---

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

|x                                                              |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
|-------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|                                                               |  |                                                                                         
|                                                               |  | For the Quarterly Period Ended March 31, 2003,                                          
|                                                               |  |                                                                                         
|                                                              
|                                                               |  |                                                                                         
|or                                                            
|                                                               |  |                                                                                         
|o                                                              |  | 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                               
|                                                              
|PEMCO AVIATION GROUP, INC.                                    
|(Exact name of registrant as specified in its charter)        
|                                                              
|Delaware                                                       |  | 84-0985295                                                                              
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)                                                    
|                                                               |  |                                                                                         
|1943 North 50th Street, Birmingham, Alabama                    |  | 35212                                                                                   
|(Address of principal executive offices)                       |  | (Zip Code)                                                                              
|                                                               |  |                                                                                         
|205-592-0011                                                  
|(Registrants telephone number, including area code)          
|                                                               |  |                                                                                         

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 | o | No
|- | --- | - | --

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).

|o | Yes | x | No
|- | --- | - | --

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

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

---



---

PART I.     FINANCIAL INFORMATION

Item 1.     Financial
Statements

PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

ASSETS(In Thousands)

|                                                |  | March 31, 2003 Unaudited |         | December 31, 2002 |  
|----------------------------------------------- |  | ------------------------ | ------- | ----------------- | -
|                                                |  |                          |         |                   |  
|Current assets:                                 |  |                          |         |                   |  
|Cash                                            |  | $                        | 2,370   |                   | $
|Accounts receivable, net                        |  |                          | 28,866  |                   |  
|Inventories, net                                |  |                          | 21,273  |                   |  
|Deferred income taxes                           |  |                          | 12,387  |                   |  
|Prepaid expenses and other                      |  |                          | 408     |                   |  
|                                                |  |                          |         |                   |  
|Total current assets                            |  |                          | 65,304  |                   |  
|                                                |  |                          |         |                   |  
|Machinery, equipment, and improvements at cost: |  |                          |         |                   |  
|Machinery and equipment                         |  |                          | 29,110  |                   |  
|Leasehold improvements                          |  |                          | 26,780  |                   |  
|Construction in process                         |  |                          | 1,577   |                   |  
|                                                |  |                          |         |                   |  
|                                                |  |                          | 57,467  |                   |  
|Less accumulated depreciation and amortization  |  |                          | (30,934 | )                 |  
|                                                |  |                          |         |                   |  
|Net machinery, equipment, and improvements      |  |                          | 26,533  |                   |  
|                                                |  |                          |         |                   |  
|Other non-current assets:                       |  |                          |         |                   |  
|Deposits and other                              |  |                          | 1,007   |                   |  
|Related party receivable                        |  |                          | 444     |                   |  
|Intangible assets, net                          |  |                          | 5,691   |                   |  
|                                                |  |                          |         |                   |  
|                                                |  |                          | 7,142   |                   |  
|                                                |  |                          |         |                   |  
|Total assets                                    |  | $                        | 98,979  |                   | $
|                                                |  |                          |         |                   |  

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

-1-



---

PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS EQUITY(In Thousands, except common share information)

|                                                                                                                                                     |  | March 31, 2003 Unaudited |         | December 31, 2002 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ----------------- | -
|                                                                                                                                                     |  |                          |         |                   |  
|Current liabilities:                                                                                                                                 |  |                          |         |                   |  
|Current portion of long-term debt                                                                                                                    |  | $                        | 1,110   |                   | $
|Current portion of pension liability                                                                                                                 |  |                          | 11,070  |                   |  
|Accounts payable                                                                                                                                     |  |                          | 2,471   |                   |  
|Accrued liabilities  payroll related                                                                                                                |  |                          | 9,743   |                   |  
|Accrued liabilities  other                                                                                                                          |  |                          | 8,843   |                   |  
|Customer deposits in excess of cost                                                                                                                  |  |                          | 8,294   |                   |  
|                                                                                                                                                     |  |                          |         |                   |  
|Total current liabilities                                                                                                                            |  |                          | 41,531  |                   |  
|                                                                                                                                                     |  |                          |         |                   |  
|Long-term debt                                                                                                                                       |  |                          | 18,323  |                   |  
|Long-term pension benefit liability                                                                                                                  |  |                          | 24,215  |                   |  
|Other long-term liabilities                                                                                                                          |  |                          | 1,852   |                   |  
|                                                                                                                                                     |  |                          |         |                   |  
|Total liabilities                                                                                                                                    |  |                          | 85,921  |                   |  
|                                                                                                                                                     |  |                          |         |                   |  
|Stockholders equity:                                                                                                                                |  |                          |         |                   |  
|Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none outstanding                                                                    |  |                          | 0       |                   |  
|Common stock, $0.0001 par value, 12,000,000 shares authorized, 4,394,854 and 4,379,494 issued at  March 31,
2003 and December 31, 2002, respectively |  |                          | 1       |                   |  
|Additional paid-in capital                                                                                                                           |  |                          | 9,933   |                   |  
|Retained earnings                                                                                                                                    |  |                          | 29,793  |                   |  
|Treasury stock, at cost  348,899 shares at March 31, 2003 and December 31, 2002                                                                     |  |                          | (6,788  | )                 |  
|Accumulated other comprehensive loss                                                                                                                 |  |                          | (19,881 | )                 |  
|                                                                                                                                                     |  |                          |         |                   |  
|Total stockholders equity                                                                                                                           |  |                          | 13,058  |                   |  
|                                                                                                                                                     |  |                          |         |                   |  
|Total liabilities and stockholders equity                                                                                                           |  | $                        | 98,979  |                   | $
|                                                                                                                                                     |  |                          |         |                   |  

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

-2-



---

PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Net Income per Common
Share Information)

|                                               |  | Three Months Ended March 31, 2003 |        | Three Months Ended March 31, 2002 |  
|---------------------------------------------- |  | --------------------------------- | ------ | --------------------------------- | -
|                                               |  |                                   |        |                                   |  
|Net sales                                      |  | $                                 | 35,669 |                                   | $
|Cost of sales                                  |  |                                   | 28,227 |                                   |  
|                                               |  |                                   |        |                                   |  
|Gross profit                                   |  |                                   | 7,442  |                                   |  
|Selling, general, and  administrative expenses |  |                                   | 5,170  |                                   |  
|                                               |  |                                   |        |                                   |  
|Income from operations                         |  |                                   | 2,272  |                                   |  
|Interest                                       |  |                                   | 219    |                                   |  
|                                               |  |                                   |        |                                   |  
|Income before income taxes                     |  |                                   | 2,053  |                                   |  
|Provision for income taxes                     |  |                                   | 780    |                                   |  
|                                               |  |                                   |        |                                   |  
|Net income                                     |  | $                                 | 1,273  |                                   | $
|                                               |  |                                   |        |                                   |  
|Net income per common share:                   |  |                                   |        |                                   |  
|Basic                                          |  | $                                 | 0.32   |                                   | $
|Diluted                                        |  | $                                 | 0.29   |                                   | $
|Weighted average common shares outstanding:    |  |                                   |        |                                   |  
|Basic                                          |  |                                   | 4,036  |                                   |  
|Diluted                                        |  |                                   | 4,384  |                                   |  

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

-3-



---

PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)

|                                                                                  |  | Three Months Ended March 31, 2003 |        | Three Months Ended March 31, 2002 |  
|--------------------------------------------------------------------------------- |  | --------------------------------- | ------ | --------------------------------- | -
|                                                                                  |  |                                   |        |                                   |  
|Cash flows from operating activities:                                             |  |                                   |        |                                   |  
|Net income                                                                        |  | $                                 | 1,273  |                                   | $
|                                                                                  |  |                                   |        |                                   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                   |        |                                   |  
|Depreciation and amortization                                                     |  |                                   | 740    |                                   |  
|Provision for deferred income taxes                                               |  |                                   | 780    |                                   |  
|Pension cost in excess of funding                                                 |  |                                   | (398   | )                                 |  
|Amortization of intangible asset                                                  |  |                                   | 36     |                                   |  
|Changes in assets and liabilities:                                                |  |                                   |        |                                   |  
|Accounts receivable, net                                                          |  |                                   | 1,296  |                                   |  
|Inventories                                                                       |  |                                   | (4,981 | )                                 |  
|Prepaid expenses and other                                                        |  |                                   | 796    |                                   |  
|Deposits and other                                                                |  |                                   | (95    | )                                 |  
|Accounts payable and other liabilities                                            |  |                                   | 1,337  |                                   |  
|                                                                                  |  |                                   |        |                                   |  
|Total adjustments                                                                 |  |                                   | (489   | )                                 |  
|                                                                                  |  |                                   |        |                                   |  
|Net cash provided by operating activities                                         |  |                                   | 784    |                                   |  
|                                                                                  |  |                                   |        |                                   |  
|Cash flows from investing activities:                                             |  |                                   |        |                                   |  
|Capital expenditures                                                              |  |                                   | (2,369 | )                                 |  
|                                                                                  |  |                                   |        |                                   |  
|Net cash used in investing activities                                             |  |                                   | (2,369 | )                                 |  
|Cash flows from financing activities:                                             |  |                                   |        |                                   |  
|Proceeds from exercise of stock options                                           |  |                                   | 175    |                                   |  
|Net change under revolving credit facility                                        |  |                                   | 1,393  |                                   |  
|Borrowings under long-term debt                                                   |  |                                   | 0      |                                   |  
|Principal payments under long-term debt                                           |  |                                   | (408   | )                                 |  
|                                                                                  |  |                                   |        |                                   |  
|Net cash provided by/(used in) financing activities                               |  |                                   | 1,160  |                                   |  
|                                                                                  |  |                                   |        |                                   |  
|Net increase/(decrease) in cash                                                   |  |                                   | (425   | )                                 |  
|Cash, beginning of period                                                         |  |                                   | 2,795  |                                   |  
|                                                                                  |  |                                   |        |                                   |  
|Cash, end of period                                                               |  | $                                 | 2,370  |                                   | $
|                                                                                  |  |                                   |        |                                   |  
|Supplemental disclosure of cash flow information:                                 |  |                                   |        |                                   |  
|Cash paid during the period for:                                                  |  |                                   |        |                                   |  
|Interest                                                                          |  | $                                 | 178    |                                   | $
|Income taxes                                                                      |  | $                                 | 0      |                                   | $

The accompanying notes are an integral part of these consolidated
statements

-4-



---

PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the Quarter EndedMarch 31, 2003 and
2002

|1. | CONSOLIDATED FINANCIAL STATEMENTS
|-- | ---------------------------------
|   |                                  
|   |                                  
|   |                                  
|2. | STOCK OPTIONS                    
|   |                                  
|   |                                  

-5-



---

| |  | 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)

|                                                                                                                                   |  | 2003 |       | 2002 |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | -
|                                                                                                                                   |  |      |       |      |  
|Net income - as reported                                                                                                           |  | $    | 1,273 |      | $
|Stock based compensation under fair value method, net of tax effect (tax effect for 2003 and 2002 was $594 and $530,
respectively) |  |      | 969   |      |  
|                                                                                                                                   |  |      |       |      |  
|Net income  pro forma                                                                                                             |  | $    | 304   |      | $
|                                                                                                                                   |  |      |       |      |  
|Net income per share, basic  - as reported                                                                                         |  | $    | 0.32  |      | $
|Net income per share, diluted  - as reported                                                                                       |  | $    | 0.29  |      | $
|Net income per share, basic  - pro forma                                                                                           |  | $    | 0.08  |      | $
|Net income per share, diluted  - pro forma                                                                                         |  | $    | 0.07  |      | $

|3. | INVENTORIES
|-- | -----------
|   |            
|   |            

(In
Thousands)

|                                             |  | March 31, 2003 |         | December 31, 2002 |  
|-------------------------------------------- |  | -------------- | ------- | ----------------- | -
|                                             |  |                |         |                   |  
|Work in process                              |  | $              | 35,483  |                   | $
|Finished goods                               |  |                | 2,486   |                   |  
|Raw materials and supplies                   |  |                | 2,566   |                   |  
|                                             |  |                |         |                   |  
|Total                                        |  |                | 40,535  |                   |  
|Less progress payments and customer deposits |  |                | (19,262 | )                 |  
|                                             |  |                |         |                   |  
|                                             |  | $              | 21,273  |                   | $
|                                             |  |                |         |                   |  

| |  | A portion of the above inventory balances relates to U.S. Government contracts.  The company receives  milestone payments on the majority of its government related
sub-contracts.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-6-



---

|4. | NET INCOME PER SHARE
|-- | --------------------
|   |                     
|   |                     
|   |                     
|   |                     



(All numbers In Thousands, except Income Per Share)

|                                |  | Three Months Ended March 31, 2003 |       | Three Months Ended March 31, 2002 |  
|------------------------------- |  | --------------------------------- | ----- | --------------------------------- | -
|                                |  |                                   |       |                                   |  
|Net Income                      |  | $                                 | 1,273 |                                   | $
|Weighted Average Shares         |  |                                   | 4,036 |                                   |  
|Basic Net Income Per Share      |  | $                                 | 0.32  |                                   | $
|Dilutive Securities: Options    |  |                                   | 348   |                                   |  
|Diluted Weighted Average Shares |  |                                   | 4,384 |                                   |  
|Diluted Net Income Per Share    |  | $                                 | 0.29  |                                   | $



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



-7-



---

|5. | DEBT
|-- | ----
|   |     
|   |     

(In
Thousands)

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

| |  | The company maintains a $20.0 million revolving credit facility, two term loans and a Letter of Credit in support of one of these term loans.                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | The revolving credit facility has a 2-year term that began on December 16, 2002.  The Bank Term Loan has a term of 5 years that also began on December 16, 2002. The Airport
Authority Term Loan was originated on November 26, 2002 and has a term of 15 years.  The Letter of Credit supports the Airport Authority Term Loan and has a fee of 1.0% per year with a 5-year term.                                                                                                                                                            
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Borrowing availability under the revolving credit facility is tied to percentages of eligible accounts receivable and inventories.  The company had borrowings of $12.3
million outstanding under the revolving credit facility at March 31, 2003. Remaining borrowing capacity available under the facility at March 31, 2003, based upon the calculation that defines the borrowing base, totaled $7.7 million.  All of
the facilities have provisions for increases in the interest rate during any period when an event of default exists.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | The amount outstanding under the Bank Term Loan at March 31, 2003 was $4.8 million and  is being repaid in 60 monthly installments of $83,333 plus interest that commenced on
January 31, 2003. The amount outstanding under the Airport Authority Term Loan at March 31, 2003 was $2.2 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.                   

-8-



---

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

(In
Thousands)

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

|   |                      | A significant portion of the 2004 maturity of debt listed above relates to the expiration of the 2-year term of the revolving credit facility that the company originated in
December 2002.  The company expects that it will renew the agreement for an additional 2-year term on the first anniversary of its origination in December 2003 and continue to do so each year, although there can be no assurances in that
regard.  Notwithstanding this intended continuous renewal of the revolving credit facility, the company may elect to pay down the facility out of proceeds from the results of operations, or other potential financing sources, prior to the
scheduled maturity.
|-- | -------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                      | 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.                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|6. | STOCKHOLDERS EQUITY
|   |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                      | Holders of stock options under the companys Non-Qualified Stock Option Plan exercised options for approximately 16,000 and 5,000 shares, respectively, of the
companys common stock during the three months ended March 31, 2003 and 2002.  The company recorded both the exercise price and a tax benefit totaling approximately $0.3 million and $0.7 million, respectively, to Additional Paid In Capital
during the first quarter of 2003 and 2002.                                                                                                                                                                                                                                  

-9-



---

|7. | CONTINGENCIES
|-- | -------------
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              

-10-



---

| |  | 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 11th Circuit
Court of Appeals.  The company has taken effective remedial and corrective action, acted promptly in respect to any specific complaint by any employee, and will vigorously defend this case.  Management believes that the results of this
claim will not have a material impact on the future results of operations, financial condition or liquidity of the company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 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 the future results of operations, financial condition or liquidity of the company.                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | The company and its subsidiaries are also parties to other non-employment related litigation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Environmental Compliance - In December 1997, the company received an inspection report from the Environmental Protection Agency (EPA) documenting the results
of an inspection at the Birmingham, Alabama facility.  The report cited various violations of environmental laws.  The company has taken actions to correct the items raised by the inspection.  On April 2, 1998, the company received a
complaint and compliance order from EPA proposing penalties of $225,256.  The company disagreed with the citations and contested the penalties.  On December 21, 1998, the company and the EPA entered into a Consent Agreement and Consent
Order (CACO) resolving the 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 begun.  The costs of the Phase II Site Characterization Plan are expected to be $240,000, all

-11-



---

|   |                     | of which should be incurred during 2003.  Management believes that the results of this claim will not have a material impact on the future results of operations, financial
condition or liquidity of the company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                     | The company is required to comply with environmental regulations at the federal, state and local levels.  These requirements apply especially to the stripping, cleaning and
painting of aircraft.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|8. | SEGMENT INFORMATION
|   |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                     | The company has three reportable segments: Government Services Group (GSG), Commercial Services Group (CSG), and Manufacturing and Components Group
(MCG).  The GSG, located in Birmingham, Alabama, provides aircraft maintenance and modification services for government and military customers.  The CSG, located in Dothan, Alabama, provides commercial aircraft maintenance and
modification services on a contract basis to the owners and operators of large commercial aircraft and also distributes aircraft parts.  The MCG, located in California, designs and manufactures a wide array of proprietary aerospace products
including various space systems, such as guidance control systems and launch vehicles; and aircraft cargo-handling systems.
|   |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                     | The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the companys 2002 Annual Report on Form
10-K.  The company evaluates performance based on total (external and inter-segment) revenues, gross profits and operating income.  The company accounts for inter-segment sales and transfers as if the sales or transfers were to third
parties. The amount of intercompany profit is not material. The company does not allocate income taxes, interest income and interest expense to segments.                                                                                                                                                                                                
|   |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                     | The companys reportable segments are strategic business units that offer different products and services.  They are managed separately because each business requires
different operating and marketing strategies.  The CSG and MCG segments may generate revenues from governmental entities and the GSG segment may generate revenues from commercial entities.  Sales to governmental entities in the
three-months ended March 31, 2003 and 2002 were $23.2 million, and $24.3 million, respectively.                                                                                                                                                                                                                                                               

-12-



---

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

(In Thousands)

|Three Months Ended March 31, 2003         |  | GSG |        | CSG |   | MCG    |   | Consolidated |      
|----------------------------------------- |  | --- | ------ | --- | - | ------ | - | ------------ | -----
|                                          |  |     |        |     |   |        |   |              |      
|Revenues from external domestic customers |  | $   | 21,991 |     | $ | 9,326  |   | $            | 1,897
|Revenues from external foreign customers  |  |     | 0      |     |   | 2,326  |   |              | 129  
|Inter-segment revenues                    |  |     | 98     |     |   | 44     |   |              | 132  
|                                          |  |     |        |     |   |        |   |              |      
|Total segment revenues                    |  |     | 22,089 |     |   | 11,696 |   |              | 2,158
|Elimination                               |  |     |        |     |   |        |   |              |      
|                                          |  |     |        |     |   |        |   |              |      
|Total Revenue                             |  |     |        |     |   |        |   |              |      
|                                          |  |     |        |     |   |        |   |              |      
|Gross profit                              |  |     | 6,550  |     |   | 918    |   |              | (26  
|Segment operating income (loss)           |  |     | 3,244  |     |   | (734   | ) |              | (238 
|Interest expense                          |  |     |        |     |   |        |   |              |      
|Income taxes                              |  |     |        |     |   |        |   |              |      
|                                          |  |     |        |     |   |        |   |              |      
|Net income                                |  |     |        |     |   |        |   |              |      
|                                          |  |     |        |     |   |        |   |              |      
|Assets                                    |  | $   | 60,391 |     | $ | 31,785 |   | $            | 6,671
|Depreciation/amortization                 |  |     | 508    |     |   | 195    |   |              | 55   
|Capital additions                         |  |     | 947    |     |   | 1,508  |   |              | 46   

|Three Months Ended March 31, 2002         |  | GSG |        | CSG |   | MCG    |   | Consolidated |      
|----------------------------------------- |  | --- | ------ | --- | - | ------ | - | ------------ | -----
|                                          |  |     |        |     |   |        |   |              |      
|Revenues from external domestic customers |  | $   | 22,220 |     | $ | 10,278 |   | $            | 3,277
|Revenues from external foreign customers  |  |     | 0      |     |   | 85     |   |              | 185  
|Inter-segment revenues                    |  |     | 0      |     |   | 0      |   |              | 0    
|                                          |  |     |        |     |   |        |   |              |      
|Total segment revenues                    |  | $   | 22,220 |     | $ | 10,363 |   | $            | 3,462
|Elimination                               |  |     |        |     |   |        |   |              |      
|                                          |  |     |        |     |   |        |   |              |      
|Total Revenue                             |  |     |        |     |   |        |   |              |      
|                                          |  |     |        |     |   |        |   |              |      
|Gross profit                              |  |     | 7,062  |     |   | 598    |   |              | 698  
|Segment operating income (loss)           |  |     | 4,095  |     |   | (995   | ) |              | 363  
|Interest expense                          |  |     |        |     |   |        |   |              |      
|Income taxes                              |  |     |        |     |   |        |   |              |      
|                                          |  |     |        |     |   |        |   |              |      
|Net income                                |  |     |        |     |   |        |   |              |      
|                                          |  |     |        |     |   |        |   |              |      
|Assets                                    |  | $   | 43,572 |     | $ | 23,130 |   | $            | 9,470
|Depreciation/amortization                 |  |     | 593    |     |   | 191    |   |              | 95   
|Capital Additions                         |  |     | 1,108  |     |   | 1,164  |   |              | 0    

| |  | 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.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-13-



---

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.

Three months ended March 31, 2003 Versus three months ended March 31, 2002

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

|                       |  | (In $Millions) |     
|---------------------- |  | -------------- | ----
|                       |  |                |     
|                       |  | 2003           |     
|                       |  |                |     
|Revenue                |  | $              | 35.7
|Gross profit           |  |                | 7.4 
|Income from operations |  |                | 2.3 
|Income before taxes    |  |                | 2.1 
|Net income             |  |                | 1.3 
|EBITDA                 |  |                | 3.0 

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

|             |  | (In $Millions) |     
|------------ |  | -------------- | ----
|             |  |                |     
|             |  | 2003           |     
|             |  |                |     
|GSG          |  | $              | 22.1
|CSG          |  |                | 11.7
|MCG          |  |                | 2.2 
|Eliminations |  |                | (0.3
|             |  |                |     
|Total        |  | $              | 35.7
|             |  |                |     

Without regard to operating segments, the companys mix of business between government and
commercial customers was approximately 35% commercial and 65% government in 2003 and 32% commercial and 68% government in 2002.

The $0.1 million decrease in sales in the GSG was due
primarily to a slight decrease in revenue in the KC-135 Programmed Depot Maintenance (PDM) program.  During the first quarter of 2003 the GSG delivered five PDM aircraft, two drop-in aircraft, and performed time and material based
services under the KC-135 PDM program versus delivering eight PDM, one drop-in aircraft and

-14-



---

time and material based services during the same period in 2002.  An increase in average revenue per aircraft delivered, the delivery of an additional drop-in aircraft,
and higher time and material service revenues mostly offset the lower volume of PDM aircraft deliveries in the first quarter of 2003 compared to the first quarter of 2002.

The increase in the CSG
revenue of $1.3 million was due to increased revenue in commercial Maintenance, Repair, and Overhaul (MRO).  During the first quarter of 2003 CSG delivered 36 aircraft versus 22 aircraft delivered during the first quarter of
2002.

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

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

Cost of sales increased
to $28.2 million during the first quarter of 2003 from $27.7 million in the first quarter of 2002.  Overall, the gross profit percentage of the company decreased during this same time period to 20.9% in 2003 from 23.2% in 2002.  The higher
cost of sales during the first quarter of 2003 was principally a result of the following:

Cost of Sales at the GSG were higher in the first quarter of 2003 compared with the first quarter of
2002.  These higher costs resulted from a change in the mix of business with more revenue coming from lower profit over and above sales.  In addition, some of the PDM aircraft delivered had abnormally high levels of required
maintenance resulting in higher costs for those deliveries.  Cost of sales at the CSG increased primarily due to higher training and learning curve costs incurred as the company began work on new types of aircraft.  Costs of sales in MCG
were lower as a result of lower revenue during the first quarter of 2003 versus the first quarter of 2002.

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

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

-15-



---

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

(In $Millions)

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

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

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

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

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

(In $Millions)

|                            |  | 2003 |     | 2002 |  
|--------------------------- |  | ---- | --- | ---- | -
|                            |  |      |     |      |  
|                            |  |      |     |      |  
|Net Income                  |  | $    | 1.3 |      | $
|Interest                    |  |      | 0.2 |      |  
|Taxes                       |  |      | 0.8 |      |  
|Depreciation & Amortization |  |      | 0.7 |      |  
|                            |  |      |     |      |  
|EBITDA                      |  | $    | 3.0 |      | $
|                            |  |      |     |      |  

-16-



---

LIQUIDITY AND CAPITAL RESOURCES

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

(In $Thousands Except Long Term Debt to Equity)

|                          |  | March 31, 2003 |        | December 31, 2002 |   | Change |  
|------------------------- |  | -------------- | ------ | ----------------- | - | ------ | -
|                          |  |                |        |                   |   |        |  
|Cash                      |  | $              | 2,370  |                   | $ | 2,795  |  
|Working Capital           |  |                | 23,773 |                   |   | 23,953 |  
|Revolving credit facility |  |                | 12,266 |                   |   | 10,873 |  
|Long-term debt            |  |                | 7,167  |                   |   | 7,311  |  
|Stockholders equity      |  |                | 13,058 |                   |   | 11,536 |  
|Long-term debt to equity  |  |                | 54.9   | %                 |   | 63.4   | %

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

Operating activities provided $0.7 million of cash for the three months ended March 31, 2003.  Cash was used during the three months ended
March 31, 2002 to purchase $2.5 million of machinery, equipment, and improvements.

At March 31, 2003 the company had additional borrowing capacity of $7.7 million under its revolving line of
credit and $0.3 million under its arrangement with the Dothan-Houston County Airport Authority.

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

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

-17-



---

may need to raise additional capital in the future.  Additional capital may not be available at all, or may not be available on terms favorable to the
company.  Any additional issuance of equity or equity-linked securities may result in substantial dilution to the companys stockholders.  The company is continually monitoring and reevaluating its level of investment in all
of its operations, as well as the financing sources available to achieve its goals in each business area.

COMMITMENTS AND CONTINGENCIES

Facility And Operating Leases

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

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

(In Thousands)

|Year Ending                             |  | Facilities |        | Vehicles and Equipment |   | Total | 
|--------------------------------------- |  | ---------- | ------ | ---------------------- | - | ----- | 
|                                        |  |            |        |                        |   |       | 
|2003                                    |  | $          | 1,602  |                        | $ | 225   | 
|2004                                    |  |            | 1,588  |                        |   | 185   | 
|2005                                    |  |            | 1,371  |                        |   | 149   | 
|2006                                    |  |            | 1,275  |                        |   | 87    | 
|2007                                    |  |            | 1,275  |                        |   | 11    | 
|Thereafter                              |  |            | 15,831 |                        |   | 0     | 
|Total minimum future rental commitments |  | $          | 22,942 |                        | $ | 657   | 

-18-



---

|Repayment Of Long Term Debt
|---------------------------
|                           
|                           

(In
Thousands)

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

| | A significant portion of the 2004 maturity of debt listed above relates to the expiration of the 2-year term of the revolving credit facility that the company originated in
December 2002.  The company expects that it will renew the agreement for an additional 2-year term on the first anniversary of its origination in December 2003 and continue to do so each year, although there can be no assurances in that
regard.  Notwithstanding this intended continuous renewal of the revolving credit facility, the company may elect to pay down the facility out of proceeds from the results of operations, or other potential financing sources, prior to the
scheduled maturity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The above loans are collateralized by substantially all of the assets of the company and have various covenants which limit or prohibit the company from incurring additional
indebtedness, disposing of assets, merging with other entities, declaring dividends, or making capital expenditures 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.                                                                                                                                                                                                                                                                                                                                                                                                        

TRADING ACTIVITIES

The company has not engaged in trading activities or in trading non-exchange traded contracts.  As of March 31, 2003 and 2002, the carrying amounts of the companys financial instruments were estimated to approximate
their fair values, due to their short-term nature, and variable or market interest rates.  The company has not hedged its interest rate or foreign exchange risks through the use of derivative financial instruments.  See Quantitative
and Qualitative Disclosures about Market Risk included in Item 3 of this Report.

-19-



---

RELATED PARTY TRANSACTIONS

The company had accruals of approximately $0.1 million and $0.5 million at March 31,
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 (CEO) $425,000 under the terms of a Promissory Note.  The Promissory Note carries a fixed interest rate of 5% per annum and is payable within 60 days of the CEOs termination of employment with
the company.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Revenue Recognition

The company derives a significant portion of its revenue from contracts accounted for by the
percentage -of- completion method, based on units delivered.  The company regularly reviews its progress on these contracts and reviews the estimated costs of fulfilling its obligations.  If the company does not accurately estimate the
resources required or the scope of the work to be performed, or does not manage these contracts properly within the planned periods of time or satisfy its obligations under the contracts, then future revenue and margins may be significantly and
negatively affected, or losses on existing contracts may need to be recognized.  Any resulting reductions in revenues, margins or contract losses could be material to the companys results of operations.

Deferred Taxes

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

-20-



---

Inventories

The company regularly estimates the degree of technological obsolescence in its raw materials and
finished goods 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. The majority of the companys inventory, work-in-process, is not subject to
technological obsolescence and potential decertification.

Pensions

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

Contingencies

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

-21-



---

BACKLOG

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

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

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

Total commercial backlog increased $3.2 million.  Backlog at the CSG increased $4.6 million while backlog at Pemco Engineers, of the MCG, decreased $1.4 million.  The
increase in backlog at the CSG is due primarily to inputs of cargo conversion aircraft from one of its major customers.  The decrease in Pemco Engineers backlog is a result of a downturn in conversion of aircraft for which the unit produces
cargo-handling systems combined with a decrease in sales of replacement parts for cargo-handling systems on aircraft in service.

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

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

CONTINGENCIES

See Note 6 to the
Consolidated Financial Statements.

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

Some of the information under the
caption Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Quarterly Report contains forward-looking statements.  These forward-looking statements include, but are not
limited to, statements about the companys plans, objectives, expectations and intentions, award or loss of contracts, the outcome of pending or future litigation, estimates of backlog and other statements contained in

-22-



---

this Quarterly Report that are not historical facts.  When used in this Quarterly Report, the words expects, anticipates,
intends, plans, believes, seeks, estimates and similar expressions are generally intended to identify forward-looking statements.  Because these forward-looking statements involve
risks and uncertainties, there are important factors, including the factors discussed under the caption Factors That May Affect Future Performance in the companys 2002 Annual Report on Form 10-K, that could cause actual results to
differ materially from those expressed or implied by these forward-looking statements.  The company cautions readers not to place undue reliance on any forwardlooking statements, which speak only as of the date on which they are
made.  The company does not undertake any obligation to update or revise any forward-looking statements.

Item 3.     Quantitative and Qualitative Disclosures about
Market Risk

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

Item 4.     Controls and Procedures

The company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the companys Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the companys management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this Quarterly Report, the company carried out an evaluation, under the supervision and with the participation of the companys management, including the
companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the companys disclosure controls and procedures.  Based on the foregoing, the companys Chief Executive Officer
and Chief Financial Officer concluded that the companys disclosure controls and procedures were effective.

There have been no significant changes in the companys internal controls or
in other factors that could significantly affect the internal controls subsequent to the date the company completed its evaluation.

-23-



---

PART II     OTHER INFORMATION

Item 1.     Legal
Proceedings

See Note 6 to the Consolidated Financial Statements.

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

| | Exhibits None                                                                             
| | -------------------------------------------------------------------------------------------
| |                                                                                            
| | Reports on Form 8-K.                                                                       
| |                                                                                            
| | a.  For 8-K dated May 8, 2003, and filed May 8, 2003  Press release First Quarter Results.

-24-



---

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:   May 7, 2003 | By: | /s/  RONALD A. ARAMINI                                                                              
|                     |     |                                                                                                     
|                     |     | Ronald A. Aramini, President and Chief Executive Officer (Principal Executive Officer)              
|                     |     |                                                                                                     
|                     |     |                                                                                                     
|Dated:   May 7, 2003 | By: | /s/  JOHN R. LEE                                                                                    
|                     |     |                                                                                                     
|                     |     | John R. Lee, Sr. Vice President and Chief Financial Officer (Principal Finance & Accounting Officer)
|                     |     |                                                                                                     
|                     |     |                                                                                                     

-S1-



---

CERTIFICATIONS

I, Ronald A. Aramini, certify that:

|1. |  | I have reviewed this quarterly report on Form 10-Q of Pemco Aviation Group, Inc.;                                                                                                                                                                                                                                                                                                       
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;                                                          
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;                                                                             
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                                
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | a)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | b)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | c)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):                                                                                                                                           
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | a)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | b)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

|Dated:   May 7, 2003 | By:                                   | /s/  RONALD A. ARAMINI
|-------------------- | ------------------------------------- | ----------------------
|                     |                                       |                       
|                     | President and Chief Executive Officer



---

I, John R. Lee, certify that:

|1. |  | I have reviewed this quarterly report on Form 10-Q of Pemco Aviation Group, Inc.;                                                                                                                                                                                                                                                                                                       
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;                                                          
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;                                                                             
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                                
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | a)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | b)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | c)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):                                                                                                                                           
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | a)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | b)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

|Dated:   May 7, 2003 | By:                                            | /s/  JOHN R. LEE
|-------------------- | ---------------------------------------------- | ----------------
|                     |                                                |                 
|                     | Sr. Vice President and Chief Financial Officer