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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 June 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 August 12, 2003
|Common Stock, $.0001 par value |  | 4,047,500                     



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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 six months ended June 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 August 13, 2003 original filing date of the companys Quarterly Report on Form 10-Q for the quarterly
period ended June 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 June 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)



|                                               |  |                           |         |   |                  |   |         |  
|---------------------------------------------- |  | ------------------------- | ------- | - | ---------------- | - | ------- | -
|                                               |  | June 30,2003Unaudited     |         |   | December 31,2002 |  
|                                               |  | (As Restated, See Note 1) |         |   |                  |  
|Current assets:                                |  |                           |         |   |                  |   |         |  
|Cash                                           |  | $                         | 162     |   |                  | $ | 2,795   |  
|Accounts receivable, net                       |  |                           | 35,673  |   |                  |   | 30,162  |  
|Inventories, net                               |  |                           | 23,216  |   |                  |   | 16,292  |  
|Deferred income taxes                          |  |                           | 11,447  |   |                  |   | 13,092  |  
|Prepaid expenses and other                     |  |                           | 1,501   |   |                  |   | 1,204   |  
|                                               |  |                           |         |   |                  |   |         |  
|Total current assets                           |  |                           | 71,999  |   |                  |   | 63,545  |  
|                                               |  |                           |         |   |                  |   |         |  
|Machinery, equipment and improvements at cost: |  |                           |         |   |                  |   |         |  
|Machinery and equipment                        |  |                           | 30,312  |   |                  |   | 28,193  |  
|Leasehold improvements                         |  |                           | 26,637  |   |                  |   | 22,426  |  
|Construction-in-process                        |  |                           | 1,767   |   |                  |   | 4,214   |  
|                                               |  |                           |         |   |                  |   |         |  
|                                               |  |                           | 58,716  |   |                  |   | 54,833  |  
|Less accumulated depreciation and amortization |  |                           | (31,981 | ) |                  |   | (30,193 | )
|                                               |  |                           |         |   |                  |   |         |  
|Net machinery, equipment and improvements      |  |                           | 26,735  |   |                  |   | 24,640  |  
|                                               |  |                           |         |   |                  |   |         |  
|Other non-current assets:                      |  |                           |         |   |                  |   |         |  
|Deposits and other                             |  |                           | 1,152   |   |                  |   | 933     |  
|Related party receivable                       |  |                           | 450     |   |                  |   | 425     |  
|Intangible pension asset                       |  |                           | 5,410   |   |                  |   | 5,410   |  
|Intangible assets, net                         |  |                           | 294     |   |                  |   | 315     |  
|                                               |  |                           |         |   |                  |   |         |  
|                                               |  |                           | 7,306   |   |                  |   | 7,083   |  
|                                               |  |                           |         |   |                  |   |         |  
|Total assets                                   |  | $                         | 106,040 |   |                  | $ | 95,268  |  
|                                               |  |                           |         |   |                  |   |         |  



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



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)



|                                                                                                                                                         |  |                          |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                         |  | June 30,2003Unaudited    |         |   | December 31,2002 |  
|                                                                                                                                                         |  | (As Restated,See Note 1) |         |   |                  |  
|Current liabilities:                                                                                                                                     |  |                          |         |   |                  |   |         |  
|Current portion of long-term debt                                                                                                                        |  | $                        | 1,114   |   |                  | $ | 1,103   |  
|Current portion of pension liability                                                                                                                     |  |                          | 9,259   |   |                  |   | 10,341  |  
|Accounts payable                                                                                                                                         |  |                          | 7,141   |   |                  |   | 4,258   |  
|Accrued health and dental                                                                                                                                |  |                          | 1,911   |   |                  |   | 1,243   |  
|Accrued liabilities - payroll related                                                                                                                    |  |                          | 8,561   |   |                  |   | 7,816   |  
|Accrued liabilities - other                                                                                                                              |  |                          | 4,598   |   |                  |   | 5,949   |  
|Customer deposits in excess of cost                                                                                                                      |  |                          | 12,787  |   |                  |   | 8,882   |  
|                                                                                                                                                         |  |                          |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                |  |                          | 45,371  |   |                  |   | 39,592  |  
|                                                                                                                                                         |  |                          |         |   |                  |   |         |  
|Long-term debt                                                                                                                                           |  |                          | 19,543  |   |                  |   | 17,081  |  
|Long-term pension benefit liability                                                                                                                      |  |                          | 24,701  |   |                  |   | 25,341  |  
|Other long-term liabilities                                                                                                                              |  |                          | 1,934   |   |                  |   | 1,718   |  
|                                                                                                                                                         |  |                          |         |   |                  |   |         |  
|Total liabilities                                                                                                                                        |  |                          | 91,549  |   |                  |   | 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, 4,0444,050 and 4,030,595 outstanding at June 30, 2003 and December 31, 2002,
respectively |  |                          | 1       |   |                  |   | 1       |  
|Additional paid-in capital                                                                                                                               |  |                          | 9,953   |   |                  |   | 9,684   |  
|Retained earnings                                                                                                                                        |  |                          | 31,342  |   |                  |   | 28,520  |  
|Treasury stock, at cost  354,856 and 348,899 shares at June 30, 2003 and December 31, 2002, respectively                                                |  |                          | (6,924  | ) |                  |   | (6,788  | )
|Accumulated other comprehensive loss                                                                                                                     |  |                          | (19,881 | ) |                  |   | (19,881 | )
|                                                                                                                                                         |  |                          |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                               |  |                          | 14,491  |   |                  |   | 11,536  |  
|                                                                                                                                                         |  |                          |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                               |  | $                        | 106,040 |   |                  | $ | 95,268  |  
|                                                                                                                                                         |  |                          |         |   |                  |   |         |  



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



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 EndedJune 30, 2003 |        | ThreeMonths EndedJune 30, 2002 |  
|                                              |  | (As Restated,See Note 1)       |        |                                |  
|Net sales                                     |  | $                              | 47,253 |                                | $ | 41,922 |  
|Cost of sales                                 |  |                                | 36,133 |                                |   | 32,692 |  
|                                              |  |                                |        |                                |   |        |  
|Gross profit                                  |  |                                | 11,120 |                                |   | 9,230  |  
|                                              |  |                               
|Selling, general, and administrative expenses |  |                                | 7,456  |                                |   | 5,678  |  
|                                              |  |                                |        |                                |   |        |  
|Income from operations                        |  |                                | 3,664  |                                |   | 3,552  |  
|                                              |  |                               
|Interest                                      |  |                                | 230    |                                |   | 230    |  
|Litigation, net                               |  |                                |        |                                |   | (1,480 | )
|                                              |  |                                |        |                                |   |        |  
|Income before income taxes                    |  |                                | 3,434  |                                |   | 4,802  |  
|Income tax expense                            |  |                                | 1,305  |                                |   | 1,825  |  
|                                              |  |                                |        |                                |   |        |  
|Net income                                    |  | $                              | 2,129  |                                | $ | 2,977  |  
|Net income per common share:                  |  |                                |        |                                |   |        |  
|Basic                                         |  | $                              | 0.53   |                                | $ | 0.73   |  
|Diluted                                       |  | $                              | 0.49   |                                | $ | 0.64   |  
|                                              |  |                               
|Weighted average common shares outstanding:   |  |                                |        |                                |   |        |  
|Basic                                         |  |                                | 4,043  |                                |   | 4,083  |  
|Diluted                                       |  |                                | 4,377  |                                |   | 4,626  |  



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)



|                                              |  |                               |        |                              |   |        |  
|--------------------------------------------- |  | ----------------------------- | ------ | ---------------------------- | - | ------ | -
|                                              |  | Six Months EndedJune 30, 2003 |        | SixMonths EndedJune 30, 2002 |  
|                                              |  | (As Restated,See Note 1)      |        |                              |  
|Net sales                                     |  | $                             | 82,922 |                              | $ | 77,967 |  
|Cost of sales                                 |  |                               | 65,297 |                              |   | 60,379 |  
|                                              |  |                               |        |                              |   |        |  
|Gross profit                                  |  |                               | 17,625 |                              |   | 17,588 |  
|                                              |  |                              
|Selling, general, and administrative expenses |  |                               | 12,626 |                              |   | 10,573 |  
|                                              |  |                               |        |                              |   |        |  
|Income from operations                        |  |                               | 4,999  |                              |   | 7,015  |  
|                                              |  |                              
|Interest                                      |  |                               | 449    |                              |   | 535    |  
|Litigation, net                               |  |                               |        |                              |   | (1,480 | )
|                                              |  |                               |        |                              |   |        |  
|Income before income taxes                    |  |                               | 4,550  |                              |   | 7,960  |  
|Income tax expense                            |  |                               | 1,728  |                              |   | 3,025  |  
|                                              |  |                               |        |                              |   |        |  
|Net income                                    |  | $                             | 2,822  |                              | $ | 4,935  |  
|                                              |  |                               |        |                              |   |        |  
|Net income per common share:                  |  |                               |        |                              |   |        |  
|Basic                                         |  | $                             | 0.70   |                              | $ | 1.21   |  
|Diluted                                       |  | $                             | 0.65   |                              | $ | 1.09   |  
|                                              |  |                              
|Weighted average common shares outstanding:   |  |                               |        |                              |   |        |  
|Basic                                         |  |                               | 4,040  |                              |   | 4,075  |  
|Diluted                                       |  |                               | 4,381  |                              |   | 4,531  |  



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)



|                                                                                            |  |                               |        |   |                              |   |         |  
|------------------------------------------------------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------- | -
|                                                                                            |  | Six Months EndedJune 30, 2003 |        |   | SixMonths EndedJune 30, 2002 |  
|                                                                                            |  | (As Restated, See Note 1)     |        |   |                              |  
|Cash flows from operating activities:                                                       |  |                               |        |   |                              |   |         |  
|Net income                                                                                  |  | $                             | 2,822  |   |                              | $ | 4,935   |  
|                                                                                            |  |                               |        |   |                              |   |         |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |                               |        |   |                              |   |         |  
|Depreciation and amortization                                                               |  |                               | 1,788  |   |                              |   | 2,311   |  
|Provision for deferred income taxes                                                         |  |                               | 1,728  |   |                              |   | 3,025   |  
|Funding (over) under of pension cost                                                        |  |                               | (1,722 | ) |                              |   | 746     |  
|Amortization of intangible asset                                                            |  |                               | 21     |   |                              |   | 93      |  
|Changes in assets and liabilities:                                                          |  |                               |        |   |                              |   |         |  
|Related party receivable                                                                    |  |                               | (25    | ) |                              |   | (425    | )
|Accounts receivable, net                                                                    |  |                               | (5,511 | ) |                              |   | (10,042 | )
|Inventories                                                                                 |  |                               | (6,925 | ) |                              |   | 5,683   |  
|Prepaid expenses and other                                                                  |  |                               | (298   | ) |                              |   | (909    | )
|Deposits and other                                                                          |  |                               | (219   | ) |                              |   | (600    | )
|Accounts payable and accrued liabilities                                                    |  |                               | 7,064  |   |                              |   | 6,104   |  
|                                                                                            |  |                               |        |   |                              |   |         |  
|Total adjustments                                                                           |  |                               | (4,099 | ) |                              |   | 5,986   |  
|                                                                                            |  |                               |        |   |                              |   |         |  
|Net cash (used in) provided by operating activities                                         |  |                               | (1,277 | ) |                              |   | 10,921  |  
|                                                                                            |  |                               |        |   |                              |   |         |  
|Cash flows from investing activities:                                                       |  |                               |        |   |                              |   |         |  
|Capital expenditures                                                                        |  |                               | (3,883 | ) |                              |   | (4,318  | )
|                                                                                            |  |                               |        |   |                              |   |         |  
|Net cash used in investing activities                                                       |  |                               | (3,883 | ) |                              |   | (4,318  | )
|                                                                                            |  |                               |        |   |                              |   |         |  
|Cash flows from financing activities:                                                       |  |                               |        |   |                              |   |         |  
|Proceeds from exercise of stock options                                                     |  |                               | 188    |   |                              |   | 615     |  
|Purchase of treasury stock                                                                  |  |                               | (136   | ) |                              |   | (6,691  | )
|Net change under revolving credit facility                                                  |  |                               | 2,714  |   |                              |   | (205    | )
|Borrowings under long-term debt                                                             |  |                               |        |   |                              |   | 613     |  
|Principal payments under long-term debt                                                     |  |                               | (239   | ) |                              |   | (1,141  | )
|                                                                                            |  |                               |        |   |                              |   |         |  
|Net cash provided by (used in) financing activities                                         |  |                               | 2,527  |   |                              |   | (6,809  | )
|                                                                                            |  |                               |        |   |                              |   |         |  
|Net decrease in cash                                                                        |  |                               | (2,633 | ) |                              |   | (206    | )
|                                                                                            |  |                               |        |   |                              |   |         |  
|Cash, beginning of period                                                                   |  |                               | 2,795  |   |                              |   | 927     |  
|                                                                                            |  |                               |        |   |                              |   |         |  
|Cash, end of period                                                                         |  | $                             | 162    |   |                              | $ | 721     |  
|                                                                                            |  |                               |        |   |                              |   |         |  
|Supplemental disclosure of cash flow information:                                           |  |                               |        |   |                              |   |         |  
|Cash paid during the period for:                                                            |  |                               |        |   |                              |   |         |  
|Interest                                                                                    |  | $                             | 386    |   |                              | $ | 451     |  
|                                                                                            |  |                               |        |   |                              |   |         |  



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

June 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 June 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 June 30, 2003, for the effects of these transactions and for other charges related to bad debt expense and warranty reserves. This
restatement has also been reflected in the companys Amendment No. 1 to Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003.



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



(In thousands, except per share information)



|                              |  |                                 |        |                                |   |                        |  |            |        |  |   |       
|----------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ---------------------- |  | ---------- | ------ |  | - | ------
|                              |  | Three Months EndedJune 30, 2003 |        | Six Months Ended June 30, 2003
|                              |  | As PreviouslyReported*          |        | AsRestated                     |   | As PreviouslyReported* |  | AsRestated
|Net Sales                     |  | $                               | 48,681 |                                | $ | 47,253                 |  | $          | 84,350 |  | $ | 82,922
|                              |  |                                 |        |                               
|Gross Profit                  |  | $                               | 12,251 |                                | $ | 11,120                 |  | $          | 19,693 |  | $ | 17,625
|                              |  |                                 |        |                               
|Net Income                    |  | $                               | 2,830  |                                | $ | 2,129                  |  | $          | 4,103  |  | $ | 2,822 
|                              |  |                                 |        |                               
|Net income per share, basic   |  | $                               | 0.70   |                                | $ | 0.53                   |  | $          | 1.02   |  | $ | 0.70  
|                              |  |                                 |        |                               
|Net income per share, diluted |  | $                               | 0.65   |                                | $ | 0.49                   |  | $          | 0.94   |  | $ | 0.65  

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|* | As previously reported in the companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003, filed with the Securities and Exchange Commission
on August 13, 2003.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



In total, the company reversed approximately $1.4 million in revenue related
to such transactions during the second quarter of 2003, of which approximately $0.3 million was recognized prematurely and approximately $1.1 million was improperly recognized. Additionally, the company provides for losses on uncompleted contracts
in the period in which management determines that the estimated total costs under the contract will exceed the estimated total contract revenues. The adjustments to revenue 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 and $640,000, and a corresponding increase to the reserve for contract losses, as of and for the three month periods ended March 31, 2003 and June 30, 2003, respectively. The accrual of the $937,000 loss provision
during the first quarter resulted in an adjustment to decrease cost of sales previously reported during the second quarter by an equal amount upon delivery of the aircraft.



Page 8



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2. CONSOLIDATED FINANCIAL STATEMENTS



The interim consolidated financial statements have been prepared by Pemco Aviation Group, Inc. (the company)
following the requirements of the Securities and Exchange Commission for interim reporting, and are unaudited. In the opinion of management, all adjustments necessary for a fair presentation are reflected in the interim financial statements. Such
adjustments are of a normal and recurring nature. The results of operations for the period ended June 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 intrinsic value method for stock option grants to individuals defined as employees under which no compensation is recognized for
options granted at or above the fair market value of the underlying stock on the grant date. The company uses the fair value method for stock options granted for services rendered by non-employees in accordance with SFAS No. 123 Accounting for
Stock Based Compensation.



Page 9



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



(In thousands except per share information)



|                                                                                       |  |                                |       |   |                                |   |       |                              |  |   |                              |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ------------------------------ | ----- | - | ------------------------------ | - | ----- | ---------------------------- |  | - | ---------------------------- | - |  | - | ------ | -
|                                                                                       |  | ThreeMonths EndedJune 30, 2003 |       |   | ThreeMonths EndedJune 30, 2002 |   |       | SixMonths EndedJune 30, 2003 |  |   | SixMonths EndedJune 30, 2002 |  
|                                                                                       |  | (As Restated)                  |       |   |                                |   |       | (As Restated)                |  |   |                              |  
|Net Income  as reported                                                               |  | $                              | 2,129 |   |                                | $ | 2,977 |                              |  | $ | 2,822                        |   |  | $ | 4,935  |  
|Stock based compensation under fair value method, net of tax effect using 38% tax rate |  |                                | (182  | ) |                                |   | (148  | )                            |  |   | (1,158                       | ) |  |   | (1,012 | )
|                                                                                       |  |                                |       |   |                                |   |       |                              |  |   |                              |   |  |   |        |  
|Net income  pro forma                                                                 |  | $                              | 1,947 |   |                                | $ | 2,829 |                              |  | $ | 1,664                        |   |  | $ | 3,923  |  
|                                                                                       |  |                                |       |   |                                |   |       |                              |  |   |                              |   |  |   |        |  
|Net income per share, basic  as reported                                              |  | $                              | 0.53  |   |                                | $ | 0.73  |                              |  | $ | 0.70                         |   |  | $ | 1.21   |  
|                                                                                       |  |                                |       |   |                                |   |       |                              |  |   |                              |   |  |   |        |  
|Net income per share, diluted  as reported                                            |  | $                              | 0.49  |   |                                | $ | 0.64  |                              |  | $ | 0.65                         |   |  | $ | 1.09   |  
|                                                                                       |  |                                |       |   |                                |   |       |                              |  |   |                              |   |  |   |        |  
|Net income per share, basic  pro forma                                                |  | $                              | 0.48  |   |                                | $ | 0.69  |                              |  | $ | 0.41                         |   |  | $ | 0.96   |  
|                                                                                       |  |                                |       |   |                                |   |       |                              |  |   |                              |   |  |   |        |  
|Net income per share, diluted  pro forma                                              |  | $                              | 0.44  |   |                                | $ | 0.61  |                              |  | $ | 0.38                         |   |  | $ | 0.87   |  
|                                                                                       |  |                                |       |   |                                |   |       |                              |  |   |                              |   |  |   |        |  



4. INVENTORIES



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



(In thousands)



|                                              |  |              |         |   |                  |   |         |  
|--------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                              |  | June 30,2003 |         |   | December 31,2002 |  
|Work in process                               |  | $            | 33,486  |   |                  | $ | 26,181  |  
|Finished goods                                |  |              | 2,441   |   |                  |   | 1,228   |  
|Raw materials and supplies                    |  |              | 4,005   |   |                  |   | 2,727   |  
|                                              |  |              |         |   |                  |   |         |  
|Total                                         |  |              | 39,932  |   |                  |   | 30,136  |  
|Less milestone payments and customer deposits |  |              | (16,716 | ) |                  |   | (13,844 | )
|                                              |  |              |         |   |                  |   |         |  
|                                              |  | $            | 23,216  |   |                  | $ | 16,292  |  
|                                              |  |              |         |   |                  |   |         |  



A portion of the above
inventory balances relates to a sub-contract with Boeing for KC-135 aircraft. The company receives customer deposits from Boeing based on milestones in the maintenance process.



5. 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.



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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. 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.



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



(All numbers in thousands, except income per share)



|                                |  |                                |       |                                |   |                              |  |                              |       |  |   |      
|------------------------------- |  | ------------------------------ | ----- | ------------------------------ | - | ---------------------------- |  | ---------------------------- | ----- |  | - | -----
|                                |  | ThreeMonths EndedJune 30, 2003 |       | ThreeMonths EndedJune 30, 2002 |   | SixMonths EndedJune 30, 2003 |  | SixMonths EndedJune 30, 2002
|                                |  | (As Restated)                  |       |                                |   | (As Restated)                |  |                             
|Net income                      |  | $                              | 2,129 |                                | $ | 2,977                        |  | $                            | 2,822 |  | $ | 4,935
|Weighted average shares         |  |                                | 4,043 |                                |   | 4,083                        |  |                              | 4,040 |  |   | 4,075
|Basic net income per share      |  | $                              | 0.53  |                                | $ | 0.73                         |  | $                            | 0.70  |  | $ | 1.21 
|Dilutive securities: options    |  |                                | 334   |                                |   | 543                          |  |                              | 341   |  |   | 456  
|Diluted weighted average shares |  |                                | 4,377 |                                |   | 4,626                        |  |                              | 4,381 |  |   | 4,531
|Diluted net income per share    |  | $                              | 0.49  |                                | $ | 0.64                         |  | $                            | 0.65  |  | $ | 1.09 



Options to purchase
approximately 217,000 and 0 shares of common stock related to June 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.



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7. DEBT



Debt as of June 30, 2003 and December 31, 2002 consists of the following:



(In thousands)



|                                                                                                                   |  |              |        |   |                  |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                                                                                                                   |  | June 30,2003 |        |   | December 31,2002 |  
|Revolving credit facility; interest at LIBOR plus 2.75% (3.86% at June 30, 2003)                                   |  | $            | 13,587 |   |                  | $ | 10,873 |  
|Bank Term Loan; interest at LIBOR plus 3.00% (4.11% at June 30, 2003)                                              |  |              | 4,500  |   |                  |   | 5,000  |  
|Treasury Stock Term Loan; Interest at LIBOR plus 3.00% (4.11% at June 30, 2003)                                    |  |              |        |   |                  |   |        |  
|Airport Authority Term Loan; interest at BMA plus 0.36% (1.23% at June 30, 2003)                                   |  |              | 2,419  |   |                  |   | 2,105  |  
|Capital Lease Obligations; interest from 9.07% to 10.00%, collateralized by security interest in certain equipment |  |              | 151    |   |                  |   | 206    |  
|                                                                                                                   |  |              |        |   |                  |   |        |  
|Total long-term debt                                                                                               |  |              | 20,657 |   |                  |   | 18,184 |  
|Less portion reflected as current                                                                                  |  |              | (1,114 | ) |                  |   | (1,103 | )
|                                                                                                                   |  |              |        |   |                  |   |        |  
|Long term-debt, net of current portion                                                                             |  | $            | 19,543 |   |                  | $ | 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.



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 $13.6 million outstanding under the revolving credit facility at June 30, 2003. Remaining
borrowing capacity available under the facility at June 30, 2003, based upon the calculation that defines the borrowing base, totaled $6.4 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 June 30, 2003 was $4.5 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 June 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 June 30, 2003 was $2.4 million and is expected to increase to $2.5 million. The
Airport Authority Term Loan will be repaid over 14 annual installments of $178,000, assuming the entire $2.5 million available is drawn, commencing on September 30, 2004.



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



(In thousands)



|           |  |   |       
|---------- |  | - | ------
|2003       |  | $ | 1,114 
|2004       |  |   | 14,765
|2005       |  |   | 1,150 
|2006       |  |   | 1,140 
|2007       |  |   | 1,140 
|Thereafter |  |   | 1,348 
|           |  |   |       
|           |  | $ | 20,657
|           |  |   |       



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



The above loans are collateralized by substantially all of the assets of the company and have various covenants which limit or prohibit the company from
incurring additional indebtedness, disposing of assets, merging with other entities, declaring dividends, or making capital expenditures 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.



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8. STOCKHOLDERS EQUITY



Holders of Stock Options under the companys Non-Qualified Stock Option Plan exercised options for 1,000 shares of the
companys common stock during the three months ended June 30, 2003. The company recorded both the exercise price and a tax benefit totaling approximately $8 thousand to Additional Paid In Capital during the second quarter of 2003. During the
six months ended June 30, 2003 holders of Stock Options under the companys Non-Qualified Stock Option Plan exercised options for approximately 17,000 shares of the companys common stock, adding with its associated tax benefit,
approximately $270 thousand to Additional Paid In Capital. During the six months ended June 30, 2002 holders of Stock Options under the companys Non-Qualified Stock Option Plan exercised options for approximately 70,000 shares of the
companys common stock, adding with its associated tax benefit, approximately $0.9 million to Additional Paid In Capital.



9. 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 67% and
59% of the companys total revenues for the six-month periods ended June 30, 2003 and 2002, respectively. The companys two largest programs generated approximately 83% of its revenues during this same period of 2003 and 87% in 2002.
Termination or a disruption of any of its significant customer contracts, including by way of option years not being exercised, or the inability of the company to renew or replace any of these customer contracts when they expire, could materially
harm the companys business and impair the value of its common stock.



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Litigation



Breach of Contract 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 agreed upon an arbitrator 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. 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 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.



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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 $240,000, all of which should be incurred during 2003. 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.



10. SEGMENT INFORMATION



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



The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in the companys 2002 Annual Report on Form 10-K/A. The company evaluates performance based on total (external and inter-segment) revenues, gross profits and operating income. The company accounts
for inter-segment



Page 16



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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 CSG and MCG segments may generate revenues from governmental entities and the GSG 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 June 30, 2003 and 2002:



(In thousands)



|                                               |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|---------------------------------------------- |  | --- | ------ | --- | - | ------ | --- |  | - | ------------ | - |  | - | ------- | -
|Three Months Ended June 30, 2003 (As Restated) |  | GSG |        | CSG |   |        | MCG |  |   | Consolidated |  
|Revenues from external domestic customers      |  | $   | 34,276 |     | $ | 11,317 |     |  | $ | 1,428        |   |  | $ | 47,021  |  
|Revenues from external foreign customers       |  |     |        |     |   | 160    |     |  |   | 72           |   |  |   | 232     |  
|Inter-company revenues                         |  |     | 2      |     |   | 549    |     |  |   | 508          |   |  |   | 1,059   |  
|                                               |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Total segment revenues                         |  |     | 34,278 |     |   | 12,026 |     |  |   | 2,008        |   |  |   | 48,312  |  
|Elimination                                    |  |     |        |     |   |        |     |  |   |              |   |  |   | (1,059  | )
|                                               |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Total Revenue                                  |  |     |        |     |   |        |     |  |   |              |   |  | $ | 47,253  |  
|                                               |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Gross profit                                   |  |     | 12,963 |     |   | (928   | )   |  |   | (915         | ) |  |   | 11,120  |  
|Segment operating income (loss)                |  |     | 7,753  |     |   | (2,912 | )   |  |   | (1,177       | ) |  |   | 3,664   |  
|Interest expense                               |  |     |        |     |   |        |     |  |   |              |   |  |   | 230     |  
|Litigation, net                                |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|Income taxes                                   |  |     |        |     |   |        |     |  |   |              |   |  |   | 1,305   |  
|                                               |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Net income                                     |  |     |        |     |   |        |     |  |   |              |   |  | $ | 2,129   |  
|                                               |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Assets                                         |  | $   | 67,693 |     | $ | 32,473 |     |  | $ | 5,874        |   |  | $ | 106,040 |  
|Depreciation/amortization                      |  |     | 712    |     |   | 384    |     |  |   | 59           |   |  |   | 1,155   |  
|Capital Additions                              |  |     | 272    |     |   | 1,104  |     |  |   | 5            |   |  |   | 1,381   |  
|                                               |  |     |        |    
|Three Months Ended June 30, 2002               |  | GSG |        | CSG |   |        | MCG |  |   | Consolidated |  
|Revenues from external domestic customers      |  | $   | 25,469 |     | $ | 13,083 |     |  | $ | 3,026        |   |  | $ | 41,578  |  
|Revenues from external foreign customers       |  |     |        |     |   | 216    |     |  |   | 128          |   |  |   | 344     |  
|Inter-company revenues                         |  |     | 1      |     |   |        |     |  |   | 76           |   |  |   | 77      |  
|                                               |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Total segment revenues                         |  |     | 25,470 |     |   | 13,299 |     |  |   | 3,230        |   |  |   | 41,999  |  
|Elimination                                    |  |     |        |     |   |        |     |  |   |              |   |  |   | (77     | )
|                                               |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Total Revenue                                  |  |     |        |     |   |        |     |  |   |              |   |  | $ | 41,922  |  
|                                               |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Gross profit                                   |  |     | 7,807  |     |   | 933    |     |  |   | 490          |   |  |   | 9,230   |  
|Segment operating income (loss)                |  |     | 4,356  |     |   | (927   | )   |  |   | 123          |   |  |   | 3,552   |  
|Interest expense                               |  |     |        |     |   |        |     |  |   |              |   |  |   | 230     |  
|Litigation, net                                |  |     |        |     |   |        |     |  |   |              |   |  |   | (1,480  | )
|Income taxes                                   |  |     |        |     |   |        |     |  |   |              |   |  |   | 1,825   |  
|                                               |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Net income                                     |  |     |        |     |   |        |     |  |   |              |   |  | $ | 2,977   |  
|                                               |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Assets                                         |  | $   | 48,384 |     | $ | 24,749 |     |  | $ | 8,196        |   |  | $ | 81,329  |  
|Depreciation/amortization                      |  |     | 591    |     |   | 187    |     |  |   | 72           |   |  |   | 850     |  
|Capital Additions                              |  |     | 557    |     |   | 1,484  |     |  |   | 5            |   |  |   | 2,046   |  



Page 18



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



(In thousands)



|                                             |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|-------------------------------------------- |  | --- | ------ | --- | - | ------ | --- |  | - | ------------ | - |  | - | ------- | -
|Six Months Ended June 30, 2003 (As Restated) |  | GSG |        | CSG |   |        | MCG |  |   | Consolidated |  
|Revenues from external domestic customers    |  | $   | 56,267 |     | $ | 20,643 |     |  | $ | 3,325        |   |  | $ | 80,235  |  
|Revenues from external foreign customers     |  |     |        |     |   | 2,486  |     |  |   | 201          |   |  |   | 2,687   |  
|Inter-company revenues                       |  |     | 100    |     |   | 592    |     |  |   | 640          |   |  |   | 1,332   |  
|                                             |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Total segment revenues                       |  |     | 56,367 |     |   | 23,721 |     |  |   | 4,166        |   |  |   | 84,254  |  
|Elimination                                  |  |     |        |     |   |        |     |  |   |              |   |  |   | (1,332  | )
|                                             |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Total Revenue                                |  |     |        |     |   |        |     |  |   |              |   |  | $ | 82,922  |  
|                                             |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Gross profit                                 |  |     | 20,012 |     |   | (1,446 | )   |  |   | (941         | ) |  |   | 17,625  |  
|Segment operating income (loss)              |  |     | 11,397 |     |   | (4,984 | )   |  |   | (1,414       | ) |  |   | 4,999   |  
|Interest expense                             |  |     |        |     |   |        |     |  |   |              |   |  |   | 449     |  
|Litigation, net                              |  |     |        |     |   |        |     |  |   |              |   |  |   |        |  
|Income taxes                                 |  |     |        |     |   |        |     |  |   |              |   |  |   | 1,728   |  
|                                             |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Net income                                   |  |     |        |     |   |        |     |  |   |              |   |  | $ | 2,822   |  
|                                             |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Assets                                       |  | $   | 67,693 |     | $ | 32,473 |     |  | $ | 5,874        |   |  | $ | 106,040 |  
|Depreciation/amortization                    |  |     | 1,206  |     |   | 596    |     |  |   | 111          |   |  |   | 1,913   |  
|Capital Additions                            |  |     | 2,018  |     |   | 1,814  |     |  |   | 51           |   |  |   | 3,883   |  
|                                             |  |     |        |    
|Six Months Ended June 30, 2002               |  | GSG |        | CSG |   |        | MCG |  |   | Consolidated |  
|Revenues from external domestic customers    |  | $   | 47,689 |     | $ | 23,361 |     |  | $ | 6,303        |   |  | $ | 77,353  |  
|Revenues from external foreign customers     |  |     |        |     |   | 301    |     |  |   | 313          |   |  |   | 614     |  
|Inter-company revenues                       |  |     | 1      |     |   |        |     |  |   | 76           |   |  |   | 77      |  
|                                             |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Total segment revenues                       |  |     | 47,690 |     |   | 23,662 |     |  |   | 6,692        |   |  |   | 78,044  |  
|Elimination                                  |  |     |        |     |   |        |     |  |   |              |   |  |   | (77     | )
|                                             |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Total Revenue                                |  |     |        |     |   |        |     |  |   |              |   |  | $ | 77,967  |  
|                                             |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Gross profit                                 |  |     | 14,869 |     |   | 1,531  |     |  |   | 1,188        |   |  |   | 17,588  |  
|Segment operating income (loss)              |  |     | 8,451  |     |   | (1,922 | )   |  |   | 486          |   |  |   | 7,015   |  
|Interest expense                             |  |     |        |     |   |        |     |  |   |              |   |  |   | 535     |  
|Litigation, net                              |  |     |        |     |   |        |     |  |   |              |   |  |   | (1,480  | )
|Income taxes                                 |  |     |        |     |   |        |     |  |   |              |   |  |   | 3,025   |  
|                                             |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Net income                                   |  |     |        |     |   |        |     |  |   |              |   |  | $ | 4,935   |  
|                                             |  |     |        |     |   |        |     |  |   |              |   |  |   |         |  
|Assets                                       |  | $   | 48,384 |     | $ | 24,749 |     |  | $ | 8,196        |   |  | $ | 81,329  |  
|Depreciation/amortization                    |  |     | 1,197  |     |   | 382    |     |  |   | 171          |   |  |   | 1,750   |  
|Capital Additions                            |  |     | 1,665  |     |   | 2,648  |     |  |   | 5            |   |  |   | 4,318   |  



Page 19



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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 table reconciles the effect of this capitalization of costs for the three months ended June 30, 2003 and 2002:



(In thousands)



|                                                                                                          |  |      |       |      |   |       |  
|--------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|Three Months Ended June 30                                                                                |  | 2003 |       | 2002 |  
|Change in Accumulated Depreciation and Amortization Reflected on the Consolidated Statement of Cash Flows |  | $    | 1,048 |      | $ | 1,147 |  
|Net Depreciation and Amortization (Capitalized Into) or Removed from Work-in-Process                      |  |      | 107   |      |   | (76   | )
|                                                                                                          |  |      |       |      |   |       |  
|Depreciation and Amortization Recorded in Cost of Goods Sold Upon Delivery of Aircraft                    |  | $    | 1,155 |      | $ | 850   |  
|                                                                                                          |  |      |       |      |   |       |  



The following table
reconciles the effect of this capitalization of costs for the six months ended June 30, 2003 and 2002:



(In thousands)



|                                                                                                          |  |      |       |      |   |        |  
|--------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ------ | -
|Six Months Ended June 30                                                                                  |  | 2003 |       | 2002 |  
|Change in Accumulated Depreciation and Amortization Reflected on the Consolidated Statement of Cash Flows |  | $    | 1,788 |      | $ | 2,311  |  
|Net Depreciation and Amortization (Capitalized Into) or Removed from Work-in-Process                      |  |      | 125   |      |   | (561   | )
|                                                                                                          |  |      |       |      |   |        |  
|Depreciation and Amortization Recorded in Cost of Goods Sold Upon Delivery of Aircraft                    |  | $    | 1,913 |      |   | $1,750 |  
|                                                                                                          |  |      |       |      |   |        |  



11. RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS



In January 2003, the Financial Accounting
Standards Board (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 beginning after June 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.



Page 20



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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
June 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). 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 June 30, 2003

Versus three months ended June 30, 2002



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



(In millions)



|                    |  |      |      |      |   |        |  |       |   
|------------------- |  | ---- | ---- | ---- | - | ------ |  | ----- | --
|                    |  | 2003 |      | 2002 |   | Change | 
|Revenue             |  | $    | 47.3 |      | $ | 41.9   |  | 12.9  | % 
|Gross Profit        |  |      | 11.1 |      |   | 9.2    |  | 20.7  | % 
|Operating income    |  |      | 3.7  |      |   | 3.6    |  | 2.8   | % 
|Income before taxes |  |      | 3.4  |      |   | 4.8    |  | (29.2 | )%
|Net income          |  |      | 2.1  |      |   | 3.0    |  | (30.0 | )%
|EBITDA              |  |      | 4.8  |      |   | 5.9    |  | (18.6 | )%



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



(In
millions)



|                            |  |      |     |      |   |    
|--------------------------- |  | ---- | --- | ---- | - | ---
|                            |  | 2003 |     | 2002
|Net Income                  |  | $    | 2.1 |      | $ | 3.0
|Interest                    |  |      | 0.2 |      |   | 0.2
|Taxes                       |  |      | 1.3 |      |   | 1.8
|Depreciation & Amortization |  |      | 1.2 |      |   | 0.9
|                            |  |      |     |      |   |    
|EBITDA                      |  | $    | 4.8 |      | $ | 5.9
|                            |  |      |     |      |   |    



Page 21



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The company believes that Earnings Before Interest Taxes Depreciation and Amortization, more commonly referred to as
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 & Amortization amounts used in the EBITDA calculation are those that were recorded in the Consolidated Statements of Operations in this report. Due to the long-term nature of much of the companys business, the
Depreciation & Amortization amounts recorded in the Consolidated Statements of Operations will not directly match the change in Accumulated Depreciation and Amortization reflected on the companys Consolidated Balance Sheets. This is a
result of the capitalization of costs on long-term contracts into Work-in-Process.



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



(In millions)



|             |  |      |   |  |      |   |  |        |   |  |          |   
|------------ |  | ---- | - |  | ---- | - |  | ------ | - |  | -------- | --
|             |  | 2003 |   |  | 2002 |   |  | Change |   |  | % Change |   
|GSG          |  | 34.3 |   |  | 25.5 |   |  | 8.8    |   |  | 34.5     | % 
|CSG          |  | 12.0 |   |  | 13.3 |   |  | (1.3   | ) |  | (9.8     | )%
|MCG          |  | 2.0  |   |  | 3.2  |   |  | (1.2   | ) |  | (37.5    | )%
|Eliminations |  | (1.1 | ) |  | (0.1 | ) |  | (1.0   | ) |  |          |   
|Total        |  | 47.2 |   |  | 41.9 |   |  | 5.3    |   |  | 12.6     | % 



Without regard to operating segments,
the companys mix of business between government and commercial customers was 23.6% commercial and 76.4% government in 2003 and 38.9% commercial and 61.1% government in 2002.



The $8.8 million increase in the sales of the GSG was due primarily to increased revenue under the KC-135 PDM program of $10.4 million and
an increase in C-130 related work of $0.3 million offset by a decrease of $1.9 million in other programs. During the three months ended June 30, 2003 the company delivered ten PDM aircraft whereas during the same period in 2002 the company delivered
eight 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 has recognized a Request for Equitable Adjustment (REA)
in the amount of $0.7 million related to work on the KC-135 program. The company completed work on two C-130 drop-in aircraft during the second 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 $1.9 million during the three months ended June 30, 2002 and no sales during the same period of 2003. The KC-135 PDM
programs represented 99.0% of the revenue of the GSG during the second quarter of 2003 and 92.1% during the same period of 2002.



The decrease in the CSG revenue of $1.3 million was primarily due to a decrease of $4.1 million of Commercial Maintenance, Repair, and Overhaul (MRO) sales
offset by an increase in Conversion revenues of $2.1 million and the recognition of an REA on the H-3 Helicopter program in the amount of $0.7 million. Sales of parts remained relatively constant between the two periods.



Page 22



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Revenue in the MCG decreased $1.2 million for the three months ended June 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. The three months ended June 30, 2002
included a sale of $0.1 million of consignment inventory held from a former division of the Group.



Cost of sales increased during the second quarter from $32.7 million in 2002 to $36.1 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 22.0% in the second quarter of 2002 to 23.5% in the second quarter of 2003. Cost of sales during the second quarter of 2003 included a $0.6 million charge for estimated losses on contracts-in-process.



Selling, general, and administrative (SG&A) expenses increased $1.8 million
between the second quarter of 2002 ($5.7 million) and the second quarter of 2003 ($7.5 million). Part of the increase in SG&A expenses is attributable to the increase in revenue in the GSG while the remaining amounts are due to increased
expenditures at Space Vector for independent research and development and bid and proposal activities, and the addition after the second quarter of 2002 of an executive to oversee activities of the MCG.



Interest expense remained constant at $0.2 million during the second quarters of 2002 and
2003. The effective average interest rate on the companys revolving credit facility was approximately 5.25% in 2002 and 4.17% in 2003. The impact of the lower effective interest rate was offset by an increase in the companys average debt
outstanding during the quarter ended June 30, 2003 compared to the quarter ended June 30, 2002.



The large increase in Accounts Receivable between December 31, 2002 and June 30, 2003, reflected on the companys Consolidated Statement of Cash Flows is attributable primarily to the GSGs new billing
process and methodology between the company and The Boeing Company. The company anticipates that this short-term increase in Accounts Receivable will be corrected during the third quarter of 2003. Inventories have also increased due primarily to
work in process at CSG related to the cargo conversion aircraft contract with General Electric Capital Aviation Services (GECAS). The company also anticipates the increase in work in process to be short-term, and expects a reduction in the third
quarter.



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



Page 23



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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 |  
|                                     |  |        |       |  



Six months ended June 30, 2003

Versus six months ended June 30, 2002



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



(In millions)



|                    |  |      |      |      |   |        |  |       |   
|------------------- |  | ---- | ---- | ---- | - | ------ |  | ----- | --
|                    |  | 2003 |      | 2002 |   | Change | 
|Revenue             |  | $    | 82.9 |      | $ | 78.0   |  | 6.3   | % 
|Gross Profit        |  |      | 17.6 |      |   | 17.6   |  | 0.0   | % 
|Operating income    |  |      | 5.0  |      |   | 7.0    |  | (28.6 | )%
|Income before taxes |  |      | 4.6  |      |   | 8.0    |  | (42.5 | )%
|Net income          |  |      | 2.8  |      |   | 4.9    |  | (42.9 | )%
|EBITDA              |  |      | 6.8  |      |   | 10.2   |  | (33.3 | )%



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



(In millions)



|                            |  |      |     |      |   |     
|--------------------------- |  | ---- | --- | ---- | - | ----
|                            |  | 2003 |     | 2002
|Net Income                  |  | $    | 2.8 |      | $ | 4.9 
|Interest                    |  |      | 0.4 |      |   | 0.5 
|Taxes                       |  |      | 1.7 |      |   | 3.0 
|Depreciation & Amortization |  |      | 1.9 |      |   | 1.8 
|                            |  |      |     |      |   |     
|EBITDA                      |  | $    | 6.8 |      | $ | 10.2
|                            |  |      |     |      |   |     



Page 24



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The table below presents the highlights in Revenue by Operating Segment from the six months ended June 30, 2003 and 2002.



(In millions)



|             |  |      |   |  |      |   |  |        |   |  |          |   
|------------ |  | ---- | - |  | ---- | - |  | ------ | - |  | -------- | --
|             |  | 2003 |   |  | 2002 |   |  | Change |   |  | % Change |   
|GSG          |  | 56.4 |   |  | 47.7 |   |  | 8.7    |   |  | 18.2     | % 
|CSG          |  | 23.7 |   |  | 23.7 |   |  | 0.0    |   |  | 0.0      | % 
|MCG          |  | 4.2  |   |  | 6.7  |   |  | (2.5   | ) |  | (37.3    | )%
|Eliminations |  | (1.3 | ) |  | (0.1 | ) |  | (1.2   | ) |  |          |   
|Total        |  | 83.0 |   |  | 78.0 |   |  | 5.0    |   |  | 6.4      | % 



Without regard to operating segments,
the companys mix of business between government and commercial customers was 28.9% commercial and 71.1% government in 2003 and 35.9% commercial and 64.1% government in 2002.



The $8.7 million increase in the sales of the GSG was due primarily to increased revenue under the KC-135 PDM program of $10.2 million and
an increase in C-130 related work of $0.4 million offset by a decrease of $1.9 million in other programs. During the six months ended June 30, 2003 the company delivered 17 PDM aircraft whereas during the same period in 2002 the company delivered 16
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 a REA in the amount of $0.7 million related to work on
the KC-135 program.. The company completed work on two C-130 drop-in aircraft during the six months ended June 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 $1.9 million during the six months ended June 30, 2002 and no sales during the same period of 2003. The KC-135 PDM programs represented 99.1% of the revenue of the
GSG during the first six months of 2003 and 95.7% during the same period of 2002.



CSG revenue remained constant at $23.7 million, with a decrease of $2.9 million of Commercial MRO sales offset by increases in Conversion revenues of $2.1 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 MCG decreased $2.5 million for the six months ended June 30, 2003 versus the same period in 2002. Sales at the Space Vector division decreased $2.1 million primarily as a result of concluding work on a target program. Revenue in the Pemco
Engineers division declined $0.3 million between the two periods. The six months ended June 30, 2002 also included a sale of $0.1 million of consignment inventory held from a former division of the Group.



Cost of sales increased during the six months ended June 30, from $60.4 million in 2002 to
$65.3 million in 2003, primarily as a result of the increase in sales between the two periods. Overall, the gross profit percentage of the company decreased from 22.6% during the six months ended June 30, 2002 to 21.3% for the same period of 2003,
primarily as a result of higher training and learning curve costs at the CSG incurred in connection with work performed on new types of aircraft. Such costs included a $0.6 million charge for estimated losses on contracts-in-process.



SG&A expenses increased $2.0 million between the six months ended June 30, 2002 ($10.6
million)



Page 25



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and the same period of 2003 ($12.6 million). Part of the increase in SG&A expenses is attributable to the increase in
revenue in the GSG while the remaining amounts are due to increased expenditures at Space Vector for independent research and development and bid and proposal activities, and the addition of an executive to oversee activities of the MCG.



Interest expense decreased from $0.5 million during the six months ended June 30, 2002 to
$0.4 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 4.03% in 2003. The impact of the lower effective interest rate was offset by an
increase in the companys average debt outstanding during the six months ended June 30, 2003 compared to the six months ended June 30, 2002.



In the six-month periods ended June 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)



|                                             |  |              |        |                  |   |        |  |   |        |  
|-------------------------------------------- |  | ------------ | ------ | ---------------- | - | ------ |  | - | ------ | -
|                                             |  | June 30,2003 |        | December 31,2002 |   | Change | 
|Cash                                         |  | $            | 162    |                  | $ | 2,795  |  | $ | (2,633 | )
|Working Capital                              |  |              | 26,628 |                  |   | 23,953 |  |   | 2,675  |  
|Revolving credit facility                    |  |              | 13,587 |                  |   | 10,873 |  |   | 2,714  |  
|Long term debt and capital lease obligations |  |              | 5,956  |                  |   | 6,208  |  |   | (252   | )
|Shareholders equity                         |  |              | 14,491 |                  |   | 11,536 |  |   | 2,955  |  
|Long term debt to equity                     |  |              | 1.35   |                  |   | 1.48   |  |   | (0.13  | )



Operating activities used $1.3 million
of cash during the six months ended June 30, 2003. The company also received proceeds from the exercise of company stock options of $0.2 million. Cash was used during the six months ended June 30, 2003 for capital expenditures of $3.9 million, and
the repurchase of company common stock, $0.1 million.



At June 30, 2003 the
company had additional borrowing capacity of $6.4 million under its revolving line of credit.



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.



Page 26



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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. The company anticipates that it will be required to make further contributions to the Plan during
2003. Under ERISA rules, the company expects that the minimum required contribution in 2003 would be approximately $10.3 million. As of the date of this report, the company has made contributions of $4.4 during 2003. It is possible that the company
may elect, as it did during 2001, to contribute more than the minimum requirement.



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



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.



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.



Page 27



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Future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of June 30, 2003 are as follows:



(In
thousands)



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



REPAYMENT OF LONG TERM DEBT



Schedule of debt maturing over the next five years at
June 30, 2003:



(In thousands)



|           |  |   |       
|---------- |  | - | ------
|2003       |  | $ | 1,114 
|2004       |  |   | 14,765
|2005       |  |   | 1,150 
|2006       |  |   | 1,140 
|2007       |  |   | 1,140 
|Thereafter |  |   | 1,348 
|           |  |   |       
|           |  | $ | 20,657
|           |  |   |       



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



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



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



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TRADING ACTIVITIES



The company has not engaged in trading activities or in trading non-exchange traded contracts. As of June 30, 2003 and 2002, the carrying amounts of the companys
financial instruments are 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 $0.2 million at June 30, 2003 and 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.



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.



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



Contingencies



As further discussed in Note 8 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,



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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.



BACKLOG



The following table presents the companys backlog (in thousands of dollars) at June 30, 2003 and June 30, 2002:



|                |  |      |         |      |   |        
|--------------- |  | ---- | ------- | ---- | - | -------
|Customer Type   |  | 2003 |         | 2002
|U.S. Government |  | $    | 108,508 |      | $ | 128,313
|Commercial      |  |      | 13,587  |      |   | 15,017 
|                |  |      |         |      |   |        
|Total           |  | $    | 122,095 |      | $ | 143,330
|                |  |      |         |      |   |        



The reduction in government backlog
was primarily related to the companys GSG and the Space Vector subsidiary in the MCG. GSG decreased its backlog approximately $14 million year-over-year while MCG decreased its backlog $6 million during this same period. The decrease in the
GSG was due to a reduction in the number of aircraft in the backlog, which were 29 in 2003 versus 39 in 2002. The decrease in the backlog in the MCG is the result of the close out of a sub-contract with Lockheed at Space Vector. Space Vector was
notified late in 2002 that the Lockheed contract was ending and has been working down the backlog during 2003.



Total commercial backlog decreased $1.4 million. The CSG decreased backlog $0.9 million while backlog at Pemco Engineers, in the MCG, decreased $0.5 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 remained constant between both Government and Commercial during
the two periods with approximately 89% Government and 11% Commercial for the six months ended June 30, 2002 and for the six months ended June 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



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expressions are generally intended to identify forward-looking statements. Because these forward-looking statements
involve risks and uncertainties, there are important factors, including the factors discussed under the caption Factors That May Affect Future Performance in the companys 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 plus 0.36% on the remaining loan. The actual fluctuation of interest rates is not determinable; accordingly, actual results of interest rate fluctuations could differ. These interest rates were 3.86%, 4.11%, and 1.23%, respectively at June
30, 2003. Had the rate of the variable rate debt increased 100 basis points, net income would have been reduced $45,000 during the quarter and $83,000 year-to-date.



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 4. Submission of Matters to a Vote of Security Holders



The companys Annual Meeting of Stockholders was held on May 14, 2003. At the meeting, stockholders approved an amendment to the companys Non-Qualified Stock
Option Plan; elected Robert E. Joyal and Michael E. Tennenbaum as Class III directors to serve until 2006 and ratified the appointment of Ernst & Young, LLP as the companys independent public accountants for the year ending December 31,
2003.



The number of votes cast for or against, and abstentions
and broker non-votes with respect to, the amendment to the companys Non-Qualified Stock Option Plan were as follows:



|          |  |         |  |         |  |                 
|--------- |  | ------- |  | ------- |  | ----------------
|For       |  | Against |  | Abstain |  | Broker Non-votes
|1,642,163 |  | 325,263 |  | 1,860   |  | 518,760         



The number of votes
cast for or withheld for each director nominee were as follows:



|                      |  |           |  |         
|--------------------- |  | --------- |  | --------
|Nominee               |  | For       |  | Withheld
|Robert E. Joyal       |  | 2,481,361 |  | 6,685   
|Michael E. Tennenbaum |  | 2,481,361 |  | 6,685   



The number of votes cast for or
against, and abstentions for ratification of auditors were as follows:



|          |  |         |  |        
|--------- |  | ------- |  | -------
|For       |  | Against |  | Abstain
|2,478,040 |  | 6,668   |  | 3,338  



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



a. Exhibits



|     |  |                                                                                                                                |  |    
|---- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | ---
|     |  |                                                                                                                               
|10.1 |  | Non-Qualified Stock Option Plan amended and restated May 15, 2003.                                                             |  | (1)
|     |  |                                                                                                                               
|10.2 |  | First Amendment to the Credit and Security Agreement Dated May 22, 2003 between Pemco Aviation Group, Inc. and SouthTrust Bank |  | (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 on August 13, 2003 with the companys Form 10-Q for the quarter ended June 30, 2003
|--- | ----------------------------------------------------------------------------------------------------

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



b. Reports on Form 8-K



The company filed no reports on Form 8-K during the quarter ended June 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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