 9,207 |  | $ | 108,914 |  
|Revenues from external foreign customers  |  |     |        |     |   | 4,057  |     |  |              | 396   |  |   | 4,453   |  
|Inter-company revenues                    |  |     | 10     |     |   |        |     |  |              | 104   |  |   | 114     |  
|                                          |  |     |        |     |   |        |     |  |              |       |  |   |         |  
|Total segment revenues                    |  |     | 67,054 |     |   | 36,720 |     |  |              | 9,707 |  |   | 113,481 |  
|Elimination                               |  |     |        |     |   |        |     |  |              |       |  |   | (114    | )
|                                          |  |     |        |     |   |        |     |  |              |       |  |   |         |  
|Total Revenue                             |  |     |        |     |   |        |     |  |              |       |  | $ | 113,367 |  
|                                          |  |     |        |     |   |        |     |  |              |       |  |   |         |  
|Gross profit                              |  |     | 20,559 |     |   | 1,793  |     |  |              | 1,539 |  |   | 23,891  |  
|Segment operating income (loss)           |  |     | 11,057 |     |   | (2,980 | )   |  |              | 431   |  |   | 8,508   |  
|Interest expense                          |  |     |        |     |   |        |     |  |              |       |  |   | 861     |  
|Litigation, net                           |  |     |        |     |   |        |     |  |              |       |  |   | (1,480  | )
|Income taxes                              |  |     |        |     |   |        |     |  |              |       |  |   | 3,468   |  
|                                          |  |     |        |     |   |        |     |  |              |       |  |   |         |  
|Net income                                |  |     |        |     |   |        |     |  |              |       |  | $ | 5,659   |  
|                                          |  |     |        |     |   |        |     |  |              |       |  |   |         |  
|Assets                                    |  | $   | 54,308 |     | $ | 25,548 |     |  | $            | 7,484 |  | $ | 87,340  |  
|Depreciation/amortization                 |  |     | 1,612  |     |   | 611    |     |  |              | 244   |  |   | 2,467   |  
|Capital Additions                         |  |     | 2,055  |     |   | 3,482  |     |  |              | 5     |  |   | 5,542   |  



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Due to the long-term nature of much of the companys business, the depreciation and 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.



The following tables reconcile the effect of
this capitalization of costs for the three and nine months ended September 30, 2003 and 2002:



(In thousands)



|                                                                                                          |  |      |     |      |   |     |  
|--------------------------------------------------------------------------------------------------------- |  | ---- | --- | ---- | - | --- | -
|Three Months Ended September 30                                                                           |  | 2003 |     | 2002 |  
|Change in Accumulated Depreciation and Amortization Reflected on the Consolidated Statement of Cash Flows |  | $    | 973 |      | $ | 832 |  
|Net Depreciation and Amortization (Capitalized Into) or Removed from Work-in-Process                      |  |      | 26  |      |   | (76 | )
|                                                                                                          |  |      |     |      |   |     |  
|Depreciation and Amortization Recorded in Cost of Goods Sold Upon Delivery of Aircraft                    |  | $    | 999 |      | $ | 756 |  
|                                                                                                          |  |      |     |      |   |     |  



(In thousands)



|                                                                                                          |  |      |       |      |   |       |  
|--------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|Nine Months Ended September 30                                                                            |  | 2003 |       | 2002 |  
|Change in Accumulated Depreciation and Amortization Reflected on the Consolidated Statement of Cash Flows |  | $    | 2,761 |      | $ | 3,143 |  
|Net Depreciation and Amortization (Capitalized Into) or Removed from Work-in-Process                      |  |      | 151   |      |   | (676  | )
|                                                                                                          |  |      |       |      |   |       |  
|Depreciation and Amortization Recorded in Cost of Goods Sold Upon Delivery of Aircraft                    |  | $    | 2,912 |      | $ | 2,467 |  
|                                                                                                          |  |      |       |      |   |       |  



12.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



In November
2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Others, which is
effective for guarantees issued or modified after December 31, 2002. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a
company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The
provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantors obligations do not apply to product warranties or to guarantees accounted for as derivatives. The adoption of FIN 45 in the first
quarter 2003 did not have a significant impact on the companys consolidated results of operations or financial position.



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In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin 51, Consolidation of Financial Statements, which addresses consolidation of variable interest entities (VIE) by business enterprises. FIN 46 requires
immediate consolidation of VIEs created after January 31, 2003, and the compliance of older entities in the first fiscal year or interim period ending after December 15, 2003. The company is still evaluating the impact, if any, that adoption of FIN
46 may have on its consolidated results of operations or financial position.



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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
September 30, 2003 to reflect adjustments related to the amounts and timing of revenue recognition, contract loss accruals, and other adjustments as described in 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 September 30, 2003



Versus three months ended September 30, 2002



The table below presents major highlights from the quarters ended September 30, 2003 and 2002.



(In millions)



|                    |  |      |      |      |   |        |  |       |  
|------------------- |  | ---- | ---- | ---- | - | ------ |  | ----- | -
|                    |  | 2003 |      | 2002 |   | Change | 
|Revenue             |  | $    | 44.1 |      | $ | 35.4   |  | 24.6  | %
|Gross Profit        |  |      | 12.7 |      |   | 6.3    |  | 101.6 | %
|Operating income    |  |      | 6.1  |      |   | 1.5    |  | 306.7 | %
|Income before taxes |  |      | 6.4  |      |   | 1.2    |  | 433.3 | %
|Net income          |  |      | 4.0  |      |   | 0.7    |  | 471.4 | %
|EBITDA              |  |      | 7.6  |      |   | 2.2    |  | 245.5 | %



EBITDA for the quarters ended
September 30, 2003 and 2002 was calculated using the following approach:



(In millions)



|                            |  |      |     |      |   |    
|--------------------------- |  | ---- | --- | ---- | - | ---
|                            |  | 2003 |     | 2002
|Net Income                  |  | $    | 4.0 |      | $ | 0.7
|Interest                    |  |      | 0.2 |      |   | 0.3
|Taxes                       |  |      | 2.4 |      |   | 0.4
|Depreciation & Amortization |  |      | 1.0 |      |   | 0.8
|                            |  |      |     |      |   |    
|EBITDA                      |  | $    | 7.6 |      | $ | 2.2
|                            |  |      |     |      |   |    



Page 22



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The company presents Earnings Before Interest Taxes Depreciation and Amortization, more commonly referred to as EBITDA,
because its management uses the measure to evaluate the companys performance and to allocate resources. In addition, the company believes EBITDA is an important gauge used by 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 and 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 and 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 is not a measure
of financial performance under generally accepted accounting principles and should not be considered as a substitute for or superior to other measures of financial performance reported in accordance with GAAP. EBITDA as presented herein may not be
comparable to similarly titled measures reported by other companies.



The table
below presents Revenue by Operating Segment from the three months ended September 30, 2003 and 2002.



(In millions)



|             |  |      |   |  |      |  |        |   |  |          |   
|------------ |  | ---- | - |  | ---- |  | ------ | - |  | -------- | --
|             |  | 2003 |   |  | 2002 |  | Change |   |  | % Change |   
|GSS          |  | 34.1 |   |  | 19.4 |  | 14.7   |   |  | 75.8     | % 
|CSS          |  | 8.8  |   |  | 13.0 |  | (4.2   | ) |  | (32.3    | )%
|MCS          |  | 1.9  |   |  | 3.0  |  | (1.1   | ) |  | (36.7    | )%
|Eliminations |  | (0.7 | ) |  |     |  |        |   |  |          |   
|Total        |  | 44.1 |   |  | 35.4 |  | 8.7    |   |  | 24.6     | % 



Without regard to operating segments,
the companys mix of business between government and commercial customers was 21.7% commercial and 78.3% government in 2003 and 39.3% commercial and 60.7% government in 2002.



The $14.7 million increase in the sales of the GSS was due primarily to increased revenue under the KC-135 PDM program of $15.5 million and
an increase in C-130 related work of $0.4 million, offset by a decrease of $1.2 million in other programs. During the three months ended September 30, 2003 the company delivered eight PDM aircraft whereas during the same period in 2002 the company
delivered six PDM aircraft. Year-over-year the company has realized an increase in sales per PDM aircraft due to an increase in the amount of work performed on each aircraft delivered. The company completed work on two C-130 drop-in aircraft during
the third quarter of 2003 with no corresponding sales on C-130s during the same period in the prior year. The overall increase of PDM program related sales and C-130 sales was offset by the completion of the J-Stars program that had sales of $1.2
million during the three months ended September 30, 2002 and no sales during the same period of 2003. The KC-135 PDM programs represented 99.0% of the revenue of the GSS during the third quarter of 2003 and 93.4% during the same period of 2002.



Page 23



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The decrease in the CSS revenue of $4.2 million was primarily due to a decrease of $5.6 million of Commercial
Maintenance, Repair, and Overhaul (MRO) sales on DC-9 and Boeing 737 aircraft offset by an increase in Conversion revenues of $1.4 million.



Revenue in the MCS decreased $1.1 million for the three months ended September 30, 2003 versus the same period in 2002. Sales at the Space Vector subsidiary decreased
$1.1 million primarily as a result of concluding work on a targets program. Revenue in the Pemco Engineers subsidiary remained relatively constant between the two periods.



Cost of sales increased during the third quarter from $29.1 million in 2002 to $31.4 million in 2003, primarily as a result of the increase
in sales between the two periods. The company delivered eight aircraft under the KC-135 contract during the third quarter of 2003 compared with six delivered during the same period of 2002. Overall, the gross profit percentage of the company
increased from 17.8% in the third quarter of 2002 to 28.7% in the third quarter of 2003. The percentage increase is due to several factors. Included in Cost of Sales for the quarter is a $0.7 million insurance recovery related to a fire in the
companys Dothan, Alabama facility in January 2002. In addition, the KC-135 aircraft delivered during the third quarter of 2003 were on average more profitable than those delivered during 2002 as a result of an increase in non-routine work and
a change in the KC-135 model mix.



Selling, general, and administrative
(SG&A) expenses increased $1.8 million between the third quarter of 2002 ($4.8 million) and the third quarter of 2003 ($6.6 million). Part of the increase in SG&A expenses is attributable to the increase in revenue in the GSS
while the remaining amounts are due to increased expenditures at the MCS for independent research and development and bid and proposal activities and increased costs for the companys employee suggestion program.



Interest expense decreased by $0.1 million, from $0.3 million during the third quarter of
2002 to $0.2 million during the same period of 2003. The effective average interest rate on the companys revolving credit facility was approximately 5.25% in 2002 and 3.87% in 2003. The impact of the lower effective interest rate during the
quarter was the reason for the reduction.



In the three-month periods ended
September 30, 2003 and 2002, the company recorded income tax provisions on a normalized basis at an effective rate of 38%.



Page 24



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Nine months ended September 30, 2003

Versus nine months ended September 30, 2002



The table below presents major highlights from the nine months ended September 30, 2003 and 2002.



(In millions)



|                    |  |      |       |      |   |        |  |      |  
|------------------- |  | ---- | ----- | ---- | - | ------ |  | ---- | -
|                    |  | 2003 |       | 2002 |   | Change | 
|Revenue             |  | $    | 127.0 |      | $ | 113.4  |  | 12.0 | %
|Gross Profit        |  |      | 30.3  |      |   | 23.9   |  | 26.8 | %
|Operating income    |  |      | 11.1  |      |   | 8.5    |  | 30.6 | %
|Income before taxes |  |      | 10.9  |      |   | 9.1    |  | 19.8 | %
|Net income          |  |      | 6.8   |      |   | 5.7    |  | 19.3 | %
|EBITDA              |  |      | 14.6  |      |   | 12.5   |  | 16.8 | %



EBITDA for the nine months ended
September 30, 2003 and 2002 was calculated using the following approach:



(In millions)



|                            |  |      |      |      |   |     
|--------------------------- |  | ---- | ---- | ---- | - | ----
|                            |  | 2003 |      | 2002
|Net Income                  |  | $    | 6.8  |      | $ | 5.7 
|Interest                    |  |      | 0.7  |      |   | 0.9 
|Taxes                       |  |      | 4.2  |      |   | 3.5 
|Depreciation & Amortization |  |      | 2.9  |      |   | 2.4 
|                            |  |      |      |      |   |     
|EBITDA                      |  | $    | 14.6 |      | $ | 12.5
|                            |  |      |      |      |   |     



The table below presents Revenue by
Operating Segment from the nine months ended September 30, 2003 and 2002.



(In millions)



|             |  |       |   |  |       |   |  |        |   |  |          |   
|------------ |  | ----- | - |  | ----- | - |  | ------ | - |  | -------- | --
|             |  | 2003  |   |  | 2002  |   |  | Change |   |  | % Change |   
|GSS          |  | 90.5  |   |  | 67.1  |   |  | 23.4   |   |  | 34.9     | % 
|CSS          |  | 32.5  |   |  | 36.7  |   |  | (4.2   | ) |  | (11.4    | )%
|MCS          |  | 6.0   |   |  | 9.7   |   |  | (3.7   | ) |  | (38.1    | )%
|Eliminations |  | (2.0  | ) |  | (0.1  | ) |  |        |   |  |          |   
|Total        |  | 127.0 |   |  | 113.4 |   |  | 15.5   |   |  | 13.7     | % 



Without regard to operating segments,
the companys mix of business between government and commercial customers was 27.0% commercial and 73.0% government in 2003 and 35.4% commercial and 64.6% government in 2002.



The $23.4 million increase in the sales of the GSS was due primarily to increased revenue under the KC-135 PDM program of $25.7 million and
an increase in C-130 related work of $0.8 million, offset by a decrease of $3.1 million in other programs. During the nine months ended September 30, 2003 the company delivered 23 PDM aircraft whereas during the same period in 2002 the



Page 25



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company delivered 22 PDM aircraft. Year-over-year the company has realized an increase in sales per PDM aircraft due to
an increase in the amount of work performed on each aircraft delivered and the recognition of an REA in the amount of $0.7 million related to work on the KC-135 program. The company completed work on four C-130 drop-in aircraft during the nine
months ended September 30, 2003 with no corresponding sales on C-130s during the same period in the prior year. The overall increase of PDM program related sales and C-130 sales was offset by the completion of the J-Stars program that had sales of
$3.1 million during the nine months ended September 30, 2002 and no sales during the same period of 2003. The KC-135 PDM programs represented 99.0% of the revenue of the GSS during the first nine months of 2003 and 95.0% during the same period of
2002.



The decrease in the CSS revenue of $4.2 million was primarily due to a
decrease of $8.5 million of Commercial MRO sales offset by increases in Conversion revenues of $3.5 million, the recognition of an REA on the H-3 Helicopter program in the amount of $0.7 million and an increase in the sales of parts of $0.1 million.



Revenue in the MCS decreased $3.7 million for the nine months ended September
30, 2003 versus the same period in 2002. Sales at the Space Vector division decreased $3.2 million primarily as a result of concluding work on a targets program. Revenue in the Pemco Engineers division declined $0.5 million between the two periods.
The nine months ended September 30, 2002 also included a sale of $0.1 million of consignment inventory held from a former division of the MCS.



Cost of sales increased during the nine months ended September 30, from $89.5 million in 2002 to $96.7 million in 2003, primarily as a result of the increase in sales
between the two periods. Overall, the gross profit percentage of the company increased from 21.1% during the nine months ended September 30, 2002 to 23.8% for the same period of 2003. The percentage increase is attributable to several factors. The
KC-135 aircraft delivered during the 2003 were on average more profitable than those delivered during 2002 as a result of an increase in non-routine work and changes in the KC-135 model mix. In addition, included in Cost of Sales for 2003 is a $0.7
million insurance recovery related to a fire in the companys Dothan, Alabama facility in January 2002.



SG&A expenses increased $3.8 million between the nine months ended September 30, 2002 ($15.4 million) and the same period of 2003 ($19.2 million). Part of the increase in SG&A expenses is attributable to the
increase in revenue in the GSS while the remaining amounts are due to increased expenditures at the MCS for independent research and development, bid and proposal activities, and the addition of an executive to oversee activities of the MCS.



Interest expense decreased from $0.9 million during the nine months ended
September 30, 2002 to $0.7 million during the same period of 2003. The effective average interest rate on the companys revolving credit facility was approximately 5.25% in 2002 and 3.98% in 2003. The impact of the lower effective interest rate
was partially offset by an increase in the companys average debt outstanding during the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002.



Page 26



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During the second quarter of 2002 the company agreed to settlements on several outstanding legal actions. These
settlements are reflected on the Consolidated Statements of Operations as Litigation, net and are composed of the following cases.



Litigation, net

(In thousands)



|                                     |  |        |       |  
|------------------------------------ |  | ------ | ----- | -
|Case                                 |  | Amount |      
|Net Award on Product Liability       |  | $      | 1,960 |  
|Settlement on Replacement Workers    |  |        | (388  | )
|Settlement on Alleged Discrimination |  |        | (92   | )
|                                     |  |        |       |  
|Litigation, net                      |  | $      | 1,480 |  
|                                     |  |        |       |  



In the nine-month periods ended
September 30, 2003 and 2002, the company recorded income tax provisions on a normalized basis at an effective rate of 38%.



Liquidity and Capital Resources



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



(In thousands except long term debt to equity)



|                                             |  |                   |        |                  |   |        |  |   |       |  
|-------------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------ |  | - | ----- | -
|                                             |  | September 30,2003 |        | December 31,2002 |   | Change | 
|Cash                                         |  | $                 | 1,813  |                  | $ | 2,795  |  | $ | (982  | )
|Working Capital                              |  |                   | 26,997 |                  |   | 23,953 |  |   | 3,044 |  
|Revolving credit facility                    |  |                   | 14,838 |                  |   | 10,873 |  |   | 3,965 |  
|Long term debt and capital lease obligations |  |                   | 5,595  |                  |   | 6,208  |  |   | (613  | )
|Shareholders equity                         |  |                   | 18,429 |                  |   | 11,536 |  |   | 6,893 |  
|Long term debt to equity                     |  |                   | 1.11   |                  |   | 1.48   |  |   | (0.37 | )



Operating activities used $0.4 million
of cash during the nine months ended September 30, 2003. Operating activities provided $10.1 million of cash during the same period of 2002. The company received proceeds from the exercise of company stock options of $0.3 million and $1.1 million
during the nine months ended September 30, 2003 and 2002, respectively. Cash of $4.1 million and $5.5 million was used during the nine months ended September 30, 2003 and 2002, respectively, for capital expenditures, and $0.3 million and $6.7
million, respectively, was used for the repurchase of company common stock.



At
September 30, 2003 the company had additional borrowing capacity of $5.2 million under its revolving line of credit.



The increase in inventories between December 31, 2002 and September 30, 2003, reflected on the



Page 27



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companys Consolidated Statement of Cash Flows, is due primarily to work in process at CSS related to aircraft cargo
conversion programs. The company anticipates the increase in work in process to be short-term, and expects a reduction in the fourth quarter.



On May 22, 2003 the company executed an amendment to its credit agreement to create a $5.0 million line of credit for the repurchase of the companys common stock.
The credit line may be used to make purchases of the companys common stock from any person who is not or has never been an affiliate of the company. The credit line can be drawn in increments of $0.5 million and carries an interest rate of
LIBOR plus 3.0%. The line is to be repaid over 43 months beginning on May 22, 2004. As of the date of this report, the company has not drawn on this new credit facility.



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, the Plan was under-funded by approximately $37.5 million at December 31, 2002. Under ERISA rules, the company has paid the minimum required contribution in 2003. As of the date of this report,
the company has made contributions of $9.3 million during 2003. The company does not expect to make any further contributions to the Plan during 2003.



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



Funding for the advancement of the companys strategic goals, including possible investments in targeted business areas and
acquisitions, is expected to continue. 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.



The aircraft services industry has
been in a consolidation phase generally. As a consequence, the company receives and sometimes initiates inquiries with respect to corporate combinations. The company has not completed any such combinations for a number of years, and there is no
assurance that it will be party to such transactions in the future.



Page 28



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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 four 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 September 30, 2003
were as follows:



(In thousands)

|                                        |  |            |        |                      |   |       |  |   |       
|--------------------------------------- |  | ---------- | ------ | -------------------- | - | ----- |  | - | ------
|Year Ending                             |  | Facilities |        | VehiclesAndEquipment |   | Total
|2003                                    |  | $          | 2,107  |                      | $ | 275   |  | $ | 2,382 
|2004                                    |  |            | 1,734  |                      |   | 249   |  |   | 1,983 
|2005                                    |  |            | 1,395  |                      |   | 195   |  |   | 1,590 
|2006                                    |  |            | 1,275  |                      |   | 91    |  |   | 1,366 
|2007                                    |  |            | 1,275  |                      |   | 8     |  |   | 1,283 
|Thereafter                              |  |            | 17,106 |                      |   |       |  |   | 17,106
|                                        |  |            |        |                      |   |       |  |   |       
|Total minimum future rental commitments |  | $          | 24,892 |                      | $ | 818   |  | $ | 25,710
|                                        |  |            |        |                      |   |       |  |   |       



REPAYMENT OF LONG TERM DEBT



The schedule below sets forth maturities of long-term debt as of
September 30, 2003:



(In thousands)



|           |  |   |       
|---------- |  | - | ------
|Current    |  | $ | 1,275 
|1-3 years  |  |   | 17,223
|3-5 years  |  |   | 1,610 
|Thereafter |  |   | 1,600 
|           |  |   |       
|           |  | $ | 21,708
|           |  |   |       



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



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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 companys long-term debt is collateralized by substantially all of the assets of the company and has 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 September 30, 2003 and 2002, 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 $0.0 million and $0.1 million at September 30, 2003 and December 31, 2002, 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 $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
President and Chief Executive Officers termination of employment with the company. Any change in the related party receivable relates to interest accumulated during the period.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The companys significant accounting policies are disclosed in Note 1 of Notes to the Consolidated Financial Statements located in the Companys 2002 10-K/A.
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.



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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. For additional information regarding accounting policies the company has established for recognizing revenue, see Revenue Recognition in Note 1 to the Consolidated Financial Statements.



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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. 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.



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 cost (income) and other postretirement benefit costs 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



As further discussed in Note 9 to the Consolidated Financial Statements, 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. A settlement or an adverse resolution of one or more of these matters, however, 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.



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BACKLOG



The following table presents the companys backlog at September 30, 2003 and 2002:



(In thousands)



|                |  |      |         |      |   |        
|--------------- |  | ---- | ------- | ---- | - | -------
|Customer Type   |  | 2003 |         | 2002
|U.S. Government |  | $    | 87,490  |      | $ | 103,238
|Commercial      |  |      | 14,010  |      |   | 10,905 
|                |  |      |         |      |   |        
|Total           |  | $    | 101,500 |      | $ | 114,143
|                |  |      |         |      |   |        



The reduction in government backlog
was primarily related to the companys GSS. The GSS decreased its backlog approximately $14 million year-over-year. The decrease in the GSS was due to a reduction in the number of aircraft in the backlog, which were 29 in 2003 versus 35 in
2002. In addition, during the third quarter of 2002, several aircraft at the GSS were in work in process due to poor weather during the last month of the quarter that delayed test flights, resulting in the sale of these aircraft during the fourth
quarter of 2002.



Total commercial backlog increased $3.1 million. The CSS
increased backlog $3.2 million due to 4 cargo conversions in work in process, while backlog at Pemco Engineers, in the MCS, decreased $0.1 million. 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 90.4% government and 9.6% commercial as of September 30, 2002 to 86.2% government
and 13.8% commercial as of September 30, 2003.



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



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companys 2002 Annual Report on Form 10-K/A 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 and two term loans as noted in Note 6 to the Consolidated Financial Statements and bears interest at LIBOR plus 2.75% and 3.00% on two of the loans, and BMA (Bond Market Association) plus 0.36%
on the remaining loan. These interest rates were 3.89%, 4.14%, and 1.33%, respectively at September 30, 2003. Had the rate of the variable rate debt increased 100 basis points, net income would have been reduced approximately $50,000 during the
quarter and $149,000 year-to-date. The actual fluctuation of interest rates is not determinable; accordingly, actual results of interest rate fluctuations could differ.



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 8 to the Consolidated Financial Statements.



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



a. Exhibits



|     |  |                                                                                                                                           |  |    |  
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | -- | -
|10.1 |  | Amendment No. 1 to Amended and Restated Employment Agreement between Pemco Aviation Group, Inc. and Ronald A. Aramini dated May 13, 2003. |  | (1 | )
|     |  |                                                                                                                                          
|10.2 |  | First Amendment to Executive Deferred Compensation Agreement between Pemco Aviation Group, Inc. and Ronald A. Aramini dated May 16, 2003. |  | (1 | )
|     |  |                                                                                                                                          
|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.                  |  | (* | )

---

|(1) | Previously filed with the companys Form 10-Q for the quarter ended September 30, 2003 on November 5, 2003.
|--- | -----------------------------------------------------------------------------------------------------------

|(*) | Filed herewith
|--- | --------------



b. Reports on Form 8-K



The company filed no reports on Form 8-K during the quarter ended September 30, 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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