<PAGE>

                      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 September 30, 2001, or

[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Transition Period From ________ To _________.



                        Commission file number: 0-13829

                          PEMCO AVIATION GROUP, INC.
            (Exact name of registrant as specified in its charter)

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

           1943 North 50/th/ 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  [_] No


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

            Class                              Outstanding at November 6, 2001
            -----                              -------------------------------
Common Stock, $.0001 par value                           4,035,929
<PAGE>

PART I.     FINANCIAL INFORMATION

Item 1.  Financial Statements

                  PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

                                    ASSETS
                                (In Thousands)

                                                 September 30,   December 31,
                                                     2001            2000
                                                  Unaudited
                                                 ------------   -------------
     Current assets:
      Cash                                          $  1,985       $  1,441
      Accounts receivable, net                        17,835         14,121
      Inventories, net                                21,842         16,790
      Deferred income taxes                            1,836          4,800
      Prepaid expenses and other                       1,164          1,755
                                                    --------       --------
        Total current assets                          44,662         38,907
                                                    --------       --------

     Machinery, equipment, and improvements at
     cost:
      Machinery and equipment                         26,567         25,259
      Leasehold improvements                          20,462         17,110
                                                    --------       --------
                                                      47,029         42,369
      Less accumulated depreciation and
      amortization                                   (25,996)       (23,134)
                                                    --------       --------
        Net machinery, equipment, and
        improvements                                  21,033         19,235
                                                    --------       --------

     Other non-current assets:
      Prepaid pension costs                                0            189
      Deposits and other                                 363          1,149
      Intangible assets, net                             403            543
                                                    --------       --------
                                                         766          1,881
                                                    --------       --------
        Total assets                                $ 66,461       $ 60,023
                                                    ========       ========


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

                                      -1-
<PAGE>

                  PEMcCO AVIATION GROUP, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS


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


                                               September 30,      December 31,
                                                   2001              2000
                                                 Unaudited
                                               -------------     -------------
Current liabilities:
 Revolving credit facility                        $ 8,959           $10,296
 Current portion of long-term debt                  2,350             3,674
 Accounts payable                                   2,086             2,482
 Accrued liabilities - payroll related             11,267            12,138
 Accrued liabilities - other                       17,122            14,726
                                                  -------           -------

   Total current liabilities                       41,784            43,316
                                                  -------           -------

Long-term debt                                      4,377             4,139
Other long-term liabilities                         2,640             2,641
                                                  -------           -------
   Total liabilities                               48,801            50,096
                                                  -------           -------


Stockholders' equity:
 Common stock, $.0001 par value,
 12,000,000 shares authorized, 4,032,313
 and 4,027,815 issued and outstanding at
 September 30, 2001 and December 31,
 2000, respectively                                     1                 1
 Additional paid-in capital                         5,130             5,109
 Retained earnings                                 12,529             4,817
                                                  -------           -------

Total stockholders' equity                         17,660             9,927
                                                  -------           -------

Total liabilities and stockholders' equity        $66,461           $60,023
                                                  =======           =======


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

                                      -2-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                 Three                   Three
                                                              Months Ended            Months Ended
                                                              September 30,           September 30,
                                                                  2001                    2000
                                                              -------------           -------------
<S>                                                           <C>                     <C>
Net sales                                                           $41,447                 $40,363
Cost of sales                                                        32,582                  32,416
                                                                    -------                 -------
  Gross profit                                                        8,865                   7,947

Selling, general, and  administrative expenses                        4,771                   4,830
                                                                    -------                 -------
  Income from operations                                              4,094                   3,117

Interest                                                                397                     566
                                                                    -------                 -------

  Income before income taxes                                          3,697                   2,551
Provision for income taxes                                            1,315                     952
                                                                    -------                 -------

  Net income                                                        $ 2,382                 $ 1,599
                                                                    =======                 =======

Net income per common share:
    Basic                                                           $  0.59                 $  0.40
    Diluted                                                         $  0.56                 $  0.37

Weighted average common shares outstanding:
    Basic                                                             4,029                   4,023
    Diluted                                                           4,288                   4,296
</TABLE>

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

                                      -3-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                  Nine                    Nine
                                                              Months Ended            Months Ended
                                                              September 30,           September 30,
                                                                  2001                    2000
                                                              -------------           -------------
<S>                                                           <C>                     <C>
Net sales                                                          $127,237                $127,539
Cost of sales                                                        99,293                 103,213
                                                                   --------                --------
  Gross profit                                                       27,944                  24,326

Selling, general, and  administrative expenses                       15,831                  15,281
                                                                   --------                --------
  Income from operations                                             12,113                   9,045

Interest                                                              1,434                   2,018
                                                                   --------                --------

  Income before income taxes                                         10,679                   7,027
Provision (credit) for income taxes                                   2,968                    (824)
                                                                   --------                --------

Net income                                                         $  7,711                $  7,851
                                                                   ========                ========

Net income per common share:
    Basic                                                          $   1.91                $   1.96
    Diluted                                                        $   1.83                $   1.85

Weighted average common shares outstanding:
    Basic                                                             4,028                   4,006
    Diluted                                                           4,224                   4,235
</TABLE>

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

                                      -4-
<PAGE>

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

<TABLE>
<CAPTION>
                                                              Nine                    Nine
                                                          Months Ended            Months Ended
                                                          September 30,           September 30,
                                                              2001                    2000
                                                          -------------           -------------
<S>                                                       <C>                     <C>
Cash flows from operating activities:
Net income                                                      $ 7,711                 $ 7,851
                                                                -------                 -------

Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization                                     2,862                   2,378
Provision (credit) for deferred income taxes                      2,964                  (1,117)
Pension cost in excess of funding                                 1,039                     913
Amortization of intangible asset                                    140                     125
Changes in assets and liabilities:
Accounts receivable, net                                         (3,714)                  4,997
Inventories                                                      (5,052)                  1,312
Prepaid expenses and other                                          591                    (135)
Deposits and other                                                  786                     215
Accounts payable and accrued liabilities                            279                  (3,336)
                                                                -------                 -------
  Total adjustments                                                (105)                  5,352
                                                                -------                 -------
Net cash provided by operating activities                         7,606                  13,203
                                                                -------                 -------

Cash flows from investing activities:
Capital expenditures                                             (4,660)                 (6,694)
                                                                -------                 -------
  Net cash used in investing activities                          (4,660)                 (6,694)
                                                                -------                 -------

Cash flows from financing activities:
Proceeds from exercise of stock options                              21                     285
Net repayments under revolving credit facility                   (1,334)                 (5,392)
Borrowings under long-term debt                                   2,688                       0
Principal payments under subordinated debt                       (2,460)                 (1,230)
Principal payments under long-term debt                          (1,317)                   (699)
                                                                -------                 -------
Net cash used in financing activities                            (2,402)                 (7,036)
                                                                -------                 -------

Net increase (decrease) in cash                                     544                    (527)
Cash, beginning of period                                         1,441                     527
                                                                -------                 -------
Cash, end of period                                             $ 1,985                       0
                                                                =======                 =======

Supplemental disclosure of cash flow information:
Cash paid during the period for:
  Interest                                                      $ 1,434                 $ 2,018
  Income taxes                                                  $     0                 $   284
</TABLE>

                  The accompanying notes are an integral part
                       of these consolidated statements

                                      -5-
<PAGE>

                  PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       As of and for the Quarters Ended
                          September 30, 2001 and 2000


1.   CONSOLIDATED FINANCIAL STATEMENTS

        The interim consolidated financial statements have been prepared by
        Pemco Aviation Group, Inc. (the "company") following the requirements of
        the Securities and Exchange Commission for interim reporting, and are
        unaudited. In the opinion of management, all adjustments necessary for a
        fair presentation are reflected in the interim financial statements.
        Such adjustments are of a normal and recurring nature. The results of
        operations for the period ended September 30, 2001 are not necessarily
        indicative of the operating results expected for the full year. The
        interim financial statements should be read in conjunction with the
        audited financial statements and notes thereto included in the company's
        2000 Annual Report on Form 10-K.

2.   INVENTORIES

        Inventories as of September 30, 2001 and December 31, 2000 consist of
        the following:

                                        (In Thousands)

                                                 September 30,     December 31,
                                                     2001              2000
                                                 -------------     ------------

             Work in process                           $25,789         $ 27,373
             Finished goods                              2,574            3,143
             Raw materials and supplies                  2,652            2,286
                                                       -------         --------
               Total                                    31,015           32,802
             Less progress payments and
             customer deposits                          (9,173)         (16,012)
                                                       -------         --------
                                                       $21,842         $ 16,790
                                                       =======         ========

        A substantial portion of the above inventory balances relate to U.S.
        Government contracts. The company receives progress payments on the
        majority of its government contracts. The reduction in the progress
        payment balance from December 31, 2000 to September 30, 2001 is the
        result of lower average progress payments per aircraft received during
        2001. The average progress payment per aircraft in 2000 reflects the
        highest average for any year during the term of the current KC135
        contract. The title to all inventories on which the company receives
        these payments is vested in the government to the extent of the progress
        payment balance.

                                      -6-
<PAGE>

3.  NET INCOME PER SHARE

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

        The following table represents the net income per share calculations for
        the three month and nine month periods ended September 30, 2001 and
        2000:

              (All numbers In Thousands, except Income Per Share)

                                                 Three               Nine
                                              Months ended       Months Ended
                                              September 30       September 30
                                              ------------       ------------

          2001
          Net Income                                $2,382             $7,711
          Weighted Average Shares                    4,029              4,028
          Basic Net Income Per Share                $ 0.59             $ 1.91
          Dilutive Securities: Options                 259                196
          Diluted Weighted Average Shares            4,288              4,224
          Diluted Net Income Per Share              $ 0.56             $ 1.83

          2000
          Net Income                                $1,599             $7,851
          Weighted Average Shares                    4,023              4,006
          Basic Net Income Per Share                $ 0.40             $ 1.96
          Dilutive Securities: Options                 273                229
          Diluted Weighted Average Shares            4,296              4,235
          Diluted Net Income Per Share              $ 0.37             $ 1.85

        Options to purchase approximately 101,000 and 46,000 shares of common
        stock related to September 30, 2001 and 2000, 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-
<PAGE>

4.  DEBT

     Debt as of September 30, 2001 and December 31, 2000 consists of the
following:

                                (In Thousands)


                                                  September 30,   December 31,
                                                      2001           2000
                                                 --------------   ------------
         Revolving credit facility                  $ 8,959         $10,296
                                                    =======         =======
         Senior Subordinated Loan;
         interest at 13.5%                          $     0         $ 2,460
         Term Loan A;
         interest at Prime plus 0.50%
         (6.00% at September 30, 2001)                2,900           2,900
         Term Loan B;
         interest at Prime plus 0.75%
         (6.25% at September 30, 2001)                1,138           1,925
         Capital Equipment Acquisition Facility;
         interest at Prime plus 0.50%
         (6.00% at September 30, 2001)                  788               0
         Term Loan C;
         interest at Prime plus 0.75%
         (6.25% at September 30, 2001)                1,504               0
         Other obligations: interest from  8.75% to
         10.95%, collateralized by security interest
         in certain equipment                           397             528

                                                      -----         -------
         Total long-term debt                         6,727           7,813
         Less portion reflected as current            2,350           3,674
                                                    -------         -------
         Long term-debt, net of current portion     $ 4,377         $ 4,139
                                                    =======         =======

     The company maintains a $20.0 million revolving credit facility, three term
     loans that were originated at $6.9 million in the aggregate, and a capital
     equipment acquisition facility of $3.1 million. Additional amounts
     available under the revolving credit facility at September 30, 2001, based
     upon the calculation that defines the borrowing base, totaled $11.0
     million.  Under the capital equipment facility, borrowing availability is
     tied to a percentage of the value of certain capital assets acquired since
     January 1, 2000 and capital assets that are acquired in future periods. At
     September 30, 2001, the company had $2.3 million of additional borrowing
     capacity under the capital equipment facility.

     Due to the "Lockbox" provisions of the company's revolving credit facility
     with its lender, coupled with a subjective acceleration clause, all of the
     revolving credit facility has been classified as current per the Emerging
     Issues Task Force ("ETIF") of the Financial Accounting Standards Board,
     EITF Issue No. 95-22, notwithstanding the three-


                                      -8-
<PAGE>

     year term of the credit agreement. Management does not believe that the
     subjective acceleration clause will be invoked, although there can be no
     assurances in that regard.

     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. The company was in compliance with its debt covenants as of
     September 30, 2001.

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

5.  CONTINGENCIES

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

     A Significant Portion of the Company's Revenue is Derived From a Few of its
     Customers- A small number of the company's customers account for a
     significant percentage of its revenues.  The KC-135 program comprised 61.1%
     and 60.5% of the company's total revenues for the nine-month period ended
     September 30, 2001 and 2000, respectively.   The company's two largest
     customers generated approximately 74.6% of its revenues during this same
     period of 2001 and 65.3% in 2000. Termination or a disruption of its
     significant customer contracts, or the inability of the company to renew or
     replace any of these customer contracts when they expire, could materially
     harm the company's business and impair the value of its common stock.
     Reference should be made to the company's 2000 Annual Report on Form 10-K
     for a description of the status of the KC-135 contract.

                                      -9-
<PAGE>

     Litigation

     Reference should be made to the company's 2000 Annual Report on Form 10-K
     and subsequent Quarterly Reports on Form 10-Q for a description of the
     material legal proceedings of the company.

6. INCOME TAXES

     The company maintains a valuation allowance for its deferred income taxes
     unless realization is considered more likely than not.  As a result of the
     company's losses during 1997, the company provided a valuation allowance
     through its tax provision to fully reserve for its deferred tax assets at
     December 31, 1997.  Since 1997, the company has returned to profitability
     and generated taxable income for which net operating loss carry-forwards
     were utilized.  The net deferred tax assets at September 30, 2001 and 2000
     reflect the portion of total deferred taxes for which management considers
     the realization through future profitability to be more likely than not.
     At September 30, 2001 the company had a remaining deferred tax valuation
     allowance of $6.1 million.

7. RECLASSIFICATIONS

     Certain amounts in the 2000 Statements of Operations have been reclassified
     to conform to the 2001 presentation.  These reclassifications have no
     effect on Net Income or Shareholders' Equity.

8. SEGMENT INFORMATION

     The company has three reportable segments: Government Services Group,
     Commercial Services Group, and Manufacturing and Overhaul Group.  The
     Government Services Group, located in Birmingham, Alabama, provides
     aircraft maintenance and modification services for government and military
     customers.  The Commercial Services Group, located in Dothan, Alabama,
     provides commercial aircraft maintenance and modification services on a
     contract basis to the owners and operators of large commercial aircraft.
     The Manufacturing and Overhaul Group, located in California and Florida,
     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 2000 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

                                      -10-
<PAGE>

     and services. They are managed separately because each business requires
     different operating and marketing strategies. The Commercial Services and
     Manufacturing and Overhaul segments may generate sales to governmental
     entities and the Government Services segment may generate sales to
     commercial entities.

     During the third quarter of 2000 the Company restated $1.2 million of
     international sales previously reported in the Commercial Services Group to
     the Manufacturing and Overhaul Group. The restatement had no effect on
     overall sales or earnings for the Company.

                                      -11-
<PAGE>

     The following table presents information about segment profit or loss for
     the three months ended September 30, 2001 and 2000:

<TABLE>
<CAPTION>
                                                    (In Thousands)
                                                                            Manufacturing
Three Months Ended September 30, 2001          Government    Commercial        & Overhaul      Consolidated
                                               ----------    ----------     -------------      ------------
<S>                                            <C>           <C>            <C>                <C>
Revenues from external domestic customers         $26,179       $10,677           $ 4,591           $41,447
Revenues from external foreign customers                0             0                 0                 0
Inter-segment revenues                                 40             0                 0                40
                                                  -------       -------           -------           -------
Total segment revenues                            $26,219       $10,677           $ 4,591           $41,487
Elimination                                                                                             (40)
                                                                                                    -------
Total Revenue                                                                                       $41,447
                                                                                                    =======

Gross profit                                        6,512           969             1,384             8,865
Segment operating income (loss)                     4,305          (575)              364             4,094
Interest expense                                                                                        397
Income taxes                                                                                          1,315
                                                                                                    -------
Net income                                                                                          $ 2,382
                                                                                                    =======

Assets                                             38,775        16,641            11,045            66,461
Depreciation/amortization                             465           132                69               666
Capital Additions                                     763           395                32             1,190

<CAPTION>
                                                                            Manufacturing
Three Months Ended September 30, 2000          Government    Commercial        & Overhaul      Consolidated
                                               ----------    ----------     -------------      ------------
<S>                                            <C>           <C>            <C>                <C>
Revenues from external domestic customers         $29,158       $ 7,908           $ 3,188          $40,254
Revenues from external foreign customers                0        (1,196)            1,305              109
Inter-segment revenues                                466             0                 2              468
                                                  -------       -------           -------          -------
Total segment revenues                            $29,624       $ 6,712           $ 4,495          $40,831
Elimination                                                                                           (468)
                                                                                                   -------
Total Revenue                                                                                      $40,363
                                                                                                   =======

Gross profit                                        7,636          (722)            1,033            7,947
Segment operating income (loss)                     5,197        (2,035)              (45)           3,117
Interest expense                                                                                       566
Income taxes                                                                                           952
                                                                                                   -------
Net income                                                                                         $ 1,599
                                                                                                   =======

Assets                                            $30,665       $12,691           $11,526          $54,882
Depreciation/amortization                             391           117               112              620
Capital Additions                                   1,621           676               104            2,401
</TABLE>

                                      -12-
<PAGE>

     The following table presents information about segment profit or loss for
     the nine months ended September 30, 2001 and 2000:

                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                            Manufacturing
Nine Months Ended September 30, 2001           Government    Commercial        & Overhaul      Consolidated
                                               ----------    ----------     -------------      ------------
<S>                                            <C>           <C>            <C>                <C>
Revenues from external domestic customers         $79,721       $32,736           $11,352          $123,809
Revenues from external foreign customers                0         2,228             1,200             3,428
Inter-segment revenues                                184             0                 0               184
                                                  -------       -------           -------          --------
Total segment revenues                            $79,905       $34,964           $12,552          $127,421
Elimination                                                                                            (184)
                                                                                                   --------
Total Revenue                                                                                      $127,237
                                                                                                   ========

Gross profit                                       20,096         4,397             3,451            27,944
Segment operating income (loss)                    13,619        (1,439)              (67)           12,113
Interest expense                                                                                      1,434
Income taxes                                                                                          2,968
                                                                                                   --------
Net income                                                                                         $  7,711
                                                                                                   ========

Assets                                            $38,775        16,641            11,045            66,461
Depreciation/amortization                           1,416           333               207             1,956
Capital Additions                                   3,248         1,315                97             4,660

<CAPTION>
                                                                            Manufacturing
Nine Months Ended September 30, 2001           Government    Commercial        & Overhaul      Consolidated
                                               ----------    ----------     -------------      ------------
<S>                                            <C>           <C>            <C>                <C>
Revenues from external domestic customers         $82,741       $30,417           $13,076          $126,234
Revenues from external foreign customers                0             0             1,305             1,305
Inter-segment revenues                                694             0                14               708
                                                  -------       -------           -------          --------
Total segment revenues                            $83,435       $30,417           $14,395          $128,247
Elimination                                                                                            (708)
                                                                                                   --------
Total Revenue                                                                                      $127,539
                                                                                                   ========

Gross profit                                       20,699           432             3,195            24,326
Segment operating income (loss)                    13,417        (4,330)              (42)            9,045
Interest expense                                                                                      2,018
Income taxes                                                                                           (824)
                                                                                                   --------
Net income                                                                                         $  7,851
                                                                                                   ========

Assets                                            $30,665       $12,691           $11,526          $ 54,882
Depreciation/amortization                           1,166           412               256             1,834
Capital Additions                                   4,684         1,702               308             6,694
</TABLE>

                                      -13-
<PAGE>

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 September 30, 2001
Versus three months ended September 30, 2000

The table below presents major highlights from the quarters ended September 30,
2001 and 2000.

                                               (In $Millions)

                                        2001        2000       Change
                                     ----------  ----------   -----------


           Revenue                     $41.4         $40.4          2.5%
           Operating income              4.1           3.1         32.3%
           Income before taxes           3.7           2.6         42.3%
           Net income                    2.4           1.6         50.0%
           EBITDA                        4.8           3.7         29.7%


Sales in the Government Services Group decreased $3.4 million during the third
quarter of 2001, or 11.5%, from $29.6 million in 2000 to $26.2 million in 2001.
This decrease was due primarily to processing fewer aircraft under the C-130
paint contract of $1.7 million; lower revenue generation in the KC-135 Program
Depot Maintenance (PDM) contract of $1.1 million due to delivering fewer PDM
aircraft in the quarter offset, partially, by higher time and materials sales;
and lower revenue in other contracts of $0.6 million. Sales in the Commercial
Services Group increased by $4.0 million or approximately 59.7%, during the
third quarter of 2001, from $6.7 million in 2000 to $10.7 million in 2001.  This
increase was primarily due to an increase in commercial Maintenance, Repair and
Overhaul revenues of $6.6 million, offset by lower revenue on government
contracts of $2.6 million.  The Manufacturing & Overhaul Group saw its revenues
increase slightly, $0.1 million, approximately 2.2%, during the third quarter of
2001, from $ 4.5 million in 2000 to $4.6 million in 2001, due to higher revenue,
$0.5 million, in the Space Vector subsidiary offset by lower revenue in the PASS
and Pemco Engineers subsidiaries of $0.1 million and $0.3 million respectively.

Without regard to operating segments, the company's mix of business between
government and commercial customers shifted from 27.4% commercial and 72.6%
government during the third quarter of 2000 to 30.7% commercial and 69.3%
government in 2001.

Cost of sales increased during the third quarter from $32.4 million in 2000 to
$32.6 million in 2001, primarily as a result of increased revenue. This $0.2
million increase in the cost of sales was offset by higher production
efficiencies during the quarter in the company's Commercial Services Group and
Government Services Group.  Overall, the gross profit percentage of the company
increased

                                      -14-
<PAGE>

from 19.7% in the third quarter of 2000 to 21.4% in the third quarter of 2001.

Selling, general, and administrative ("SG&A") expenses remained at approximately
$4.8 million during the third quarter of both 2000 and 2001.

Interest expense was $0.6 million during the third quarter of 2000 versus $0.4
million during the same period in 2001.  The effective average interest rate on
the company's revolving credit facility was approximately 13.00% in 2000 and
6.57% in 2001.

During the third quarter the company recorded income taxes of $1.0 million and
$1.3 million for 2000 and 2001, respectively.

Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") was
approximately $4.8 million for the three months ended September 30, 2001
compared to $3.7 million for the three months ended September 30, 2000.

Nine months ended September 30, 2001
Versus Nine months ended September 30, 2000

The table below presents major highlights from the nine month periods ended
September 30, 2001 and 2000.

                                                    (In $Millions)

                                             2001         2000       Change
                                          ---------    ---------    ---------

           Revenue                          $127.2       $127.5      (0.2%)
           Operating income                   12.1          9.0      34.4%
           Income before taxes                10.7          7.0      52.9%
           Net income                          7.7          7.9      (2.5%)
           EBITDA                             14.1         10.9      29.4%


Sales in the Government Services Group decreased $3.5 million or 4.2%, from
$83.4 million in 2000 to $79.9 million in 2001.  This decrease was due primarily
to processing fewer aircraft under the C-130 paint contract, $4.8 million,
offset by greater time and materials sales in the KC-135 Program Depot
Maintenance (PDM) and other contracts of $1.3 million.  Sales in the Commercial
Services Group increased by $4.6 million or approximately 15.1%, for the nine
months ended September 30, 2001, from $30.4 million in 2000 to $35.0 million in
2001.  This increase was primarily due to an increase in commercial Maintenance,
Repair and Overhaul revenues of $9.4 million. This increase was offset by lower
revenue on government contracts of $4.8 million.  The Manufacturing & Overhaul
Group saw its revenues decline $1.9 million, approximately 13.2% for the nine
months ended September 30, 2001, from $14.4 million in 2000 to $12.5 million in
2001, this decrease was due to lower revenue in the Space Vector and Pemco
Engineers subsidiaries of $1.5 million and $0.5 million, respectively, partially
offset by an increase of $0.1 million at the PASS subsidiary.  Intercompany
eliminations of revenue were $0.1 million and $0.7 million in the nine months
ended September 30, 2001 and 2000, respectively.

                                      -15-
<PAGE>

Without regard to operating segments, the company's mix of business between
government and commercial customers shifted from 34.9% commercial and 65.1%
government during the nine months ended September 30, 2000 to 33.5% commercial
and 66.5% government in 2001.

Cost of sales decreased during the nine months ended September 30 from $103.2
million in 2000 to $99.3 million in 2001.  In addition to the normal decrease in
costs associated with the slightly decreased revenue, cost of sales was also
affected by higher production efficiencies during the year in the company's
Commercial Services Group and Government Services Group.  Overall, the company's
gross profit percentage increased from 19.1% in the nine months ended September
30, 2000 to 22.0% in the same period of 2001.

SG&A expenses increased during the nine months ended September 30, from $15.3
million in 2000 to $15.8 million in 2001.  This increase in SG&A expenses is due
primarily to increased rates of spending in Engineering, Business Development
and other SG&A areas and reflects the effects of the company's efforts to
strengthen and improve these areas in 2001.

Interest expense was $2.0 million for the nine months ended September 30, 2000
versus $1.4 million during the same period in 2001.  The effective average
interest rate on the company's revolving credit facility was approximately 12.6%
in 2000 and 7.56% in 2001.

Net income results for the nine months ended September 30, 2001 and September
30, 2000 reflect the favorable impact of adjustments made to the company's
deferred tax valuation allowance.  These adjustments were made in the second
quarter of both years.  In 2001, this adjustment added $1.0 million to net
income while in 2000 this adjustment added $2.1 million.  In addition, the tax
provision in the first nine months of 2000 was lower than the statutory rate
because of alternate minimum tax considerations.

EBITDA was approximately $14.1 million for the nine months ended September 30,
2001, compared to $10.9 million for the nine months ended September 30, 2000.

Liquidity and Capital Resources

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

                                 (In $Thousands Except Long Term Debt to Equity)

                                     September 30,   December 31,
                                         2001            2000        Change
                                    -------------   -------------  ----------

Cash                                   $ 1,985         $ 1,441      $   544
Working Capital                          2,878          (4,409)       7,287
Revolving credit facility                8,959          10,296       (1,337)
Long term debt and capital lease         4,377           4,139          238
 obligations
Shareholders' equity                    17,660           9,927        7,733
Long term debt to equity                  24.8%           41.7%        16.9%

                                      -16-
<PAGE>

The company's revolving credit facility is included in current liabilities.  See
Note 4 to the Consolidated Financial Statements for detailed explanations of the
company's debt and the classification of the revolving credit facility as
current.  Management does not believe that the subjective acceleration clause,
mentioned in Note 4 will be invoked, although there can be no assurances in that
regard.

Operating activities provided $7.6 million of cash for the nine months ended
September 30, 2001.  During this same period, the company borrowed $1.9 million
as a discretionary term loan and $0.8 million on its capital equipment
acquisition facility.  These two new loans carry variable interest rates, which
were 6.00% and 6.25%, respectively, at September 30, 2001.  Cash was used during
the nine months ended September 30, 2001 for $4.7 million of capital
expenditures and to make the final two payments, totaling $2.5 million, under
the company's Senior Subordinated debt agreement.

At September 30, 2001 the company had additional borrowing capacity of $2.3
million under its capital equipment acquisition facility and $11.0 million under
its revolving line of credit.

On September 21, 2001 the Board of Directors authorized the company to
repurchase up to 400,000 shares of its common stock, representing approximately
10% of the company's issued and outstanding shares.  The repurchases are
authorized to be made from time to time through open market purchases, privately
negotiated transactions, or both.  The Board of Directors approved the
repurchase program after considering current economic and market factors and the
company's capital position.  The program does not obligate the company to
acquire any particular number of shares and may be suspended at any time at the
company's discretion.  As of the date of this report, the company has
repurchased 2,500 shares.  All shares were acquired subsequent to September 30,
2001.

The company maintains a defined benefit pension plan (the "Plan") that covers
substantially all employees at its Birmingham and Dothan, Alabama facilities. As
disclosed in the company's 2000 Annual Report on Form 10-K, 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. Due to the level of risk associated with certain investment
securities, changes in the values of the investment securities have occurred and
could continue in the near term. The impact of a continued decline in the fair
value of such securities could cause the company to increase its funding of the
Plan as required by law. Such funding requirement, which is not yet
determinable, would be required in fiscal 2002. Management continues to monitor
this requirement and will implement strategies to offset any material funding
requirements that are necessary.

Funding for the advancement of the company's strategic goals, including
investment in targeted business areas and acquisitions, is expected to continue.
The company plans to finance its capital expenditures, working capital and
liquidity requirements through the most advantageous sources of capital
available to the company at the time, which may include the sale of equity or
debt securities through public offerings or private placements, the incurrence
of additional indebtedness through secured or unsecured borrowings and the
reinvestment of proceeds from the disposition of assets.  The company believes
that its internally generated liquidity, together

                                      -17-
<PAGE>

with access to external capital resources, will be sufficient to satisfy
existing commitments and plans for at least the next twelve months. However, the
company could elect, or could be required, to raise additional funds during that
period, and the company may need to raise additional capital in the future.
Additional capital may not be available at all, or may not be available on terms
favorable to the company. Any additional issuance of equity or equity-linked
securities may result in substantial dilution to the company's stockholders. The
company is continually monitoring and reevaluating its level of investment in
all of its operations, as well as the financing sources available to achieve its
goals in each business area.

Backlog

The following table presents the company's backlog (in thousands of dollars) at
September 30, 2001 and September 30, 2000:


                Customer Type             2001              2000
                --------------           -------          --------

                U.S. Government          $115,079          $120,211

                Commercial                 15,055            14,294
                                         --------          --------

                Total                    $130,134          $134,505
                                         ========          ========

Government backlog, which represents 88.4% of the company's total backlog,
decreased $5.1 million, or 4.3%.  Space Vector accounted for $2.0 million of
this decrease due to completion of contracts in 2000.  The 2001 Government
backlog does not include the full potential amount from the recent award of new
business to the company's Space Vector subsidiary, as it has not, as of the date
of this report, been fully funded.  In addition, the backlog does not include
several other contract awards that are, as of the date of this report, not yet
funded.  Backlog at the company's Government Services Group decreased $2.0
million as a result of lower year over year inductions of aircraft under the
final year of the KC135 contract. Government backlog also decreased $1.1
million, in the Commercial Services Group, as a result of completing the H-3
helicopter contract.

Substantially all of the company's government backlog scheduled for delivery can
be terminated at the convenience of the U.S. Government since orders are often
placed well before delivery, and the company's contracts typically provide that
orders may be terminated with limited or no penalties.

The company's commercial backlog at September 30, 2001 increased $0.8 million or
5.3%.    The Commercial Services Group increased backlog by $1.1 million over
the third quarter of 2000.  This increase was partially offset by a $0.3 million
decrease of backlog at the Pemco Engineers operating unit.

The company has historically derived approximately $0.40 in additional sales for
each dollar represented in its backlog.  The backlog is based upon fixed prices
for specific scopes of work.  In performing this work the company frequently
discovers necessary repairs that are in addition to the original scope.  These
additional repairs, which are approved by the customers before being

                                      -18-
<PAGE>

performed, often lead to "over and above" time and materials sales.

As previously announced by the company, and in furtherance of disclosure found
in the company's 2000 Annual Report on Form 10K, the company is in the final
stages of negotiation of a long-term contract with The Boeing Company for PDM
work on the KC-135 aircraft for the United States Air Force.  As of the date of
this report, the company has inducted five KC-135 aircraft at its Birmingham
facility under an interim agreement in anticipation of finalization of a long-
term agreement.

The company is actively engaged in pursuing both additional contracts and new
customers on a regular basis.  While there can be no guarantee of success, the
company expects that it will be awarded additional orders and contracts in the
normal course of business.

Contingencies

See Note 5 to the Consolidated Financial Statements.

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

Some of the information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this
Quarterly Report contains forward-looking statements.  These forward-looking
statements include, but are not limited to, statements about the company's
plans, objectives, expectations and intentions, award or loss of contracts, the
outcome of pending or future litigation, estimates of backlog and other
statements contained in this Quarterly Report that are not historical facts.
When used in this Quarterly Report, the words "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions are
generally intended to identify forward-looking statements.  Because these
forward-looking statements involve risks and uncertainties, there are important
factors, including the factors discussed under the caption "Factors That May
Affect Future Performance" in the company's 2000 Annual Report on Form 10-K,
that could cause actual results to differ materially from those expressed or
implied by these forward-looking statements.  The company cautions readers not
to place undue reliance on any forward-looking statements, which speak only as
of the date on which they are made.  The company does not undertake any
obligation to update or revise any forward-looking statements.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

The company is exposed to market risk from changes in interest rates as part of
its normal operations. The company maintains various debt instruments to finance
its business operations.  The debt consists of fixed and variable rate debt.
The variable rate debt is related to the company's revolving line of credit,
term loans, and capital equipment acquisition facility as noted in Note 4 to the
Consolidated Financial Statements and bears interest at prime plus 0.50% or
0.75%, depending upon the loan (6.00% and 6.25% at September 30, 2001).  If the
prime rate had increased 100 basis points, net income would have been reduced by
approximately $40,000 during the quarter, and $114,000 during the year.

                                      -19-
<PAGE>

PART II   OTHER INFORMATION

Item 1.  Legal Proceedings

See Note 5 to the Consolidated Financial Statements.

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

         a. Exhibits

         None.

         b.  Reports on Form 8-K. No Reports on Form 8-K were filed with the
Securities and Exchange Commission during the quarter ended September 30, 2001.

                                      -20-
<PAGE>

                                  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: November 12, 2001              By:/s/ Ronald A. Aramini
       -----------------                 ---------------------
                                         Ronald A. Aramini, President
                                         and Chief Executive Officer
                                         (Principal Executive Officer)


Dated: November 12, 2001              By:/s/ John R. Lee
       -----------------                 -----------------
                                         John R. Lee, Sr. Vice President and
                                         Chief Financial Officer
                                         (Principal Finance & Accounting
                                         Officer)

                                      -21-