UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, ~~2003~~2008,

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

For ~~The~~the Transition Period From To .

Commission File Number: 0-13829

~~PEMCO~~ALABAMA ~~AVIATION~~AIRCRAFT ~~GROUP~~INDUSTRIES, 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)

1943 North 50th Street, Birmingham, Alabama		35212
(Address of principal executive offices)		(Zip Code)

205-592-0011

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None


Common Stock, $.0001 par value		The NASDAQ Stock Market LLC
(Title of each class)		(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

~~Common~~Indicate ~~Stock~~by check mark whether the Company is a well-known seasoned issuer, ~~$.0001~~as ~~par~~defined ~~value~~in Rule 405 of the Securities Act of 1933. ¨ Yes x No

Indicate by check mark whether the Company is not required to file reports pursuant to Section 13 or Section 15(~~Title~~d) of ~~Class)~~the Securities Exchange Act of 1934. ¨ Yes x No

Indicate by check mark whether the ~~company~~ Company (1) has filed all reports required to be filed by ~~Section~~ Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the ~~company~~Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of ~~company~~ the Company’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the ~~company~~registrant is a large accelerated filer, an accelerated filer, ~~(as~~a ~~defined~~non-accelerated infiler, ~~the~~or a smaller ~~Exchange~~reporting ~~Act~~company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2). ¨of ~~Yes~~the xExchange NoAct.

~~The~~(Check ~~aggregate~~one): ~~market~~Large ~~value~~accelerated offiler ~~the~~¨ ~~Common~~Accelerated ~~Stock~~filer ~~held~~¨ ~~by non~~Non-~~affiliates~~accelerated onfiler ~~June~~¨ ~~30,~~Smaller ~~2003~~reporting ~~was~~company ~~approximately~~x ~~$23,689,000.~~ (Do not check if a smaller reporting company)

~~The~~Indicate ~~number~~by ofcheck ~~shares~~mark ofwhether the ~~company’s~~Company ~~Common~~is ~~Stock~~a ~~outstanding~~shell company (as ~~of April~~defined ~~12,~~in ~~2004~~Rule ~~was~~12b-2 ~~4,045,402~~of the Exchange Act). ¨ Yes x No

~~DOCUMENTS INCORPORATED~~The BYaggregate ~~REFERENCE~~market value of the Common Stock held by non-affiliates on June 30, 2008 was approximately $2,665,043.

~~Portions~~The number of shares of the ~~company~~Company’s ~~definitive~~Common ~~proxy statement~~Stock tooutstanding beas ~~filed pursuant to Regulation 14A not later than 120 days after the end~~ of ~~the fiscal year (December 31~~March 23, ~~2003)~~2009 ~~are~~was ~~incorporated by reference in Part III~~4,128,950.

FORM 10-K ANNUAL REPORT

FOR THE YEAR ENDED DECEMBER 31, ~~2003~~2008

~~PEMCO~~ALABAMA ~~AVIATION~~AIRCRAFT ~~GROUP~~INDUSTRIES, INC.

		Page
PART I
Item 1.	Business	1
Item 2.	Properties	12
Item 1A.	Risk Factors	10
Item 3.	Legal Proceedings	13
Item 1B.	Unresolved Staff Comments	15
Item 4.	Submission of Matters to a Vote of Security Holders	15
Item 2.	Properties	16
Item 3.	Legal Proceedings	16
Item 4.	Submission of Matters to a Vote of Security Holders	17
PART II
Item 5.	Market for ~~company~~Company’s Common Equity, ~~and~~ Related Stockholder Matters and Issuer Purchases of Equity Securities	1518
Item 6.	Selected Financial Data	1518
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	3730
Item 8.	Financial Statements and Supplementary Data	3831
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	8164
Item 9A.	Controls and Procedures	81
Item 9A(T).	Controls and Procedures	64
Item 9B.	Other Information	65
PART III
Item 10.	Directors, ~~and~~ Executive Officers ofand ~~the~~Corporate ~~company~~Governance	8266
Item 11.	Executive Compensation	8269
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	8275
Item 13.	Certain Relationships and Related Transactions, and Director Independence	8277
Item 14.	Principal Accountant Fees and Services	8278
PART IV
Item 15.	Exhibits, and Financial Statement Schedules ~~and Reports on Form 8-K~~	8379
SIGNATURES		87

- i -

FORWARD-LOOKING STATEMENTS—CAUTIONARY LANGUAGE

Some of the information under the captions “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended). These forward-looking statements include, but are not limited to, statements about Alabama Aircraft Industries, Inc.’s (the “Company”) plans, objectives, expectations and intentions, the Company’s delisting from The Nasdaq Stock Market LLC, award or loss of contracts, the outcome of pending or future litigation, estimates of backlog and other statements contained in this Annual Report that are not historical facts. When used in this Annual Report, the words “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “may”, “will”, “should”, “could” 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 in the section below entitled “Item 1A. Risk Factors”, which 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.

- ii -

PART I

Item 1. Business.

A. GENERAL

~~Pemco~~Alabama ~~Aviation~~Aircraft ~~Group~~Industries, Inc., (“AAII” or the “~~company~~Company”), is aan ~~diversified~~ aerospace and defense company ~~composed~~whose ofprimary ~~three~~business ~~operating~~is ~~segments:~~providing aircraft ~~Government~~maintenance ~~Services~~and modification services to the U.S. Government, ~~Commercial~~including ~~Services~~complete airframe inspection, maintenance, repair and ~~Manufacturing~~custom airframe design and ~~Components~~modification. The ~~company~~ Company’s ~~primary~~Manufacturing ~~business~~and Components Segment (“MCS”), which is ~~providing~~comprised ~~aircraft~~solely ~~maintenance~~by ~~and~~Space ~~modification~~Vector ~~services~~Corporation (“SVC”), ~~including~~was ~~complete~~being ~~airframe~~marketed ~~inspection,~~for ~~maintenance~~sale at December 31, ~~repair~~2008 and ~~custom~~was ~~airframe~~sold ~~design~~during the first quarter of 2009, and ~~modification~~is presented herein as discontinued operations. The businesses historically comprising the Commercial Services Segment (“CSS”) were sold in the third quarter of 2007 and are presented herein as discontinued operations.

The ~~company~~Company provides ~~such~~aircraft maintenance and modification services for government and military customers primarily through its Government Services Segment (“GSS”), which specializes in providing Programmed Depot Maintenance (“PDM”) on large transport aircraft. In addition to PDM, various other repair, maintenance, and modification services are performed for the GSS’s customers. The GSS’s contracts are generally multi-aircraft programs lasting several years. The Company believes that GSS’s facilities, tooling, experienced labor force, quality, and on -time delivery record position it currently as one of ~~the~~ ~~premiere~~the premier providers of PDM for large transport aircraft in the country. The GSS is the only remaining segment of the Company’s continuing operations so all segment related disclosures are not required.

The ~~company~~ Company’s ~~Commercial~~website ~~Services~~address ~~Segment~~is ~~(“CSS”) provides commercial aircraft maintenance and modification services on a contract basis to the owners and operators of large commercial aircraft~~www. ~~The CSS provides commercial aircraft maintenance varying in scope from a single aircraft serviced over a few days to multi-aircraft programs lasting several years~~alabamaaircraft.com. The ~~CSS~~Company ismakes ~~able~~available tofree ~~offer~~of ~~full~~charge ~~range~~through ~~maintenance~~its ~~support~~website ~~services~~its toannual ~~airlines~~report ~~coupled~~on ~~with the related technical services~~Form ~~required~~10-K, byquarterly ~~these~~reports ~~customers.~~on ~~The~~Form ~~CSS also has broad experience in modifying commercial aircraft and providing value~~10-~~added technical solutions~~Q, ~~and~~current ~~holds~~reports ~~over~~on 70Form ~~proprietary Supplemental Type Certificates (“STCs”). The CSS’s facilities~~8-K, ~~tooling,~~ and ~~experienced~~all ~~labor~~amendments ~~force enable it~~ to ~~perform~~those areports ~~broad~~as ~~range~~soon ofas ~~airframe~~reasonably ~~modifications~~practicable ~~for~~after ~~its~~such ~~customers.~~materials ~~The~~have ~~CSS~~been ~~has~~filed ~~performed~~with ~~nearly~~or ~~300~~furnished ~~cargo~~to ~~conversions~~the ~~encompassing~~Securities ~~19 different types of narrow~~ and ~~wide-body~~Exchange ~~commercial~~Commission ~~aircraft and is currently investigating the economic potential of converting the Boeing 757 to freighter configuration~~(“SEC”).

The company’s Manufacturing and Components Segment (“MCS”) designs and manufactures a wide array of proprietary aerospace products including various space systems, such as guidance control systems and launch vehicles; aircraft cargo-handling systems; and precision parts and components for aircraft.

The company’s website address is www.pemcoaviationgroup.com. The company makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material has been filed with or furnished to the Securities and Exchange Commission.

B. SIGNIFICANT DEVELOPMENTS

~~Coast~~Delisting ~~Guard~~and ~~C-130~~Deregistration ~~Contract~~of ~~Award~~Common Stock and Suspension of Reporting Obligations.

~~During~~On ~~August~~March 16, ~~2003~~2009, the ~~GSS~~Board ~~was~~of Directors ~~awarded~~of aAAII ~~contract~~unanimously voted to delist AAII Common Stock (“Common Stock”) from ~~the~~The ~~United~~Nasdaq ~~States~~Stock ~~Coast~~Market ~~Guard~~LLC (“~~USCG~~NASDAQ”) and to ~~perform~~voluntarily ~~depot~~terminate ~~level~~the ~~maintenance~~registration ~~and~~of ~~repairs~~its onCommon ~~HC-130~~Stock under the Securities and Exchange Act ~~aircraft~~of 1934, as amended (the “Exchange Act”). ~~The~~In ~~contract~~connection ~~includes~~therewith, athe ~~base~~Company ~~period~~notified NASDAQ on March 18, 2009 of ~~two~~the ~~years~~Company’s intention to file a Form 25 with ~~three~~the ~~one-year~~SEC ~~options~~on or about March 31, 2009 in order to voluntarily delist its Common Stock. ~~The~~On ~~company~~March 31, ~~received~~2009, AAII filed a Form 25 with the ~~first~~SEC ~~HC-130~~to ~~aircraft~~delist its Common Stock from NASDAQ and to deregister its Common Stock with the SEC under ~~this~~Section 12(b) ~~contract~~of inthe ~~January~~Exchange ~~2004~~Act. ~~The~~By ~~estimated~~operation ~~value~~ of ~~this~~law, ~~effort~~the delisting will become effective on April 10, ~~including~~2009. Additionally, on March 30, 2009, the ~~three~~Company ~~one~~filed with the SEC post-~~year~~effective ~~options,~~amendments isto its registration statements on Form S-8 in order to remove from registration under the ~~approximately~~Securities $Act of 1933 any of the securities that remained unsold under each such registration statement as of March 30, 2009.

On April 10, 2009, the effective date of the delisting of the Company’s Common Stock from NASDAQ, the Company intends to file a Form 15 with the SEC in order to deregister its Common Stock with the SEC under Section 12(g) of the Exchange Act and to suspend AAII’s reporting obligations under the Section 15(d) of the Exchange Act. The Company is eligible to file a Form 15 to deregister its Common Stock under Section 12(g) and to suspend its reporting obligations under Section 15(d) because it has fewer than 300 holders of record of its Common Stock. Upon filing of the Form 15 with the SEC, the Company’s obligations to file certain reports with the SEC, including Forms 10-K, 10-Q and 8-K, will be suspended immediately. Additionally, the Company expects the deregistration of its Common Stock with the SEC under Section 12 of the Exchange Act to become effective 90 days after filing the Form 15 with the SEC unless such date is extended or accelerated by the SEC. Following the effectiveness of the Form 25, the Company expects to be quoted on the Pink Sheets.

~~million.~~Financial ~~During~~Condition ~~the second quarter~~ of ~~2003,~~ the ~~company~~Company ~~received one HC-130 aircraft from the USCG in anticipation of the contract award. The company anticipates completion of this aircraft during the first quarter of 2004.~~

The Company’s primary sources of liquidity and capital resources include cash-on-hand and cash flows from operations (primarily from collection of accounts receivable and conversion of work-in-process inventory to cash). Principal factors affecting the Company’s liquidity and capital resources position include, but are not limited to, the following: results of operations; the number of KC-135 inducted as a result of the U.S. Air Force (“USAF”) Cextension of the Company’s KC-~~130~~135 ~~Spar~~bridge ~~Inspection~~contract ~~Contract~~with ~~Award~~The Boeing Company (“Boeing”); collection of accounts receivable; funding requirements associated with the Company’s defined benefit pension plan (“Pension Plan”); settlements of various claims; legal cost related to the KC-135 PDM contract award; and the payment terms of any short-term or long-term debt. Due to the current state of the credit markets in the United States, there is uncertainty as to whether the Company would be able to obtain additional financing from lenders during 2009. The Company anticipates that cash-on-hand will be sufficient to fund operations, make moderate capital expenditures, make scheduled interest payments on its debt obligation for the next twelve months and make the required contributions to its Pension Plan.

~~During~~Sale ~~the first quarter~~ of ~~2003,~~Space the company was awarded a contract from the United States Air Force (“USAF”) to perform spar inspections on C-130 aircraft. The company received its first C-130 aircraft under this contract during February 2003. TheVector estimated value of this effort is approximately $2.4 million. During 2003, the company delivered four aircraft under this contract and recognized related revenues of $0.8 million. This contract is expected to continue through 2005.

~~B737~~On March 31, 2009, the Company sold all of the outstanding stock in SVC, a wholly-~~200/300~~owned ~~Conversion~~subsidiary ~~Approvals~~of AAII-Birmingham, Inc., to a group of investors. The historical financial results of SVC have been presented in the accompanying financial statements as discontinued operations for all periods presented. The Company received $250,000 at closing. The Company also retained an interest in a portion of certain contract settlements which may be received by SVC in the future. All of the proceeds from the sale of SVC will be used to reduce the Company’s long-term debt. The Company recorded a $1.9 million impairment charge during the fourth quarter of 2008 to adjust the value of its investment in SVC to the net realizable value from the sale.

InSale ~~January 2003, the General Administration~~ of ~~Civil~~Pemco ~~Aviation of China (“CAAC”)~~World ~~approved~~Air ~~the~~Services company’s B737-300 aircraft cargo conversion for operations in China. In September 2003, the United Kingdom Civil Aviation Authority (“UK-CAA”) issued certification approval of the company’s B737-200/300 aircraft cargo conversion. The company believes that it has the only CAAC or UK-CAA approved certifications in the world to perform this type of conversion on Boeing 737-200/300 aircraft. During 2003, the company’s CSS completed six passenger-to-cargo conversions on B737-300 aircraft, several of which are in operation in China. The company anticipates growth for aircraft operating in the cargo environment over the next decade. The company believes its approvals from many airworthiness authorities throughout the world to perform such passenger to cargo conversions demonstrates its commitment to the quality of its conversion program and uniquely positions the company as a leader in the conversion market.

~~GECAS~~On ~~B737-300~~September 19, ~~Conversion~~2007, ~~Contract~~the Company sold all of the outstanding stock in Pemco World Air Services, Inc., a wholly owned subsidiary of the Company (“PWAS”), to WAS Aviation Services, Inc., an affiliate of Sun Capital Partners, Inc. (“WAS”). The sale was approved by the Company’s stockholders on September 17, 2007. As part of the transaction, the Company changed its name from Pemco Aviation Group, Inc. to Alabama Aircraft Industries, Inc. PWAS historically has comprised substantially all of the CSS. The historical financial results of PWAS have been presented in the accompanying consolidated financial statements as discontinued operations for all periods presented.

InRepayment January 2003, the company received a contract from GE Capital Aviation Services (“GECAS”) to perform conversions on B737-300 aircraft from passenger-to-freighter configuration and passenger-to-quick-change configuration. The contract included six firm orders and four options. The company delivered six aircraft under this contract during 2003 and recognized related revenue of ~~$20.4~~Certain ~~million.~~Debt

~~Treasury~~On ~~Stock~~December 16, 2002, the Company entered into a Credit Agreement with Wachovia Bank and Compass Bank (the “Credit Agreement”) that provided for a revolving credit facility and various term loans (“Bank Debt”). On October 12, 2006, the Company entered into an Amended and Restated Credit Agreement (“Amended Credit Agreement”) with Wachovia Bank and Compass Bank. On September 19, 2007, the Company paid off the Bank Debt with the proceeds from the sale of PWAS. A Dothan Airport Authority term loan was paid off on October 4, 2007. In addition to eliminating the Bank Debt and the Dothan Airport Authority term loan, the sale provided approximately $8.0 million of cash for future working capital needs.

~~During~~Severance ~~the~~Agreements ~~second quarter of 2003, the Board~~With ofCertain ~~Directors~~Key ~~authorized~~Employees the company to repurchase up to an additional 200,000 shares of its common stock, representing approximately 5% of the company’s issued and outstanding shares (“new repurchase program”). The repurchases are authorized to be made from time to time through open market purchases, privately negotiated transactions or both, at prices to be determined by the Investment Committee of the Board of Directors. The Board of Directors approved the new repurchase program after considering current economic market factors and the company’s capital position. As of December 31, 2003, the company had acquired approximately 11,000 shares under the new repurchase program.

~~During~~On January 21, 2008, the ~~third~~Compensation ~~quarter~~Committee of ~~2001,~~ the Company’s Board of Directors ~~authorized~~approved the ~~company to repurchase~~ upAlabama toAircraft ~~400~~Industries,~~000~~ ~~shares~~Inc. ofExecutive ~~its~~Retention ~~common~~Plan ~~stock,~~(the ~~representing~~“Executive ~~approximately~~Retention ~~10%~~Plan”). The purpose of the ~~company’s~~Executive ~~issued~~Retention ~~and~~Plan ~~outstanding~~is ~~shares~~to ~~(“prior~~replace ~~repurchase~~the ~~program”)~~Pemco Aviation Group, Inc. ~~The~~Separation ~~company~~Benefit ~~acquired~~Plan, ~~approximately~~which ~~349~~terminated on December 1,~~000~~ ~~shares~~2007, ~~under~~and to act as a retention incentive by providing certain eligible executives of the ~~prior~~Company ~~repurchase program,~~with ~~which~~severance ~~was~~payments in the event their employment is terminated ~~and~~either ~~replaced~~by the Company without cause or by the ~~new~~executive ~~repurchase~~for ~~program~~good reason.

AsIf a covered executive’s employment is terminated by the Company without cause or by the executive for good reason, payments under the Executive Retention Plan are due if the executive is ineligible for severance payments under another existing employment letter, agreement or arrangement. No payments will be made to a covered executive pursuant to the Executive Retention Plan if his or her employment is terminated by the Company at any time with cause or upon the executive’s resignation without good reason. For each covered executive, the Executive Retention Plan provides for severance payments in the form of ~~December~~base salary continuation for a 365-day period and the payment of a post-tax lump sum equal to the executive’s total group health insurance continuation (COBRA) premiums for the base salary continuation period. On October 8, 2008, the Compensation Committee of the Board of Directors approved a First Amendment, effective September 30, 2008, to the Plan (“Amendment”). The Executive Retention Plan was initially scheduled to expire on December 31, ~~2003~~2008, or the ~~company~~date as of which all payments due to be made under it had ~~repurchased~~been ~~approximately~~made. Under ~~360~~the Amendment,~~000~~ ~~shares~~the ~~under~~Executive Retention Plan will automatically extend on the ~~new~~last ~~and~~day ~~prior~~of ~~repurchase~~each calendar quarter for an additional ~~programs~~12 months from such date, unless the Board terminates the Executive Retention Plan, in which case the Executive Retention Plan will terminate at athe ~~cost~~end of ~~approximately~~the $7last 12-month extension.0 In ~~million~~accordance with the terms of the Executive Retention Plan, each of the three covered executives consented to the Amendment by executing an amendment to their coverage letters on or prior to October 10, 2008.

~~Defined~~Eligible ~~Benefit~~employees ~~Pension~~under the Executive Retention Plan include employees of the Company or subsidiaries of the Company who have received a Coverage Letter under the Executive Retention Plan, so long as the employee, as of his or her termination date, (1) has not previously agreed in writing to waive eligibility for the Executive Retention Plan and (2) has no employment agreement or arrangement that provides for the payment of employment separation benefits (other than agreements or arrangements that provide for the payment of separation benefits solely in connection with or due to (a) the sale of any stock or assets of the Company and/or its subsidiaries or the merger or consolidation of the Company and/or subsidiary of the Company, or (b) a change in the membership of the Board of Directors of the Company and/or subsidiary of the Company that is a “change of control” or “change of ownership” under such an employment agreement or arrangement). Eligible employees currently include individuals who are the named executive officers of the Company.

As a result of unfavorable investment returns related to the company’s Defined Benefit Pension Plan (the “Plan”) during 2002 and 2001, coupled with an increase in actuarial liability resulting from lower interest rates, the Plan was underKC-~~funded~~135 ~~by approximately $26.5 million at December 31,~~PDM ~~2003.~~Contract Pursuant to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), minimum funding requirements, the company made contributions to the Plan during 2003 of approximately $11.0 million. The company anticipates that it will be required to make contributions of approximately $8.6 million to the Plan during 2004.

CThe financial condition and results of operations of the Company, which operated as a subcontractor to Boeing have been impacted by several unusual events in connection with the USAF KC-135 PDM program and the related recompetition for the new KC-135 PDM contract award. ~~INDUSTRY~~As ~~OUTLOOK~~discussed in previous filings, from May 2005 through June 2006, the Company worked in cooperation with Boeing to submit a proposal on the new KC-135 contract under a Memorandum of Agreement with Boeing (“MOA”). After filing an initial proposal with the USAF, which included critical financial and operational information on the Company’s KC-135 program, the Company believes Boeing breached the MOA due to the USAF’s reducing the number of aircraft in the request for proposal. From July 2006 to September 2007, the Company prepared its own proposal for the new KC-135 contract. The Company’s proposal for the KC-135 PDM program was unsuccessful as the contract was awarded to Boeing in September 2007. The Company filed a protest with the Government Accountability Office (“GAO”) and the GAO upheld in part the Company’s protest on the basis that the USAF failed to conduct a proper analysis of Boeing’s cost/price proposal for realism or potential risk. On March 3, 2008, the USAF advised the GAO that in response to the recommendation by the GAO it had completed additional review and that the Company’s proposal was not selected for award. The Company filed a protest on the new award decision on March 11, 2008 as to the USAF’s lack of proper evaluation to meet GAO recommendations and sudden post-award change of work scope under the contract recompete. On June 13, 2008, the GAO denied the Company’s March 11, 2008 protest. On June 27, 2008, the Company filed a complaint in the United States Court of Federal Claims (the “Court”) protesting the actions of the USAF in connection with the award to Boeing of the KC-135 PDM contract. On July 3, 2008, the Court granted Boeing’s motion to intervene in the case. On September 30, 2008, the Court set aside the KC-135 PDM solicitation enjoining the USAF from proceeding with the award to Boeing and requiring a resolicitation of the procurement that will explicitly address the role of the aging KC-135 fleet on

Although the impact of September 11, 2001 will be felt in the aviation industry for years to come, the air travel market and the related commercial aircraft maintenance market are showing signs of recovery. The U.S. airline industry’s loss is expected to total about $5 billion in 2003, a significant improvement from the $11.3 billion loss in 2002. Passenger traffic trends also suggest expected improvements in the market. The Federal Aviation Administration (“FAA”) forecasts enplanements for U.S. airlines to grow from 549.5 million in 2003 to 573.7 million in 2004, a 4.4% growth rate. The same report forecasts Revenue Passenger Miles (“RPMs” – one revenue passenger flown one mile) to grow from 620.1 billion in 2003 to 641.4 billion in 2004,, a growth rate of 3.4%. Over the next 10 years, the FAA expects enplanements and RPMs to grow at average annual growth rates of 3.6% and 3.9%, respectively.

Aircraft operators continue to be pressured to lower their direct operating costs. A primary driver of this pressure is reduced yields. Air Transport Association member airlines reported average yields dropped from 12.05¢ per RPM in 2002 to 11.95¢ in 2003, a drop of 0.8%. In the wake of airline bankruptcies and tight military budgets, maintenance costs stand out as one of the only true controllable expenses. As such, both military and commercial operators are focused on the ways in which they can reduce their maintenance costs, and outsourcing to independent service providers has become more prevalent. In the commercial market, airlines such as United have already taken significant steps toward outsourcing man-power intensive activities such as heavy maintenance and signs continue to be positive that the third-party maintenance and modification industry will be the beneficiary of these trends in the coming years.

Military Maintenance and Modification Industry

Continuing conflicts in Iraq and Afghanistan and the deployment of various military aircraft to support these missions illustrate the operational requirements of the U.S. Armed Forces. This deployment requirement has insulated the military maintenance and modification industry from many of the effects of shrinking defense budgets. Budget restrictions have limited the U.S. Government’s ability to replace substantial portions of its aging transport fleets. The U.S. Government thus continues to utilize older aircraft. Typically, these older aircraft require more service than newer aircraft, generating greater revenue for the military maintenance and modification sector of the industry.

One of the company’s core competencies for 50 years has been military aircraft maintenance and modification. The company believes that this core competency will enable it to continue to provide

~~services~~the ~~directly~~PDM toprocess. ~~its~~In ~~military~~February ~~customers~~2009, the USAF and toBoeing ~~participate~~filed inappeals ~~teaming~~of ~~arrangements~~the ~~with~~Court’s ~~public~~ruling orwith ~~private~~the ~~operators~~U.S. ~~Bundling~~Court ~~requirements,~~of ~~however,~~Appeals ~~may limit~~for the ~~company’s~~Federal ~~ability~~Circuit (“Federal Circuit”). The Company expects to ~~compete~~file ~~for~~a ~~major~~cross ~~new~~appeal ~~military~~with ~~contracts~~the asFederal aCircuit ~~prime~~in ~~contractor~~the second quarter of 2009. InThe ~~order~~Company expects the appeals process before the Federal Circuit to ~~mitigate~~be resolved in the ~~effects~~fourth quarter of ~~contract~~2009 ~~bundling,~~or the first ~~company~~quarter ~~plans~~of to2010. ~~team~~The Company is currently negotiating a subcontract with ~~other~~Boeing ~~contractors~~for ~~whenever~~KC-135 ~~desirable~~PDM work to be performed until a new solicitation and award is completed by the USAF pursuant to the Court’s order.

~~Commercial~~GECAS ~~Maintenance~~Lawsuits ~~and Modification Industry~~

~~Recovery~~On ~~trends~~January 16, ~~carry~~2004, ~~over from~~ the ~~air~~Company filed ~~travel~~a ~~market~~complaint ~~into~~in the ~~commercial~~Circuit ~~airframe~~Court ~~heavy maintenance~~of ~~market.~~Dale ~~Maintenance~~County, ~~Repair~~Alabama ~~and~~against ~~Overhaul~~GE Capital Aviation Services, Inc. (“~~MRO~~GECAS”) ~~industry~~for ~~consultants~~monies owed for modification and maintenance services provided on six 737-300 aircraft, ~~Aerostrategy~~all of which were re-delivered to GECAS during 2003 and are in service. On January 20, ~~estimate~~2004, the ~~2003~~Company ~~total~~received ~~market~~service ~~for~~of ~~airframe~~a ~~heavy~~suit ~~maintenance~~filed atagainst $5the Company’s former subsidiary, Pemco World Air Services Inc.3, ~~billion~~in ~~worldwide~~New York state court, claiming breach of contract with regard ~~approximately~~to ~~40%~~two of the aircraft re-delivered, oras ~~just~~well ~~over~~as $2fraud ~~billion~~and conversion. On March 5, of2004, the Company filed a motion to dismiss the claims filed by GECAS in New York state court, which was denied. On March 24, 2004, the Circuit Court ~~this~~of ~~demand~~Dale ~~generated~~County, Alabama denied a motion filed by GECAS to dismiss or stay the proceedings. GECAS subsequently paid in ~~North~~full ~~America~~charges owed on four of the six aircraft. The ~~industry~~New ~~experts~~York ~~forecast~~state ~~this~~court ~~market~~ordered tomediation ~~grow~~in atthe 6matter.4% ~~annually~~Mediation took place on October 6, a2004, ~~worldwide~~but ~~basis~~was unsuccessful in bringing resolution. Thereafter, the Company and 4GECAS amended to add additional claims and counterclaims, respectively.1% ~~annually~~The case was again mediated on October 6, 2006 without success. On October 16, 2006, the Alabama state court granted the Company partial summary judgment as to two of the eight GECAS counterclaims. Trial of the case commenced in ~~North~~Alabama ~~America~~state court, in the Circuit Court of Dale County, on March 30, 2009. The New York state court has scheduled the case for trial on June 10, 2009 in the event the matter is not resolved in the Alabama proceeding. Management believes there is a remote chance that the outcome of these lawsuits will have a material impact on the Company’s financial position or results of operations.

~~The~~L-3 ~~company~~Communications, ~~anticipates~~Integrated ~~that~~Systems ~~the~~Division ~~portion of commercial aircraft maintenance that is outsourced to independent suppliers will continue to grow in response to pressures to further reduce operating costs~~U. ~~Further supporting the growth of the outsourced market is the continued success of low cost carriers (“LCCs”) which typically outsource most or all of their maintenance~~S. ~~Based~~ onNavy ~~anticipated~~P-3 ~~fleet~~SMIP ~~and~~Award maintenance market growth, and the company’s expectation that outsourcing airframe maintenance should continue to increase, the company believes that the market segment in which it operates could grow ~~substantially over the next several years.~~

~~The~~In ~~air~~an ~~cargo~~agreement ~~industry~~announced ~~and~~in ~~the corresponding~~February ~~demand~~2005, ~~for~~L-3 ~~freighter~~Integrated ~~aircraft~~Systems ~~also~~(“L-3 ~~suffered~~IS”), ~~post-9/11.~~a ~~According~~division toof ~~Boeing~~L-3 Communications, inInc., ~~1999~~announced that ~~and~~it ~~2000~~had selected the ~~air~~Company ~~cargo~~as ~~market~~a ~~grew~~partner ~~6.2%~~to pursue and ~~7.1%,~~execute ~~respectively~~military aircraft maintenance contracts. In ~~2001~~July 2005, ~~that~~the ~~market~~L-3/AAII-Birmingham ~~declined~~team 5received a contract award from the U.9% S. ~~Similar~~Navy to ~~the~~perform ~~passenger~~P-3 ~~market,~~maintenance ~~these~~and ~~impacts~~modification work ~~lingered~~under the Sustainment Modification and Inspection Program (“SMIP”). The contract is an indefinite delivery, ~~but~~indefinite quantity contract with the ~~air~~U.S. ~~cargo~~Navy ~~market~~Aviation ~~shows~~Program ~~signs~~Management ofAgency. ~~recovery,~~The contract encompasses periodic maintenance and ~~growth~~unscheduled ~~through~~or ~~2023~~special isrepairs ~~projected~~and atmodifications 6for U.4%S. ~~annually~~Navy P-3 aircraft as required. ~~Over~~The ~~this~~subcontract ~~period~~with ofL-3 ~~time,~~IS ~~industry~~was ~~estimates~~finalized ~~suggest~~during ~~that~~September ~~nearly~~2005. ~~3,000~~The ~~freighter~~Company had one P-3 aircraft ~~will~~in bework ~~added~~at toDecember 31, ~~the~~2008 ~~fleet~~and toinducted ~~support~~another ~~market~~P-3 ~~growth~~aircraft ~~and~~in ~~anticipated~~March ~~retirement~~2009. ofAlthough ~~older~~the Company believes additional aircraft. ~~Nearly~~will ~~75%~~be inducted prior to end of ~~those~~contract, ~~additions~~the ~~are~~Company ~~expected~~can toprovide beno ~~supplied~~assurance bythat ~~passenger~~more toinductions ~~freighter~~will ~~conversions~~occur.

~~Space~~The ~~Systems~~Company believes the U.S. Navy intends to recompete the P-3 SMIP in 2009 or 2010. Should that be the case, the Company intends to submit a proposal to perform the work on that program as a prime contractor, however, the Company can provide no assurances that the U.S. Navy will release a Request for Proposal, that the Company’s proposal will be accepted or how much work it would receive under this program if its proposal was accepted.

~~The~~C-130 ~~primary~~Strip ~~focus~~Contract ofAward company’s Space Vector subsidiary is to provide launch vehicles and/or associated subsystems for various National Missile Defense programs and other governmental agencies. While no new target vehicles were open to competitive bid during 2003, Space Vector expects to compete for several target missions scheduled for release during 2004. Although Space Vector has served the missile community since 1969, and is one of only four companies in the country that currently provide high fidelity guided target vehicles, no assurance can be given that Space Vector will receive significant amounts of work on new missile defense programs.

On February 20, 2009 the Company was awarded a contract from the USAF to perform de-paint and safety of flight repairs on various USAF and U.S. Navy C-130 aircraft. The contract carries a term of one base period of six months and one option period of six months. The Company is under contract to induct 19 aircraft during the first six months of the program with the possibility of additional aircraft inductions at a later date.

D.Defined ~~PRINCIPAL~~Benefit ~~PRODUCTS~~Pension ~~AND~~Plan ~~SERVICES~~

~~Aircraft~~On ~~Maintenance~~February 29, &2008, ~~Modification~~the Company applied to the Internal Revenue Service (“IRS”) for a waiver of contributions for the 2007 plan year which concluded on September 15, 2008. On September 15, 2008, the Company contributed $3.9 million to the Pension Plan, fully satisfying the contribution requirements for the 2007 plan year. On March 30, 2009, the IRS granted the waiver request resulting in a deferral of required contributions for the 2007 plan year being spread over the next five years. As a result of the waiver, the pension payment for the 2007 plan year is now considered a payment for the 2008 plan year. The remaining amount owed for the 2008 plan year of $0.5 million was made during the first quarter of 2009. As a result of the missed quarterly contributions while the waiver request was under consideration, the Pension Benefit Guaranty Corporation (“PBGC”) filed liens on the Company’s assets. The PBGC will maintain a lien on the Company’s assets over the time period of the deferral of the 2007 plan year contributions, which will be approximately five years.

~~General~~The Pension Plan was under-funded by approximately $33.1 million and $9.2 million at December 31, 2008 and 2007, respectively (See Note 9 to the Consolidated Financial Statements) primarily due to inconsistent investment returns including large losses in the equity portion of the investment portfolio in 2008, and to a lesser extent an increase in actuarial liability resulting from lower interest rates, increased mortality rates and the terms of the collective bargaining agreements entered into in 2005. The Company froze the Pension Plan effective December 31, 2007 for all non-union employees. Pursuant to the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the Company made contributions to the Pension Plan during 2008 and 2007 of approximately $3.9 million and $9.1 million, respectively. The Company is required to contribute $3.5 million to the Pension Plan during 2009. The losses incurred in 2008 will likely result in substantially increased contributions to the Pension Plan in 2010 and beyond.

The company’s aircraft maintenance and modification services include complete airframe maintenance and repair, and custom airframe design and modification, coupled with technical publications and after market supportC. A majority of the services are provided under multi-year programs for both military and commercial customers. The company’s military customers include the United States Armed Forces (“Armed Forces”) and certain foreignINDUSTRY ~~military~~OUTLOOK ~~services. The company’s commercial customers include some of the major global lessors of aircraft as well as airlines and airfreight carriers.~~

~~The~~Military ~~company~~Maintenance ~~employs a large skilled work force. The principal services performed are PDM, commercial “C”-level~~ and ~~“D”-level~~Modification ~~heavy~~Industry maintenance checks, passenger-to-cargo conversions, passenger-to-quick-change conversions, aircraft stripping and painting, rewiring, parts fabrication and engineering support. While some of these services are performed exclusively for either military or commercial customers, the majority of the services are performed for both customer groups.

The ~~company’s~~Company ~~competition~~focuses ~~for~~on ~~military~~the ~~aircraft~~ maintenance ~~contracts~~and ~~includes~~modification ~~Boeing~~of ~~Aerospace~~military ~~Support Center~~transport, ~~Lockheed-Martin~~tanker ~~Aeromod, L-3 Communications,~~ and ~~various~~patrol ~~military~~aircraft ~~depots.~~airframes, ~~The~~primarily ~~company’s competition~~ for ~~outsourced commercial~~U.S. ~~work~~military incustomers. ~~the~~This ~~United~~market ~~States~~is ~~consists~~one segment of ~~the~~a ~~Goodrich~~worldwide ~~Airframe Services Division~~military maintenance, ~~Timco~~repair ~~Aviation~~and ~~Services,~~overhaul ~~Singapore~~(“MRO”) ~~Technologies~~market ~~(which~~that includes ~~Mobile~~depot ~~Aerospace~~level ~~Engineering,~~maintenance ~~San~~for ~~Antonio Aerospace~~airframe, ~~and~~engines ~~Dalfort Aerospace),~~ and ~~approximately ten~~components. ~~smaller~~Military ~~independent~~aircraft ~~repair and modification~~ operators. ~~While~~continue ~~many~~to offace ~~the~~pressure ~~company’s~~to ~~competitors~~lower ~~tend~~their tooperating ~~specialize~~costs. onWhile ~~specific~~the ~~portions~~Department of Defense ~~the~~budget ~~aircraft,~~reflects ~~the~~a ~~company~~year-to-year ~~focuses~~increase onin ~~total~~the ~~airframe~~Operations ~~repair,~~and ~~maintenance~~Maintenance ~~and~~budget ~~conversion.~~line, ~~The~~increased ~~company considers~~operational ~~its~~requirements ~~competitive~~and ~~strengths~~their toassociated becosts ~~its~~are ~~emphasis~~consuming onan ~~quality,~~increasing ~~record~~share of ~~on-time~~the ~~delivery,~~budget. ~~substantial~~In ~~capacity,~~the awake ~~trained,~~of ~~experienced,~~tight ~~and~~military ~~stable~~budgets, ~~labor~~the Company ~~force,~~believes ~~product~~that ~~support,~~maintenance ~~proprietary~~costs ~~products,~~will ~~systems~~be ~~integration~~closely ~~capability,~~scrutinized ~~and~~by ~~strong customer~~its ~~base~~customers.

~~Government~~While ~~Services~~the ~~Segment~~aging of the military transport, tanker and patrol aircraft fleets, along with the high operational requirements and budget restrictions for the acquisition of new aircraft, have limited the impact on this market from many of the effects of defense budget cuts, the Company has experienced a reduction in recent years in the number of KC-135, C-130 and P-3 aircraft being inducted due to the continuing late fiscal year funding shifts associated with U.S. Armed Forces activity in Iraq and Afghanistan. Furthermore, in the event that it fails in its efforts to win the USAF’s KC-135 contract award, the Company may entirely lose its KC-135 based business. See “KC-135 PDM Contract” above for additional information regarding the KC-135 contract. Military depots such as Warner Robins Air Logistics Center and Oklahoma City Air Logistics Center currently perform more than 75% of U.S. military airframe MRO work. The Company believes that the balance of maintaining government-operated depot capabilities and dependence upon private-sector contractors will not change dramatically in the near term.

The ~~company~~Company ~~provides~~participated ~~aircraft~~in ~~maintenance~~the ~~and modification services either directly as a prime contractor or indirectly as a sub~~re-~~contractor.~~compete ~~These services are provided to the Armed Forces and other agencies~~ of the ~~U.S. Government, as well as foreign military services through its GSS. The majority of the aircraft that the company~~Flexible ~~services~~Acquisition ~~are~~and ~~transports~~Sustainment ~~such~~Tool ~~as the C-130~~ (“~~Hercules~~FAST”) ~~and~~by ~~refueling aircraft such as~~ the ~~KC-135~~USAF. ~~Currently,~~FAST ~~the U.S. KC-135 tanker fleet~~ is ~~estimated~~the tocurrent ~~include~~Warner ~~over~~Robins ~~500~~Air ~~aircraft,~~Logistics ~~and~~Center isprogram ~~projected~~of tochoice befor inacquiring ~~service~~contractor ~~through 2040. These~~ aircraft are essential to support peacetime operations and war or contingency deployments. The Armed Forces cannot deploy without these resources. The demands placed on these aircraft mean that they require maintenance services such as those provided by the company.

Military contracts generally specify a certain number of aircraft to be serviced for the duration of the program. In addition to the number of aircraft originally contracted, the Armed Forces typically increase this number with aircraft that were not scheduled for maintenance but which require servicing. These “drop-in” aircraft generally increase the value of each contract. The company intends to use its experience and expertise to retain its existing contracts, as well as increase the likelihood of securing additional contracts in the future.

The principal services performed under military contracts are PDM, systems integration of component upgrades and modification of fixed wing aircraft. The PDM is the most thorough scheduled maintenance “check-up” for a military aircraft, entailing a bolt-by-bolt, wire-by-wire and section-by-section examination of the entire aircraft. The typical PDM program involves a nose to tail inspection and a repair program on a four or five-year cycle. In addition to heavy maintenance, the program can include airframe corrosion prevention and control, rewiring, component overhauls, and structural, avionics and various other system modifications.

Atsupport for the ~~onset~~military ofdepot. ~~the~~The ~~PDM~~re-compete, ~~the~~Future ~~aircraft~~Flexible Acquisition and Sustainment Tool (“F2AST”), was awarded to 12 prime contractors in September 2008. The Company is ~~generally~~a ~~stripped~~subcontractor on 9 of ~~paint~~the ~~and~~12 teams. The Company expects an increase in C-130 related work from this program. The Company is currently in the ~~entire~~process ~~airframe~~of proposing to induct, ~~including~~through ~~the~~our ~~ribbings~~Lockheed Martin partner, ~~skins~~a ~~and~~USAF contracted, ~~wings~~foreign government owned, ~~undergoes~~Foreign Military Sales (“FMS”) C-130 into the Birmingham facility. Though the Company cannot guarantee that a ~~thorough~~contract will be issued, this aircraft would be the first of potentially several FMS ~~structural~~aircraft. ~~examination~~The Company, ~~which~~if ~~can~~put ~~result~~under contract, would have a subcontract with Lockheed Martin and in ~~repairs~~turn, toLockheed Martin would have a contract, through F2AST, with the ~~airframe~~U.S. Government. The Company believes that the volume of FMS related aircraft’s work ~~avionics~~will ~~receive~~increase ~~examination~~in future years. This program will provide the Company with wide exposure throughout the FMS C-130 community and ~~repair,~~also ~~replacement~~allows orthe Company to do an avionics modification asto ~~required.~~a C-130 aircraft for the first time since the late 1990s. The Company also expects to compete on additional work on P-3 aircraft isin ~~repainted~~2009. Approximately 39 P-3 aircraft were grounded at ~~the~~December 31, ~~completion~~2008 ofdue ~~the~~to ~~overhaul~~structural issues.

In order for the company to efficiently complete its maintenance procedures, it maintains hydraulic, electrical, sheet metal and machine shops to satisfy all of its testing and assembly needs and to fabricate, repair and restore parts and components for aircraft structural repairsD. ~~The~~PRINCIPAL ~~company~~PRODUCTS ~~also~~AND ~~performs~~SERVICES in-house heat treatment on alloys used in aircraft modifications and repairs and has complete non-destructive testing capabilities and test laboratories. The company’s work force is familiar with virtually all aspects of military aircraft maintenance, repair, and overhaul.

~~The~~Aircraft ~~company~~Maintenance & ~~has~~Modification provided quality maintenance, integration and modification work on a wide variety of military aircraft over the past 50 years, including C-130, KC-135, C-9, P-3, T-34, A-10, F-4, F-15, F-16, T-38 and U.S. Navy H-2 and H-3 helicopters.

InThe ~~August~~Company ~~1994,~~provides ~~the~~aircraft ~~USAF~~maintenance ~~awarded~~and ~~the~~modification ~~company~~services, awhich ~~contract~~include ~~for~~complete ~~the~~airframe ~~PDM~~maintenance ofand ~~its~~repair, ~~KC-135~~and ~~aircraft consisting~~custom ofairframe ~~one base year~~ design and ~~six option years~~modification. ~~The~~A ~~company~~majority ~~completed~~of ~~work on~~ the ~~final~~services ~~aircraft~~are ~~inducted~~provided ~~for PDM~~ under ~~this~~multi-year ~~contract~~programs ~~during 2003. On December 12, 2001 the company entered into a contract with Boeing Aerospace Support Center to serve as a subcontractor to Boeing~~ for ~~PDM~~military ~~on KC-135 aircraft~~customers. InThe ~~effect this new contract continues the company~~Company’s ~~involvement~~military incustomers ~~KC-135~~include ~~aircraft~~the ~~PDM~~U.S. ~~The~~Armed ~~contract~~Forces ~~provides~~(the ~~for~~“Armed ~~one~~Forces”) ~~base year~~ and ~~five~~certain ~~option~~foreign ~~years~~military ~~with~~services. ~~an estimated value of $600~~The ~~million~~Company inemploys ~~revenues~~a ~~over~~large, ~~the~~skilled ~~course~~work offorce. ~~the~~The ~~agreement~~principal ifservices ~~all~~performed ~~options~~ are ~~exercised.~~PDM, ~~The~~aircraft ~~company~~modifications, isaircraft ~~currently~~stripping ~~operating~~and inpainting, ~~the~~rewiring, ~~second~~parts ~~option~~fabrication, ~~year~~and engineering support.

The ~~company~~Company’s ~~first~~competitors ~~performed~~for ~~PDM~~military onaircraft ~~the~~maintenance KCcontracts include Boeing LSS, Lockheed-~~135~~Martin inAircraft ~~1968~~and Logistics Center, L-3 Communications, and ~~has~~various ~~since~~military ~~processed~~depots. ~~over~~The 3Company considers its competitive strengths to be its emphasis on quality,~~000~~ ~~such~~its ~~aircraft~~record of on-time delivery, its substantial capacity, its trained, experienced and stable labor force, product support and systems integration capability.

AsThe ~~the~~Company ~~USAF~~provides ~~continues~~aircraft tomaintenance ~~upgrade~~ and ~~modernize~~modification ~~the~~services ~~KC-135~~either ~~fleet~~directly toas ~~ensure~~a ~~its~~prime contractor ~~viability~~or ~~through~~indirectly ~~2040,~~as ~~the~~a KCsub-~~135~~contractor ~~PDM program is anticipated~~ to ~~further~~the ~~expand~~Armed toForces ~~include~~and ~~additional~~other ~~upgrades~~agencies ~~such~~of asthe ~~new~~U.S. ~~cockpit~~Government, ~~lavatories,~~as ~~and~~well ~~avionics~~as ~~systems~~foreign governments. The ~~company~~majority ~~has~~of ~~performed~~the ~~other~~aircraft ~~major~~that ~~upgrades~~the inCompany ~~the~~services ~~past,~~are ~~including~~transports ~~wing~~such reas the C-~~skin~~130 “Hercules”, refueling ~~major~~aircraft ~~rewire,~~such ~~corrosion~~as ~~prevention~~the ~~control~~KC-135, ~~auto pilot~~ and ~~fuel~~ ~~savings~~the ~~advisory~~P-3 ~~system~~patrol ~~modifications~~aircraft.

InMilitary ~~August~~contracts ~~2003,~~generally ~~the~~specify ~~company was awarded~~ a ~~contract~~certain ~~from~~number ~~the USCG consisting~~ of ~~two~~aircraft ~~base years and three one-year options~~ to be ~~perform~~serviced ~~depot~~for ~~level~~the ~~maintenance~~duration ~~and~~of ~~repairs~~the ~~on HC-130 aircraft~~program. ~~The~~In ~~contract~~addition ~~contains provisions~~ to ~~perform~~ the ~~Progressive~~number ~~Structural~~of ~~Inspection Baseline (PSI-B) and Repair as well as Unscheduled Depot Level Maintenance (“UDLM”) work. The company received its first HC-130~~ aircraft ~~under~~originally ~~this~~contracted, ~~contract in January 2004. This contract has an estimated value of $30 million in revenues over~~ the ~~course~~ ofArmed ~~the~~Forces ~~agreement~~typically ifincrease ~~all~~this ~~options~~number ~~are~~with ~~exercised.~~aircraft Inthat ~~April~~were ~~2003,~~not ~~prior~~scheduled tofor ~~being awarded this contract~~maintenance, ~~the~~but ~~company~~which ~~received~~require ~~one~~servicing. HCThese “drop-~~130~~in” aircraft ~~from~~(Unscheduled ~~the~~Depot ~~USCG.~~Level ~~The~~Maintenance, ~~company~~or ~~anticipates~~“UDLM” ~~delivery of this~~ aircraft) ~~during~~generally increase the ~~second~~value ~~quarter~~ of ~~2004~~each contract.

The ~~GSS~~principal isservices ~~located~~performed inunder ~~Birmingham~~military contracts are PDMs, ~~Alabama~~systems inintegration ~~facilities~~of ~~that~~component ~~are~~upgrades ~~believed~~and ~~to be~~modification of fixed wing aircraft. The PDM is the ~~largest~~most thorough scheduled maintenance “check-up” for ~~third~~a military aircraft, entailing a bolt-~~party~~by-bolt, ~~maintenance~~wire-by-wire, inand ~~North~~section-by-section ~~America~~examination ~~with~~of ~~approximately~~the 1entire aircraft.9 ~~million~~The ~~square~~typical ~~feet~~PDM ~~under~~program ~~roof~~involves a nose-to-tail inspection and a repair program on a four- or five-year cycle. In addition to heavy maintenance, the program can include airframe corrosion prevention and control, rewiring, component overhauls, and structural, avionics, and various other system modifications.

Commercial Services Segment

The company provides commercial aircraft maintenance and modification services on a contract basis to both the owners and operators of large commercial transport aircraft (i.e., leasing companies, banks, airlines, air

~~cargo~~At ~~carriers)~~the ~~through~~onset ~~its~~of ~~CSS.~~the ~~Programs~~PDM, ~~for~~the ~~commercial~~aircraft ~~maintenance~~is ~~range~~generally ~~from~~stripped ~~single~~of ~~aircraft~~paint toand ~~multi-aircraft~~the entire airframe, including the ribs, skins and ~~can~~wings, ~~span~~undergoes a ~~year~~thorough orstructural ~~longer.~~examination, ~~The principal~~which ~~services~~results ~~performed~~in ~~under~~repairs ~~commercial~~to ~~maintenance~~the ~~contracts~~airframe. ~~are~~The ~~“C”~~aircraft’s ~~and~~avionics ~~“D”~~receive ~~maintenance~~examination ~~checks~~and repair, ~~passenger-to-freighter conversions~~replacement, ~~passenger-to-quick-change~~or ~~conversions,~~modification ~~strip~~as ~~and~~required. ~~paint,~~The ~~interior~~aircraft ~~reconfiguration~~is ~~and~~repainted at the ~~fleet~~completion ~~standardization~~of the overhaul.

~~The~~In ~~“C”~~order ~~check~~for isthe anCompany ~~intermediate~~to ~~level~~efficiently complete its maintenance procedures, it maintains hydraulic, ~~service~~electrical, ~~inspection~~sheet ~~that~~metal, ~~depending~~and ~~upon~~machine ~~the~~shops ~~FAA~~to ~~approved~~satisfy ~~maintenance~~all ~~program~~of ~~being~~its ~~used,~~testing ~~includes~~and ~~systems~~assembly ~~operational~~needs ~~tests~~and to fabricate, ~~thorough~~repair ~~exterior~~and ~~cleaning,~~restore parts and ~~limited~~components ~~interior~~for ~~cleaning~~aircraft ~~and~~structural ~~servicing~~repairs. ItThe Company also ~~includes~~performs ~~engine~~in-house heat treatment on alloys used in aircraft modifications and ~~operation~~repairs ~~systems~~and has complete non-destructive testing capabilities and test laboratories. The Company has provided quality maintenance, integration, and modification work on a wide variety of military aircraft over the past ~~lubrication~~50 years, including C-130, KC-135, C-9, P-3, T-34, A-10, F-4, F-15, F-16, T-38, and ~~filter~~U.S. ~~servicing~~Navy H-2 and H-3 helicopters.

The ~~“D”~~Company ~~check~~and Boeing iscontinue ato ~~more~~be ~~intensive inspection~~teamed ofon the ~~aircraft~~KC-135 ~~structure.~~bridge ~~The~~contract ~~“D”~~for ~~check~~which ~~includes~~the ~~all~~USAF ofexercised ~~the~~an ~~work~~option ~~accomplished~~to inextend ~~the~~through ~~“C”~~September 30, ~~check~~2009. ~~but~~There ~~places~~are ~~more~~no ~~emphasis~~assurances onthat the ~~integrity~~Company ofwill ~~the~~receive ~~systems~~more ~~and~~ aircraft ~~structural~~than ~~functions.~~what Inhas ~~the~~already ~~“D”~~been ~~check,~~inducted during the ~~aircraft~~latest isextension ~~disassembled~~of to the ~~point~~KC-135 ~~where~~bridge ~~the~~contract. ~~entire~~There ~~structure~~are ~~can~~no beguarantees ~~inspected~~additional ~~and~~options ~~tested.~~will ~~Once~~be ~~the~~exercised ~~structure~~or ~~has~~that, ~~been~~if ~~inspected and repaired~~exercised, ~~the~~any aircraft ~~and~~will ~~its~~be ~~various~~inducted ~~systems~~under ~~are~~such ~~reassembled to the detailed tolerances demanded in each system’s functional test series~~options.

The ~~form,~~Company ~~function~~first ~~and~~performed ~~interval~~PDM ofon the ~~“C”~~ ~~and~~KC-135 ~~“D”~~in ~~checks~~1968 ~~are~~and ~~different~~has ~~with~~since ~~each~~processed ~~operator’s~~over ~~program.~~3,400 ~~Each~~such ~~operator~~aircraft. ~~must~~As ~~have~~the ~~its~~USAF ~~particular~~continues ~~maintenance~~to ~~program~~upgrade ~~approved~~and by modernize the ~~FAA.~~KC-135 Afleet ~~number~~to ofensure ~~variables~~its ~~determines~~viability through 2040, the ~~final~~Company ~~form~~anticipates ofthat athe ~~given~~KC-135 PDM program, ~~including~~will ~~the age~~further ofexpand ~~the~~to ~~aircraft,~~include ~~the~~additional ~~environment~~upgrades. inThe ~~which~~Company ~~the~~has ~~aircraft~~performed ~~flies,~~other ~~the~~major ~~number~~upgrades ofin ~~hours~~the ~~that~~past, ~~the~~including ~~aircraft~~wing ~~regularly~~re-skin, ~~flies~~major rewire, ~~and~~corrosion ~~the~~prevention ~~number~~control, ofauto ~~take-offs~~pilot, and ~~landings~~fuel ~~(called~~savings ~~“flight~~advisory ~~cycles”)~~system ~~that the aircraft regularly performs~~modifications.

InAAII ~~addition~~is tolocated ~~the tasks required~~ in ~~the “C” and “D” checks~~Birmingham, ~~additional~~Alabama ~~inspections~~in ~~are~~facilities ~~performed.~~that ~~These~~the ~~inspections~~Company ~~include~~believes ~~Supplemental~~to ~~Structure~~be ~~Inspections~~the ~~(“SSI”),~~largest ~~which~~for ~~are~~third-party ~~structural~~maintenance ~~inspections~~in ~~focusing~~North onAmerica ~~known~~with ~~problem~~approximately ~~areas, and Corrosion Prevention and Control Programs (“CPCP”), which are inspections of known corrosion problems~~1.9 million ~~These~~square ~~additional~~feet ~~inspections~~under ~~supplement the “C” and “D” check tasks~~roof.

The process of converting a passenger plane to a freighter configuration entails completely stripping the interior, strengthening the load-bearing capacity of the flooring, installing a bulkhead or cargo net, cutting into the fuselage for the installation of a cargo door, reinforcing the surrounding structure for the new door, replacing windows with metal plugs, and installing the cargo door itself. The aircraft interior may also need to be lined to protect cabin walls from pallet damage, the air conditioning system modified, and smoke detection installed. Additionally, the company installs the on-board cargo handling system. Conversion contracts also typically require concurrent “C” or “D” maintenance checks as the operator takes maximum advantage of the time that the aircraft will be out of service. It is also possible that the converted aircraft has often been out of service for some time and maintenance is required to bring the plane up to current FAA standards.

The company also provides modification and integration services for its commercial customers under its own or customer-provided Supplemental Type Certificates, including integration of new avionics systems, installation of new galleys and air-stairs, and reconfiguration of interior layouts and seating. The company believes that its facilities, tooling, engineering capabilities and experienced labor force enable it to perform virtually any airframe modification a commercial customer may currently require.

The company holds approximately 70 STCs from the FAA for the conversion of various aircraft from passenger-to-freighter, passenger-to-quick-change, and combination passenger and freighter conversions. The FAA, under a specific certificate, certifies each type of aircraft. Subsequent modifications to the aircraft require the review, flight-testing and approval of the FAA, and are then certified by an additional STC. The company holds passenger-to-freighter configuration STCs for the conversion of Boeing 727-100, 727-200,

737-200, 737-300 aircraft, and BAe-146 aircraft. Additionally, the company holds a passenger-to-quick-change configuration STC for the conversion of Boeing 737-300 aircraft and a combi configuration STC for the conversion of Boeing 727 aircraft. The recent large decreases in prices for older commercial aircraft could increase the demand for conversions, and the company is expecting to expand this line of business in 2004 and beyond.

Contracts for commercial aircraft are performed at the company’s Dothan, Alabama facility. During 2002 and 2003 this facility received the FAA Diamond award for its training activities.

Manufacturing & Components Segment

The MCS is comprised of two independent manufacturing and service businesses located in California. The Pemco Engineers subsidiary designs and manufactures proprietary aerospace products; the Space Vector division subsidiary and manufactures launch vehicles and associated subsystems for scientific, military and commercial customers.

Pemco Engineers, Inc.

Pemco Engineers designs and manufactures aircraft cargo-handling systems (that the CSS often installs); high precision machined parts and components for aircraft; barrier nets and other sewn products; seat pallets; floor panels; flight deck doors; and other sheet metal components. The company’s principal expertise is in the innovative design and manufacturing of on-board cargo-handling systems for many types of large transport aircraft.

The company’s principal markets for cargo handling systems are major United States and foreign airlines and aircraft manufacturers. The company has approximately eight competitors in this market and considers its strengths in this industry to be its innovation, quality, reliability and cost-effective pricing.

The markets for high precision-machined components cover a wide range of manufacturers in numerous industries. There are over 1,000 manufacturers of components in the United States corresponding to an industry size of approximately $3 billion. The company’s competitors range in size from “single-machine” shops to companies with revenues exceeding $20 million. Most of the competitors, however, produce a broader mix of products while the company focuses on the manufacture of high precision components. The company considers its strengths in this industry to be its quality, competitive pricing, and on time delivery.

Boeing has recognized Pemco Engineers as a Gold contractor in all areas relating to product quality and as a Silver contractor in the delivery category.

Space Vector Corporation

The company’s Space Vector subsidiary maintains a research, development and engineering staff dedicated to the design, manufacture and launch of space-related systems. These systems include scientific sounding rockets, sophisticated guided target missiles, launch vehicles, guidance and control subsystems, vehicle structures and recovery systems. Space Vector has had prime contractor responsibility for launching 37 vehicles with go-ahead to launch in as short as eight months. The company’s hardware has flown on over 300 domestic and international space flights.

The company is a prime contractor to the Air Force Space & Missile Systems Center (“SMC”) on the Sounding Rocket Program (“SRP-2”) and has served as a subcontractor on large U.S. Department of Defense programs, including the Ground-based Midcourse Defense (“GMD”) Interceptor. The company also serves the scientific community and supports the NASA Sounding Rocket Operations Contract (“NSROC”).

The company’s principal markets for its space and missile products are the U.S. Government and prime contractors to the U.S. Government. The company’s competition ranges from small organizations for the component subsystems to major corporations for the design, systems integration and manufacture of spacecraft and launch vehicles. The company’s contracts are generally awarded in accordance with the U.S. Government’s competitive bidding practices.

Space Vector has supported numerous classified and unclassified target systems and Missile Defense flight tests by providing systems and components such as split clamshell Nose Fairings, Vehicle Structures, Avionics and Electronics, Attitude Control Systems, and Cabling and Test Equipment. The company’s quality system is certified to the ISO 9001 and AS9100 standards.

The company’s size, capabilities and experience have earned it the reputation of being a responsive, flexible and low cost provider of launch vehicle hardware and services.

E. SALES

Foreign and Domestic Operations and Export Sales

All of the ~~company~~Company’s revenues during ~~2003~~2008 were generated at facilities in the United States and all of ~~the~~its ~~company’s~~ assets were located in the United States. The ~~Approximately~~Company 2%provides ofmaintenance ~~revenues~~and inmodification ~~2003~~services ~~were~~for ~~generated from~~ foreign-based ~~owned~~military ~~entities~~aircraft at its U.S. ~~The~~facilities. ~~company~~All ~~continuously~~services ~~reviews~~and ~~possible~~products ~~foreign~~sold ~~ventures~~by ~~and~~the ~~sales~~Company ~~opportunities~~are payable in U.S. dollars.

The ~~company~~following ~~provides~~table ~~maintenance~~presents ~~and~~the ~~modification~~percentages ~~services~~of ~~for~~total ~~foreign-based~~revenue ~~aircraft~~from ~~owners~~continuing ~~and~~operations ~~operators~~for ateach ~~its~~principal ~~U.S.~~product ~~facilities. The company’s Space Vector~~ and ~~Pemco~~service ~~Engineers~~rendered ~~subsidiaries~~for ~~also~~the ~~sell~~last ~~in export~~two ~~markets~~fiscal years. ~~The~~There ~~services~~were ~~and~~no ~~products~~foreign ~~sold~~sales atduring the ~~company’s~~last ~~U.S.~~two ~~locations~~fiscal ~~are generally payable in U~~years.S. ~~dollars.~~

The following table presents the percentages of total sales for each principal product and service rendered for the last three fiscal years and the percentage of export sales for the last three fiscal years:


Products and Services Rendered	2008		2007
KC-135 Aircraft Maintenance and Modification	83	%	74	%
C-130 Aircraft Maintenance and Modification	9	%	11	%
P-3 Aircraft Maintenance and Modification	2	%	10	%
Other Aircraft Maintenance and Modification	6	%	5	%

Total	100	%	100	%

Products and Services Rendered	2003		2002		2001
Aircraft Maintenance and Modification	96	%	93	%	91	%
Space Vehicles and Support Systems	2	%	4	%	4	%
Pemco Engineers	2	%	3	%	5	%
Total	100	%	100	%	100	%
Export Sales-Principally Europe	2	%	3	%	2	%

Major Customers

The following table presents the percentages of total ~~sales~~revenue from continuing operations for the ~~company~~Company’s three largest customers for ~~the~~2008 ~~last~~and ~~three fiscal years~~2007:

Customer	~~2003~~2008		~~2002~~2007		~~2001~~
U.S. Government	69	%	67	%	67	%
U.S. Government Subcontracts:
Northwest Airlines	15	%	25	%	18	%
Boeing Corporation (KC-135 Aircraft)	83	%	74	%
GECAS	11	%	0	%	0	%
Lockheed Martin/BAE (C-130 Aircraft)	9	%	11	%
L-3 Communications (P-3 Aircraft)	2	%	10	%

F. BACKLOG

The following table presents the ~~company~~Company’s backlog from continuing operations at December 31, ~~2003~~2008 and ~~2002~~2007:

(In $Thousands)

Customer Type	2003		2002
Contract	2008		2007
U.S. Government	$	85,947	$	93,683
KC-135 Aircraft	$	29,097	$	24,945
Commercial		6,241		12,740
C-130 Aircraft		345		2,160
Total	$	92,188	$	106,423
P-3 Aircraft		1,290		1,274
Total	$	30,732	$	28,379

Backlog with U.S. Government ~~backlog,~~prime ~~which~~ contractors represented ~~approximately 93~~100% of the ~~company~~Company’s total backlog inat ~~2003~~December 31, ~~decreased~~2008 and 2007. Total backlog increased $72.74 million, or 8.3%., ~~The~~from ~~backlog~~2007. ~~decrease~~This increase is primarily the result of 2the induction of additional KC-135 aircraft offset by fewer C-130 aircraft in work. The Company had nine KC-135 aircraft, two C-130 aircraft and one P-3 aircraft in work at ~~the~~December 31, ~~end~~2008 ofversus ~~2003~~seven ~~vs.~~KC-135 ~~2002~~aircraft, seven C-130 aircraft and one P-3 aircraft at ~~the~~December 31, ~~GSS~~2007.

The GSS received 33 aircraft in 2001, 26 aircraft in 2002 and 29 aircraft in 2003 for PDM under its contracts. The company classifies all work for which the final customer is the U.S. Government as U.S. Government work whether the work is performed directly or under sub-contract.

Total commercial backlog decreased $6.5 million or 51.2%. The primary reason for this decrease was the timing of sales for our largest customer at the CSS in 2003 vs. 2002. At the end of 2003, there was $5.5 million related to this customer vs. 2002 backlog of $11.7 million. The decrease of $0.3 million 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.

G. RAW MATERIALS

The ~~company~~Company purchases a variety of raw materials, including aluminum sheets and plates, extrusion, alloy steel, and forgings. There are a large number of suppliers for these materials ~~and~~which ~~they~~ are readily available on the open market. The ~~company~~Company has not entered into any long-term contracts with its suppliers of raw materials. The ~~company~~Company experienced no significant shortages of raw material essential to its business during ~~2003~~2008 and does not anticipate any shortages of critical commodities in the near future. The Company faces some dependence on suppliers for certain types of parts involving highly technical processes; however, this risk has decreased in the past few years as additional high technology suppliers have entered the market.

The ~~company~~U.S. ~~procures many~~Government ~~components,~~and ~~parts~~certain ~~and~~prime contractors furnish a portion of the equipment ~~items~~and ~~from~~components ~~various~~used ~~domestic~~by ~~companies~~the Company in the fulfillment of the Company’s services under U.S. ~~The~~Government ~~company~~contracts ~~faces~~without ~~some~~charge ~~dependence~~to onthe ~~suppliers~~Company. ~~for~~The ~~certain~~Company ~~types~~is ofdependent ~~parts~~upon ~~involving~~U.S. ~~highly~~Government ~~technical~~and ~~processes;~~prime ~~however,~~contractor ~~this~~furnished ~~risk~~material ~~has~~to ~~lessened~~meet indelivery ~~the~~schedules, ~~past~~and ~~few~~untimely ~~years~~receipt ~~as additional~~of ~~high~~such ~~technology~~material ~~suppliers~~could adversely ~~have~~affect ~~entered~~production ~~the~~schedules, ~~market~~and contract profitability.

H. 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 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 and remediate such contamination as necessary. 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 (“Phase II Plan”) was submitted to the EPA in 2001 upon receiving the agency’s response to the 1999 samples. The Phase II Plan was approved in January 2003, wells installed and favorable sampling events recorded. The Company compiled the results and submitted a revised work plan to the agency which was accepted on July 30, 2004. The Media Clean-up Standard Report, as required, was submitted to the EPA in January 2005. It is the Company’s policy to accrue environmental remediation costs when it is probable that such costs will be incurred and when a range of loss can be reasonably estimated. The Company reviews the status of all significant existing or potential environmental issues and adjusts its accruals as necessary. The Company recorded liabilities of approximately $100,000 related to the Phase II Plan at both December 31, 2008 and 2007, which are included in “accrued liabilities—other” on the accompanying Consolidated Balance Sheets. The Company anticipates the total costs of the Phase II Plan to be approximately $550,000, of which the Company had paid approximately $450,000 as of December 31, 2008. Management believes that the results of the Phase II Plan will not have a material impact on the Company’s financial position or results of operations.

In March 2005, Pemco Aeroplex, Inc. (now AAII-Birmingham, Inc.) received notice from the South Carolina Department of Health and Environmental Control that it was believed to be a potentially responsible party (“PRP”) with regard to contamination found on the Philips Service Corporation (“PSC”) site located in Rock Hill, South Carolina. Pemco was listed as a PRP due to alleged use by the Company of contract services in disposal of hazardous substances. The Company joined a large group of existing PRP notification recipients in retaining environmental counsel. The Company believes it is possible that paint chips were disposed of with this contractor beginning in 1997. PSC filed for bankruptcy in 2003. It is noted that contamination seems to be primarily linked to a diesel fuel tank leak whereby over 200,000 gallons of diesel product was lost or released into the environment at the Rock Hill site. The database of manifests located on-site at PSC has been reviewed and the waste-in compilations have been completed, but remain subject to revision. The PRP group continues to increase. Management believes that the Company’s potential liability will not exceed $50,000. The Company believes it is adequately insured in this matter. Management believes that the resolution of the above matter will not have a material impact on the Company’s financial position or results of operations.

In addition, in conjunction with the sale of PWAS, WAS and the Company contracted for division of any environmental liability that may be required to meet applicable environmental remediation standards at the Company’s former Dothan, Alabama facilities such that, in the event significant environmental remediation is required, WAS will bear the risk of the first $1.0 million dollars of such losses and the Company will bear the risk of any such losses in excess of $1.0 million but not to exceed $2.0 million in the aggregate. As a result, WAS would be responsible for all losses in excess of $3.0 million. The funds required to meet the Company’s obligations have been escrowed for a five-year period. No portion of the amount required to be escrowed in connection with the sale of PWAS was considered as a portion of the gain recognized in connection with the sale. The Company considers the amount held in escrow to be a contingent asset and is not included in the Company’s balance sheet.

On January 5, 2009, the Company received notice from the EPA that it intends to conduct a RCFA Facility Assessment (“RFA”) of its Birmingham, Alabama facility site. The RFA typically includes document review, review of activities, visual site inspection and interviews of site representatives. The purpose of the RFA is to distinguish between sites that pose little or no threat to human health and environment and sites that require further investigation or assessment. It is believed that the RFA is being conducted for purposes of developing familiarization with waste generators and for general mapping and assessment purposes. The RFA is anticipated to take place in early summer 2009.

Furthermore, the Company is subject to various environmental regulations at the federal, state, and local levels, particularly with respect to the stripping, cleaning, and painting of aircraft. Compliance with environmental regulations have not had, and are not expected to have, a material effect on the Company’s financial position or results of operations.

I. EMPLOYEES

On December 31, 2008, the Company had 613 employees. Approximately 467 of these employees are covered under collective bargaining agreements primarily with the United Automobile, Aerospace, and Agricultural Implement Workers of America (“UAW”). Negotiations took place in 2005 with the UAW and a new collective bargaining agreement was signed that year. The Company’s agreement with the UAW was ratified for a new five-year period and will expire on March 21, 2010.

Item 1A. Risk Factors

You should carefully consider the following risk factors, in addition to the other information contained in this report, in your evaluation of the Company and its financial condition. Numerous risk factors, including potentially the risk factors described in this section, could cause material harm to the Company’s business and impair the value of its Common Stock.

The Company is Heavily Dependent on U.S. Government Contracts.

All of the Company’s revenues from continuing operations in 2008 and 2007 were derived directly or indirectly from U.S. Government contracts or subcontracts. U.S. Government contracts expose the Company to a number of risks, including:

•

Unpredictable contract or project terminations;

•

Reductions in government funds available for the Company’s projects due to government policy changes, budget cuts and contract adjustments;

•

Disruptions in scheduled workflow due to untimely delivery of equipment and components necessary to perform government contracts;

•

Penalties arising from post award contract audits; and

•

Final cost audits in which the value of the Company’s contracts may be reduced and may take a substantial number of years to be completed.

In addition, substantially all of the Company’s backlog scheduled for delivery can be terminated at the convenience of the U.S. Government since orders are often placed well before delivery, and its contracts typically provide that orders may be terminated with limited or no penalties. If the Company is unable to address any of the above risks, the Company’s business could be materially harmed and the value of its Common Stock could be impaired.

All of the Company’s Revenues is Derived From a Few Contracts, and the Termination or Failure to Renew Any of Them Could Materially Harm the Company’s Business.

A small number of contracts account for all of the Company’s revenues. Contracts with the U.S. Government comprised approximately 100% of the Company’s revenues from continuing operations during 2008 and 2007. The USAF KC-135 PDM program in and of itself comprised 83% and 74% of the Company’s total revenues from continuing operations during 2008 and 2007, respectively. Termination of a contract, a dispute over compliance with contract terms, a disruption of any of these contracts (including option years not being exercised), or the inability of the Company to renew or replace any of these contracts when they expire, could materially harm its business and impair the value of its Common Stock.

The financial condition and results of operations of the Company, which operated as a subcontractor to the Boeing Company (“Boeing”), have been impacted by several unusual events in connection with the U.S. ~~Government~~Air ~~furnishes~~Force (“USAF”) KC-135 Program Depot Maintenance (“PDM”) program and the related recompetition for the new KC-135 contract award. As discussed in previous filings, from May 2005 through June 2006, the Company worked in cooperation with Boeing to submit a ~~portion~~joint proposal on the new KC-135 contract under a Memorandum of Agreement with Boeing (“MOA”). After filing an initial proposal with the ~~equipment~~USAF, which included critical financial and ~~components~~operational ~~used~~information byon the ~~company~~Company’s KC-135 program, the Company believes Boeing breached the MOA due to the USAF’s reducing the number of aircraft in the ~~fulfillment~~request for proposal. From July 2006 to September 2007, the Company prepared its own proposal for the new KC-135 contract. The Company’s proposal for the KC-135 PDM program was unsuccessful as the contract was awarded to Boeing in September 2007. The Company filed a protest with the Government Accountability Office (“GAO”) and the GAO upheld in part the Company’s protest on the basis that the USAF failed to conduct a proper analysis of Boeing’s cost/price proposal for realism or potential risk. On March 3, 2008, the USAF advised the GAO that in response to the recommendation by the GAO it had completed additional review and that the Company’s proposal was not ~~company~~selected for award. The Company filed a protest on the new award decision on March 11, 2008 as to the USAF’s ~~services~~lack of proper evaluation to meet GAO recommendations and sudden post-award change of work scope under Uthe contract recompete.S On June 13, 2008, the GAO denied the Company’s March 11, 2008 protest. ~~Government~~On ~~contracts~~June 27, ~~without~~2008, ~~charge~~the Company filed a complaint in the United States Court of Federal Claims (the “Court”) protesting the actions of the USAF in connection with the award to Boeing of the ~~company~~KC-135 PDM contract. ~~The~~On ~~company~~July 3, is2008, ~~dependent~~the ~~upon~~Court granted Boeing’s motion to intervene in the case. On September 30, 2008, the Court set aside the KC-135 PDM solicitation, enjoining the USAF from proceeding with the award to Boeing and requiring a resolicitation of the procurement that will explicitly address the role of the aging KC-135 fleet on the PDM process. In February 2009, the USAF and Boeing filed appeals of the Court’s ruling with the U.S. ~~Government~~Court ~~furnished~~of ~~material~~Appeals for the Federal Circuit (“Federal Circuit”). The Company expects to ~~meet~~file ~~delivery~~a ~~schedules,~~cross ~~and~~appeal ~~untimely~~with ~~receipt~~the Federal Circuit in the second quarter of ~~such~~2009. ~~material~~The ~~adversely~~Company ~~affects~~expects ~~production~~the appeals process before the ~~schedules~~Federal Circuit to be resolved in the fourth quarter of 2009 or the first quarter of 2010. The Company is currently negotiating a subcontract with Boeing for KC-135 PDM work to be performed until a new solicitation and ~~contract~~award ~~profitability~~is completed pursuant to the Court’s order. If the Company is not successful in the new re-competition for the KC-135 PDM, it would have a material adverse effect on the Company’s financial condition and prospects, materially harm the Company’s business and impair the value of its Common Stock.

H.The ~~PATENTS,~~Company’s ~~TRADEMARKS,~~Trust ~~COPYRIGHTS~~for ~~AND~~its ~~STCs~~Defined Benefit Plan is Under-Funded and Subject to Financial Market Forces.

The ~~company~~Company ~~holds~~maintains ~~approximately~~a 70Defined ~~FAA-issued~~Benefit ~~STCs~~Plan ~~that~~(the ~~authorize~~“Pension itPlan”), towhich ~~perform~~covers ~~various~~substantially ~~modifications~~all toemployees ~~aircraft.~~at ~~These~~its Birmingham, ~~modifications~~Alabama ~~include~~facilities. ~~air-stair~~The ~~installation,~~Pension ~~the conversion~~Plan’s ofassets ~~commercial~~consist ~~aircraft~~primarily ~~from~~of ~~passenger-to-freighter~~equity ormutual ~~passenger-to-quick~~funds, ~~change~~bond ~~configurations~~mutual ~~and~~funds, ~~ground proximity~~ and ~~wind~~cash ~~shear warning systems~~equivalents. ~~The~~These ~~company~~assets ~~has~~are ~~STCs~~exposed ~~applicable~~ to various ~~aircraft~~risks, ~~including~~such ~~Boeing~~as ~~737~~interest rate, ~~BAe-146~~credit, and ~~Airbus~~ ~~A320~~overall ~~series aircraft~~market volatility. ~~Approximately~~At 21December 31, of2008, the ~~company’s~~Pension ~~STCs~~Plan ~~are~~was ~~related~~underfunded toby ~~its~~$33.1 ~~cargo~~million ~~handling~~due ~~systems~~primarily ~~for~~to ~~various~~investment ~~types~~losses ofincurred ~~large~~during ~~transport~~2008 ~~aircraft.~~in ~~STCs~~the ~~are~~equity ~~not~~portion ~~patentable;~~of ~~rather,~~the ~~they~~Pension ~~indicate~~Plan ainvestments. ~~procedure~~Changes ~~that~~in isinvestment ~~acceptable~~returns, ~~to the~~discount ~~FAA~~assumptions, tomortality ~~perform~~assumptions aor ~~given~~benefit ~~air-worthiness~~obligations ~~modification.~~may ~~The~~have ~~company~~a ~~develops~~significant ~~its~~impact ~~STCs~~on ~~internally~~the ~~and~~funded ~~uses~~status ~~licensing~~of ~~agreements~~the ~~with~~Pension ~~the~~Plan. ~~original~~Unless ~~equipment~~and ~~manufacturer,~~until ~~when~~the ~~applicable.~~Pension InPlan ~~addition~~under-funding is remedied sufficiently, the ~~company~~making ~~has~~of ~~obtained~~minimum ~~approvals~~required ~~from many~~contributions ~~airworthiness~~may ~~authorities~~adversely ~~throughout~~affect the ~~world~~Company’s ~~for~~liquidity ~~its~~and ~~passenger-to-freighter~~cash orflow, ~~passenger-to-quick~~which ~~change~~could ~~configurations,~~materially ~~principally~~harm ~~related~~its tobusiness and impair the ~~B737-200/300~~value ~~aircraft~~of its Common Stock.

~~The~~On ~~company~~February 29, ~~also~~2008, ~~holds~~the ~~FAA-issued~~Company ~~Parts~~applied ~~Manufacturing~~to ~~Approvals~~the Internal Revenue Service (~~PMAs~~“IRS”) ~~that~~for ~~authorize~~a itwaiver toof ~~manufacture~~contributions ~~parts~~for ofthe ~~its~~2007 ~~own~~plan ~~design~~year orwhich ~~that~~concluded ofon September 15, 2008. On September 15, 2008, the Company ~~other~~contributed ~~manufacturers~~$3.9 ~~related~~million to ~~its~~the ~~cargo~~Pension ~~handling~~Plan, ~~systems~~fully satisfying the contribution requirements for the 2007 plan year. ~~The~~On ~~company~~March 30, ~~holds~~2009, ~~numerous~~the ~~other~~IRS ~~PMAs~~granted the waiver request resulting in a deferral of required contributions for the 2007 plan year being spread over the next five years. As a result of the waiver, ~~that~~the ~~give~~pension payment for the ~~company~~2007 ~~authority~~plan toyear ~~manufacture~~is ~~certain~~now ~~parts~~considered ~~used~~a inpayment for the ~~conversion~~2008 plan year. The remaining amount owed for the 2008 plan year of ~~aircraft~~$0.5 ~~from~~million ~~passenger-to-freighter~~was ~~and~~made ~~passenger-to-quick~~during the ~~change~~first ~~configurations~~quarter of 2009. As a result of the missed quarterly contributions while the waiver request was under consideration, the Pension Benefit Guaranty

In addition, the company has a U.S. design patent for a permanent doorsill designed for use in cargo configurations and a design patent for a braking roller for preventing unintended movement of cargo containers. The company does not believe that the expiration or invalidation of either of these patents would have a material adverse impact upon its financial condition or results of operations.

The STCs and PMAs are perpetual, unless the company makes a decision to surrender them to the FAA.

I. 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 (“Phase II Plan”) was submitted to the EPA in 2001 upon receiving the agency’s response to the 1999 samples. The Phase II Plan was approved in January 2003 and well installation has been completed. The costs of the Phase II Plan are expected to be approximately $441,000, of which the company has paid approximately

~~$341,000~~Corporation as(“PBGC”) offiled ~~December~~liens ~~31,~~on ~~2003~~the Company’s assets. ~~Management~~The ~~believes~~PBGC ~~that~~will maintain a lien on the ~~results~~Company’s assets over the time period of the deferral of the ~~Phase~~2007 IIplan ~~Plan~~year contributions, which will ~~not~~be ~~have~~approximately afive ~~material~~years. ~~impact~~The onadditional pension contributions and the ~~company’s~~PBGC ~~financial position~~liens orcould ~~results~~make ofit ~~operations~~more difficult for the Company to obtain additional financing in the future.

The ~~company~~Company isMay ~~required~~Need toAdditional ~~comply~~Financing ~~with environmental regulations at the federal, state and local levels. These requirements apply especially~~ to ~~the~~Maintain ~~stripping,~~its ~~cleaning~~Business ~~and~~Which ~~painting~~May ~~of aircraft. The requirements to comply with environmental regulations have not had, and are not expected to have, a material effect on the company’s financial position~~ or ~~results~~May ofNot ~~operations.~~Be Available

JThe Company is proposing and is expecting to propose on several programs in the next twelve months. ~~EMPLOYEES~~If the Company is successful in winning contracts for some or all of these programs, additional financing may be needed to fund working capital requirements related to the buildup of accounts receivable and inventory on the projects. If additional financing is needed, the Company’s recent negative results of operations and the uncertainties regarding future contract awards will likely make it more difficult and expensive for the Company to raise additional capital that may be necessary to continue its operations.

OnIn ~~December 31~~addition, ~~2003,~~ the ~~company~~ongoing ~~had~~global ~~2,230~~financial ~~employees.~~crisis ~~Approximately~~affecting ~~1,686~~the ofbanking ~~these~~system ~~employees~~and ~~are~~financial ~~covered~~markets ~~under~~has ~~collective~~resulted ~~bargaining~~in ~~agreements~~a ~~with~~severe ~~the~~tightening ~~United~~in ~~Automobile~~credit markets, ~~Aerospace,~~a ~~and~~low ~~Agricultural~~level ~~Implement Workers~~ of ~~America~~liquidity ~~(“UAW”),~~in ~~International~~many ~~Association~~financial ~~of Machinists and Aerospace Workers (“IAM”)~~markets, and ~~the~~extreme ~~Association~~volatility ofin ~~Plant~~credit ~~Police~~and ofequity ~~America (“APPA”)~~markets. ~~The~~This ~~current~~financial ~~collective~~crisis ~~bargaining~~could ~~agreements~~impact ~~for~~our ~~most~~business ofin ~~these employees~~a ~~run~~number ~~through~~of ~~2005.~~ways, including:

~~Item~~Potential 2Deferment of Purchases and Orders by Customers: Uncertainty about current and future global economic conditions may cause governments, including the U.S. ~~Properties~~government, which is our largest customer, consumers and businesses to modify, defer or cancel purchases in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, future demand for our products could differ materially from our current expectations. Additionally, if customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Any inability of current and/or potential customers to pay us for our products may adversely affect our earnings and cash flow.

~~Following~~Negative isImpact from Increased Financial Pressures on Key Suppliers: Our ability to meet customers’ demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and components from our suppliers. If certain key suppliers were to become capacity constrained or insolvent as a ~~list~~result of the ~~company’s~~financial ~~properties~~crisis, then we may have to find new suppliers. We may experience significant delays in servicing our customers and incur additional costs to establish alternative sources of supply if we lose any of these sources. We cannot predict if we will be able to obtain replacement suppliers within the time frames that we require at an affordable cost, if at all. In addition, credit constraints of key suppliers could result in accelerated payment of accounts payable by us, impacting our cash flow.

~~Birmingham~~Customers’ Inability to Obtain Financing to Make Purchases from us and/or Maintain Their Business: Some of our customers may require substantial financing in order to fund their operations and make purchases from us. The inability of these customers to obtain sufficient credit to finance purchases of our products, ~~Alabama~~or otherwise meet their payment obligations to us could adversely impact our financial condition and results of operations. In addition, if the financial crisis results in insolvencies for our customers, it could adversely impact our financial condition and results of operations.

~~The GSS, as well as the company’s~~These ~~corporate~~significant ~~offices,~~dislocations ~~are~~and ~~located~~liquidity atdisruptions in the ~~Birmingham~~United ~~International~~States ~~Airport,~~credit inmarkets ~~Birmingham,~~have ~~Alabama.~~also ~~The~~caused ~~Birmingham~~the ~~facility~~spreads ~~is located~~ on ~~192~~prospective ~~acres~~debt offinancings ~~land~~to ~~with~~widen ~~approximately 1~~considerably.9 ~~million~~These ~~square~~circumstances ~~feet~~have ofmaterially ~~production~~impacted ~~and~~liquidity ~~administrative~~in ~~floor~~the ~~space.~~debt ~~The~~markets, ~~facility~~making ~~includes~~financing ~~ten~~terms ~~flow-through~~for ~~bays~~borrowers ~~permitting~~less ~~continual production line operation. The facility also includes a number of ancillary buildings such as a paint hangar~~attractive, ~~a shipping~~ and ~~receiving~~in ~~warehouse,~~certain acases ~~wing~~have ~~rehabilitation~~resulted ~~shop,~~in athe ~~sheet~~unavailability ~~metal shop~~of ~~and~~certain atypes ~~55,000~~of ~~square~~debt ~~foot~~financing. ~~general~~Continued ~~office~~uncertainty ~~building~~in ~~which houses~~ the ~~administrative~~credit ~~staff.~~markets ~~Available~~may ~~ramp~~negatively ~~area~~impact ~~exceeding~~the ~~3.0~~Company’s ~~million~~ability ~~square~~to ~~feet~~access debt isfinancing ~~adjacent~~or to ~~the~~refinance ~~municipal~~existing ~~airport~~debt ~~runways.~~maturities ~~Additionally,~~on ~~the~~favorable ~~facility~~terms ~~operates~~(or aat ~~control tower~~all), which ~~supplements~~may ~~the~~negatively ~~FAA-managed~~affect ~~municipal~~its ~~air~~ability ~~control~~to ~~tower~~fund ~~for~~current ~~handling aircraft on the company’s property~~ and afuture ~~fire-fighting~~programs. ~~unit,~~A prolonged ~~which~~downturn ~~supplements~~in ~~fire-fighting~~the ~~equipment~~credit ~~operated~~markets bymay ~~both~~cause the ~~City~~Company ofto ~~Birmingham~~seek alternative ~~and~~sources ~~the~~of ~~Alabama~~potentially ~~Air~~ ~~National Guard.~~

The Birmingham facility is a complete aircraft modification and maintenance center. The facility is an approved FAA and JAA (Europe) Repair Station and maintains a Department of Defense “SECRET” security clearance.

The facility is leased from the Birmingham Airport Authority. The lease expires September 30, 2019.

Dothan, Alabama

The Dothan facility of the CSS is located at the Dothan-Houston County Airport, in Dothan, Alabama. The facility is located on 80.0 acres of land with approximately 558,000 square feet of production and administrative floor space. The facility includes 296,000 square feet of aircraft hangar space, which is comprised of eight narrow-body bays, three wide-body bays, and a paint hangar. The facility also includes four warehouses, support shops and 26,000 square feet of administrative offices. The facility has 850,000 square feet of aircraft flight line and parking ramp space and is served by an airport consisting of two runways of 5,000 and 8,500 feet, an FAA Flight Service Station and a control tower.

~~The~~ less ~~Dothan~~attractive ~~facility~~financing, isand anmay ~~approved~~require ~~FAA,~~the ~~JAA~~Company ~~and~~to ~~CAA~~adjust ~~(United~~its ~~Kingdom)~~business ~~repair~~plan ~~station~~accordingly. ~~The~~These ~~facility~~events isin ~~leased~~the ~~from~~credit ~~the~~markets have also had an adverse ~~Dothan/Houston~~effect ~~County~~on ~~Airport~~other ~~Authority~~financial ~~under~~markets ain ~~lease~~the ~~agreement~~United ~~that~~States, ~~inclusive~~which may make it more difficult or costly for the Company to raise capital through the issuance of aCommon ~~ten-year~~Stock, ~~option~~preferred ~~period~~stock or other equity securities. If the Company cannot raise adequate funds on acceptable terms, ~~expires~~or inat ~~December~~all, ~~2033~~then its business could be materially harmed.

InOur ~~December~~Common ~~2001,~~Stock ~~the~~Will ~~company~~Not ~~began~~Be ~~construction~~Traded onOn aA ~~25,000~~National ~~square foot addition to one of the wide-body hangers at its Dothan, Alabama facility. The first aircraft~~Security ~~began~~Exchange ~~using the new addition during the fourth quarter of 2002~~ and ~~final~~We ~~work~~Will ~~was~~Suspend ~~completed~~Our onReporting ~~the~~Obligations ~~addition~~with ~~during~~ the ~~first~~SEC ~~quarter of 2003.~~

~~Chatsworth~~On March 16, ~~California~~2009, the Board of Directors of AAII unanimously voted to delist its Common Stock (“Common Stock”), from The Nasdaq Stock Market LLC (“NASDAQ”) and to voluntarily terminate the registration of its Common Stock under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). In connection therewith, the Company notified NASDAQ on March 17, 2009 of the Company’s intention to file a Form 25 with the Securities and Exchange Commission (“SEC”) on or about March 31, 2009 in order to voluntarily delist its Common Stock. On March 31, 2009, AAII filed a Form 25 with the SEC to delist its Common Stock from NASDAQ and to deregister its Common Stock with the SEC under Section 12(b) of the Exchange Act. By operation of law, the delisting will become effective on April 10, 2009. Additionally, on March 30, 2009, the Company filed with the SEC post-effective amendments to its registration statements on Form S-8 in order to remove from registration under the Securities Act of 1933 any of the securities that remained unsold under each such registration statement as of March 30, 2009. In the event the Company has 300 or more stockholders of record as of the end of any fiscal year in the future, it may be required to resume its reporting obligations with the SEC.

~~Space~~On ~~Vector~~April 10, ~~Corporation~~2009, ~~part~~the effective date of the ~~MCS~~delisting of the Company’s Common Stock from NASDAQ, isthe ~~located~~Company intends to file a Form 15 with the SEC in ~~Chatsworth,~~order ~~California.~~to ~~This~~deregister ~~facility~~its ~~consists~~Common Stock with the SEC under Section 12(g) of ~~three~~the ~~industrial~~Exchange ~~buildings~~Act and to suspend AAII’s reporting obligations under the Section 15(d) of ~~approximately~~the ~~63,000~~Exchange ~~square~~Act. ~~feet~~The Company is eligible to file a Form 15 to deregister its Common Stock under Section 12(g) and to suspend its reporting obligations under Section 15(d) because it had fewer than 300 holders of record of its Common Stock as of January 1, 2009. ~~One~~Upon filing of ~~these~~the ~~buildings~~Form 15 with the SEC, ~~approximately~~the 26Company’s obligations to file certain reports with the SEC,~~000 square~~ ~~feet~~including Forms 10-K, is10-Q ~~currently~~and ~~subleased~~8-K, will be suspended immediately. ~~Space~~Additionally, ~~Vector~~the Company ~~Corporation~~expects ~~occupies~~the ~~these~~deregistration ~~buildings~~of its Common Stock with the SEC under aSection 12 ~~lease~~of ~~agreement~~the ~~that~~Exchange ~~expires~~Act into ~~October~~become ~~2004~~effective 90 days after filing the Form 15 with the SEC.

~~Corona~~Once our Common Stock is delisted from NASDAQ, ~~California~~we do not intend to list the Common Stock on another national securities exchange. Once delisted, it is possible that the Common Stock will be traded on the Pink Sheets electronic quotation service (the “Pink Sheets”). The trading of our Common Stock in the Pink Sheets rather than on NASDAQ may reduce the price of our common stock and the levels of liquidity available to our stockholders. Purchasers of shares of our Common Stock may find it difficult to resell their shares at prices quoted in the market or at all. Furthermore, because of the limited market and generally low volume of trading in our Common Stock, our Common Stock is more likely to be affected by broad market fluctuations, general market conditions, fluctuations in our operating results, changes in the market’s perception of our business, and announcements made by us, our competitors or parties with whom we have business relationships. Additionally, stocks that trade in the Pink Sheets are no longer eligible for margin loans, and a company trading in the Pink Sheets cannot avail itself of federal preemption of state securities or “blue sky” laws, which adds substantial compliance costs to securities issuances, including pursuant to employee option plans, stock purchase plans and private or public offerings of securities. Our ability to issue additional securities for financing or other purposes, or to otherwise arrange for any financing we may need in the future, may also be materially and adversely affected by the fact that our securities will not be traded on a national securities exchange. The fact that our Common Stock will not be traded on a national securities exchange could also have other adverse effects on us in addition to the foregoing, including, without limitation, the loss of confidence in us by current and prospective suppliers, customers, employees and others with whom we have or may seek to initiate business relationships.

The Pemco Engineers division of the MCS is located in Corona, California. The facility consists of approximately 27,000 square feet and houses production and administrative functions. The facility is held under a lease agreement that expires in February 2005.

Clearwater, Florida

The company’s Clearwater facility is located at the St. Petersburg/Clearwater International Airport in Clearwater, Florida. The facility is located on 22 acres of land with approximately 133,000 square feet of production and administrative floor space. The facility includes two bays of approximately 92,000 square feet as well as supply and support shops and administrative offices. The facility has 782,000 square feet of ramp space and is served by airport facilities consisting of five runways (from 4,000 to 8,800 feet), an FAA Flight Service Station and a control tower. The facility has been sub-leased to a third-party aviation related business since April 2000.

The facility is leased from Pinellas County, a political subdivision of the State of Florida, under a lease agreement that expires in September 2005, exclusive of four optional renewal periods of five years each which would extend the lease until September 2025.

Item 3. Legal Proceedings

Breach of Contract Lawsuits

On October 12, 1995, Falcon Air AB filed a Complaint in the United States District Court, Northern District of Alabama, alleging that the modification of three Boeing 737 aircraft to Quick Change configuration by the company was defective, limiting the commercial use of the aircraft. The District Court released the case to alternative dispute resolution until the company requested reinstatement of the case on September 13, 2001. Reinstatement was denied, and the company filed an appeal with the 11th Circuit Court of Appeals for determination on certain procedural issues on October 31, 2001. The parties have subsequently entered into arbitration and discovery is in its initial stages. Management

~~believes~~The ~~that~~Company’s ~~the~~Markets ~~results~~are ofHighly ~~this~~Competitive ~~claim~~and ~~will~~Some ~~not~~of ~~have~~its aCompetitors ~~material~~Have ~~impact~~Greater onResources than the ~~company’s financial position or results of operations~~Company.

OnThe ~~January~~aircraft ~~16,~~maintenance ~~2004,~~and ~~the~~modification ~~company~~services ~~filed~~industry ais ~~complaint~~highly incompetitive, and the ~~Circuit~~Company ~~Court~~expects ofthat ~~Dale~~the ~~County,~~competition will ~~Alabama~~continue ~~against~~to ~~GE Capital Aviation Services, Inc~~intensify. ~~(“GECAS”)~~Some ~~for monies owed for modification and maintenance services provided on six 737-300 aircraft, all~~ of ~~which~~the ~~were~~Company’s reprivate-~~delivered~~sector tocompetitors ~~GECAS~~are ~~during~~larger ~~2003~~ and ~~are~~more inestablished ~~service.~~companies Onwith ~~March~~strategic 24advantages, ~~2004,~~ ~~the~~including ~~Circuit~~greater ~~Court~~financial ofresources ~~Dale~~and ~~County,~~greater ~~Alabama~~name ~~denied a motion filed by GECAS to dismiss or stay the proceedings~~recognition. OnThe ~~January 20, 2004, GECAS filed suit against the company~~Company’s ~~Pemco~~competition ~~World~~for military ~~Air~~aircraft ~~Services,~~maintenance ~~Inc.~~includes ~~subsidiary~~Boeing inAerospace ~~New~~Support ~~York state court~~Center, ~~claiming~~ ~~breach~~Lockheed-Martin ofAircraft ~~contract~~and ~~with~~Logistics ~~regard~~Center, toL-3 ~~two~~Communications ofand ~~the~~various ~~aircraft~~military ~~re-delivered~~depots. OnIf ~~March 5, 2004,~~ the ~~company~~Company ~~filed~~is aunable ~~motion~~ to ~~dismiss~~compete ~~the~~effectively ~~claim~~against ~~filed~~any inof ~~the~~these ~~New~~entities ~~York state court, for which no hearing date has been set. Management believes that the~~it ~~results~~could ofmaterially ~~this~~harm ~~claim~~its ~~will~~business ~~not~~and ~~have~~impair ~~a material impact on~~ the ~~company’s~~value ~~financial~~of ~~position~~its orCommon ~~results of operations~~Stock.

~~ACC Capital Corporation (“ACC Capital”) claims the company improperly terminated leases for computer hardware and software in November of 2002.~~ The ~~company filed~~Company is a ~~Declaratory~~Party ~~Judgment action on February 4, 2003 in the District Court Northern District, Alabama~~ to ~~substantiate~~Legal ~~the~~Proceedings company’s end-of-term option to purchase. ACC Capital filed an action in Utah state court on March 17, 2003, which was subsequently removed to federal court on the company’s motion. The company filed its Motion for Partial Summary Judgment on February 9, 2004. The company believes that ~~the~~Could ~~results~~be ofCostly ~~this claim will not have a material impact on the~~to ~~company’s financial position or results of operations~~Resolve.

~~Employment~~The Company is exposed to legal claims relating to the services it provides. The Company is currently a party ~~Lawsuits~~to several legal proceedings, including breach of contract claims and claims based on the Company’s employment practices. While the Company maintains insurance covering many risks from its business, the insurance may not cover all relevant claims or may not provide sufficient coverage. If the Company’s insurance coverage does not cover all costs resulting from these claims, an adverse determination on these claims could materially harm the Company’s business and impair the value of its Common Stock.

In December 1999, the company and its Pemco Aeroplex subsidiary were served with a purported class action in the U.S. District Court, Northern District of Alabama, seeking declaratory, injunctive relief and other compensatory and punitive damages based upon alleged unlawful employment practices of race discrimination and racial harassment by the company’s managers, supervisors, and other employees. The ~~complaint~~Company ~~sought~~Could ~~damages~~Incur inSignificant ~~the~~Costs ~~amount of $75 million. On July 27, 2000 the U.S. District Court determined that the group would not be certified as a class~~ and ~~the~~Expenses ~~plaintiffs~~Related withdrew their request for class certification. The Equal Employment Opportunity Commission (“EEOC”) subsequently entered the case purporting a parallel class action. The Court denied consolidation of the cases for trial purposes. On June 28, 2002 a jury determined that there was no hostile work environment with regard to ~~any~~Environmental ~~of the 22 plaintiffs in the original case and granted verdicts for the company~~Problems. 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 and all briefs filed. Arguments are expected to be heard by the Court during the second quarter of 2004. The company has taken effective remedial and corrective action, acted promptly in respect to any specific complaint by an employee, and will vigorously defend this case. Management believes that the results of this claim will not have a material impact on the company’s financial position or results of operations.

Various ~~claims~~federal, ~~alleging~~state, ~~employment~~and ~~discrimination~~local laws and regulations require property owners or operators to pay for the costs of removal or remediation of hazardous or toxic substances located on a property. For example, ~~including~~there ~~race~~are stringent legal requirements applicable to the stripping, ~~sex~~cleaning, ~~age~~ and ~~disability,~~painting ~~have~~of ~~been~~aircraft. ~~made~~The ~~against~~Company has previously paid penalties to the ~~company~~EPA ~~and~~for ~~its~~violations ~~subsidiaries~~of bythese ~~current~~laws and regulations, ~~former~~and ~~employees~~it atmay ~~its~~be ~~Birmingham~~required ~~and~~to ~~Dothan,~~pay ~~Alabama~~additional ~~facilities~~penalties inor ~~proceedings~~remediation ~~before~~costs in the ~~EEOC~~future. These laws and ~~before~~regulations ~~state~~also ~~and~~impose ~~federal~~liability ~~courts~~on inpersons ~~Alabama.~~who ~~Workers’~~arrange for the disposal or treatment of hazardous or toxic substances at another ~~compensation~~location ~~claims~~for ~~brought~~the bycosts ~~employees~~of removal or remediation of ~~Pemco~~these ~~Aeroplex~~hazardous ~~are~~substances ~~also~~at ~~pending~~the indisposal ~~Alabama~~or ~~state~~treatment ~~court~~facility. ~~The~~Further, ~~company~~these ~~believes~~laws ~~that~~and noregulations ~~one~~often impose liability regardless of ~~these~~whether ~~claims~~the isentity ~~material~~arranging tofor the ~~company~~disposal asever aowned or ~~whole~~operated the disposal facility. As an operator of properties and ~~that~~as ~~such~~potential ~~claims~~arrangers ~~are~~for ~~more~~hazardous ~~reflective~~substance ofdisposal, the ~~general increase~~Company inmay ~~employment-related~~be ~~litigation~~liable inunder the ~~U.S.,~~laws and ~~Alabama~~regulations infor ~~particular~~removal or remediation costs, ~~than~~governmental penalties, property damage, and related expenses. Payment of any ~~actual~~of ~~discriminatory~~these ~~employment~~costs ~~practices~~and byexpenses could materially harm the Company’s business and impair the value of its Common Stock.

In addition, in conjunction with the sale of Pemco World Air Services, Inc., WAS Aviation Services, Inc. (“WAS”) and the Company contracted for division of any environmental liability that may be required to meet applicable remediation standards at the Company’s former Dothan, Alabama facilities such that, in the event significant environmental remediation is required, WAS will bear the risk of the first $1.0 million dollars of such losses and the Company will bear the risk of any such losses in excess of $1.0 million but not to exceed $2.0 million in the aggregate. As a result, WAS would be responsible for all losses in excess of $3.0 million. The funds required to meet the Company’s obligations have been escrowed for a five-year period.

The Company May Not Be Able to Hire and Retain a Sufficient Number of Qualified Employees.

The Company’s success and growth will depend on its ability to continue to attract and retain skilled personnel. Competition for qualified personnel in the aircraft maintenance and modification services industry has been intense. Any failure to attract and retain qualified personnel could materially harm the Company’s business and impair the value of its Common Stock. Failure to negotiate new collective bargaining agreements in the future with unionized employees could materially harm the Company’s business.

~~company~~The orAmount ~~any~~and ~~subsidiary.~~Terms ~~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~~Company’s ofIndebtedness ~~these~~Restrict ~~claims will not have a material impact on~~ the ~~company~~Company’s ~~financial~~Financial ~~position~~and ~~or results of operations~~Operational Flexibility.

~~The~~On ~~company~~February 15, ~~and~~2006, ~~its~~the ~~subsidiaries~~Company ~~are~~entered ~~also~~into ~~parties~~a Note Purchase Agreement with Silver Canyon Services, Inc. (“Silver Canyon”), pursuant to ~~other~~which ~~non-employment~~it ~~related~~issued ~~litigation~~to Silver Canyon a senior secured note in the principal amount of $5.0 million (the “Note”). The Note contains customary events of default. The payment of all outstanding principal, interest and other amounts owing under the ~~results~~Note may be declared immediately due and payable upon the occurrence of ~~which~~an ~~are~~event ~~not~~of ~~expected~~default toas defined by Section 12 of the Note Purchase Agreement. The Company may be ~~material~~unable to locate other lenders at comparable interest rates if an event of default occurs. On July 31, 2006, the ~~company’s~~Note ~~financial~~was ~~position~~purchased orby ~~results~~Special Value Bond Fund, LLC, which is managed by Tennenbaum Capital Partners, LLC, a related party of ~~operations~~the Company. The Note Purchase Agreement was amended effective December 31, 2008 to change the maturity date of the Note to February 15, 2010.

~~Item~~The 4.Company ~~Submission~~has pledged substantially all of ~~Matters~~its assets to secure the debt under the Note. If the amounts outstanding under the Note were accelerated, the lender could proceed against those assets. Any event of default, therefore, could have a ~~Vote~~material adverse effect on the Company’s business and impair the value of ~~Security~~its ~~Holders~~Common Stock.

~~There~~Insiders ~~were~~Have noSubstantial ~~matters~~Control ~~submitted~~Over ~~for a vote of~~ the ~~company’s~~Company ~~stockholders~~and inCan Significantly ~~the~~Influence ~~fourth~~Matters ~~quarter~~Requiring ofStockholder ~~fiscal 2003~~Approval.

~~PART~~As IIof December 31, 2008, the Company’s executive officers, directors, and affiliates, in the aggregate, beneficially owned approximately 57% of it outstanding Common Stock. As a result, these stockholders are able to significantly influence matters requiring stockholder approval, including election of directors and the approval of mergers or other business combination transactions. This control may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of other stockholders to approve transactions that they may deem to be in their best interest.

~~Item~~The 5Company is Unable to Compete with the Pemco World Air Services, Inc. ~~Market~~Business for ~~Company’s~~Three ~~Common~~Years ~~Equity~~from ~~and~~the ~~Related~~Date ~~Stockholder~~of ~~Matters~~the Closing.

The ~~company’s~~stock ~~common~~purchase ~~stock~~agreement ~~trades~~under onwhich the ~~Nasdaq~~Company ~~National~~sold ~~Market~~PWAS includes ~~under~~a ~~the~~non-competition ~~symbol~~obligation ~~“PAGI.”~~which ~~The~~lasts ~~following~~for ~~table~~a ~~sets~~period ~~forth~~of three years from the ~~range~~ closing of ~~high~~the ~~and~~sale. ~~low~~Under ~~sales~~this ~~prices~~provision, ~~for~~ the ~~common~~Company ~~stock~~is onnot aable ~~quarterly~~to ~~basis~~engage ~~for~~in ~~each~~the ofbusiness ~~the~~sold ~~last~~to ~~two~~WAS, ~~fiscal~~except with respect to military customers, for three years asfollowing ~~reported~~the closing, which occurred on ~~Nasdaq~~September 19, 2007. ~~Quotations~~This ~~represent~~limitation ~~prices~~on ~~between~~the ~~dealers,~~scope doof ~~not~~the ~~include~~Company’s ~~retail~~business ~~mark-ups,~~operations ~~markdowns~~may oradversely ~~commissions,~~effect ~~and~~its ~~do not~~business ~~necessarily~~prospects, ~~represent~~operating ~~actual~~results ~~transactions~~and financial condition.

	2003				2002
Quarter End	High		Low		High		Low
March 31	$	26.90	$	21.15	$	24.97	$	13.50
June 30		26.28		21.66		30.71		19.50
September 30		27.43		20.61		25.15		17.05
December 31		34.75		23.11		24.50		13.50

The Company is Obligated to Indemnify WAS under Certain Circumstances.

OnWhile ~~April~~the ~~12,~~representations ~~2004,~~and ~~there~~warranties ~~were 4,405,125~~in ~~shares~~the ofstock ~~common~~purchase ~~stock~~agreement ~~issued~~under ~~and~~which ~~4,045,402~~the ~~shares~~Company sold PWAS did not survive the closing of ~~common~~the ~~stock~~sale, ~~outstanding~~the ~~held~~Company byagreed ~~approximately~~to ~~142~~a ~~owners~~limited ofindemnity ~~record~~for any and ~~895~~all ~~beneficial~~losses incurred ~~owners.~~by WAS resulting from:

~~The~~• ~~company~~fraud ~~has~~with ~~never~~respect ~~paid cash dividends on its common stock and currently intends~~ to ~~continue~~any ~~that~~representation ~~policy~~or ~~indefinitely.~~warranty ~~The~~made ~~company’s~~by ~~credit~~the ~~facilities~~Company ~~restrict its~~or ~~ability~~PWAS toin ~~pay~~the ~~dividends.~~stock purchase agreement;

~~The~~• ~~last~~certain ~~reported~~tax ~~sales price of the company’s common stock on April 12, 2004 was $32.10.~~ liabilities;

~~Item~~• 6.certain ~~Selected~~potential ~~Financial~~environmental ~~Data~~remediation costs; and

~~The~~• ~~following~~losses ~~selected~~resulting ~~financial~~from ~~data should be read in conjunction with~~ the ~~company’s~~litigation ~~financial~~between ~~statements~~PWAS and ~~accompanying~~GE ~~notes~~Capital ~~located~~Aviation ~~elsewhere~~Services, ~~in this report and Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations~~Inc.

In the event that any such indemnification obligations do arise and are material, this may adversely effect the Company’s business prospects, operating results and financial condition.

Item 1B. Unresolved Staff Comments

None.

~~Consolidated~~Item 2. ~~operating~~Properties ~~data for the company is as follows:~~

~~(In~~The ~~Thousands~~Company’s ~~Except~~corporate ~~Per~~offices ~~Share~~are ~~Information)~~located at the Birmingham International Airport, in Birmingham, Alabama. The Birmingham facility is located on approximately 190 acres of land with approximately 1.9 million square feet of production and administrative floor space. The facility includes ten flow-through bays permitting continual production line operation. The facility also includes a number of ancillary buildings such as a paint hangar, a shipping and receiving warehouse, a wing rehabilitation shop, a sheet metal shop, and a 55,000 square foot general office building that houses the administrative staff. Available ramp area exceeding 3.0 million square feet is adjacent to the municipal airport runways. Additionally, the facility operates a control tower that supplements the FAA-managed municipal air control tower for handling aircraft on the Company’s property and a fire-fighting unit that supplements fire-fighting equipment operated by both the City of Birmingham and the Alabama Air National Guard. The Company is party to a Mutual Aid Agreement with Birmingham Fire and Rescue and the Alabama Air National Guard for fire prevention and hazardous materials incident response capabilities.

	Year Ended 12/31/03		Year Ended 12/31/02		Year Ended 12/31/01		Year Ended 12/31/00		Year Ended 12/31/99
Net Sales	$	190,376	$	162,863	$	165,460	$	161,664	$	169,273
Income from Operations		16,225		14,272		16,109		10,503		6,767
Net Income		9,984		8,841		14,862		9,449		6,177
Net Income per common share - diluted	$	2.27	$	2.02	$	3.50	$	2.23	$	1.52

The Birmingham facility is a complete aircraft modification and maintenance center. The facility is an approved FAA repair station and maintains a Department of Defense “SECRET” security clearance.

The ~~following~~facility ~~charges,~~is orleased ~~reversals~~from ~~of charges, are included in~~ the ~~consolidated~~Birmingham ~~operating~~Airport ~~data for the company and had an impact on year-to-year comparability of results~~Authority. ~~With~~The ~~the~~lease ~~exception~~expires ~~of the reversals of the deferred tax valuation allowance~~September 30, ~~all~~2019. ~~charges or reversals of charges are pre-tax:~~

• The company maintains a valuation allowance for its deferred tax assets unless realization is considered more likely than not. The company evaluates the need for its deferred tax asset valuation allowance each year, which includes an analysis of past operating trends, projections of future operating results, and revisions to existing programs and contracts. The company reversed the valuation allowance partially each year during 1999, 2000 and 2001 as a result of the annual exercise of the one year renewal option or an increase in aircraft for on option year on the company’s largest contract, at which time the company could reasonably determine that utilization of the deferred tax assets was more likely than not. The reduction in the valuation allowance during 2003 resulted form the generation of Alabama taxable income during the year which resulted in the utilization of Alabama net operating loss carryforwards which had previously been subject to a valuation allowance. Reversal of the deferred tax valuation allowance had the effect of increasing Net Income in the years ended December 31, 1999, 2000, 2001, and 2003 by $2.5 million, $Item 3.7 ~~million,~~Legal ~~$5.9~~Proceedings ~~million, and $0.4 million, respectively.~~

•GECAS ~~During~~Lawsuits the year ended December 31, 1999 the company recorded charges of $1.6 million relating to its former CEO/President’s employment agreement and $0.4 million for the relocation of the company’s headquarters from Denver, Colorado to Birmingham, Alabama. The company also recorded during 1999 a $5.0 million charge for potential litigation settlements, $1.3 million in charges relating to scaling back its Pemco Nacelles operation, and a charge of $1.6 million to reflect disputes with several customers over the payment of invoices. During the year ended December 31, 2000 the company was able to collect some of the $1.6 million in disputes on invoices and recorded a gain of $0.9 million. During the year ended December 31, 2002, the company recorded a net gain of $1.4 million related to various litigation settlements. During the year ended December 31, 2003, the company settled an insurance claim related to a fire at the company’s Dothan, Alabama facility, resulting in a gain of $1.2 million.

•On ~~The~~January 16, ~~company~~2004, ~~recorded~~the ~~charges~~Company filed a complaint in the Circuit Court of Dale County, Alabama against GE Capital Aviation Services, Inc. (“GECAS”) for ~~inventory~~monies ~~obsolescence~~owed for modification and maintenance services provided on six 737-300 aircraft, all of which were re-delivered to GECAS during 2003 and are in service. On January 20, 2004, the ~~years~~Company ~~ended~~received ~~December~~service 31of a suit filed against the Company’s former subsidiary, ~~1999~~Pemco World Air Services Inc., ~~2000~~in New York state court, ~~2001~~claiming breach of contract with regard to two of the aircraft re-delivered, ~~2002~~as well as fraud and ~~2003~~conversion. On March 5, 2004, the Company filed a motion to dismiss the claims filed by GECAS in New York state court, which was denied. On March 24, 2004, the Circuit Court of $1Dale County, Alabama denied a motion filed by GECAS to dismiss or stay the proceedings.1 ~~million~~GECAS subsequently paid in full charges owed on four of the six aircraft. The New York state court ordered mediation in the matter. Mediation took place on October 6, $02004, but was unsuccessful in bringing resolution.7 ~~million~~Thereafter, $0the Company and GECAS amended to add additional claims and counterclaims, respectively.9 ~~million~~The case was again mediated on October 6, $02006 without success.4 ~~million~~On ~~and~~October 16, $02006, the Alabama state court granted the Company partial summary judgment as to two of the eight GECAS counterclaims.7 ~~million~~Trial of the case commenced in Alabama state court, ~~respectively~~in the Circuit Court of Dale County, on March 30, 2009. The New York state court has scheduled the case for trial on June 10, 2009 in the event the matter is not resolved in the Alabama proceeding. Management believes there is a remote chance that the outcome of these lawsuits will have a material impact on the Company’s financial position or results of operations.

•Employment ~~The~~Lawsuits ~~company originated a new bank loan in the year ended December 31, 2002, which resulted in a charge of $0.4 million related to prepayment fees and the write-off of un-amortized loan origination fees.~~

On March 14, 2009, a federal jury in the United States District Court for the Northern District of Alabama (Southern Division) returned a verdict against the Company for $250,000 in compensatory damages and $250,000 in punitive damages in a case involving a former employee who was terminated for unethical conduct involving the threatening touching of a female employee. In July 2005 the terminated employee filed EEOC charges against the Company for race and gender discrimination and retaliation for having been a plaintiff in a 2002 case brought against the Company. The jury found no evidence of retaliation, but found the Company liable on the basis of race and gender discrimination in the employee’s termination. The Company maintains its position as to the appropriateness of steps taken and intends to vigorously pursue appeal of the matter. The case is believed to be covered by the Company’s employer liability insurance coverage.

Various claims alleging employment discrimination, including race, sex, disability, and age have been made against the Company and its subsidiaries by current and former employees at its Birmingham, Alabama facilities in proceedings before the U.S. Equal Employment Opportunity Commission (the “EEOC”) and before state and

• federal ~~During~~courts ~~the~~in ~~year~~Alabama. ~~ended~~Workers’ ~~December~~compensation 31claims brought by employees are also pending in Alabama state court. The Company believes that none of these claims, ~~2000~~individually or in the ~~company~~aggregate, ~~recorded~~are amaterial ~~charge~~to the Company and that such claims are more reflective of ~~$0.7~~the ~~million~~general increase in employment-related tolitigation ~~its~~in ~~leasehold~~the ~~improvements~~U.S., atand ~~its~~Alabama ~~Clearwater~~in particular, ~~Florida~~than ~~facility~~of ~~upon~~any ~~its~~actual ~~decision~~discriminatory employment topractices ~~relocate~~by ~~its~~the ~~remaining~~Company ~~Florida~~or ~~based~~any ~~operations~~subsidiary. toExcept ~~Dothan~~for workers’ compensation benefits as provided by statute, ~~Alabama~~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 Company’s financial position or results of operations.

~~Consolidated~~Other ~~balance~~Legal Proceedings ~~sheet data for the company is as follows (in thousands of dollars):~~

	12/31/03		12/31/02		12/31/01		12/31/00			12/31/99
Working Capital	$	28,093	$	23,953	$	8,138	$	(4,455	)	$	(7,618	)
Total Assets		105,422		95,268		78,385		60,129			57,403
Long Term Debt		20,299		17,081		3,994		4,199			4,168
Other Long Term Liabilities		17,755		27,059		13,977		2,641			3,023
Stockholders’ Equity		22,975		11,536		19,349		9,927			138

The Company and its subsidiaries are also parties to other non-employment related litigation, the results of which are not expected to be material to the Company’s financial position or results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the Company’s financial position or results of operations for the period in which the ruling occurs, or future periods.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted for a vote of the Company’s stockholders in the fourth quarter of fiscal 2008.

PART II

Item 5. Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s Common Stock trades on the Nasdaq Global Market under the symbol “AAII.” The following table sets forth the range of high and low sales prices for the Common Stock on a quarterly basis for each of the last two fiscal years as reported on Nasdaq.


	2008				2007
Quarter End	High		Low		High		Low
March 31	$	7.20	$	2.50	$	9.00	$	6.82
June 30		3.07		1.45		10.95		7.56
September 30		2.53		1.25		12.00		4.00
December 31		3.47		1.02		6.39		1.75

On March 23, 2009, there were 4,542,348 shares of Common Stock issued and 4,128,950 shares of Common Stock outstanding held by approximately 120 owners of record and 820 beneficial owners. The Company has never paid cash dividends on its Common Stock and currently intends to continue that policy indefinitely. The Company’s senior secured note restricts its ability to pay dividends. The last reported sales price of the Company’s Common Stock on March 26, 2009 was $1.30.

On March 16, 2009, the Board of Directors of AAII unanimously voted to delist AAII Common Stock (“Common Stock”) from The Nasdaq Stock Market LLC (“NASDAQ”) and to voluntarily terminate the registration of its Common Stock under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). In connection therewith, the Company notified NASDAQ on March 18, 2009 of the Company’s intention to file a Form 25 with the Securities and Exchange Commission (“SEC”) on or about March 31, 2009 in order to voluntarily delist its Common Stock. On March 31, 2009, AAII filed a Form 25 with the SEC to delist its Common Stock from NASDAQ and to deregister its Common Stock with the SEC under Section 12(b) of the Exchange Act. By operation of law, the delisting will become effective on April 10, 2009. Additionally, on March 30, 2009, the Company filed with the SEC post-effective amendments to its registration statements on Form S-8 in order to remove from registration under the Securities Act of 1933 any of the securities that remained unsold under each such registration statement as of March 30, 2009.

Item 6. Selected Financial Data

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the ~~company~~Company’s consolidated financial statements and notes thereto included herein as Item 8. This discussion contains forward-looking statements. Refer to “FORWARD-LOOKING STATEMENTS-CAUTIONARY LANGUAGE” on page ii and “RISK FACTORS THAT MAY AFFECT FUTURE PERFORMANCE” beginning on page 10, for a discussion of the uncertainties, risks, and assumptions associated with these statements.

EXECUTIVE OVERVIEW

The ~~company~~Company operates primarily in the aerospace and defense industry and its principal business is providing aircraft maintenance and ~~modification~~ modification services to military ~~and commercial~~ customers. The company conducts its business through three operating segments: Government Services Segment (“GSS”), Commercial Services Segment (“CSS”), and Manufacturing and Components Segment (“MCS”). The companyCompany’s services are ~~generally~~ provided under traditional contracting agreements that include fixed- price, time and material, cost plus and variations of such arrangements. The ~~company~~Company’s revenue and cash flows are derived primarily from services provided under these contracts, and cash flows include the receipt of milestone or progress payments under certain contracts.

~~The~~During ~~company’s~~the ~~success~~third ~~obtaining~~quarter ~~FAA~~of ~~approval~~2007, ~~during~~the ~~2002~~Company ofsold its ~~STC~~Pemco ~~for~~World ~~modification~~Air ofServices, ~~Boeing~~Inc. ~~737-300~~(“PWAS”) ~~aircraft~~subsidiary ~~from passenger~~ to ~~cargo configurations~~WAS ~~contributed~~Aviation ~~significantly~~Services, toInc., ~~its~~an ~~revenue~~affiliate ~~growth~~of ~~from~~Sun ~~2002~~Capital ~~to 2003~~(“WAS”). The ~~company~~Company ~~performed~~recorded ~~six~~a gain ~~such~~of ~~conversions during 2003 compared to one during 2002~~$11.4 ~~The~~million, ~~company~~net ~~anticipates~~of ~~growth in the demand for freighter aircraft over the near term~~tax, asrelated ~~well~~to ~~as increased competition in~~ the ~~cargo~~sale ~~conversion~~of ~~market~~PWAS. The ~~company~~sale ~~believes~~of ~~approvals~~PWAS ~~from~~allowed ~~airworthiness authorities in China and~~ the ~~U.K.~~Company ~~have~~to ~~helped~~pay ~~position~~off itits asrevolving acredit ~~leader~~facility, intreasury ~~this~~stock ~~global~~term ~~market.~~loan ~~The~~and ~~company~~bank ~~also~~term ~~experienced revenue~~loan ~~growth~~(“the ~~from~~Bank ~~commercial~~Debt”) ~~MRO~~with ~~services~~Wachovia ~~during~~Bank ~~2003~~and Compass Bank. ~~The~~In ~~company~~addition ~~expects~~to ~~continued~~eliminating ~~recovery~~the ~~from~~Bank ~~post~~Debt, ~~9-11 effects in~~ the ~~commercial~~sale ~~airframe~~provided ~~heavy~~approximately ~~maintenance~~$8.0 ~~market~~million ~~as carriers regain the confidence~~ of ~~air-travelers~~cash ~~and~~for ~~operators~~future ~~place aircraft~~working ~~parked~~capital ~~subsequent~~needs. toAs ~~9-11~~part ~~back~~of ~~into~~the ~~service.~~transaction ~~The~~in ~~company’s~~which ~~success~~the inCompany ~~this~~sold ~~industry~~PWAS ~~continues~~ to ~~depend~~WAS, onthe ~~its~~Company ~~ability~~changed toits ~~offer~~name ~~competitive~~from ~~pricing~~Pemco ~~and quality performance~~Aviation Group, ~~and meet customer delivery requirements~~Inc. ~~The~~to ~~company~~Alabama ~~believes that~~Aircraft asIndustries, ~~commercial~~Inc. ~~airline~~PWAS ~~owners~~historically ~~and~~comprised ~~operators~~substantially ~~face~~all ~~increased~~of ~~pressure~~the toCommercial ~~reduce~~Services ~~costs,~~Segment ~~independent~~(“CSS”). ~~MRO~~The ~~service~~historical ~~providers~~financial ~~will~~results ~~continue~~of toPWAS ~~benefit~~have bybeen ~~offering~~presented ain ~~lower-cost~~the ~~alternative~~Company’s toconsolidated financial ~~performing~~statements ~~heavy~~as ~~maintenance~~discontinued ~~in-house~~operations.

The ~~market~~financial ~~for~~condition ~~PDM/MRO~~and ~~services~~results ~~provided~~of tooperations of the ~~U.S.~~Company, ~~Armed~~which ~~Forces~~operated ~~and~~as ~~other government~~a ~~agencies~~subcontractor isto ~~very~~The ~~mature~~Boeing Company (“Boeing”), ~~providing~~have ~~relatively~~been ~~slow~~impacted ~~growth~~by ~~and~~several ~~aggressive~~unusual ~~competition~~events onin ~~pricing~~connection with the USAF KC-135 PDM program and ~~scheduling.~~the ~~The~~related ~~company’s~~recompetition ~~extensive~~for ~~years~~the ofnew ~~experience~~KC-135 inPDM ~~this~~contract ~~market~~award. As discussed in previous filings, ~~proven~~from ~~past~~May ~~performance~~2005 through June 2006, ~~and~~the ~~broad~~Company ~~recognition~~worked ofin ~~capabilities~~cooperation ~~have helped~~with Boeing to ~~sustain~~submit ~~its~~a ~~presence~~proposal inon ~~this~~the ~~market.~~new ~~The~~KC-135 ~~company’s~~contract ~~growth~~under ina ~~this~~Memorandum ~~market~~of isAgreement ~~largely~~with ~~dependent~~Boeing on(“MOA”). ~~expanding~~After ~~beyond~~filing ~~the~~an ~~current~~initial ~~PDM/MRO~~proposal ~~business~~with ~~base~~the USAF, which ~~primarily~~included ~~consisting~~critical offinancial and operational information on the Company’s KC-135 program, ~~and~~the ~~diversifying~~Company ~~into~~believes ~~other~~Boeing breached the MOA due to the USAF’s reducing the number of aircraft in the request for proposal. From July 2006 to ~~platforms~~September 2007, the Company prepared its own proposal for the new KC-135 contract. The ~~USCG~~Company’s Cproposal for the KC-~~130~~135 PDM program was unsuccessful as the contract was awarded to ~~the~~Boeing ~~company~~in ~~during~~September ~~2003~~2007. ~~was~~The aCompany ~~significant~~filed ~~step~~a ~~toward~~protest ~~expanding~~with the Government ~~PDM/MRO~~Accountability ~~base~~Office (“GAO”) and ~~re-establishing~~the GAO upheld in part the ~~company~~Company’s asprotest on the basis that the USAF failed to conduct a ~~major~~proper ~~competitor~~analysis of Boeing’s cost/price proposal for realism or potential risk. On March 3, 2008, the USAF advised the GAO that in response to the ~~C-130~~recommendation ~~maintenance~~by ~~market~~the GAO it had completed additional review and that the Company’s proposal was not selected for award. The ~~company~~Company ~~believes~~filed a protest on the ~~aging~~new ofaward decision ~~military~~on ~~aircraft~~March 11, ~~coupled~~2008 ~~with~~as ~~defense~~to ~~budget~~the ~~constraints~~USAF’s ~~limiting~~lack ~~the~~of ~~development~~proper evaluation to meet GAO recommendations and ~~deployment~~sudden post-award change of ~~new~~work ~~aircraft~~scope under the contract recompete. On June 13, ~~will~~2008, ~~contribute~~the toGAO ~~positive~~denied ~~growth~~the Company’s March 11, 2008 protest. On June 27, 2008, the Company filed a complaint in the ~~military~~United States Court of Federal Claims (the “Court”) protesting the actions of the USAF in connection with the award to Boeing of the KC-135 PDM~~/MRO~~ ~~industry~~contract. ~~over~~On July 3, 2008, the ~~next~~Court ~~decade~~granted Boeing’s motion to intervene in the case. On September 30, 2008, the Court set aside the KC-135 PDM solicitation enjoining the USAF from proceeding with the award to Boeing and requiring a resolicitation of the procurement that will explicitly address

~~The~~19 company responded to the opportunities and challenges of 2003 with strong performances in its GSS and CSS, reporting record consolidated sales during 2003 of $190.4 million, a 16.9% increase over 2002 sales of $162.9 million. Consolidated net income increased 13.6%, from $8.8 million in 2002 to $10.0 million in 2003.

the role of the aging KC-135 fleet on the PDM process. In February 2009, the USAF and Boeing filed appeals of the Court’s ruling with the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”). The Company expects to file a cross appeal with the Federal Circuit in the second quarter of 2009. The Company expects the appeals process before the Federal Circuit to be resolved in the fourth quarter of 2009 or the first quarter of 2010. The Company is currently negotiating a subcontract with Boeing for KC-135 PDM work to be performed until a new solicitation and award is completed by the USAF pursuant to the Court’s order.

In order to adjust for and mitigate the effects of the past events discussed above, the Company has taken several significant steps. On November 6, 2007 the Company officially qualified with the Small Business Administration as a small business for military contracts. The Company believes that this will provide vital opportunities for defense contracts which were previously unavailable. Management has also taken significant steps to reduce costs including headcount reductions, administrative cost reductions, freezing the defined benefit pension plan for salaried employees as of December 31, 2007, eliminating salary increases for 2008 and restructuring the medical and dental benefit plans. In addition, the Board of Directors, in a unified move to support the Company, agreed to a 50% reduction in all Board fees for 2008. Effective October 1, 2008, the previous compensation arrangements went back into effect. The Company and Boeing continue to be teamed on the KC-135 bridge contract for which the USAF exercised an option to extend through September 30, 2009. There are no assurances that the Company will receive more aircraft than what has already been inducted during the latest extension of the KC-135 bridge contract. There are no guarantees additional options will be exercised or that, if exercised, any aircraft will be inducted under such options.

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. As a result of the awarding of the KC-135 contract to Boeing and the lack of other long-term contracts in conjunction with the sale of PWAS, which generated significant pretax income during 2007, there is insufficient evidence for the Company to conclude as of December 31, 2008 or 2007 that it is more likely than not that the deferred income tax assets recorded by the Company would be realized. During 2007, the Company recorded a $9.7 million valuation allowance against the deferred income tax asset accounts which substantially increased the reported income tax expense in 2007.

RESULTS OF OPERATIONS

Twelve months ended December 31, 2008 versus twelve months ended December 31, ~~2003~~2007

~~Versus~~The ~~twelve~~table ~~months~~below presents major highlights from the years ended ~~December~~ December 31, ~~2002~~2008 and 2007 excluding the results of discontinued operations, except for net (loss) income.

The table below presents major highlights from the years ended December 31, 2003 and 2002.

(In $Millions)

	2003			2002			Change
	2008				2007				% Change
Revenue	$	~~190~~53.45		$	~~162.9~~$	65.1	~~16.9~~	%	(17.8	)%
Gross Profit		42.3			35.8		18.2	%
Gross profit		7.7				3.8			102.6	%
Operating income		16.2			14.3		13.3	%
Operating loss from continuing operations		(0.5	)			(6.4	)		92.2	%
Income before taxes		15.8			14.3		10.5	%
Loss from continuing operations before taxes		(1.3	)			(7.0	)		81.4	%
Net income		10.0			8.8		13.6	%
Loss from continuing operations		(1.1	)			(13.3	)		91.7	%
EBITDA		21.1			19.3		9.3	%
Net (loss) income		(5.8	)			1.0			(680.0	)%
EBITDA from continuing operations		1.1				(4.7	)		123.4	%

~~EBITDA~~The ~~for~~Company defines operating loss from continuing operations, as shown in the ~~years~~above ~~ended~~table, ~~December~~as ~~31,~~revenue ~~2003~~less ~~and~~cost ~~2002~~of ~~was~~sales, ~~calculated~~less ~~using~~selling, ~~the~~general, ~~following~~and ~~approach:~~administrative expenses.

(In $Millions)

	2003		2002
Net Income	$	10.0	$	8.8
Interest		0.9		1.5
Taxes		5.9		5.4
Depreciation and Amortization		4.3		3.6
EBITDA	$	21.1	$	19.3

The company presents Earnings Before Interest, Taxes, Depreciation and Amortization, more commonly referred to as EBITDA, because its management uses the measure to evaluate the company’s performance and to allocate resources. In addition, the company believes EBITDA is an important gauge used by commercial banks, investment banks, other financial institutions, and current and potential investors, to approximate its cash generation capability. Accordingly, the company has included EBITDA as part of this report. The Depreciation and Amortization amounts used in the EBITDA calculation are those that were recorded in the Consolidated Statements of Operations in this report. Due to the long-term nature of much of the company’s business, the Depreciation and Amortization amounts recorded in the Consolidated Statements of Operations will not directly match the change in Accumulated Depreciation and Amortization reflected on the company’s Consolidated Balance Sheets. This is a result of the capitalization of depreciation expense on long-term contracts into Work-in-Process. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered as a substitute for or superior to other measures of financial

performance reported in accordance with GAAP. EBITDA as presented herein may not be comparable to similarly titled measures reported by other companies.

The table below presents the highlights in Revenue by Operating Segment for the years ended December 31, 2003 and 2002.

(In $Millions)

	2003			2002			Change			% Change
GSS	$	126.4		$	102.2		$	24.2		23.7	%
CSS		59.1			48.7			10.4		21.4	%
MCS		7.8			12.1			(4.3	)	(35.5	%)
Eliminations		(2.9	)		(0.1	)
Total	$	190.4		$	162.9		$	27.5		16.9	%

Without regard to operating segments, the company’s mix of business between government and commercial customers was 68% government and 32% commercial in 2003 and 67% government and 33% commercial in 2002.

The $24.2 million increase in the sales of the GSS was due primarily to increased revenue under the KC-135 PDM program of $25.5 million and an increase in C-130 related work of $2.1 million, offset by a net decrease of $3.4 million in other programs. The KC-135 PDM program allows for the company to provide services on PDM aircraft, drop-in aircraft, and other aircraft related areas. During 2003, the company delivered 32 PDM aircraft and two drop-in aircraft compared to 35 PDM and one drop-in aircraft during 2002. Year-over-year the company has realized an increase in sales per PDM aircraft due to an increase in the amount of work performed on each aircraft delivered. The amount of non-routine work performed per aircraft varies as a result of differences in aircraft condition and model mix. In addition, the company’s pricing on the KC-135 PDM program increased as a result of a transition from government furnished material (“GFM”) to customer furnished material (“CFM”) that began during 2002, the effects of which were realized during 2003. Under the GFM arrangement, the government furnished the company free of charge certain material necessary for completing the PDM process. Under the CFM arrangement, the company began procuring material previously provided through the GFM arrangement and increased its pricing to the customer accordingly. The company also recognized revenue of $0.7 million related to an REA on work performed under the KC-135 program. The company completed work on four C-130 spar inspections during 2003 with no corresponding sales on C-130 aircraft during 2002. The overall increase of KC-135 PDM program related sales and C-130 sales was offset by the completion of the J-Stars program that had sales of $3.7 million during 2002 and no sales during 2003. The KC-135 PDM programs represented 98.0% of the revenue of the GSS during 2003 and 96.2% during 2002.

The increase in the CSS revenue of $10.4 million was primarily due to increases in Conversion revenues of $11.2 million, the recognition of an REA on the H-3 Helicopter program in the amount of $0.7 million, an increase in parts sales of $0.1 million, and an increase in engineering and design revenue of $1.6 million. The CSS delivered six cargo conversions during 2003 compared to one during 2002. These increases were partially offset by a decrease in commercial MRO sales of $3.2 million.

~~Revenue~~EBITDA infrom ~~the~~continuing ~~MCS~~operations ~~decreased~~for ~~$4.3~~the ~~million~~years inended ~~2003~~December 31, ~~declining~~2008 toand ~~$7.8~~2007 ~~million~~was ~~in 2003 from $12.1 million in 2002. Revenue~~calculated ~~declined~~using ~~primarily as a result of~~ the ~~early~~following ~~termination~~approach: ~~of a government contract for a launch vehicle program.~~

~~The~~(In ~~company~~$Millions) ~~defines operating income, as shown in the Highlights Table at the beginning of this 2003 versus 2002 discussion, as revenue less cost of sales, less selling, general, and administrative expenses.~~

Cost of sales increased to $148.1 million in 2003 from $127.1 million in 2002. The increased cost of sales during 2003 was primarily a result of higher sales during the year. Overall, the company’s gross profit percentage increased to 22.2% in 2003 from 22.0% in 2002. The increase in gross profit percent is attributable to several factors. The KC-135 aircraft delivered during 2003 were on average more profitable than those delivered during 2002 as a result of an increase in non-routine work and changes in the KC-135 model mix. The company experienced several delays on KC-135 aircraft during 2002 due to the inability to obtain required parts which resulted in increased costs during the period. In addition, included in cost of sales during 2003 is a $0.7 million insurance recovery related to a fire at the company’s Dothan, Alabama facility in January 2002. These favorable factors were partially offset by relatively lower margins on work performed under new contracts during 2003. Cost of sales associated with new contracts included charges of $3.6 million related to estimated losses on contracts-in-process at December 31, 2003.


	2008			2007
Loss from continuing operations	$	(1.1	)	$	(13.3	)
Interest expense		0.8			0.6
Taxes		(0.2	)		6.3
Depreciation and Amortization		1.6			1.7

EBITDA from continuing operations	$	1.1		$	(4.7	)

~~Selling,~~The ~~general,~~Company ~~and~~presents ~~administrative~~Earnings (~~“SG&A”~~Loss) ~~expenses~~Before ~~increased~~Interest, ~~from~~Taxes, ~~$21.5~~Depreciation ~~million~~and inAmortization, ~~2002~~more commonly referred to ~~$26.1~~as ~~million~~EBITDA, inbecause ~~2003.~~its Asmanagement auses ~~percent~~the ofmeasure ~~sales,~~to ~~SG&A~~evaluate ~~expenses~~the ~~increased~~Company’s ~~from~~performance ~~13.2%~~and ~~in 2002~~ to 13allocate resources.7% inIn ~~2003.~~addition, ~~The~~the ~~increase~~Company ~~in SG&A~~believes ~~expense~~EBITDA is ~~attributable~~an toimportant ~~several~~gauge ~~factors.~~used ~~The~~by ~~company~~commercial ~~continued~~banks, toinvestment ~~invest~~banks, other infinancial ~~its~~institutions, ~~Industrial~~and ~~Engineering~~current ~~function~~and ~~during~~potential ~~2003~~investors, into anapproximate ~~effort~~its tocash ~~improve~~generation ~~productivity~~capability. Accordingly, ~~adding~~the ~~approximately~~Company ~~$0.5~~has ~~million~~included toEBITDA ~~SG&A~~as ~~expense~~part ~~year-over-year~~of this report. The ~~company~~ ~~incurred~~Depreciation ~~approximately~~and ~~$0.4~~Amortization ~~million~~amounts used in ~~expenses~~the ~~during~~EBITDA calculation ~~2003~~are ~~related~~those tothat ~~environmental~~were ~~remediation~~recorded ~~efforts~~in ~~compared~~the toConsolidated ~~$0.1~~Statements ~~million~~of ~~during~~Operations ~~2002~~in this report. ~~The~~Due ~~company~~to ~~increased~~the ~~its~~long-term ~~structural~~nature ~~SG&A~~of ~~expense~~much byof ~~expanding~~the ~~its~~Company’s ~~marketing~~business, the Depreciation and ~~business~~Amortization amounts recorded in the Consolidated ~~development~~Statements ~~capabilities~~of ~~across~~Operations ~~each~~will ~~segment~~not ~~and~~directly ~~increasing~~match the ~~capacity~~change ofin ~~its~~Accumulated ~~internal~~Depreciation ~~audit~~and ~~function.~~Amortization Atreflected on the ~~company~~Company’s ~~MCS,~~Consolidated ~~spending~~Balance Sheets. This is a result of the capitalization of depreciation expense on ~~internal~~long-term contracts ~~research~~into ~~and~~Work-in-Process. ~~development~~EBITDA ~~activities~~is ~~increased~~not ~~and~~a ~~the~~measure ~~executive~~of ~~manager~~financial ~~placed~~performance ~~over~~under ~~the~~generally ~~MCS during~~accepted ~~2002~~accounting ~~contributed~~principles toin the ~~increase~~United ~~year-over-year~~States and should not be considered as a ~~result~~substitute offor aor ~~partial~~superior ~~year~~to other measures of ~~activity~~financial performance ~~during~~reported ~~2002~~in ~~compared~~accordance with GAAP. EBITDA as presented herein may not be comparable to asimilarly ~~full~~titled ~~year~~measures ofreported ~~activity~~by ~~during~~other ~~2003~~companies.

~~Interest~~The ~~expense decreased to~~ $011.96 million decrease in ~~2003~~revenue from ~~$1.5~~continuing ~~million~~operations inat ~~2002.~~the ~~The~~Company ~~effective~~was ~~average~~primarily ~~interest~~due ~~rate~~to ondecreases ~~the~~in ~~company’s~~deliveries ~~revolving~~of ~~credit~~KC-135 ~~facility~~aircraft, ~~was approximately~~C-130 aircraft and P-3 aircraft.9% inThe ~~2003~~KC-135 ~~versus~~PDM 4program, which accounted for 83.63% inof ~~2002.~~revenue Infrom ~~addition~~continuing operations in 2008, allows for the ~~company~~Company ~~recorded~~to ~~charges~~provide ofservices ~~approximately~~on ~~$400~~PDM aircraft,~~000~~ drop-in aircraft, and other aircraft related toareas. Revenue from the ~~write~~KC-~~off~~135 ofprogram ~~loan~~decreased ~~origination~~$3.4 ~~fees~~million ~~and~~during ~~prepayment~~2008. ~~fees~~During in2008, the ~~connection~~Company ~~with~~delivered ~~refinancing~~eleven ~~its~~PDM ~~bank~~aircraft, ~~borrowings~~compared to twelve PDM aircraft during ~~the fourth~~2007. ~~quarter~~Revenue from continuing operations decreased $2.6 million under contracts to perform non-routine maintenance work on C-130 aircraft offset by additional revenue of ~~2002~~$0.7 ~~The~~million ~~impact~~to perform paint stripping under a new C-130 contract. Revenue from continuing operations decreased as a result of ~~these~~fewer ~~refinancing~~C-130 ~~costs~~aircraft ~~and~~in ~~the~~process ~~lower~~during ~~effective~~2008. ~~interest~~Revenue ~~rate~~for ~~was~~the ~~partially~~P-3 ~~offset~~program bydecreased an$5.1 ~~increase~~million in 2008 due to the delivery ~~company’s~~of ~~average~~five ~~debt~~P-3s ~~outstanding~~during 2007 versus delivery of one P-3 during ~~2003~~2008. ~~compared~~Revenue tofrom ~~2002~~continuing operations decreased $1.2 million on other contracts primarily as a result of fewer aircraft inducted under miscellaneous paint contracts.

~~During~~Cost ~~2003,~~of ~~the~~revenue ~~company~~decreased ~~recorded~~$15.4 ~~income~~million, ~~tax~~or ~~provisions~~25.2%, atto an$45.8 ~~effective~~million ~~rate~~in of2008 ~~37%~~from $61.2 ~~The effective~~million ~~rate~~ in ~~2003~~2007. ~~includes~~Cost ~~favorable~~of ~~tax~~sales ~~benefits~~was ~~generated~~adversely ~~from~~impacted ~~the~~in ~~utilization~~2007 by of$2.6 ~~Alabama~~million ~~net~~of ~~operating~~losses ~~loss~~on ~~carryforwards~~the ~~which~~P-3 ~~had~~contract, ~~previously~~$1.7 ~~been~~million ~~subject~~of tolosses aon ~~deferred~~the ~~tax~~USAF ~~valuation~~C-130 ~~allowance.~~contract ~~During~~and ~~2002,~~a ~~the~~charge ~~company~~of ~~recorded~~$0.8 ~~income~~million ~~tax provisions~~related onto afreezing ~~normalized~~the ~~basis~~defined atbenefit anpension ~~effective~~plan ~~rate~~for ofsalaried ~~38%~~employees.

Gross profit increased from $3.8 million, or 102.6%, to $7.7 million due to improvements in operational efficiency. Overall, the Company’s gross profit percentage of revenue from continuing operations increased to 14.4% in 2008 from 5.9% in 2007. The increase in gross profit as a percentage of revenue in 2008 is primarily due to losses incurred on the P-3 and C-130 programs in 2007 offset by the impact of a lower revenue base over which to spread the fixed cost of operating the Birmingham, Alabama facility.

~~Twelve~~Selling, ~~months~~general ~~ended~~and ~~December~~administrative 31(“SG&A”) expenses decreased $2.1 million, ~~2002~~or 20.1%, to $8.2 million in 2008 from $10.2 million in 2007. As a percent of sales, SG&A expenses decreased to 15.3% in 2008 from 15.7% in 2007 as the Company implemented a cost reduction program in 2008 as a result of lower revenue.

~~Versus~~During ~~twelve~~2008, ~~months~~the ~~ended~~Company ~~December~~recovered 31certain income taxes previously expensed. During 2007, ~~2001~~the Company recorded income tax expense for continuing operations of $6.3 million. Income tax expense for 2007 was significantly impacted by a valuation allowance on deferred income tax assets of $9.7 million which was recorded due to the uncertainty of future taxable income as a result of the lack of significant long-term contracts.

~~The~~(Loss) ~~table~~Income ~~below presents major highlights~~ from ~~the~~Discontinued ~~years~~Operations ~~ended December 31, 2002 and 2001.~~

~~(In~~Results from discontinued operations decreased from $~~Millions~~2.8 million of income from discontinued operations in 2007 to $4.7 million of losses from discontinued operations in 2008. Space Vector Corporation (“SVC”) incurred losses of $2.8 million in 2008 as a result of revenue decreasing from $7.7 million in 2007 to $4.5 million in 2008. SVC also continued to incur losses on a large battery contract during 2008. AAII recorded an impairment charge of $1.9 million in 2008 on its investment in SVC to adjust the value of SVC’s net assets to approximate the proceeds expected from the sale. PWAS, which was sold in 2007, experienced significant growth in cargo conversion revenue and maintenance, repair and overhaul revenue in 2007. The increase in volume of business increased capacity utilization at the Company’s former Dothan, Alabama facility, supplemented by work performed in mainland China. The improvements in volume and utilization led to lower cost and increased profitability on all lines of work in 2007.

	2002		2001		Change
Revenue	$	162.9	$	165.5	(1.6	%)
Gross Profit		35.8		36.5	(1.9	%)
Operating income		14.3		16.1	(11.2	%)
Income before taxes		14.3		14.8	(3.4	%)
Net income		8.8		14.9	(40.9	%)
EBITDA		19.3		19.6	(1.5	%)

Gain on Sale of Discontinued Operations

~~EBITDA~~The Company recorded a pretax gain of $17.6 million for the ~~years~~sale ~~ended~~of ~~December~~PWAS in the ~~31,~~first ~~2002~~nine ~~and~~months ~~2001~~of ~~was~~2007. ~~calculated~~The ~~using~~Company recorded $6.2 million in tax expense on the ~~following~~gain ~~approach:~~due to differences in the gain on the sale for financial reporting purposes and income tax reporting purposes.

~~(In~~LIQUIDITY ~~$Millions)~~AND CAPITAL RESOURCES

	2002		2001
Net Income	$	8.8	$	14.9
Interest		1.5		1.3
Taxes		5.4		(0.1	)
Depreciation and Amortization		3.6		3.5
EBITDA	$	19.3	$	19.6

General

The table below presents the ~~highlights~~ inmajor ~~Revenue~~indicators byof ~~Operating~~financial ~~Segment~~condition ~~for the years ended December 31, 2002~~ and ~~2001~~liquidity.

(In $~~Millions~~Thousands, except ratios)

	2002			2001				Change			% Change
	December 31,2008			December 31,2007			Change
GSS	$	102.2		$	104.4			$	(2.2	)	(2.1	%)
Cash	$	7,612		$	8,799		$	(1,187	)
CSS		48.7			46.7				2.0		4.3	%
Working Capital	$	11,090		$	16,192		$	(5,102	)
MCS		12.1			14.6				(2.5	)	(17.1	%)
Current portion of long-term debt and capital lease obligations	$	2		$	5		$	(3	)
Eliminations		(0.1	)		(0.2	)
Long-term debt and capital lease obligations	$	5,000		$	5,002		$	(2	)
Total	$	162.9		$	165.5			$	(2.6	)	(1.6	%)
Stockholders’ (deficit) equity	$	(15,019	)	$	16,326		$	(31,345	)

~~Without~~Working ~~regard~~Capital ~~to operating segments, the company’s mix of business between government and commercial customers remained constant at 33% commercial and 67% government in both 2002 and 2001.~~

The ~~$2.2~~Company ~~million~~has ~~decrease~~no incurrent ~~the~~arrangements ~~sales~~with ofrespect ~~the GSS was due primarily~~ to ~~decreased~~sources ~~throughput under the KC-135 PDM programs~~ of ~~$3.7~~additional ~~million~~financing, and aits ~~decrease~~negative results of ~~$0.5~~operations ~~million~~ in ~~the~~prior ~~C-130~~years ~~Paint~~and ~~Program.~~the ~~The~~current ~~KC-135~~lack ~~PDM~~of ~~program~~long-term ~~allows~~contracts, ~~for~~exacerbated by the ~~company~~current state toof ~~provide~~the ~~services~~credit ~~on PDM aircraft~~markets, ~~drop-in~~will ~~aircraft,~~likely ~~and~~make ~~other~~it ~~aircraft~~more ~~related~~difficult ~~areas.~~and ~~During~~expensive ~~2002~~for the ~~company~~Company ~~delivered~~to 35raise ~~PDM~~additional ~~and~~capital ~~one~~that ~~drop-in~~may ~~aircraft,~~be ~~whereas~~necessary into ~~2001~~continue ~~the company~~its ~~delivered~~operations. 38In ~~PDM aircraft~~addition, ~~six~~the ~~drop-in~~anticipated ~~aircraft,~~delisting ~~and~~of ~~performed~~the aCompany’s ~~one-time~~Common ~~inspection~~Stock from ~~program~~Nasdaq on 25April 6, ~~aircraft.~~2009 ~~The~~will ~~inspection~~likely ~~program~~materially inadversely ~~and~~affect ofthe ~~itself~~Company’s ~~accounted~~access ~~for~~to ~~$3.9 million of~~ the ~~2001~~capital tomarkets, ~~2002~~and ~~decrease in revenue. Year-to-year~~ the ~~company has~~limited ~~realized~~liquidity anand ~~increase~~potentially inreduced ~~sales~~price ~~per~~of ~~PDM~~the ~~aircraft~~Common ~~due~~Stock tocould anmaterially ~~increase~~adversely inaffect the Company’s ~~amount~~ability ofto ~~work~~raise ~~performed~~capital on ~~each~~terms ~~aircraft~~acceptable ~~delivered.~~to ~~The~~the ~~overall~~Company ~~decrease~~or ofat ~~PDM~~all. ~~program related sales was~~

The Company’s primary sources of liquidity and capital resources include cash-on-hand and cash flows ~~partially~~from ~~offset~~operations by(primarily anfrom ~~increase~~collection of ~~$2.0~~accounts ~~million~~receivable and conversion of work-in-process ~~other~~inventory ~~programs~~to cash). ~~The~~Principal factors affecting the Company’s liquidity and capital resources position include, but are not limited to, the following: results of operations; the number of KC-135 ~~PDM~~inducted ~~programs~~as ~~represented~~a 96result of the U.2%S. Air Force (“USAF”) extension of the ~~revenue~~Company’s KC-135 bridge contract with Boeing; collection of accounts receivable; funding requirements associated with the ~~GSS~~Company’s defined benefit pension plan (“Pension Plan”); settlements of various claims; and the payment terms of any short-term or long-term debt. Recent global market and economic conditions have been unprecedented and challenging with tighter credit conditions and recession in ~~2002~~most major economies continuing into 2009. As a result of these market conditions, the cost and 97availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads.7% Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide ~~2001~~credit to businesses and consumers. These factors have lead to a decrease in spending by businesses and consumers alike, and a corresponding decrease in global infrastructure spending. Continued turbulence in the U.S. and international markets and economies and prolonged declines in business and consumer spending may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers, including our ability to access the capital markets to meet liquidity needs. Due to the current state of the credit markets in the United States, the current status of the KC-135 contract and the Company’s recent operating performance, there is uncertainty as to whether the Company would be able to obtain additional financing from lenders during 2009. The Company anticipates that cash-on-hand will be sufficient to fund operations, make moderate capital expenditures, make scheduled interest payments on its debt obligation for the next twelve months and make the required contributions to its Pension Plan. However, the Company is proposing and is expecting to propose on several programs in the next twelve months. If the Company is successful in winning some or all of these programs, additional financing may be needed to fund working capital requirements related to the buildup of accounts receivable and inventory on the projects.

The ~~increase~~financial condition and results of operations of the Company, which operated as a subcontractor to Boeing, have been impacted by several unusual events in connection with the ~~CSS~~USAF ~~revenue~~KC-135 PDM program and the related recompetition for the new KC-135 PDM contract award. As discussed in previous filings, from May 2005 through June 2006, the Company worked in cooperation with Boeing to submit a proposal on the new KC-135 contract under a Memorandum of Agreement $2with Boeing (“MOA”).0 ~~million~~After ~~was~~filing ~~primarily~~an initial proposal with the USAF, which included critical financial and operational information on the Company’s KC-135 program, the Company believes Boeing breached the MOA due to the ~~increases~~USAF’s reducing the number of aircraft in ~~commercial~~the ~~MRO~~request for proposal. From July 2006 to September 2007, the Company prepared its own proposal for the new KC-135 contract. The Company’s proposal for the KC-135 PDM program was unsuccessful as the contract was awarded to Boeing in September 2007. The Company filed a protest with the Government Accountability Office (“GAO”) and ~~Conversion~~the ~~revenues~~GAO upheld in part the Company’s protest on the basis that the USAF failed to conduct a proper analysis of $Boeing’s cost/price proposal for realism or potential risk. On March 3, 2008, the USAF advised the GAO that in response to the recommendation by the GAO it had completed additional review and that the Company’s proposal was not selected for award.1 ~~million~~The Company filed a protest on the new award decision on March 11, 2008 as to the USAF’s lack of proper evaluation to meet GAO recommendations and $0sudden post-award change of work scope under the contract recompete.9 ~~million~~On June 13, ~~respectively~~2008, the GAO denied the Company’s March 11, 2008 protest. ~~These~~On ~~increases~~June 27, ~~were~~2008, ~~partially~~the ~~offset~~Company byfiled ~~decreased~~a ~~sales~~complaint onin ~~government~~the ~~programs~~United States Court of ~~$1.3~~Federal ~~million~~Claims ~~related~~(the ~~primarily~~“Court”) protesting the actions of the USAF in connection with the award to ~~completion~~Boeing of the HKC-135 PDM contract. On July 3, ~~helicopter program~~2008, the Court granted Boeing’s motion to intervene in ~~2001~~the case. On September 30, 2008, the Court set aside the KC-135 PDM solicitation enjoining the USAF from proceeding with the award to Boeing and ~~decreased~~requiring ~~spare~~a ~~parts~~resolicitation ~~sales~~of the procurement that will explicitly address the role of $0the aging KC-135 fleet on the PDM process.7 ~~million~~In February 2009, the USAF and Boeing filed appeals of the Court’s ruling with the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”). The Company expects to file a cross appeal with the Federal Circuit in the second quarter of 2009. The Company expects the appeals process before the Federal Circuit to be resolved in the fourth quarter of 2009 or the first quarter of 2010. The Company is currently

Revenue in the MCS decreased $2.5 million in 2002, declining to $12.1 million in 2002 from $14.6 million in 2001. The decrease in sales resulted primarily from a drop in orders for replacement parts for cargo handling systems combined with a decrease in orders for new cargo handling systems, partially offset by an increase from work on a target program.

Overall, the company’s gross profit percentage remained relatively constant at 22.0% in 2002 and 22.1% in 2001. Cost of sales decreased to $127.1 million in 2002 from $128.9 million in 2001. The lower cost of sales for 2002 was primarily a direct result of the lower sales during the year. This decrease was partially offset by the company replacing relatively high margin sales at the Pemco Engineers division with relatively lower margin business at other subsidiaries, additional expenses incurred at the CSS as it revised its production processes to accommodate changes in the design of the B737-300 cargo conversion and losses incurred at the GSS on the delivery of a JSTAR aircraft and a KC-135 aircraft under a transition contract. The KC-135 aircraft experienced several delays due to the inability to obtain required parts that increased costs.

SG&A expenses increased to $21.5 million in 2002 from $20.4 million in 2001 as a result of four major items. First, the company increased its structural SG&A expense by implementing an internal audit function, creating a corporate security function, and placing an executive manager over the Manufacturing & Components Group. Second, the company spent an additional $0.4 million year-over-year to support obtaining FAA approval on its Boeing 737-300 STC amendment and updating drawings and processes to place the new amendment into production. Third, the company invested approximately $0.2 million in enhancing its Industrial Engineering function to continue the pursuit of productivity improvements. Finally, the company incurred approximately $0.5 million in expenses associated with the unsuccessful tender offer that it made on November 12, 2002 and other related expenses incurred during the year related to the purchase of common stock. SG&A expense grew as a percentage of sales from 12.3% in 2001 to 13.2% in 2002.

Interest expense was $1.5 million in 2002 versus $1.3 million in 2001. The effective average interest rate on the company’s revolving credit facility was approximately 4.6% in 2002 and 7.4% in 2001. The average debt outstanding during 2002 was impacted by the company borrowing $6.7 million to purchase Treasury Stock at the end of the second quarter of 2002.

During 2001 the company recorded an overall income tax credit of $0.1 million because of favorable tax benefits generated from an adjustment to its deferred tax valuation allowance. In 2002, the company recorded an income tax provision with no tax credits. The effective tax provision in 2002 was 38%.

~~LIQUIDITY~~ negotiating ~~AND~~a ~~CAPITAL~~subcontract ~~RESOURCES~~with Boeing for KC-135 PDM work to be performed until a new solicitation and award is completed by the USAF pursuant to the Court’s order.

~~The~~Cash ~~table~~Flow ~~below~~Overview ~~presents the major indicators of financial condition and liquidity.~~

~~(In~~Operating ~~Thousands~~activities ~~Except~~used ~~Long-Term~~$0.6 ~~Debt~~million during 2008, compared to ~~Equity)~~providing $3.6 million during 2007. Cash payments to fund the Pension Plan exceeded pension expense by $2.0 million and $3.4 million in 2008 and 2007, respectively. Cash of $0.5 million and $0.6 million was used during 2008 and 2007, respectively, for capital expenditures. The sale of PWAS generated $31.4 million of cash during 2007. Financing activities used $25.6 million in 2007 as the Company used a portion of the proceeds from the sale of PWAS to pay off $24.1 million in long-term debt and a revolving credit facility.

	December 31, 2003		December 31, 2002		Change
Cash	$	3,156	$	2,795	$	361
Working Capital		28,093		23,953		4,140
Revolving credit facility		14,966		10,873		4,093
Long term debt and capital lease obligations		5,333		6,208		(875	)
Shareholders’ equity		22,975		11,536		11,439
Long term debt to equity		0.88		1.48		(0.60	)

Future Capital Requirements

The ~~company~~Company’s ~~primary~~potential ~~sources of liquidity and~~ capital ~~resources~~requirements ~~include~~over ~~cash~~the ~~flows~~next ~~from~~twelve ~~operations~~months ~~and~~include: ~~borrowing~~required ~~capability~~minimum ~~through~~funding ~~commercial~~of ~~lenders, including unused borrowing capacity on existing revolving credit agreements. Principal factors affecting~~ the ~~company’s liquidity~~Pension ~~and~~Plan ~~capital~~(noted ~~resources position include~~below), interest ~~but~~payments ~~are~~on ~~not~~long-term ~~limited to~~debt, the ~~following:~~cost ~~results~~ of ~~operations;~~continuing ~~expansions~~legal ~~and~~actions ~~contractions~~with inregards to the ~~industries~~award inof ~~which~~ the ~~company~~KC-135 ~~operates;~~PDM ~~funding~~contract ~~requirements~~to ~~associated~~Boeing, ~~with~~and ~~the~~working ~~company’s defined~~capital ~~benefit~~required ~~pension~~to ~~plan;~~fund ~~timing~~increases ofin ~~federal~~accounts ~~income~~receivable, ~~tax~~inventory ~~payments;~~and ~~transactions~~equipment ~~under~~if the ~~company’s~~Company is ~~stock~~awarded ~~repurchase~~new ~~plan; and potential acquisitions and divestitures~~contracts.

~~Operating~~On ~~activities~~February 29, ~~provided~~2008, ~~$1.9~~the ~~million~~Company ~~and~~applied ~~$13.0~~to ~~million~~the ofInternal ~~cash~~Revenue Service (“IRS”) for a waiver of contributions for the ~~twelve~~2007 ~~months~~plan ~~ended~~year ~~December~~which 31concluded on September 15, ~~2003~~2008. ~~and~~On ~~2002~~September 15, ~~respectively~~2008, the Company contributed $3.9 million to the Pension Plan, fully satisfying the contribution requirements for the 2007 plan year. On ~~The~~March 30, ~~company~~2009, ~~received~~the ~~proceeds~~IRS ~~from~~granted the ~~exercise~~waiver ofrequest ~~company~~resulting ~~stock~~in ~~options~~a deferral of ~~$0.3~~required ~~million~~contributions ~~and~~for ~~$2.8~~the ~~million~~2007 ~~during~~plan ~~2003~~year ~~and~~being ~~2002,~~spread ~~respectively~~over the next five years. ~~Cash~~As a result of $5the waiver, the pension payment for the 2007 plan year is now considered a payment for the 2008 plan year.0 ~~million~~The ~~and~~remaining amount owed for the 2008 plan year of $70.35 million was ~~used~~made during ~~2003~~the ~~and~~first ~~2002,~~quarter ~~respectively,~~of ~~for~~2009. ~~capital~~As a result of the missed quarterly contributions while the waiver request was under ~~expenditures~~consideration, ~~and~~the ~~$0.3~~Pension ~~million~~Benefit ~~and~~Guaranty $6Corporation (“PBGC”) filed liens on the Company’s assets.7 ~~million,~~The ~~respectively,~~PBGC ~~was~~will ~~used~~maintain ~~for~~a lien on the ~~repurchase~~Company’s assets over the time period of ~~company~~the ~~common~~deferral ~~stock~~of the 2007 plan year contributions, which will be approximately five years.

~~Contributing~~The ~~to the company~~Company’s ~~decrease~~Pension inPlan ~~cash~~was ~~flow~~under-funded ~~from~~by ~~operating~~approximately ~~activities~~$33.1 ~~from~~million ~~2002~~and to$9.2 ~~2003 as presented in the Consolidated Statements of Cash Flows was an~~million ~~increase~~at inDecember 31, ~~inventories~~2008 and ~~accounts~~2007, ~~receivable.~~respectively ~~Raw~~(See ~~material~~Note ~~inventory~~9 ~~increased~~to ~~$5.5~~the ~~million~~Consolidated ~~primarily~~Financial asStatements) aprimarily ~~result~~due ofto ainconsistent ~~change~~investment ~~from~~returns ~~government~~including ~~furnished~~large ~~material~~losses toin ~~customer~~the ~~furnished~~equity ~~material~~portion onof the ~~GSS~~investment ~~KC-135~~portfolio ~~PDM~~in ~~contract~~2008, and to a ~~ramp up of raw~~lesser ~~material~~extent ~~inventory~~an increase in ~~anticipation~~actuarial ofliability ~~the~~resulting ~~USCG~~from ~~C-130~~lower ~~PDM~~interest ~~contract~~rates, ~~that~~increased ~~begins~~mortality ~~during~~rates and the ~~first~~terms ~~quarter~~ of ~~2004.~~the ~~The~~collective ~~increase~~bargaining ofagreements ~~$5.5~~entered ~~million~~into in ~~work-in-process~~2005. ~~inventory~~The isCompany ~~primarily~~froze ~~attributable~~the toPension ~~accumulated~~Plan ~~costs~~effective onDecember 31, ~~the~~2007 for ~~USCG~~all Cnon-~~130~~union ~~program of approximately $3~~employees.5 ~~million~~Pursuant ~~and~~to onthe ~~USAF~~minimum ~~C-130~~funding ~~spar~~requirements ~~inspections~~ of ~~approximately~~the ~~$2.0~~Employee ~~million.~~Retirement ~~There~~Income ~~were~~Security noAct ~~comparable~~of ~~costs on these programs at December 31~~1974, ~~2002.~~as ~~The~~amended ~~$4.9 million increase in accounts receivable~~(“ERISA”), ~~net,~~the isCompany ~~primarily~~made ~~attributable~~contributions to an ~~increase in sales toward~~ the ~~end~~Pension ofPlan ~~2003,~~during ~~which~~2008 ~~improved~~and ~~from~~2007 of approximately $493.59 million ~~during~~and ~~the fourth quarter of 2002 to approximately~~ $639.41 million ~~during the fourth quarter of 2003~~, ~~together~~respectively. ~~with~~The ~~December~~Company ~~sales~~is ~~being~~required ~~more~~to ~~heavily~~contribute ~~weighted during~~$3.5 ~~the~~million ~~fourth quarter of 2003 compared~~ to the ~~fourth~~Pension ~~quarter~~Plan ofduring ~~2002~~2009. The ~~increase~~losses incurred in ~~accounts~~2008 ~~payable~~will oflikely ~~approximately~~result ~~$4.3~~in ~~million~~substantially ~~contributed~~increased ~~favorably~~contributions to ~~cash flow from operating activities and is primarily attributable to~~ the ~~increase~~Pension Plan in ~~raw~~ ~~material~~2010 ~~inventory~~and ~~discussed above~~beyond.

~~The~~Senior ~~company~~Secured ~~maintains~~Debt 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, partially offset by favorable returns in 2003, coupled with substantially lower interest rates, the Plan was

On February 15, 2006, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with Silver Canyon Services, Inc. (“Silver Canyon”) pursuant to which the Company issued to Silver Canyon a senior secured Note in the principal amount of $5.0 million (the “Note”). The Note accrues interest at an annual rate of 15%, which is payable quarterly in arrears. The Company may, at its election, redeem the Note at a price equal to 100% of the principal amount then outstanding, together with accrued and unpaid interest thereon. On February 15, 2007, the Company entered into an Amended and Restated Senior Secured Note with Special Value Bond Fund, LLC, pursuant to which the maturity date for the principal amount of the Note was extended. On July 31, 2007, the Company entered into an Amended and Restated Senior Secured Note

~~under-funded~~with bySpecial ~~approximately~~Value ~~$26.5~~Bond ~~million~~Fund, ~~at December 31~~LLC, ~~2003.~~in ~~The~~which ~~company~~the ~~made~~maturity ~~contributions~~date tofor the ~~Plan~~principal ~~totaling~~amount ~~approximately~~of ~~$11.0~~the ~~million~~Note ~~during~~was ~~2003 and,~~extended ~~pursuant~~until toFebruary 15, ~~ERISA~~2009. ~~funding~~On January 28, ~~requirements~~2009, the ~~company~~maturity ~~expects~~date tofor ~~make~~the ~~contributions~~principal amount of ~~approximately~~the ~~$8.6~~Note ~~million~~was toextended ~~the~~until ~~Plan~~February 15, ~~during 2004~~2010. ~~Primarily~~All asother aterms ~~result~~and conditions of ~~favorable~~the ~~returns~~Note ~~on Plan assets~~ and ~~company contributions during 2003,~~ the ~~company~~ ~~reduced~~Note ~~its~~Purchase ~~minimum~~Agreement ~~pension~~remain ~~liability~~the ~~from $35~~same.6 ~~million~~The atCompany ~~December~~has ~~31,~~agreed ~~2002~~that toall ~~$24.2~~of the ~~million~~proceeds atfrom ~~December~~the ~~31,~~sale ~~2003,~~of ~~and~~SVC ~~recorded~~will abe ~~gain~~used ofto ~~$1.2~~reduce ~~million~~the toprincipal ~~other~~of ~~comprehensive~~the ~~income~~Note.

~~During~~Funding ~~the~~Sources fourth quarter of 2002 the company refinanced its bank borrowings through a new lender. The new Credit Agreement included a Revolving Credit Facility in the amount $20.0 million and Term Loan of $5.0 million. The company’s Revolving Credit Facility was amended during the fourth quarter of 2003 to increase borrowing capacity from $20.0 million to $25.0 million and to extend its maturity through December 2005. These two loans carry variable interest rates that were 3.67% and 3.92%, respectively, at December 31, 2003. At December 31, 2003 the company had additional borrowing capacity of $10.0 million under its Revolving Credit Facility.

InThe ~~May~~Company ~~2003,~~plans ~~the~~to ~~company~~finance its ~~amended~~capital ~~the~~expenditures, ~~Credit~~working ~~Agreement~~capital toand ~~create~~liquidity arequirements through ~~line~~the most advantageous sources of capital ~~credit~~available ~~for~~to the ~~repurchase~~Company ofat the ~~company’s~~time, ~~common~~which ~~stock~~may ~~(“Treasury~~include ~~Stock~~using ~~Term~~existing ~~Loan”).~~cash ~~The~~and ~~company~~cash ~~may~~equivalents ~~draw~~and ~~upon~~ the ~~Treasury~~incurrence ~~Stock~~of ~~Term~~additional ~~Loan~~indebtedness upthrough tosecured $5or unsecured borrowings.~~0 million~~ Additional ~~through~~capital ~~May~~may ~~22,~~not ~~2004,~~be ~~and~~available ~~the~~at ~~borrowings~~all, or may not be ~~used~~available toon ~~make~~terms ~~purchases~~favorable of to the ~~company’s~~Company. The ~~common~~Company ~~stock~~is ~~from~~continually ~~any~~monitoring ~~person~~and ~~who~~reevaluating isits ~~not~~level orof ~~has~~investment ~~never~~in ~~been~~all anof ~~affiliate~~its ofoperations, as ~~the~~well ~~company.~~as ~~The~~the ~~line~~financing ofsources ~~credit~~available ~~can~~to beachieve its ~~drawn~~goals in each ~~increments~~business area. In addition, the anticipated delisting of ~~$0.5~~the ~~million and~~Company’s ~~bears~~Common ~~interest~~Stock atfrom ~~LIBOR~~NASDAQ ~~plus~~on ~~3.00%.~~April 10, ~~The~~2009 ~~company~~will ~~had~~likely nomaterially ~~outstanding~~adversely ~~balance~~affect ~~under~~the Company’s access to the ~~Treasury~~capital ~~Stock~~markets, ~~Term~~and ~~Loan~~the atlimited ~~December~~liquidity ~~31,~~and potentially ~~2003.~~reduced ~~The~~price ~~loan~~of ~~will~~the beCommon ~~repaid,~~Stock ifcould ~~drawn,~~materially inadversely ~~equal~~affect ~~monthly~~the ~~installments~~Company’s ~~over~~ability 43to ~~months~~raise ~~commencing~~capital on ~~May~~terms ~~22,~~acceptable ~~2004~~to the Company or at all.

The ~~company~~aircraft ~~executed~~services aindustry ~~loan~~has ~~agreement~~generally ~~during~~been ~~the~~in ~~fourth~~a ~~quarter~~consolidation ~~of 2002 to borrow up to $2~~phase.5 ~~million~~As ~~from~~a ~~the Dothan-Houston County Airport Authority to finance its hanger expansion at that facility~~consequence, ~~which was completed during~~ the ~~first~~Company ~~quarter~~receives ofand ~~2003.~~sometimes ~~The~~initiates ~~loan~~inquiries iswith ~~backed~~respect byto acorporate ~~letter~~combinations. ofHowever, ~~credit~~there ~~with~~can ~~the~~be ~~company’s~~no ~~primary~~assurances ~~lender~~that ~~and~~the ~~carries~~Company awill ~~variable~~be ~~interest~~party ~~rate,~~to ~~which~~any ~~was~~such ~~1.48%~~transactions atin ~~December~~the ~~31, 2003~~future.

InContractual ~~January~~Obligations 2003, the company began projects to improve its information system infrastructure. These projects included an upgrade to its enterprise software at GSS and a conversion to the enterprise software and upgrades to hardware at the CSS, altogether expected to cost approximately $1.5 million. The company anticipates costs to complete these projects during 2004 to be approximately $0.9 million. The company currently has no other material capital projects underway.

~~During~~The ~~the~~following ~~third~~table ~~quarter~~sets offorth ~~2001,~~information ~~the~~with ~~Board~~respect ~~of Directors authorized the company~~ to ~~repurchase up to 400,000 shares of its common stock, representing approximately 10% of~~ the ~~company’s~~maturities ~~issued and outstanding shares (“prior repurchase program”). The company acquired approximately 349,000 shares under the prior repurchase program. During the second quarter~~ of ~~2003,~~ the ~~Board of Directors authorized the company to repurchase up to an additional 200,000 shares of its common stock, representing approximately 5% of the company~~Company’s ~~issued~~ ~~and~~contractual ~~outstanding~~obligations ~~shares~~as (“new repurchase program”), and effectively terminated and replaced the prior repurchase program. The repurchases are authorized to be made from time to time through open market purchases, privately negotiated transactions or both, at prices to be determined by the Investment Committee of ~~the Board of Directors. As of~~ December 31, 2003, the company had acquired approximately 11,000 shares under the new repurchase program, and an aggregate of approximately 360,000 shares under the new and prior repurchase programs at a cost of approximately $72008.~~0 million. Shares were repurchased at an~~

(In $ Thousands)


	2009		2010 - 2011		2012 - 2013		After 2013		Total
Long-term debt	$	—	$	5,000	$	—	$	—	$	5,000
Capital lease obligations		2		—		—		—		2
Operating leases		263		485		320		917		1,985

Total	$	265	$	5,485	$	320	$	917	$	6,987

The Company’s manufacturing and service operations are performed principally on leased premises owned by municipal units or authorities. The principal lease for the Birmingham, Alabama facility expires on September 30, 2019. The Birmingham lease provides for basic rentals, plus contingent rentals based upon a graduated percentage of sales. The Company also leases vehicles and equipment under various operating and capital leasing arrangements. The long-term debt accrues interest at an annual rate of 15%, which is payable quarterly in arrears. Interest is not included in the table above.

The Company has future obligations with regard to the Pension Plan and its postretirement plans (“Plans”). Future contributions to the Plans are not fixed and are subject to numerous variables. The Company is required to contribute $3.5 million to the Pension Plan during 2009. The losses incurred in 2008 by the Pension Plan will most likely result in substantially increased contributions to the Pension Plan in 2010 and beyond.

Included in “Other Long-Term Liabilities” in the Consolidated Balance Sheets at December 31, 2008 is a deferred compensation plan liability of approximately $0.8 million related to deferred compensation plan assets for the Chief Executive Officer (“CEO”) of the Company. The deferred compensation liability does not have a set maturity date and has been excluded from the table of contractual obligations presented above. In February 2008, the CEO withdrew approximately $2.1 million from the deferred compensation plan assets thereby reducing the deferred compensation plan liabilities by $2.1 million.

~~average~~Contingencies price of $23.52 during 2003 and $19.50 during 2002. The shares repurchased under these programs have been reflected as Treasury Stock in the Stockholders’ Equity section of the Consolidated Balance Sheets. The company may elect to repurchase additional shares after considering current economic market factors and the company’s capital position, although there can be no assurances in that regard.

~~Funding~~While ~~for~~it ~~the advancement of the company’s strategic goals, including the possible investment in targeted business areas and acquisitions,~~ is ~~expected~~not ~~to continue. The company plans to finance its capital expenditures~~anticipated, ~~working~~a ~~capital~~material ~~and~~adverse ~~liquidity~~effect ~~requirements~~on ~~through~~ the ~~most~~Company’s ~~advantageous sources~~financial ofposition ~~capital~~and ~~available~~results ~~to the company at the time, which may include the sale~~ of ~~equity~~operations orcould ~~debt~~result ~~securities~~if ~~through public offerings or private placements,~~ the ~~incurrence~~Company ofis ~~additional~~not ~~indebtedness~~successful ~~through~~in ~~secured~~its ordefense ~~unsecured borrowings and the reinvestment~~ of ~~proceeds from the disposition of assets. The company believes that~~ its ~~internally~~legal ~~generated~~proceedings ~~liquidity,~~(See ~~together with access to external capital resources~~Item 3, ~~will be sufficient to satisfy existing commitments and plans for at least~~Legal ~~the next twelve months. The company could elect~~Proceedings, ~~or could be required, to raise additional funds during that period,~~ and ~~the~~Note ~~company~~10 ~~may need~~ to ~~raise additional capital in~~ the ~~future.~~Consolidated ~~Additional~~Financial ~~capital~~Statements ~~may~~for ~~not~~a bedescription ~~available at all, or may not be available on terms favorable to the company. Any additional issuance~~ of ~~equity~~ongoing orlegal ~~equity-linked securities may result in substantial dilution to the company’s stockholders~~proceedings). ~~The company is continually monitoring and reevaluating its level of investment in all of its operations, as well as the financing sources available to achieve its goals in each business area.~~

The ~~aircraft~~Company, ~~services~~as ~~industry~~a ~~has~~U.S. Government ~~been~~contractor, inis aroutinely ~~consolidation~~subject ~~phase~~to ~~generally.~~audits, Asreviews, aand ~~consequence,~~investigations by the ~~company~~U.S. ~~receives~~Government related to its negotiation and ~~sometimes~~performance ~~initiates~~of ~~inquiries~~U.S. ~~with~~Government ~~respect~~contracts toand its accounting for such contracts. Under certain circumstances, a ~~corporate~~contractor ~~combinations~~can be suspended or barred from eligibility for U.S. Government contract awards. The ~~company~~U.S. ~~has~~Government ~~not~~may, ~~completed~~in ~~any~~certain ~~such~~cases, ~~combinations~~also ~~for~~terminate aexisting ~~number~~contracts, ofrecover ~~years~~damages, and ~~there~~impose isother nosanctions ~~assurance~~and penalties. The Company believes, based on all available information, that itthe outcome of any U.S. Government audits, reviews or investigations will benot ~~party~~have toa ~~such~~material ~~transactions~~adverse ineffect on the ~~future.~~Company’s consolidated financial position or results of operations.

~~Contractual~~Off-Balance ~~Obligations~~Sheet Arrangements

The Company ~~following~~does ~~table~~not ~~sets~~have ~~forth~~any ~~the~~off-balance ~~maturities~~sheet ~~of the company’s contractual obligations as of December 31, 2003~~arrangements.

~~(In~~TRADING ~~Thousands)~~ACTIVITIES

	2004		2005 - 2006		2007 - 2008		After 2008		Total
Long-term debt	$	1,180	$	17,326	$	1,360	$	1,600	$	21,466
Capital lease obligations		75		13						88
Operating leases		1,997		2,972		2,562		15,831		23,362
Total	$	3,252	$	20,311	$	3,922	$	17,431	$	44,916

The Company does not engage in trading activities or in trading non-exchange traded contracts. As of December 31, 2008 and 2007, 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 risks through the use of derivative financial instruments. The Company did not have any foreign exchange risks at December 31, 2008.

ARELATED ~~significant~~PARTY ~~portion~~TRANSACTIONS of the 2005 maturity of long-term debt listed above relates to the expiration of the company’s Revolving Credit Facility. The agreement, originated in December 2002, had an original term of two years. The company amended the agreement during December 2003 to extend its term for an additional two years. The company expects that it will renew the agreement for an additional 2-year term on the second anniversary of its origination in December 2004, although there can be no assurances in that regard. Notwithstanding this intended 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.

On April 23, 2002, the Company loaned Ronald A. Aramini, its President and CEO, approximately $0.4 million under the terms of a promissory note. The promissory note carried a fixed interest rate of 5% per annum and was payable within 60 days of Mr. Aramini’s termination of employment with the Company. On March 26, 2007. Mr. Aramini paid the accumulated interest on the promissory note. On February 1, 2008, the Company forgave in full the loan represented by the promissory note, including all accrued and unpaid interest to date, in recognition of Mr. Aramini’s dual role as CEO of the Company and as acting President of the Company’s former subsidiary, PWAS, including Mr. Aramini’s critical role in the successful sale of PWAS.

On December 28, 2006, the Company and Mr. Aramini entered into a Second Amendment (the “Second Amendment”), to the Executive Deferred Compensation Agreement, dated as of May 3, 2002 (the “Agreement”), between the Company and Mr. Aramini. The Agreement, as amended, provided for annual contributions by the Company to an associated rabbi trust for the benefit of Mr. Aramini over the term of his employment agreement. The Company contributed $359,861 during January 2007 for the 2006 calendar year. Pursuant to the Second Amendment to the Agreement, the Company’s final obligation to make the $380,326 lump sum trust contribution for the 2007 calendar year was eliminated. Company contributions to the trust are invested by the trustee and are to be disbursed to Mr. Aramini in accordance with the terms of the Agreement.

On February 15, 2006, the Company entered into a Note Purchase Agreement with Silver Canyon Services, Inc. (“Silver Canyon”), pursuant to which the Company issued to Silver Canyon a senior secured note in the principal amount of $5.0 million (the “Note”). On July 31, 2006, Silver Canyon assigned the Note Purchase Agreement and sold the Note to Special Value Bond Fund, LLC, which is managed by Tennenbaum Capital Partners, LLC. Michael E. Tennenbaum is the Senior Partner of Tennenbaum Capital Partners, LLC and is Chairman of the Board of Directors of the Company. The Note Purchase Agreement was amended on January 28, 2009 to extend the maturity date of the Note to February 15, 2010.

~~The~~In ~~company’s~~February ~~manufacturing~~2008, ~~and~~the ~~service~~CEO ~~operations~~withdrew ~~are~~approximately ~~performed principally on leased premises owned by municipal units or authorities~~$2.1 ~~Remaining~~million ~~lease terms range~~ from ~~four~~the ~~months~~deferred tocompensation ~~twenty~~plan ~~years~~assets thereby ~~and~~reducing ~~provide~~the ~~for~~deferred ~~basic~~compensation ~~rentals,~~plan ~~plus~~liabilities ~~contingent~~by ~~rentals based upon a graduated percentage of sales~~$2.1 ~~The company also leases vehicles and equipment under various operating and capital leasing arrangements~~million.

~~Insurance~~CRITICAL ~~Recovery~~ ACCOUNTING POLICIES AND ESTIMATES

InThe ~~January 2002, a contractor at the company~~Company’s ~~Dothan,~~significant ~~Alabama facility~~accounting ~~accidentally~~policies ~~started~~are adisclosed ~~fire~~ in ~~which~~Note a1 ~~substantial part~~ of ~~the~~Notes ~~administration~~to ~~building~~Consolidated ~~was~~Financial ~~damaged~~Statements. AnThe ~~adjacent~~preparation ~~hangar~~of ~~also~~financial statements ~~suffered~~in ~~some~~conformity ~~damage.~~with ~~The~~generally ~~company~~accepted ~~was~~accounting ~~able~~principles torequires ~~move all aircraft~~ that ~~were~~management inuse ~~the~~judgments ~~adjacent~~to ~~hanger~~make estimates and ~~the~~assumptions ~~fire damaged~~that ~~none~~affect of the ~~aircraft~~amounts onreported ~~the~~in ~~facility. During~~ the ~~third~~financial ~~quarter~~statements. ofAs ~~2003, as~~ a result ~~of the settlement of an insurance claim related to this fire~~, ~~the~~there ~~company~~is ~~received~~some ~~$2.8~~risk ~~million~~that reported infinancial ~~settlement~~results ~~proceeds~~could ~~and~~have ~~recognized~~been amaterially ~~gain~~different ofhad ~~$1.2~~different ~~million~~methods, ~~which~~ isassumptions, ~~included in Cost of Sales ($0.7 million)~~ and ~~other~~estimates ~~income~~been ~~($0~~used.5 ~~million) in the Consolidated Statements of Operations.~~

~~Litigation~~The ~~Settlements~~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.

~~During~~Revenue ~~the~~Recognition second quarter of 2002 the company agreed to settlements on several outstanding legal actions (See Note 6 to the Consolidated Financial Statements included in the company’s Form 10-Q for the quarter ended June 30, 2002 for a detailed description of these settlements). These settlements are reflected on the Consolidated Statements of Operations as “Litigation, net” and are composed of the following cases:

Revenue is derived principally from aircraft maintenance and modification services performed under contracts or subcontracts with government and military customers. The Company recognizes revenue and associated costs under such contracts on the percentage-of-completion method as prescribed by Statement of Position 81-1 (In“SOP ~~Thousands~~81-1”), “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” These contracts generally provide for routine maintenance and modification services at fixed prices detailed in the contract. Any nonroutine maintenance and modification services are provided based upon estimated labor hours at fixed hourly rates. The Company segments the routine and the nonroutine services for purposes of accumulating costs and recognizing revenue. For routine services, the Company uses the units-of-delivery method as the basis to measure progress toward completion, with revenue recorded based upon the unit sales value stated in the contract and costs of sales recorded based upon actual unit cost. An aircraft is considered delivered when work is substantially complete and acceptance by the customer has occurred by execution of a form DD 250. For nonroutine services, the Company uses an output measure based upon units of work performed to measure progress toward completion, with revenue recorded based upon the stated hourly rates in the contract and costs of sales recorded based upon estimated average costs. The Company considers each task performed for the customer as a unit of work performed. Revenue and costs of sales are recognized upon completion of all performance obligations in accordance with the contract. Such work is performed and completed throughout the PDM process.

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

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

Legal expenses related to these cases were incurred in 2002 and 2001 and are reflected as SG&A.

Contingencies

A material adverse effect on the company’s financial position and results of operations could result if the company is not successful in its defense of its legal proceedings. (See Item 3. Legal Proceedings.)

The company, as a U.S. Government contractor, is routinely subject to audits, reviews and investigations by the government related to its negotiation and performance of government contracts and its accounting for such contracts. Under certain circumstances, a contractor can be suspended or barred from eligibility for government contract 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 or investigations would not have a material adverse effect on the company’s consolidated financial position or results of operations.

~~TRADING~~ contracts-in-process, ~~ACTIVITIES~~and costs incurred in their performance. For additional information regarding accounting policies the Company has established for recognizing revenue, see “Revenue Recognition” in Note 1 to the Consolidated Financial Statements.

~~The~~Allowance ~~company~~for ~~does~~Doubtful ~~not engage in trading activities or in trading non-exchange traded contracts. As of December 31, 2003 and 2002, the carrying amounts of the~~Accounts 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 7A of this report.

~~RELATED~~The ~~PARTY~~Company’s ~~TRANSACTIONS~~allowance for doubtful accounts is recorded on the specific identification method. This method involves subjectivity and includes an evaluation of historical experience with the customer, current relationship with the customer, aging of the receivable, contract terms, discussions with the customer, marketing, and contracts personnel, as well as other available data. Given the nature of the Company’s business and customers, write-offs have historically been nominal. The Company’s customers are primarily the U.S. Government or its prime contractors.

~~The~~Inventory ~~company~~Reserves had an accrual of approximately $0.1 million at December 31, 2002 related to a severance agreement and consulting agreement with its former Chairman of the Board, Chief Executive Officer and major stockholder. In accordance with the agreements, the accrued severance agreement amounts were paid over a 36-month period that began January 2000, while the accrued consulting agreement amounts were paid over a 6-month period that began December 2002.

OnThe ~~April~~Company ~~23,~~regularly ~~2002,~~ estimates the ~~company loaned~~degree ~~its~~of ~~current~~technological ~~President~~obsolescence in its inventories and ~~Chief~~provides ~~Executive~~inventory ~~Officer~~reserves ~~approximately~~on $0that basis.4 ~~million~~Though ~~under~~ the ~~terms~~Company ofbelieves ait ~~Promissory~~has ~~Note.~~adequately ~~The~~provided ~~Promissory~~for ~~Note~~any ~~carries~~such adeclines ~~fixed~~in ~~interest~~inventory ~~rate~~value ofto 5%date, ~~per~~any ~~annum~~unanticipated ~~and~~change isin technology ~~payable~~or ~~within~~potential 60decertification ~~days~~due ofto failure to meet design specification could significantly affect the ~~President~~value ~~and~~of ~~Chief Executive~~the ~~Officer~~Company’s ~~termination~~inventories and thereby adversely affect gross profit and results of ~~employment~~operations. ~~with~~In addition, an inability of the ~~company.~~Company ~~Any~~to ~~change~~accurately inforecast ~~this~~its inventory needs related ~~party~~to ~~receivable~~its ~~relates~~maintenance toobligations ~~interest~~could ~~accumulated~~adversely ~~during~~affect ~~the~~gross ~~period~~profit and results of operations.

~~FACTORS~~Deferred ~~THAT~~Taxes ~~MAY AFFECT FUTURE PERFORMANCE~~

~~You~~The ~~should~~Company ~~carefully~~records ~~consider~~a valuation allowance to reduce its deferred tax assets to the ~~following~~amount ~~risk~~that ~~factors,~~is inmore likely ~~addition~~than not to be realized. While the ~~other~~Company ~~information~~has ~~contained~~considered future taxable income and ongoing prudent and feasible tax planning strategies in ~~this~~assessing ~~report~~the need for the valuation allowance, in ~~your~~the ~~evaluation~~event of the ~~company~~Company ~~and~~were ~~its~~to determine that it ~~financial~~would ~~condition.~~be ~~Numerous~~able ~~risk~~to ~~factors~~realize its deferred tax assets in the future in excess of its net recorded amount, ~~including~~an ~~potentially~~adjustment to the ~~risk~~deferred ~~factors~~tax ~~described~~asset would increase income in ~~this~~the ~~section~~period such determination was made. Likewise, ~~could~~should ~~cause~~the ~~material~~Company ~~harm~~determine that it would not be able to realize all or part of its net deferred tax asset in the ~~company’s~~future, ~~business~~an ~~and~~adjustment ~~impair~~to the ~~value~~deferred oftax ~~its~~asset ~~common~~would ~~stock~~be charged to income in the period such determination was made.

~~The~~Machinery, ~~Company~~Equipment isand ~~Heavily~~Improvements ~~Dependent~~and onImpairment ~~U.S. Government Contracts.~~

~~Approximately~~Machinery, ~~69%~~equipment and leasehold improvements are stated at cost, ~~67%~~less accumulated depreciation and ~~67%~~amortization. ofDepreciation and amortization are computed using the ~~company’s~~straight-line ~~revenues~~method inover ~~2003,~~the ~~2002~~estimated ~~and~~useful ~~2001,~~lives. In the case of ~~respectively~~leasehold improvements, ~~were~~the ~~derived~~useful ~~from~~life ~~U.S.~~is ~~Government~~the ~~contracts.~~shorter Uof the lease period or the economic life of the improvements.S. ~~Government~~The ~~contracts~~Company ~~expose~~estimates the ~~company~~useful tolives abased ~~number~~on historical experience and expectations of ~~risks~~future conditions. Should the actual useful lives be less than estimated, ~~including:~~additional depreciation expense or recording a loss on disposal may be required.

•The ~~unpredictable~~Company ~~contract~~reviews machinery, orequipment ~~project~~and ~~terminations~~improvements for impairment whenever there is an indication that their carrying amount may not be recoverable and performs impairment tests on groups of assets that have separately identifiable cash flow. The Company compares the carrying amount of the assets with the undiscounted expected future cash flows to determine if an impairment exists. If an impairment exists, assets classified as held and used are written down to fair value and are depreciated over their remaining useful life, while assets classified as held for sale are written down to fair value less cost to sell. The actual fair value may differ from the estimate.

• reductions in government funds available for the company’s projects due to government policy changes, budget cuts and contract adjustments,

• disruptions in scheduled workflow due to untimely delivery of equipment and components necessary to perform government contracts,

• penalties arising from post award contract audits, and

• cost audits in which the value of the company’s contracts may be reduced.

In addition, 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.

IfPension ~~the company is unable to address any of the above risks, the company’s business could be materially harmed~~ and ~~the~~Postretirement ~~value~~Plans ~~of its common stock could be impaired.~~

AThe ~~Significant~~Company ~~Portion~~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, 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 ~~Revenues~~judgment, isconsidering ~~Derived~~all known trends and uncertainties. Actual asset returns for the ~~From~~Company apension ~~Few~~plans significantly below the Company’s assumed rate of ~~its~~return ~~Contracts~~would result in higher net periodic pension 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.

AInsurance ~~small number of the company’s~~Reserves contracts account for a significant percentage of its revenues. Contracts with the U.S. Government comprised 69%, 67% and 67% of the company’s revenues during 2003, 2002, and 2001, respectively. The U.S. Air Force KC-135 program in and of itself comprised 65%, 60%, and 61% of the company’s total revenues in 2003, 2002, and 2001, respectively, and a contract with Northwest Airlines comprised 15%, 25%, and 18% of the company’s total revenues during these same respective time periods. During 2003, a contract with GECAS comprised 11% of the company’s total revenues. In December 2001 the company entered into a contract with Boeing to serve as a subcontractor to Boeing for performing PDM on KC-135 aircraft. The contract provides for one base year and five option years and the company is currently in the second option year. Termination or a disruption of any of these contracts (including by way of option years not being exercised), or the inability of the company to renew or replace any of these contracts when they expire, could materially harm the company’s business and impair the value of its common stock.

IfThe ~~the~~Company is partially self-insured for employee medical coverage and workers compensation claims. The Company’s ~~Customers~~records ~~Experience~~a ~~Financial~~liability for orthe ~~Other~~ultimate ~~Difficulties,~~settlement of claims incurred as of the balance sheet date based upon estimates provided by the companies that administer the claims on the Company’s ~~Business~~behalf. ~~Could~~The BeCompany ~~Materially~~also ~~Harmed~~reviews historical payment trends and knowledge of specific claims in determining the reasonableness of the reserve. Adjustments to the reserve are made when the facts and circumstances of the underlying claims change. Should the actual settlement of the medical or workers compensation claims be greater than estimated, additional expense will be recorded.

AContingencies number of the company’s commercial customers, including Northwest Airlines which represented 15% of the company’s revenues in 2003, have in the past and may in the future experience significant financial difficulties. Many of these customers face risks that are similar to those encountered by the company, including risks associated with market conditions, competition, government regulations, and the ability to obtain sufficient capital. There can be no assurance that the company’s customers will be successful in managing these risks. If the company’s customers do not successfully manage these risks, it could impair the company’s ability to generate revenues, collect amounts due from these customers and materially harm the company’s business.

~~The~~As further discussed in Item 3—Legal Proceedings, and in Note 10 of Notes to Consolidated Financial Statements, the Company ~~Faces~~has ~~Risks~~been ~~from~~involved, and ~~Downturns~~may continue to be involved, in various legal proceedings arising out of the ~~Domestic~~conduct of its business, including litigation with customers, employment related lawsuits, purported class actions, and ~~Global~~actions ~~Economies~~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 appropriate, the Company has accrued an estimate of the probable cost of resolutions of these proceedings based upon consultation with outside counsel and assuming various strategies. A settlement or an adverse resolution of one or more of these matters may result in the payment of significant costs and damages that could have a material adverse effect on the Company’s financial position or results of operations.

The ~~domestic~~Company, ~~and~~as ~~global~~a ~~economies~~U.S. ~~have~~Government ~~experienced~~contractor, ~~downturns~~is ~~that~~routinely ~~have had~~subject ~~significant~~to ~~effects~~audits, reviews, onand ~~markets~~investigations ~~that~~by the ~~company~~U.S. ~~serves~~Government related to its negotiation and performance of U.S. Government contracts and its accounting for such contracts. Under certain circumstances, ~~particularly~~a ~~the~~contractor ~~airline~~can ~~industry~~be suspended or barred from eligibility for U.S. Government contract awards. The ~~company~~U.S. ~~cannot~~Government ~~predict~~may, ~~the~~in ~~depth~~certain orcases, ~~duration~~also ofterminate ~~such~~existing ~~downturns~~contracts, recover damages, and ~~the~~impose ~~company’s~~other ~~ability~~sanctions toand ~~increase~~penalties. orThe ~~maintain~~Company ~~its~~believes, ~~revenues~~based ~~and~~on ~~operating~~all available information, that the outcome ~~results~~of ~~may~~any beU.S. ~~impaired~~Government asaudits, reviews or investigations will not have a ~~result~~material ofadverse ~~negative~~effect ~~general~~on ~~economic~~the ~~conditions~~Company’s consolidated financial position or results of operations.

~~Further,~~RECENTLY ~~because~~ISSUED ~~current~~ACCOUNTING ~~domestic~~STANDARDS and global economic conditions and economies are extremely uncertain, it is difficult to estimate the growth in various parts of the economy, including the markets in which the company participates. Because parts of the company’s budgeting and forecasting are reliant on estimates of growth in the markets it serves, the current economic uncertainty renders estimates of future revenues and expenditures even more difficult than usual to formulate. The future direction of the overall domestic and global economies could have a significant impact on the company’s overall financial performance and impair the value of its common stock.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“FAS No. 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FSP No. SFAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the

~~Bundling~~ financial statements on a recurring basis (at least annually), to fiscal years and interim periods within those fiscal years, beginning after November 15, 2008. The adoption of USFAS No.S. 157 ~~Government~~did ~~Contracts~~not ~~Could~~have ~~Materially~~a ~~Harm~~material impact on the Company’s ~~Business~~financial position, results of operations or cash flows.

~~Beginning~~In inFebruary ~~1997~~2007, ~~Congress~~the ~~began~~Financial ~~including~~Accounting ~~provisions~~Standards inBoard ~~appropriations~~issued ~~bills~~Statement ~~that~~of ~~require the~~Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“~~bundling~~SFAS No. 159”). ofSFAS ~~contracts~~No. 159 ~~Bundling~~allows ~~refers~~companies to ~~the~~measure ~~practice~~many offinancial ~~combining~~assets aand ~~number~~liabilities ofat Ufair value.S. ~~Government~~It ~~contracts~~also ~~into~~establishes ~~one~~presentation ~~contract,~~and ~~which~~disclosure ~~forces~~requirements ~~smaller~~designed to facilitate comparisons between companies, ~~such~~that aschoose different ~~the~~measurement ~~company,~~attributes tofor ~~team~~similar ~~with~~types ~~one~~of orassets ~~more~~and ~~operators~~liabilities. toSFAS ~~provide~~No. 159 ais ~~bid~~effective for ~~the~~ ~~bundled~~financial ~~contract~~statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption ~~company~~of isSFAS ~~exposed~~No. 159 todid not have a ~~number~~material ofimpact ~~risks~~on ~~from~~the ~~bundling~~Company’s financial position, ~~including:~~results of operations or cash flows.

•In December 2007, the ~~inability~~Financial toAccounting ~~bid~~Standards Board issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141, Business Combinations, but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS No. 141(R) expands on ~~contracts~~the ~~independently~~disclosures previously required by SFAS No. 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any noncontrolling interests in the acquired business. SFAS No. 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS No. 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. The Company adopted this statement as of January 1, 2009. Should the Company complete an acquisition subsequent to December 31, 2008 it will apply the provisions of this statement.

•In December 2007, the ~~potential~~Financial ~~inability~~Accounting toStandards ~~locate~~Board ~~suitable~~issued Statement ~~parties~~of ~~with~~Financial ~~whom~~Accounting toStandards ~~successfully~~No. 160, ~~team~~Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 requires that noncontrolling (or minority) interests in subsidiaries be reported in the equity section of the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS No. 160 also changes the manner in which the net income of a subsidiary is reported and disclosed in the controlling company’s income statement. SFAS No. 160 also establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. SFAS No. 160 is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

•In 2006, the ~~potential~~Financial ~~inability~~Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48 Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109. FIN 48 establishes a single model to ~~team~~address ~~with~~accounting ~~other~~for ~~parties~~uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on ~~favorable~~derecognition, ~~terms~~measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48 on January 1, 2007. Upon adoption, the Company recognized no adjustment in the amount of unrecognized tax benefits. The Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense.

~~This same appropriations legislation allows private contractors to team with military depots to bid on bundled contracts and also allows military depots to bid on these contracts directly~~Item 7A. ~~Consequently,~~Quantitative ~~the company faces additional competition from military depots. For example, in March 1998, the C-130 PDM solicitation was cancelled~~ and ~~the~~Qualitative ~~work~~Disclosures ~~was~~about ~~taken~~Market inRisk ~~house by the Air Force. If the company is unable to address any of the above risks, the company’s business could be materially harmed and the value of its common stock could be impaired.~~

The Company’s ~~Markets~~is ~~are~~not ~~Highly~~exposed ~~Competitive~~to ~~and~~market ~~Some~~risk from changes in interest rates as part of its ~~Competitors~~normal ~~Have~~operations ~~Greater~~as ~~Resources~~it ~~than~~has ~~the~~no ~~Company~~variable rate debt outstanding.

The aircraft maintenance and modification services industry is highly competitive, and the company expects that the competition will continue to intensify. Some of the company’s competitors are larger and more established companies with significant competitive advantages, including greater financial resources and greater name recognition. In addition, the company is facing increased competition from entities located outside of the United States and entities that are affiliated with commercial airlines. The company’s competition for military aircraft maintenance includes Boeing Aerospace Support Center, Lockheed-Martin Aeromod, Raytheon E-Systems and various military depots. The company’s competition for outsourced commercial work in the United States consists of the Goodrich Airframe Services Division, Timco Aviation Services, and Singapore Technologies (which includes Mobile Aerospace Engineering, San Antonio Aerospace, and Dalfort Aerospace). If the company is unable to compete effectively against any of these entities it could materially harm the company’s business and impair the value of its common stock.

Expansion Into International Markets May Expose the Company to Greater Risks.

The company’s continuing efforts to increase revenue and improve operating results and stockholder value includes seeking sales opportunities in international markets. During 2003, export sales comprised 2% of total revenues, though such sales could comprise an increasingly larger percentage of revenues in the future. The company believes there are a number of factors inherent in these markets that may expose the company to significantly greater risk than domestic markets, including foreign exchange exposure; local economic and market conditions; less regulation of patents or other safeguards of intellectual property; potential political unrest; difficulty in collecting receivables; and inability to rely on local government aid to enforce standard business practices. These factors, or others the company has not currently identified, could materially harm the company’s business and impair the value of its common stock.

~~The~~Item 8. ~~Company~~Financial isStatements aand ~~Party~~Supplementary toData ~~Legal Proceedings that Could be Costly to Resolve.~~

The ~~company~~following ~~may~~financial bestatements ~~exposed to legal claims relating to the services it provides. The company is currently a party to several legal proceedings, including breach of contract claims~~ and ~~claims~~financial ~~based~~statement onschedule ~~the~~are ~~company’s~~submitted ~~employment~~herewith: practices (See Item 3, Legal Proceedings). While the company maintains insurance covering many risks from its business, the insurance may not cover all relevant claims or may not provide sufficient coverage. If the company’s insurance coverage does not cover all costs resulting from these claims, it could materially harm the company’s business and impair the value of its common stock.

The Company Could Incur Significant Costs and Expenses Related to Environmental Problems.


Financial Statements:

Report of Independent Registered Public Accounting Firm		32

Consolidated Balance Sheets—December 31, 2008 and 2007		33

Consolidated Statements of Operations—Years ended December 31, 2008 and 2007		35

Consolidated Statements of Stockholders’ (Deficit) Equity—Years ended December 31, 2008 and 2007		36

Consolidated Statements of Cash Flows—Years ended December 31, 2008 and 2007		37

Notes to Consolidated Financial Statements		38

Financial Statement Schedule:

Schedule II—Valuation and Qualifying Accounts		64

Various federal, state and local laws and regulations require property owners or operators to pay for the costs of removal or remediation of hazardous or toxic substances located on a property. For example, there are stringent legal requirements applicable to the stripping, cleaning and painting of aircraft. The company has previously paid penalties to the Environmental Protection Agency for violations of these laws and regulations, and the company may be required to pay additional penalties or remediation costs in the future. These laws and regulations also impose liability on persons who arrange for the disposal or treatment of hazardous or toxic substances at another location for the costs of removal or remediation of these hazardous substances at the disposal or treatment facility. Further, these laws and regulations often impose liability regardless of whether the entity arranging for the disposal ever owned or operated the disposal facility. As operators of properties and as potential arrangers for hazardous substance disposal, the company may be liable under the laws and regulations for removal or remediation costs, governmental penalties, property damage and related expenses. Payment of any of these costs and expenses could materially harm the company’s business and impair the value of its common stock.

The Company May Not be Able to Hire and Retain a Sufficient Number of Qualified Employees.

The company’s success and growth will depend on its ability to continue to attract and retain skilled personnel. Competition for qualified personnel in the aircraft maintenance and modification services industry has been intense. Any failure to attract and retain qualified personnel could materially harm the company’s business and impair the value of its common stock.

The Company May Need Additional Financing to Maintain its Business.

The company’s growth strategy requires continued access to capital. From time to time, the company may require additional financing to enable it to:

• finance unanticipated working capital requirements,

• develop or enhance existing services,

• respond to competitive pressures,

• acquire complementary businesses, or

• acquire additional treasury stock.

~~The~~REPORT ~~company~~OF ~~cannot~~INDEPENDENT ~~assure~~REGISTERED ~~you~~PUBLIC ~~that,~~ACCOUNTING ifFIRM it needs to raise additional funds, such funds will be available on favorable terms, or at all. If the company cannot raise adequate funds on acceptable terms, its business could be materially harmed and the value of its common stock impaired.

~~Failure~~Board toof ~~Introduce~~Directors ~~New Services in Response to Technological Advances~~ and ~~Evolving~~Stockholders ~~Industry Standards Could Materially Harm the Company’s Business.~~

~~Evolving~~Alabama ~~industry~~Aircraft ~~standards~~Industries, ~~and changing customer requirements characterize the aircraft maintenance and modification services industry~~Inc. ~~The introduction of new aircraft embodying new technologies~~ and ~~the emergence of new industry standards could render the company’s existing services~~ ~~obsolete~~Subsidiaries and cause the company to incur significant development and labor costs. Failure to introduce new services and enhancements to the company’s existing services in response to changing market conditions or customer requirements could materially harm the company’s business and impair the value of its common stock.

~~The~~We ~~Company~~have audited the accompanying consolidated balance sheets of Alabama Aircraft Industries, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’s ~~Trust~~(deficit) equity, and cash flows for ~~its~~the ~~Defined~~years ~~Benefit~~then ~~Plan~~ended. isOur ~~Subject~~audits of the basic financial statements included Schedule II—Valuation and Qualifying Accounts listed in the index appearing under Item 15 (a)(2). These financial statements and the related financial statement schedule are the responsibility of the Company’s management. Our responsibility is to ~~Financial~~express ~~Market~~an ~~Forces~~opinion on these financial statements and financial statement schedule based on our audits.

~~The~~We ~~company~~conducted our ~~maintains~~audits ain ~~defined~~accordance ~~benefit~~with ~~pension~~the ~~plan~~standards (of the ~~“Plan”)~~Public ~~that~~Company ~~covers~~Accounting ~~substantially~~Oversight ~~all~~Board ~~employees~~(United atStates). ~~its~~Those ~~Birmingham~~standards ~~and~~require ~~Dothan,~~that ~~Alabama~~we ~~facilities.~~plan ~~The~~and ~~Plan’s~~perform ~~assets~~the ~~consist~~audit ~~primarily~~to ofobtain ~~stocks, bonds~~reasonable ~~and~~assurance ~~cash~~about ~~equivalents.~~whether ~~These~~the ~~assets~~financial statements are ~~exposed~~free of tomaterial ~~various~~misstatement. ~~risks,~~The ~~such~~Company asis ~~interest~~not ~~rate,~~required ~~credit~~to have, ~~and~~nor ~~overall~~were ~~market~~we ~~volatility.~~engaged ~~Losses~~to onperform ~~the~~an ~~Plan’s~~audit ~~assets~~of ~~may~~its ~~lead~~internal tocontrol ~~significant~~over ~~cash~~financial ~~contributions~~reporting. byOur ~~the~~audit ~~company~~included toconsideration ~~fund~~of ~~the~~internal ~~Plan~~control toover ~~the actuarial~~financial ~~levels~~reporting ~~required~~as bya ~~ERISA~~basis for designing audit procedures that ~~could~~are ~~materially~~appropriate ~~harm~~in the ~~company’s~~circumstances, ~~business~~but ~~and~~not ~~impair~~for the ~~value~~purpose of ~~its~~expressing ~~common~~an ~~stock.~~opinion Ason athe ~~result~~effectiveness of ~~unfavorable~~the ~~investment~~Company’s ~~returns~~internal ~~related~~control toover ~~the~~financial ~~Plan~~reporting. ~~during~~Accordingly, ~~2002~~we ~~and~~express ~~2001,~~no ~~partially~~such ~~offset~~opinion. ~~by favorable~~An ~~returns~~audit inalso ~~2003~~includes examining, ~~coupled~~on ~~with~~a antest ~~increase~~basis, inevidence ~~actuarial~~supporting ~~liability~~the ~~resulting~~amounts ~~from~~and ~~lower~~disclosures ~~interest~~in ~~rates~~the financial statements, assessing the ~~Plan~~accounting ~~was~~principles ~~under-funded~~used byand ~~approximately~~significant ~~$26.5~~estimates ~~million~~made atby ~~December 31~~management, ~~2003.~~as Inwell ~~2004,~~as evaluating the ~~company~~overall financial ~~expects~~statement presentation. We believe that ~~the~~our ~~minimum~~audits ~~required~~provide ~~contribution would~~a bereasonable ~~approximately~~basis ~~$8.6~~for ~~million~~our opinion.

~~The~~In ~~Company’s~~our ~~Credit~~opinion, ~~Agreement~~the consolidated ~~Restricts~~financial ~~Its~~statements ~~Financial~~referred to above present fairly, in all material respects, the financial position of Alabama Aircraft Industries, Inc. and ~~Operational~~subsidiaries ~~Flexibility~~as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

~~The company’~~/s ~~Credit~~/ ~~Agreement~~Grant ~~contains~~Thornton ~~covenants~~LLP ~~that restrict~~Charlotte, ~~among~~North ~~other~~Carolina ~~things,~~March ~~its ability to borrow money~~31, make particular types of investments, sell assets, merge or consolidate, or make acquisitions. The company’s Credit Agreement also requires the company to maintain specified financial ratios. The company’s ability to meet these financial ratios can be affected by events beyond the company’s control, and there can be no assurance that the company will be able to meet these ratios. 2009

The company has pledged substantially all of its assets to secure the debt under its Credit Agreement. If the amounts outstanding under the Credit Agreement were accelerated, the lenders could proceed against those assets. Any event of default, therefore, could have a material adverse effect on the company’s business and impair the value of its common stock.

The Company Faces Potential Product Liability Claims.

The company may be exposed to legal claims relating to the products it sells or the services it provides. The company’s agreements with its customers generally contain terms designed to limit its exposure to potential product liability claims. The company also maintains a product liability insurance policy for its business. However, the company’s insurance may not cover all relevant claims or may not provide

~~sufficient~~ALABAMA ~~coverage.~~AIRCRAFT ~~If the company’s insurance coverage does not cover all costs resulting from future product liability claims~~INDUSTRIES, itINC. ~~could~~AND ~~materially harm~~SUBSIDIARIES ~~the company’s business and impair the value of its common stock.~~

~~The~~CONSOLIDATED ~~Company’s~~BALANCE ~~Business~~SHEETS ~~is Subject to Extensive Government Regulation.~~

The aircraft maintenance and modification services industry is subject to extensive regulatory and legal compliance requirements that result in significant costs. The FAA from time to time issues directives and other regulations relating to the maintenance and modification of aircraft that require significant expenditures. Regulatory changes could materially harm the company’s business by making its current services less attractive or obsoleteDecember 31, ~~or increasing~~2008 ~~the opportunity for additional competition. Changes in, or the failure to comply with, applicable regulations could materially harm the company’s business~~ and ~~impair~~2007 ~~the value of its common stock.~~

~~The~~(In ~~Company~~Thousands) ~~Has Implemented Anti-Takeover Provisions That Could Prevent an Acquisition of Its Business at a Premium Price.~~

Some of the provisions of the company’s certificate of incorporation and bylaws could discourage, delay or prevent an acquisition of the company’s business at a premium price. These provisions:


	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	7,612		$	8,799
Accounts receivable, net		6,691			7,397
Inventories, net		5,092			6,317
Prepaid expenses and other		759			620
Assets of discontinued operations		2,759			5,486

Total current assets		22,913			28,619

Machinery, equipment and improvements at cost:
Machinery and equipment		20,698			20,668
Leasehold improvements		18,921			18,719

		39,619			39,387
Less accumulated depreciation and amortization		(28,403	)		(26,808	)

Net machinery, equipment and improvements		11,216			12,579

Other non-current assets:
Deposits and other		977			3,158
Restricted cash-letter of credit		589			1,235
Related party receivable		—			440
Assets of discontinued operations		384			314

		1,950			5,147

Total assets	$	36,079		$	46,345

•The ~~permit~~accompanying ~~the~~notes ~~board~~are ofan ~~directors~~integral topart ~~increase~~of ~~its~~these ~~own~~consolidated ~~size~~statements. ~~and fill the resulting vacancies,~~

• provide for a board comprised of three classes of directors with each class serving a staggered three-year term,

• authorize the issuance of preferred stock in one or more series, and

• prohibit stockholder action by written consent.

In addition, Section 203 of the Delaware General Corporation Law imposes restrictions on mergers and other business combinations between the company and any holder of 15% or more of its common stock.

Compliance With Changing Regulation of Corporate Governance and Public Disclosure May Result in Additional Expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission regulations and Nasdaq Stock Market rules, are creating uncertainty for companies such as ours. The company is committed to maintaining high standards of corporate governance and public disclosure. As a result, the company intends to invest reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities, which could harm the company’s business and impair the value of its common stock.

Insiders Have Substantial Control Over the Company and Can Significantly Influence Matters Requiring Stockholder Approval.

As of December 31, 2003, the company’s executive officers, directors and their affiliates, in the aggregate, beneficially owned approximately 58% of the company’s outstanding common stock. As a result, these stockholders are able to significantly influence matters requiring approval by the

~~stockholders~~ALABAMA ofAIRCRAFT ~~the company~~INDUSTRIES, ~~including the election of directors and the approval of mergers or other business combination transactions~~INC. ~~This~~AND ~~control~~SUBSIDIARIES may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in their best interests.

~~CRITICAL~~CONSOLIDATED ~~ACCOUNTING~~BALANCE ~~POLICIES~~SHEETS—continued ~~AND ESTIMATES~~

The company’s significant accounting policies are disclosed in Note 1 of Notes to Consolidated Financial Statements. 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 resultDecember 31, ~~there~~2008 ~~is some risk that reported financial results could have been materially different had different methods, assumptions,~~ and ~~estimates~~2007 ~~been used.~~

~~The~~(In ~~company believes that of its significant accounting policies~~Thousands, ~~the~~Except ~~following~~Share ~~may~~Information) ~~involve a higher degree of judgment and complexity as used in the preparation of its consolidated financial statements.~~

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


	2008			2007
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Current portion of long-term debt	$	2		$	5
Accounts payable—trade		2,696			3,060
Accrued health and dental		368			491
Accrued liabilities—payroll related		2,794			2,845
Accrued liabilities—other		936			1,700
Customer deposits in excess of cost		2,767			3,657
Impairment on investment in Space Vector		1,898			—
Liabilities of discontinued operations		362			669

Total current liabilities		11,823			12,427

Long-term debt, less current portion		5,000			5,002
Long-term pension and postretirement benefit liabilities		33,509			9,654
Other long-term liabilities		766			2,936

Total liabilities		51,098			30,019

Stockholders’ (deficit) equity:
Preferred Stock, $0.0001 par value, 5,000,000 shares authorized, none outstanding		—			—
Common Stock, $0.0001 par value, 12,000,000 shares authorized, 4,128,950 outstanding at December 31, 2008 and 2007		1			1
Additional paid-in capital		15,324			15,067
Retained earnings		24,572			30,358
Treasury stock, at cost—413,398 shares at December 31, 2008 and 2007		(8,623	)		(8,623	)
Accumulated other comprehensive loss:
Pension and postretirement liabilities		(46,293	)		(20,477	)

Total stockholders’ (deficit) equity		(15,019	)		16,326

Total liabilities and stockholders’ (deficit) equity	$	36,079		$	46,345

The ~~company’s~~accompanying ~~MCS~~notes ~~derives~~are aan ~~significant~~integral ~~portion~~part of ~~its~~these ~~revenue~~consolidated ~~from cost-reimbursement type contracts accounted for under the principles prescribed by SOP 81-1 and from sales of precision parts and components~~statements. Revenue on cost-reimbursable contracts is recognized to the extent of costs incurred plus a proportionate amount of estimated fee earned. For certain other fixed-price contracts revenue is recognized when performance milestones have been achieved in accordance with contract terms. Revenue related to sales of individual components and parts is recognized upon delivery to the customer, and when the product price is fixed and determinable and collection of the resulting receivable is reasonably assured.

~~Contract~~ALABAMA ~~accounting~~AIRCRAFT requires judgment relative to assessing risks and estimating contract revenues and costs. The company employs various techniques to project contract revenue and costs which inherently include significant assumptions and estimates. Contract revenues are a function of the terms of the contract and often bear a relationship to contract costs. Contract costs include laborINDUSTRIES, ~~material, an allocation of indirect costs, and in the case of certain government contracts, an allocation of general and administrative costs~~INC. ~~Techniques~~AND ~~for~~SUBSIDIARIES estimating contract costs generally impact the company’s proposal processes, including the determination of pricing for fixed price and time-and-material elements of contracts, the evaluation of profitability on contracts, and the timing and amounts recognized for revenue and cost of sales. The company provides for losses on uncompleted contracts in the period in which management determines that the estimated total costs under the contract will exceed the estimated total contract revenues. These estimates are reviewed periodically and any revisions are charged or credited to operations in the period in which the change is determined. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the amount can be reasonably estimated. Judgment is required in determining the potential realization of claim revenue and estimating the amounts recoverable. Because of the significance of the judgments and estimates required in these processes, it is likely that materially different amounts could result from the use of different assumptions or if the underlying conditions were to change. In addition, contracts accounted for under the percentage-of-completion, units-of-delivery method may result in material fluctuations in revenue and profit margins depending on the timing of delivery and performance, the relative proportion of fixed price, time-and-material, and other types of contracts-in-process, and costs incurred in their performance. For additional information regarding accounting policies the company has established for recognizing revenue, see “Revenue Recognition” in Note 1 to the Consolidated Financial Statements.

~~Deferred~~CONSOLIDATED ~~Taxes~~STATEMENTS OF OPERATIONS

~~The~~For ~~company records a valuation allowance to reduce its deferred tax assets to~~ the ~~amount~~Years ~~that~~Ended isDecember 31, ~~more~~2008 ~~likely than not to be realized. While the company has considered future taxable income~~ and ~~ongoing~~2007 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.

~~Inventory~~(In ~~Reserves~~Thousands, Except Per Share Information)

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


	2008			2007
Revenue	$	53,499		$	65,061
Cost of revenue		45,810			61,250

Gross profit		7,689			3,811
Selling, general and administrative expenses		8,160			10,213

Operating loss from continuing operations		(471	)		(6,402	)
Interest expense		(780	)		(601	)

Loss from continuing operations before income taxes		(1,251	)		(7,003	)
Income tax (benefit) expense		(159	)		6,269

Loss from continuing operations		(1,092	)		(13,272	)
(Loss) income from discontinued operations and impairment charges, net of tax		(4,694	)		2,789
Gain on sale of discontinued operations, net of tax		—			11,428

Net (loss) income	$	(5,786	)	$	945

Net (loss) income per common share:
Basic loss from continuing operations	$	(0.26	)	$	(3.22	)
Basic (loss) income from discontinued operations	$	(1.14	)	$	3.44
Basic net (loss) income per share	$	(1.40	)	$	0.23
Diluted loss from continuing operations	$	(0.26	)	$	(3.22	)
Diluted (loss) income from discontinued operations	$	(1.14	)	$	3.44
Diluted net (loss) income per share	$	(1.40	)	$	0.23
Weighted average common shares outstanding:
Basic		4,129			4,127
Diluted		4,129			4,127

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

~~Pension~~ALABAMA ~~and~~AIRCRAFT ~~Postretirement~~INDUSTRIES, ~~Plans~~INC. AND SUBSIDIARIES

~~The~~CONSOLIDATED ~~company~~STATEMENTS ~~maintains~~OF 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 (see Item 8. Financial Statements and Supplementary Data in Note 9 of Notes to Financial Statements for additional details). 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 companySTOCKHOLDERS’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~~DEFICIT) inEQUITY 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~~Years Ended December 31, 2008 and 2007

As(In ~~further~~Thousands) discussed in Note 10 of Notes to Financial Statements, the company has been involved, and may continue to be involved, in various legal proceedings arising out of the conduct of its business including litigation with customers, employment related lawsuits, purported class actions, and actions brought by governmental authorities. The company has, and will continue to, vigorously defend itself and to assert available defenses with respect to these matters. Where necessary, the company has accrued an estimate of the probable cost of resolutions of these proceedings based upon consultation with outside counsel and assuming various strategies. 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 the company’s financial position or results of operations.

RECENTLY ISSUED ACCOUNTING STANDARDS


	Common Shares	Capital Stock		Additional Paid-in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ (Deficit) Equity
January 1, 2007	4,540	$	1	$	14,345	$	29,413		$	(8,623	)	$	(27,756	)	$	7,380
Exercise of stock options (including tax benefit of $8)	2				15											15
Stock-based compensation					707											707
Comprehensive income:
Net income							945									945
Pension and post-retirement liabilities (net of tax of $0)													1,116			1,116

Total comprehensive income																2,061
Impact from sale of PWAS													6,163			6,163

December 31, 2007	4,542		1		15,067		30,358			(8,623	)		(20,477	)		16,326

Stock-based compensation					257											257
Comprehensive loss:
Net loss							(5,786	)								(5,786	)
Pension and post-retirement liabilities (net of tax of $0)													(25,816	)		(25,816	)

Total comprehensive loss																(31,602	)

December 31, 2008	4,542	$	1	$	15,324	$	24,572		$	(8,623	)	$	(46,293	)	$	(15,019	)

InThe ~~April~~accompanying ~~2003,~~notes ~~the~~are FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends SFAS 133 for certain decisions made by the FASB Derivatives Implementation Group. In particular, SFAS 149 (1) clarifies under what circumstances a contract with an ~~initial~~integral ~~net~~part ~~investment meets the characteristic~~ of athese ~~derivative,~~consolidated (2) clarifies when a derivative contains a financing component, (3) amends the definition of underlying to conform it to language used in FASB interpretation number (FIN) 45, and (4) amends certain other existing pronouncementsstatements. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, most provisions of SFAS 149 are to be applied prospectively. SFAS No. 149 does not currently impact the company’s financial position, results of operations, or cash flows.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS 150 establishes how an issuer classifies and measures certain freestanding financial instruments with characteristics of both liabilities and equity and requires that such instruments be classified as liabilities. SFAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 for those existing financial instruments subject to its provisions. In its October 2003 meeting, the FASB Board decided to defer the effective date of certain provisions of SFAS 150. The company has not entered into any financial instruments within the scope of

~~SFAS~~ALABAMA ~~150~~AIRCRAFT ~~since May 31~~INDUSTRIES, ~~2003~~INC. ~~Accordingly,~~AND ~~SFAS~~SUBSIDIARIES ~~150 had no impact on the company’s consolidated financial statements for the year ended December 31, 2003.~~

InCONSOLIDATED ~~January~~STATEMENTS ~~2003,~~OF ~~the~~CASH ~~FASB~~FLOWS issued FIN 46, Consolidation of Variable Interest Entities. In December 2003, the FASB issued FIN 46R (revised December 2003), which replaces FIN 46. FIN 46R clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. FIN 46R is required to be applied to entities that are considered special-purpose entities no later than as of the end of the first reporting period that ends after December 15, 2003. Since the company does not have any special-purpose entities, the accompanying consolidated financial statements for 2003 were not affected by FIN 46R. FIN 46R is required to be applied by March 31, 2004 to entities not considered to be special-purpose entities. The company is currently evaluating this impact of FIN 46R and does not anticipate a material impact from such entities on financial position, results of operations, or cash flows.

~~FORWARD~~Years ~~LOOKING~~Ended ~~STATEMENTS~~December 31, –2008 ~~CAUTIONARY~~and ~~LANGUAGE~~2007

~~Some~~(In ofThousands) the information under the captions “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report are 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, anticipated increase in demand for conversions, the outcome of pending or future litigation, estimates of backlog and other statements contained in this Annual Report that are not historical facts. When used in this Annual 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 in this section of the Annual Report, which 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 7A. Quantitative and Qualitative Disclosures about Market Risk


	2008			2007
Cash flows from operating activities:
Net (loss) income	$	(5,786	)	$	945

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization of machinery, equipment and leasehold improvements		1,786			2,825
Amortization of intangible assets		—			260
Provision (benefit) for deferred income taxes		—			13,746
Funding in excess of pension cost		(1,961	)		(3,438	)
Provisions (recoveries) for losses on receivables		—			253
Provision for inventory valuation		835			1,607
Gain on Sale of Pemco World Air Services		—			(17,579	)
Loss on disposals of machinery and equipment		—			42
Provision for (reversal of) losses on contracts-in-process		(1,669	)		1,433
Stock based compensation expense		257			707
Income tax benefit from exercise of nonqualified stock options		—			8
Changes in assets and liabilities:
Restricted cash		646			(1,235	)
Accounts receivable, trade		2,277			7,662
Inventories		3,218			(3,151	)
Prepaid expenses and other		(142	)		888
Deposits and other		2,634			(450	)
Customer deposits in excess of cost		(855	)		2,841
Accounts payable and accrued liabilities		(1,852	)		(3,792	)

Total adjustments		5,174			2,627

Net cash (used in) provided by operating activities		(612	)		3,572

Cash flows from investing activities:
Capital expenditures		(506	)		(595	)
Proceeds from the sale of Pemco World Air Services		—			31,359

Net cash (used in) provided by investing activities		(506	)		30,764

Cash flows from financing activities:
Proceeds from exercise of stock options		—			7
Net change under revolving credit facility		—			(21,855	)
Principal payments under long-term debt		(69	)		(3,712	)

Net cash used in financing activities		(69	)		(25,560	)

Net (decrease) increase in cash and cash equivalents		(1,187	)		8,776

Cash and cash equivalents, beginning of year		8,799			23

Cash and cash equivalents, end of year	$	7,612		$	8,799

Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	787		$	3,131

Income taxes	$	720		$	28

The ~~company~~accompanying isnotes ~~exposed~~are toan ~~market~~integral ~~risk from changes in interest rates as~~ part of ~~its~~these ~~normal~~consolidated ~~operations~~statements. 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 Credit Agreement, which includes a revolving credit facility and one term loan, and another term loan, all as described in Note 5 to the Consolidated Financial Statements (see Item 8 herein). The Credit Agreement’s revolving credit facility and term loan bear interest at LIBOR plus 250 basis points and LIBOR plus 275 basis points, respectively, and the other term loan bears interest at BMA plus 36 basis points. These interest rates were 3.67%, 3.92%, and 1.48%, respectively at December 31, 2003. Had the rate of the variable rate debt increased 100 basis points, net income would have been reduced by approximately $205,000 during 2003.

~~Item~~ALABAMA 8.AIRCRAFT ~~Financial~~INDUSTRIES, ~~Statements~~INC. ~~and~~AND ~~Supplementary~~SUBSIDIARIES ~~Data~~

~~The~~NOTES ~~following~~TO ~~financial~~CONSOLIDATED ~~statements~~FINANCIAL ~~and~~STATEMENTS ~~financial statement schedules are submitted herewith:~~

Financial Statements:
Report of Independent Auditors		39
Consolidated Balance Sheets		41
Consolidated Statements of Operations		43
Consolidated Statements of Stockholders’ Equity		44
Consolidated Statements of Cash Flows		45
Notes to Consolidated Financial Statements		47
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts		80

As of and for the Years Ended

DECEMBER 31, 2008 and 2007

1. BUSINESSES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business—Alabama Aircraft Industries, Inc., (“AAII” or the “Company”), is an aerospace and defense company whose primary business is providing aircraft maintenance and modification services to the U.S. Government, including complete airframe inspection, maintenance, repair and custom airframe design and modification. The Company’s Manufacturing and Components Segment (“MCS”), which is comprised solely of Space Vector Corporation (“SVC”), was being marketed for sale at December 31, 2008 and was sold during the first quarter of 2009 and is presented herein as discontinued operations. The businesses historically comprising the Commercial Services Segment (“CSS”) were sold in the third quarter of 2007 and are presented herein as discontinued operations.

The Company provides aircraft maintenance and modification services for government and military customers primarily through its Government Services Segment (“GSS”), which specializes in providing Programmed Depot Maintenance (“PDM”) on large transport aircraft. In addition to PDM, various other repair, maintenance, and modification services are performed for the GSS’s customers. The GSS’s contracts are generally multi-aircraft programs lasting several years. The Company believes that GSS’s facilities, tooling, experienced labor force, quality, and on-time delivery record position it currently as one of the premier providers of PDM for large transport aircraft in the country. The GSS is the only remaining segment of the Company’s continuing operations so all segment related disclosures are not required.

Financial Condition of the Company—The Company’s primary sources of liquidity and capital resources include cash-on-hand and cash flows from operations (primarily from collection of accounts receivable and conversion of work-in-process inventory to cash). Principal factors affecting the Company’s liquidity and capital resources position include, but are not limited to, the following: results of operations; the number of KC-135 inducted as a result of the U.S. Air Force (“USAF”) extension of the Company’s KC-135 bridge contract with The Boeing Company (“Boeing”); collection of accounts receivable; funding requirements associated with the Company’s defined benefit pension plan (“Pension Plan”); settlements of various claims; legal cost related to the KC-135 PDM contract award; and the payment terms of any short-term or long-term debt. Due to the current state of the credit markets in the United States, the current status of the KC-135 contract and the Company’s recent operating performance, there is uncertainty as to whether the Company would be able to obtain additional financing from lenders during 2009. The Company anticipates that cash-on-hand will be sufficient to fund operations, make moderate capital expenditures, make scheduled interest payments on its debt obligation for the next twelve months and make the required contributions to its Pension Plan.

Sale of Space Vector—On March 31, 2009, the Company sold all of the outstanding stock in SVC, a wholly-owned subsidiary of AAII-Birmingham, Inc., to a group of investors. The historical financial results of SVC have been presented in the accompanying financial statements as discontinued operations for all periods presented. The Company received $250,000 at closing. The Company also retained an interest in a portion of certain contract settlements which may be received by SVC in the future. All of the proceeds from the sale of SVC will be used to reduce the Company’s long-term debt.

Delisting and Deregistration of Common Stock and Suspension of Reporting Obligations—On March 16, 2009, the Board of Directors of AAII unanimously voted to delist its Common Stock (“Common Stock”), from The Nasdaq Stock Market LLC (“NASDAQ”) and to voluntarily terminate the registration of its Common Stock under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). In connection therewith, the Company notified NASDAQ on March 17, 2009 of the Company’s intention to file a Form 25 with the Securities and Exchange Commission (“SEC”) on or about March 31, 2009 in order to voluntarily delist its Common Stock. On March 31, 2009, AAII filed a Form 25 with the SEC to delist its Common Stock from

~~REPORT~~NASDAQ OFand ~~INDEPENDENT~~to ~~AUDITOR~~deregister its Common Stock with the SEC under Section 12(b) of the Exchange Act. By operation of law, the delisting will become effective on April 10, 2009. Additionally, on March 30, 2009, the Company filed with the SEC post-effective amendments to its registration statements on Form S-8 in order to remove from registration under the Securities Act of 1933 any of the securities that remained unsold under each such registration statement as of March 30, 2009.

ToOn April 10, 2009, the ~~Board~~effective date of the delisting of the Company’s Common Stock from NASDAQ, the Company intends to file a Form 15 with the SEC in order to deregister its Common Stock with the SEC under Section 12(g) of the Exchange Act and to suspend AAII’s ~~Directors~~reporting obligations under Section 15(d) of the Exchange Act. The Company is eligible to file a Form 15 to deregister its Common Stock under Section 12(g) and ~~Stockholders~~to suspend its reporting obligations under Section 15(d) because it had fewer than 300 holders of record of its Common Stock as of January 1, 2009. Upon filing of the Form 15 with the SEC, the Company’s obligations to file certain reports with the SEC, including Forms 10-K, 10-Q and 8-K, will be suspended immediately. Additionally, the Company expects the deregistration of its Common Stock with the SEC under Section 12 of the Exchange Act to become effective 90 days after filing the Form 15 with the SEC.

Sale of Pemco World Air Services— On September 19, 2007, the Company sold all of the outstanding stock in Pemco World Air Services, Inc., a wholly owned subsidiary of the Company (“PWAS”), to WAS Aviation Services, Inc., an affiliate of Sun Capital Partners, Inc. (“WAS”). The sale was approved by the Company’s stockholders on September 17, 2007. As part of the transaction, the Company changed its name from Pemco Aviation Group, Inc. to Alabama Aircraft Industries, Inc. PWAS historically has comprised substantially all of the CSS. The historical financial results of PWAS have been presented in the accompanying consolidated financial statements as discontinued operations for all periods presented.

WePrinciples ~~have audited the accompanying consolidated balance sheet~~ of ~~PEMCO AVIATION GROUP, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 2003 and 2002, and~~ ~~the~~Consolidation—The ~~related~~ consolidated ~~statements of operations, stockholders’ equity and cash flows for the years then ended. These~~ financial statements ~~are~~include the ~~responsibility~~accounts of the ~~company’s~~Company ~~management.~~and ~~Our~~its ~~responsibility~~wholly isowned ~~to express an opinion on these financial statements based on our audits~~subsidiaries. ~~The~~All ~~financial~~significant ~~statements~~inter-company ofaccounts ~~PEMCO Aviation Group, Inc.~~ and ~~Subsidiaries~~transactions ~~for the years ended December 31, 2001 and 2000 were audited by other auditors who~~ have ~~ceased~~been ~~operations~~eliminated. ~~Those auditors expressed an unqualified opinion on those financial statements in their report dated March 1, 2002.~~

WeUse ~~conducted~~of ~~our~~Estimates—The ~~audits~~preparation of financial statements in ~~accordance~~conformity with ~~auditing~~accounting ~~standards~~principles generally accepted in the United States. (“GAAP”) ~~Those~~requires ~~standards~~management ~~require~~to make estimates and assumptions that weaffect ~~plan~~the reported amounts of assets and ~~perform~~liabilities ~~the~~and ~~audit~~disclosure toof ~~obtain~~contingent ~~reasonable~~assets ~~assurance~~and ~~about~~liabilities ~~whether~~as of the dates of the financial statements ~~are~~and ~~free~~the reported amounts of ~~material~~revenues ~~misstatement.~~and Anexpenses ~~audit~~during ~~includes~~the ~~examining,~~reporting onperiods. aMaterial ~~test~~estimates ~~basis,~~that ~~evidence~~may ~~supporting~~be ~~the~~subject ~~amounts~~to ~~and~~significant ~~disclosures~~change in the ~~financial~~near ~~statements.~~term Aninclude ~~audit~~those ~~also~~associated ~~includes~~with ~~assessing~~evaluation of the ~~accounting~~ultimate ~~principles~~profitability ~~used~~of ~~and~~the Company’s contracts, ~~significant~~pension ~~estimates~~and ~~made~~postretirement bybenefits, ~~management~~legal contingencies, ascollectability ~~well~~of asaccounts ~~evaluating~~receivable, the ~~overall~~use ~~financial~~and ~~statement~~recoverability ~~presentation~~of inventory, impairment of long-lived assets, self-insurance accruals and the realization of deferred tax assets. WeEstimates and ~~believe~~assumptions are reviewed periodically and the effects of revisions are reflected in the period that ~~our~~they ~~audits~~are ~~provide~~determined ato ~~reasonable~~be ~~basis~~necessary. ~~for~~Actual ~~our~~results ~~opinion~~could differ from those estimates.

InCash & ~~our~~Cash ~~opinion,~~Equivalents—Cash ~~the~~equivalents ~~2003~~are ~~and~~composed ~~2002~~of ~~financial~~highly ~~statements~~liquid ~~referred~~instruments towith ~~above~~original ~~present~~maturities ~~fairly,~~of inthree ~~all~~months ~~material~~or ~~respects, the consolidated~~less ~~financial~~when ~~position of Pemco Aviation Group, Inc~~purchased. ~~and~~Due ~~Subsidiaries~~to ~~at December 31, 2003 and 2002, and~~ the ~~consolidated~~short ~~results~~maturity of ~~their~~these ~~operations~~instruments, ~~and~~carrying ~~their~~value ~~cash~~on ~~flows for~~ the ~~years~~Company’s ~~then~~consolidated ~~ended~~balance insheets ~~conformity~~approximates ~~with~~fair ~~accounting principles generally accepted in the United States~~value.

~~Birmingham~~Inventories—Raw materials and supplies are stated at the lower of cost or net realizable value, ~~Alabama~~with ~~/s/~~cost ~~ERNST~~principally &determined ~~YOUNG~~by ~~LLP~~the last-in first-out method. Finished goods and work-in-process include materials, direct labor, manufacturing overhead, and other indirect costs incurred under each contract, less amounts in excess of estimated realizable value. Pursuant to contract provisions, agencies of the U.S. Government and certain other customers have title to, or a security interest in, inventories related to such contracts as a result of advances and customer deposits. Such advances and deposits are reflected as an offset against the related inventory balances to the extent costs have been accumulated. Inventoried costs on U.S. Government fixed price contracts include direct engineering, production and tooling costs, and applicable overhead. In addition, inventoried costs on U.S. Government contracts include general and administrative expenses estimated to be recoverable.

April 8, 2004

~~THE~~Machinery, ~~FOLLOWING~~Equipment, ~~REPORT~~and ISImprovements—Leasehold Aimprovements ~~COPY~~and OFmachinery Aand equipment ~~REPORT~~are ~~PREVIOUSLY~~stated ~~ISSUED~~at BYcost, ~~ARTHUR~~less ~~ANDERSEN~~accumulated ~~LLP~~amortization ~~AND~~and ~~HAS~~depreciation. ~~NOT~~Depreciation ~~BEEN~~and ~~REISSUED~~amortization ~~BY ARTHUR~~are ~~ANDERSEN~~computed ~~LLP.~~using ~~THE~~the ~~COMPANY~~straight-line ISmethod ~~UNABLE~~over TOthe ~~OBTAIN~~following Aestimated ~~REISSUE~~useful ~~REPORT~~lives OR(in ~~CONSENT~~the TOcase ~~INCORPORATION~~of BYleasehold ~~REFERENCE~~improvements, OFthe ~~ARTHUR~~useful ~~ANDERSEN~~life is ~~LLP’S~~the ~~REPORT~~shorter ~~FROM~~of ~~ARTHUR~~the ~~ANDERSEN~~lease ~~LLP~~period ~~BECAUSE~~or ~~ARTHUR~~the ~~ANDERSEN~~economic ~~LLP~~life ~~HAS~~of ~~CEASED~~the ~~OPERATIONS.~~improvements):

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


Classification		Useful Life In Years
Machinery and equipment		3 -12
Leasehold improvements		5 -20

ToMaintenance ~~Pemco~~and ~~Aviation~~repairs ~~Group~~are charged to expense as incurred, ~~Inc~~while major renewals and improvements are capitalized. The cost and related accumulated depreciation of assets sold or otherwise disposed of are deducted from the related accounts and resulting gains or losses are reflected in operations.

WeLong-Lived Assets—The Company periodically evaluates whether events and circumstances have ~~audited~~occurred that indicate the ~~accompanying~~carrying ~~consolidated~~value of ~~balance~~long-lived ~~sheets~~assets and certain identifiable intangibles of ~~PEMCO~~the ~~AVIATION~~Company ~~GROUP,~~may ~~INC~~not be recoverable. (Recoverability of long-lived assets to be held and used is evaluated by a ~~Delaware~~comparison ~~corporation)~~of ~~AND~~the ~~SUBSIDIARIES as~~carrying amount of ~~December~~the ~~31,~~asset ~~2001~~to ~~and~~future ~~2000,~~net ~~and~~undiscounted cash flows expected to be generated by the ~~related~~asset. ~~consolidated~~If ~~statements~~the carrying amount of ~~operations,~~an ~~stockholders’~~asset ~~equity~~exceeds ~~and~~its estimated undiscounted future cash flows, an impairment charge is recognized for ~~each~~the excess of the ~~three~~carrying ~~years~~amount inover the ~~period~~fair ~~ended~~value ~~December~~of ~~31,~~the ~~2001~~asset. ~~These~~The ~~financial~~fair value ~~statements~~of ~~are~~ the ~~responsibility~~asset ~~of the~~or ~~company’s~~asset ~~management.~~group ~~Our~~is ~~responsibility~~measured isby toquoted ~~express~~market anprices, ~~opinion~~if onavailable, ~~these~~or ~~financial~~by ~~statements~~utilizing ~~based~~present onvalue ~~our~~techniques, ~~audits~~such as discounted cash flows.

WeRestricted ~~conducted~~Cash-Letter ~~our~~of ~~audits~~Credit—The inCompany ~~accordance~~maintains ~~with~~approximately ~~auditing standards generally accepted in the United States~~$0.6 ~~Those~~million ~~standards~~of ~~require~~cash ~~that~~on weaccount ~~plan and perform the audit~~ to ~~obtain~~ ~~reasonable~~collateralize ~~assurance~~a ~~about~~letter ~~whether the financial statements are free~~ of ~~material~~credit ~~misstatement.~~that Ansupports ~~audit includes examining, on a test basis, evidence supporting~~ the ~~amounts~~Company’s ~~and~~workers ~~disclosures in the financial statements. An audit also includes~~compensation ~~assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation~~obligations. ~~We believe that our audits provide a reasonable basis for our opinion.~~

InDeferred ~~our~~Compensation—The ~~opinion,~~Company ~~the~~has ~~financial~~a ~~statements~~deferred ~~referred~~compensation toarrangement ~~above~~for ~~present~~its ~~fairly~~Chief Executive Officer, which inprovides ~~all~~for ~~material respects~~payments upon retirement, death or termination of employment. The Company funds the ~~consolidated~~deferred ~~financial~~compensation ~~position~~liability ofby ~~Pemco~~making ~~Aviation~~contributions ~~Group,~~to ~~Inc~~a rabbi trust. The contributions are invested in U.S. treasury bills, and ~~Subsidiaries~~do asnot include Company Common Stock. The fair market values of ~~December~~the assets at December 31, ~~2001~~2008 and ~~2000~~2007 were $0.8 million and $2.9 million, respectively, and are reflected in “deposits and other” in the accompanying consolidated ~~results~~balance sheets. ofThe ~~their~~deferred ~~operations~~compensation ~~and~~liability ~~their~~is ~~cash~~adjusted, ~~flows~~with ~~for~~a ~~each~~corresponding ofcharge ~~the~~or ~~three~~credit ~~years~~to compensation cost, to reflect changes in the ~~period~~fair ~~ended~~market value of the compensation liability. The amounts accrued under this plan were $0.8 million and ~~December~~$2.9 million at December 31, ~~2001~~2008 inand ~~conformity~~2007, ~~with~~respectively, ~~accounting~~and ~~principles~~are ~~generally~~reflected ~~accepted~~in “other long-term liabilities” in the ~~United~~accompanying ~~States~~consolidated balance sheets.

~~Birmingham~~Income Taxes—The Company accounts for income taxes under the asset and liability method. Federal and state income taxes are computed at current tax rates, ~~Alabama~~less ~~ARTHUR~~tax ~~ANDERSEN~~credits. ~~LLP~~Taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, plus changes in deferred tax assets and liabilities that arise because of temporary differences between the time when items of income and expense are recognized for financial reporting and income tax purposes. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not such assets will be realized.

~~March~~In 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109 (“FIN 48”). FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48 on January 1, ~~2002~~2007. Upon adoption, the Company recognized no adjustment in

~~PEMCO~~the ~~AVIATION~~amount ~~GROUP,~~of ~~INC~~unrecognized tax benefits. ~~AND~~The ~~SUBSIDIARIES~~Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense.

~~CONSOLIDATED~~The ~~BALANCE~~Company ~~SHEETS~~and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years before 2006. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward amount. During 2007, the Internal Revenue Service examination of the Company’s 2005 federal tax return was completed with no changes to the return as filed.

~~December~~Pensions—The 31Company’s funding policy for pension plans is to contribute, ~~2003~~at a minimum, the statutorily required amount to an irrevocable trust. Benefits under the plan are based on age at retirement, average annual compensation during the last five years of employment and ~~2002~~years of service. The actuarial cost method used in determining the net periodic pension cost is the projected unit credit method.

~~ASSETS~~On February 29, 2008, the Company applied to the Internal Revenue Service (“IRS”) for a waiver of contributions for the 2007 plan year which concluded on September 15, 2008. On September 15, 2008, the Company contributed $3.9 million to the Defined Benefit Pension Plan (the “Pension Plan”), fully satisfying the contribution requirements for the 2007 plan year. On March 30, 2009, the IRS granted the waiver request resulting in a deferral of required contributions for the 2007 plan year being spread over the next five years. As a result of the waiver, the pension payment for the 2007 plan year is now considered a payment for the 2008 plan year. The remaining amount owed for the 2008 plan year of $0.5 million was made during the first quarter of 2009. As a result of the missed quarterly contributions while the waiver request was under consideration, the Pension Benefit Guaranty Corporation (“PBGC”) filed liens on the Company’s assets. The PBGC will maintain a lien on the Company’s assets over the time period of the deferral of the 2007 plan year contributions, which will be approximately five years.

The Company’s Pension Plan was under-funded by approximately $33.1 million and $9.2 million at December 31, 2008 and 2007, respectively (InSee Note ~~Thousands~~9 to the Consolidated Financial Statements) primarily due to inconsistent investment returns including large losses in the equity portion of the investment portfolio in 2008, and to a lesser extent an increase in actuarial liability resulting from lower interest rates, increased mortality rates and the terms of the collective bargaining agreements entered into in 2005. The Company froze the Pension Plan effective December 31, 2007 for all non-union employees. Pursuant to the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the Company made contributions to the Pension Plan during 2008 and 2007 of approximately $3.9 million and $9.1 million, respectively. The Company is required to contribute $3.5 million to the Plan during 2009. The losses incurred in 2008 will likely result in substantially increased contributions to the Pension Plan in 2010 and beyond.

	2003			2002
Current assets:
Cash	$	3,156		$	2,795
Accounts receivable, net		35,042			30,162
Inventories, net		25,504			16,292
Deferred income taxes		7,223			13,092
Prepaid expenses and other		1,561			1,204
Total current assets		72,486			63,545
Machinery, equipment and improvements at cost:
Machinery and equipment		31,536			28,193
Leasehold improvements		27,281			22,426
Construction-in-process		988			4,214
		59,805			54,833
Less accumulated depreciation and amortization		(33,864	)		(30,193	)
Net machinery, equipment and improvements		25,941			24,640
Other non-current assets:
Deposits and other		1,779			933
Related party receivable		460			425
Intangible pension asset		4,539			5,410
Intangible assets, net		217			315
		6,995			7,083
Total assets	$	105,422		$	95,268

The Company follows the provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R) (“FAS No. 158”), which improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statements of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position.

~~The~~Customer ~~accompanying~~Deposits ~~notes~~in Excess of Cost—In the normal course of business, the Company may receive payments from customers in excess of costs that it has expended on contracts. These payments are anassociated ~~integral~~with ~~part~~milestone payments or deposits to hold production slots. To the extent that the Company has deposits in excess of expended costs on a contract, the amount in excess of cost is reflected as a liability.

Stock Options—The Company follows the provisions of ~~these~~FASB ~~consolidated~~Statement ~~statements~~No. 123(R) using the modified prospective transition method, which requires measurement and recognition of compensation expense for all

~~PEMCO~~ stock-based ~~AVIATION~~payment ~~GROUP~~awards made to employees and directors, ~~INC~~including stock options based on fair values. ~~AND~~Stock-based ~~SUBSIDIARIES~~compensation expense is based on the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense in the Company’s Consolidated Statement of Operations as of December 31, 2008 and 2007 included compensation expense for unvested stock-based payment awards granted prior to December 31, 2005 (based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123) and compensation expense for the stock-based payment awards granted subsequent to December 31, 2005 (based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R)).

~~CONSOLIDATED~~Revenue ~~BALANCE~~Recognition—Revenue ~~SHEETS~~at the Company is derived principally from aircraft maintenance and modification services performed under contracts or subcontracts with government and military customers. The Company recognizes revenue and associated costs under such contracts on the percentage-of-completion ~~continued~~method as prescribed by Statement of Position 81-1 (“SOP 81-1”), Accounting for Performance of Construction-Type and Certain Production-Type Contracts. These contracts generally provide for routine maintenance and modification services at fixed prices detailed in the contract. Any nonroutine maintenance and modification services are provided based upon estimated labor hours at fixed hourly rates. The Company segments the routine and the nonroutine services for purposes of accumulating costs and recognizing revenue. For routine services, the Company uses the units-of-delivery method as the basis to measure progress toward completion, with revenue recorded based upon the unit sales value stated in the contract and costs of sales recorded based upon actual unit cost. An aircraft is considered delivered when work is substantially complete and acceptance by the customer has occurred. For nonroutine services, the Company uses an output measure based upon units of work performed to measure progress toward completion, with revenue recorded based upon the stated hourly rates in the contract and costs of sales recorded based upon estimated average costs. The Company considers each task performed for the customer as a unit of work performed. Revenue and costs of sales are recognized upon completion of all performance obligations for each specific task. Such work is performed and completed throughout the PDM process.

~~December~~The ~~31,~~Company ~~2003~~provides for losses on uncompleted contracts in the period in which management determines that the estimated total costs under the contract will exceed the estimated total contract revenues. These estimates are reviewed periodically and ~~2002~~any revisions are charged or credited to cost of revenue in the period in which the change is determined. An amount equal to contract costs attributable to claims is included in revenue when realization is probable and the amount can be reasonably estimated. There were revenues recorded in 2008 or 2007 that were attributable to claims.

~~LIABILITIES~~Comprehensive ~~AND~~Income—Comprehensive ~~STOCKHOLDERS’~~income ~~EQUITY~~consists of net income (loss) and the after-tax impact of the pension and postretirement liabilities. Income taxes related to components of other comprehensive income are recorded based on the Company’s estimated effective tax rate.

(Earnings Per Share—Basic and diluted per share results for all periods presented were computed based on the net earnings or loss for the respective periods. The weighted average number of common shares outstanding during the period was used in the calculation of basic earnings per share. In ~~Thousands~~accordance with SFAS No. 128, ~~Except~~Earnings ~~Common~~Per Share, ~~Information)~~the weighted average number of common shares used in the calculation of diluted per share amounts is adjusted for the dilutive effects of stock options based on the treasury stock method only if the Company records earnings from continuing operations as such adjustments would otherwise be anti-dilutive to earnings per share from continuing operations.

	2003			2002
Current liabilities:
Current portion of long-term debt	$	1,255		$	1,103
Current portion of pension liability		8,612			10,341
Accounts payable		1,849			1,549
Accounts payable - accrued		6,696			4,699
Accrued health and dental		1,141			1,243
Accrued liabilities - payroll related		7,951			7,816
Accrued liabilities - other		9,210			3,959
Customer deposits in excess of cost		7,679			8,882
Total current liabilities		44,393			39,592
Long-term debt, less current portion		20,299			17,081
Long-term pension benefit liability		15,575			25,341
Other long-term liabilities		2,180			1,718
Total liabilities		82,447			83,732
Stockholders’ equity:
Preferred Stock, $0.0001 par value, 5,000,000 shares authorized, none outstanding
Common stock, $0.0001 par value, 12,000,000 shares authorized, 4,044,164 and 4,030,595 outstanding at December 31, 2003 and 2002, respectively		1			1
Additional paid-in capital		10,077			9,684
Retained earnings		38,504			28,520
Treasury stock, at cost – 359,723 and 348,899 shares at December 31, 2003 and 2002, respectively		(7,043	)		(6,788	)
Accumulated other comprehensive income (loss)
Net unrealized gain on investments		140
Minimum pension liability		(18,704	)		(19,881	)
Total stockholders’ equity		22,975			11,536
Total liabilities and stockholders’ equity	$	105,422		$	95,268

Treasury Stock—Treasury stock is accounted for by the cost method. Treasury stock activity is presented in the consolidated statements of stockholders’ equity.

~~The~~Statement ~~accompanying~~of ~~notes~~ Cash Flows—Non-cash investing and financing activities are excluded anfrom ~~integral~~the ~~part~~consolidated statements of cash flows. Non-cash transactions during 2007 included the acquisition of machinery and equipment of $0.1 million under capital lease obligations.

of these consolidated statements.

Recently Issued Accounting Standards—In September 2006, the FASB issued Statement of ~~PEMCO~~Financial ~~AVIATION~~Accounting ~~GROUP~~Standards (“SFAS”) No. 157, ~~INC~~Fair Value Measurements (“FAS No. 157”), ~~AND~~which ~~SUBSIDIARIES~~defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FSP No. SFAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years and interim periods within those fiscal years, beginning after November 15, 2008. The adoption of SFAS No. 157 did not have a material impact on the Company’s financial position, results of operations or cash flows.

~~CONSOLIDATED~~In February ~~STATEMENTS~~2007, OFthe ~~OPERATIONS~~Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 allows companies to measure many financial assets and liabilities at fair value. It also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of SFAS No. 159 did not have a material impact on the Company’s financial position, results of operations or cash flows.

~~For~~In December 2007, the ~~Years~~Financial Accounting ~~Ended~~Standards ~~December~~Board 31issued Statement of Financial Accounting Standards No. 141(R), ~~2003~~Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141, ~~2002~~Business Combinations, but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS No. 141(R) expands on the disclosures previously required by SFAS No. 141, better defines the acquirer and ~~2001~~the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any noncontrolling interests in the acquired business. SFAS No. 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS No. 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. The Company adopted this statement as of January 1, 2009. Should the Company complete an acquisition subsequent to December 31, 2008 it will apply the provisions of this statement.

(In ~~Thousands~~December 2007, ~~Except~~the ~~Net~~Financial ~~Income~~Accounting ~~per~~Standards ~~Common~~Board ~~Share~~issued ~~Information~~Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 requires that noncontrolling (or minority) interests in subsidiaries be reported in the equity section of the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS No. 160 also changes the manner in which the net income of a subsidiary is reported and disclosed in the controlling company’s income statement. SFAS No. 160 also establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. SFAS No. 160 is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

	2003			2002			2001
Net sales	$	190,376		$	162,863		$	165,460
Cost of sales		148,067			127,075			128,927
Gross profit		42,309			35,788			36,533
Selling, general, and administrative expenses		26,084			21,516			20,424
Income from operations		16,225			14,272			16,109
Interest expense		909			1,493			1,344
Insurance recovery		(527	)
Litigation, net					(1,480	)
Income before income taxes		15,843			14,259			14,765
Income tax expense		5,859			5,418			(97	)
Net income	$	9,984		$	8,841		$	14,862
Net income per common share:
Basic	$	2.47		$	2.24		$	3.69
Diluted	$	2.27		$	2.02		$	3.50
Weighted average common shares outstanding:
Basic		4,042			3,943			4,031
Diluted		4,395			4,380			4,248

The accompanying notes are an integral part

of these consolidated statements.

~~PEMCO~~2. ~~AVIATION~~LOSS ~~GROUP,~~FROM ~~INC.~~CONTINUING ~~AND~~OPERATIONS ~~SUBSIDIARIES~~PER COMMON SHARE

~~CONSOLIDATED~~Computation ~~STATEMENTS~~of OFbasic ~~STOCKHOLDERS’~~and ~~EQUITY~~ diluted earnings per share:

~~Years~~(In ~~Ended~~Thousands ~~December~~Except ~~31,~~Per ~~2003,~~Share ~~2002~~Information) ~~and 2001~~


For the Year Ended December 31, 2008	Loss from Continuing Operations			Shares Outstanding	Loss per Share
Basic loss and per share amounts	$	(1,092	)	4,129	$	(0.26	)
Dilutive securities		—		—		—

Diluted loss and per share amounts	$	(1,092	)	4,129	$	(0.26	)


For the Year Ended December 31, 2007	Loss from Continuing Operations			Shares Outstanding	Loss per Share
Basic loss and per share amounts	$	(13,272	)	4,127	$	(3.22	)
Dilutive securities		—		—		—

Diluted loss and per share amounts	$	(13,272	)	4,127	$	(3.22	)

Options to purchase 1,261,879 and 1,147,438 shares of Common Stock related to 2008 and 2007, respectively, were excluded from the computation of diluted earnings per share because the option exercise price was greater than the average market price of the shares.

3. ACCOUNTS RECEIVABLE

Accounts receivable as of December 31, 2008 and 2007 consists of the following:

(In Thousands)

	Common Shares		Capital Stock			Additional Paid-in Capital		Retained Earnings (Deficit)		Treasury Stock			Accumulated Other Comprehensive Income			Total Stockholders' Equity
	2008			2007
January 1, 2001	4,028		$	1		$	5,109	$	4,817	$	—		$	—		$	9,927
Amounts billed	$	5,620		$	7,255
Exercise of stock options	15						114										114
Recoverable costs and accrued profit on progress completed—not billed		1,071			142
Purchase of treasury stock											(98	)					(98	)
Accounts receviable	$	6,691		$	7,397
Comprehensive income:
Net income									14,862								14,862
Minimum pension liability (net of tax of $3,344)														(5,456	)		(5,456	)
Total comprehensive income																	9,406
December 31, 2001	4,043			1			5,223		19,679		(98	)		(5,456	)		19,349
Exercise of stock options (including tax benefit of $1,670)	336						4,461										4,461
Purchase of treasury stock											(6,690	)					(6,690	)
Comprehensive income:
Net income									8,841								8,841
Minimum pension liability (net of tax of $8,840)														(14,425	)		(14,425	)
Total comprehensive income																	(5,584	)
December 31, 2002	4,379			1			9,684		28,520		(6,788	)		(19,881	)		11,536
Exercise of stock options (including tax benefit of $121)	25						393										393
Purchase of treasury stock											(255	)					(255	)
Comprehensive income:
Net income									9,984								9,984
Change in net unrealized gain on deferred compensation plan assets (net of tax of $85)														140			140
Minimum pension liability (net of tax of $579)														1,177			1,177
Total comprehensive income																	11,301
	4,404		$	1		$	10,077	$	38,504	$	(7,043	)	$	(18,564	)	$	22,975

Recoverable costs and accrued profit on progress completed but not billed consist of amounts of revenue recognized on contracts, for which billings had not been presented to the contract owners because the amounts, even though earned, were not billable under the contract terms at December 31, 2008 and 2007. The ~~accompanying~~total ~~notes~~accounts receivable ~~are~~with anthe ~~integral~~U.S. ~~part~~Government or with prime contractors to the U.S. Government totaled $5.8 million and $5.6 million at December 31, 2008 and 2007, respectively.

~~of these consolidated statements~~4. INVENTORIES

Inventories as of December 31, 2008 and 2007 consist of the following:

(In Thousands)


	2008			2007
Work in process	$	9,562		$	9,100
Raw materials and supplies		6,361			6,270

Total		15,923			15,370
Less reserves for obsolete inventory		(3,210	)		(2,375	)
Less milestone payments and customer deposits		(7,621	)		(6,678	)

	$	5,092		$	6,317

All of the above inventories relate to U.S. Government contracts or sub-contracts. The Company receives ~~PEMCO~~milestone ~~AVIATION~~payments ~~GROUP,~~on ~~INC~~the majority of its government contracts. ~~AND~~The ~~SUBSIDIARIES~~title to all inventories on which the Company receives milestone payments is vested in the customer to the extent of the milestone payment balance.

~~CONSOLIDATED~~The ~~STATEMENTS~~amount OFof ~~CASH~~general ~~FLOWS~~and administrative costs remaining in inventories at December 31, 2008 and 2007 amounted to $1.0 million and $1.8 million, respectively, and are associated with government contracts.

~~Years~~Raw ~~Ended~~material ~~December~~and ~~31,~~supplies ~~2003,~~inventories ~~2002~~related to the modification and maintenance ~~2001~~of aircraft are subject to technological obsolescence and potential decertification due to failure to meet design specifications. The Company actively reserves for these obsolete inventories. Future technological changes could render some additional inventories obsolete. No estimate can be made of the loss that would occur should current design specifications change.

5. DEBT

Debt as of December 31, 2008 and 2007 consists of the following:

(In Thousands)

	2003			2002			2001
	2008			2007
Cash flows from operating activities:
Senior Secured Note, interest at 15%	$	5,000		$	5,000
Net income	$	9,984		$	8,841		$	14,862
Capital Lease Obligations; interest from 5.0% to 11.0%, collateralized by security interest in certain equipment		2			7
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Total long-term debt		5,002			5,007
Depreciation and amortization		3,768			4,572			3,306
Less portion reflected as current		(2	)		(5	)
Provision for deferred income taxes		5,326			5,368			150
Long term-debt, net of current portion	$	5,000		$	5,002
Funding (over) under pension cost		(8,868	)		10			(1,614	)
Provision for losses on receivables		472			84
Provision for inventory valuation		733			412			914
Gain on retirement of improvements								(38	)
Provision for losses on contracts-in-process		3,648						315
Write-off of debt issuance costs					154
Income tax benefit from exercise of non-qualified stock options		121
Changes in assets and liabilities:
Related party receivable		(35	)		(425	)
Accounts receivable, trade		(5,352	)		(11,765	)		(4,360	)
Inventories		(9,945	)		4,174			(5,317	)
Prepaid expenses and other		(357	)		(281	)		832
Deposits and other		(621	)		(366	)		802
Customer deposits in excess of cost		(1,203	)		6,668			2,214
Accounts payable and accrued liabilities		4,274			(4,486	)		(6,519	)
Total adjustments		(8,039	)		4,119			(9,315	)
Net cash (used in) provided by operating activities		1,945			12,960			5,547
Cash flows from investing activities:
Capital expenditures		(4,971	)		(7,306	)		(5,692	)
Net cash used in investing activities		(4,971	)		(7,306	)		(5,692	)

On December 16, 2002, the Company entered into a Credit Agreement with Wachovia Bank and Compass Bank (the “Credit Agreement”) that provides for a Revolving Credit Facility and a Bank Term Loan. On October 12, 2006, the Company entered into an Amended and Restated Credit Agreement (“Amended Credit Agreement”) with Wachovia Bank and Compass Bank. On September 19, 2007, the Company paid off the Revolving Credit Facility, the Bank Term Loan and the Treasury Stock Term Loan with the proceeds from the sale of PWAS. The Airport Authority Term Loan was paid off on October 4, 2007.

On February 15, 2006, the Company entered into a Note Purchase Agreement with Silver Canyon Services, Inc. (“Silver Canyon”), pursuant to which the Company issued to Silver Canyon a senior secured note in the principal amount of $5.0 million (the “Note”). The Note accrues interest at an annual rate of 15%, which is payable quarterly in arrears. The Company may, at its election, redeem the Note at a price equal to 100% of the principal amount then outstanding, together with accrued and unpaid interest thereon. The payment of all outstanding principal, interest and other amounts owing under the Note may be declared immediately due and payable upon the occurrences of an event of default. On July 31, 2006, the Note was purchased by Special Value Bond Fund, LLC, which is managed by Tennenbaum Capital Partners, LLC, a related party of the Company. The Note Purchase Agreement was amended on January 28, 2009 to extend the maturity date of the Note to February 15, 2010.

If additional financing is needed, the Company’s recent negative results of operations and the uncertainties regarding future contract awards will likely make it more difficult and expensive for the Company to raise additional capital that may be necessary to continue its operations. In addition, the anticipated delisting of the Company’s Common Stock from Nasdaq on April 6, 2009 will likely materially adversely affect the Company’s access to the capital markets, and the limited liquidity and potentially reduced price of the Common Stock could materially adversely affect the Company’s ability to raise capital on terms acceptable to the Company or at all. If the Company cannot raise adequate funds on acceptable terms, or at all, its business could be materially harmed.

~~PEMCO~~6. ~~AVIATION~~ALLOWANCE ~~GROUP,~~FOR ~~INC.~~ESTIMATED ~~AND~~LOSSES ~~SUBSIDIARIES~~ON CONTRACTS-IN-PROCESS

~~CONSOLIDATED~~At ~~STATEMENTS~~December 31, OF2008 ~~CASH~~and ~~FLOWS~~2007, the allowance for estimated losses on contracts-in-process ~~continued~~of approximately $0.2 million and $1.8 million, respectively, was netted against inventory in accordance with SOP 81-1 to adjust inventory to the net realizable value. This accrual is based upon management assumptions and estimates, and includes the application of the Company’s normal cost accounting methods and provisions for performance penalties. It is possible that actual results could differ from those assumptions used by management and changes to those assumptions could occur in the near term, which could result in the realization of additional losses. Management believes these assumptions are a reasonable estimate of the losses to be incurred on the respective loss contract activity through completion.

~~Years~~7. ~~Ended~~INCOME ~~December~~TAXES ~~31, 2003, 2002 and 2001~~

The provision for (benefit from) income taxes for the years ended December 31, 2008 and 2007 is as follows:

(In Thousands)

Cash flows from financing activities:
	2008			2007
Proceeds from exercise of stock options		272			2,835			114
Current:
Purchase of treasury stock		(255	)		(6,690	)		(98	)
Federal	$	5		$	(362	)
Payment of debt issuance costs					(286	)
State		(164	)		23
Net change under revolving credit facility		4,093			(718	)		1,295
		(159	)		(339	)
Borrowings under long-term debt		395			8,113			2,688
Deferred:
Principal payments under long-term debt		(1,118	)		(7,040	)		(4,368	)
Federal		—			5,739
Net cash provided by (used in) financing activities		3,387			(3,786	)		(369	)
State		—			869
Net increase (decrease) in cash and cash equivalents		361			1,868			(514	)
		—			6,608
Cash and cash equivalents, beginning of year		2,795			927			1,441
	$	(159	)	$	6,269
Cash and cash equivalents, end of year	$	3,156		$	2,795		$	927
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	777		$	1,194		$	1,761
Income taxes	$	0		$	0		$	13

The accompanying notes are an integral part

of these consolidated statements.

Deferred tax assets and liabilities are recognized for the future tax effects of temporary differences ~~PEMCO~~between ~~AVIATION~~the ~~GROUP,~~tax ~~INC~~basis of an asset or liability and its reported amount in the financial statements. ~~AND~~The ~~SUBSIDIARIES~~measurement of deferred tax assets and liabilities is based on enacted tax laws and rates currently in effect in each of the jurisdictions in which the Company operates. Deferred tax assets (liabilities) are comprised of the following at December 31:

~~NOTES~~(In TOThousands) ~~CONSOLIDATED FINANCIAL STATEMENTS~~

As of and for the Years Ended


	2008			2007
Pension costs	$	(9,984	)	$	(9,083	)
Net maintenance and service costs		(470	)		(908	)
Other		—			—

Gross deferred tax liabilities		(10,454	)		(9,991	)

Stock options		749			651
Machinery, equipment, and improvements		478			400
Accrued vacation		530			602
Deferred compensation		124			304
Accrued worker’s compensation		146			165
Inventory reserves		1,230			906
Pension liability		22,463			12,620
Deferred income		829			1,494
Other accruals and reserves		1,227			496
Federal operating loss carry-forwards		2,271			110
State operating loss carry-forwards		529			629
Alternative minimum tax credit carry-forwards		1,892			1,894

Gross deferred tax assets		32,468			20,271

Deferred tax asset valuation allowance		(22,014	)		(10,280	)

Net deferred tax asset	$	—		$	—

~~DECEMBER~~For tax purposes, the Company deducts direct labor, overhead, general and administrative costs, supplies and replacement parts as incurred. This tax accounting differs from GAAP accounting for these items creating a temporary difference, which is reflected as net maintenance and service costs in the table above. The accumulated temporary difference for these items at December 31, ~~2003~~2008 and 2007 is $1.2 million and $2.4 million, ~~2002~~respectively. Using the tax rates for deferred taxes for each year results in deferred tax liabilities of $0.5 million and ~~2001~~$0.9 million for December 31, 2008 and 2007, respectively.

1The Company maintains a valuation allowance for its deferred income taxes unless realization is considered more likely than not. ~~BUSINESS~~The ~~AND~~ultimate ~~SUMMARY~~realization OFof ~~SIGNIFICANT~~deferred ~~ACCOUNTING~~tax ~~POLICIES~~assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income and tax planning strategies in making this assessment. The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized due to the expiration of certain net operating losses and tax credit carryovers.

Business - Pemco Aviation Group, Inc. (the “company”) is a diversified aerospace and defense company composed of three operating segments: Government Services Segment (“GSS”), Commercial Services Segment (“CSS”), and Manufacturing and Components Segment (“MCS”).

The company’s primary business is providing aircraft maintenance and modification services, including complete airframe inspection, maintenance, repair and custom airframe design and modification. The company provides such services for government and military customers through its GSS, which specializes in providing Programmed Depot Maintenance (“PDM”) on large transport aircraft.

The company’s CSS provides commercial aircraft maintenance and modification services on a contract basis to the owners and operators of large commercial aircraft. The company provides commercial aircraft maintenance varying in scope from a single aircraft serviced over a few days to multi-aircraft programs lasting several years. The company is able to offer full range maintenance support services to airlines coupled with the related technical services required by these customers. The company also has broad experience in modifying commercial aircraft and providing value-added technical solutions and holds numerous proprietary Supplemental Type Certificates (“STCs”). In addition, the CSS operates an aircraft parts distribution company.

The company’s MCS designs and manufactures a wide array of proprietary aerospace products including various space systems, such as guidance control systems and launch vehicles; aircraft cargo-handling systems; and precision parts and components for aircraft.

Principles of Consolidation - The consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Material estimates which may be subject to significant change in the near term include those associated with evaluation of the ultimate profitability of the company’s contracts, recognition of losses associated with pending litigation and realization of certain assets, including deferred tax assets. Actual results could differ from those estimates.

~~Cash~~A &reconciliation ~~Cash~~from ~~Equivalents~~income -tax ~~Cash~~expense ~~equivalents~~computed ~~are~~at ~~generally~~the ~~composed~~U.S. offederal ~~highly~~statutory ~~liquid~~rate ~~instruments with maturities~~ of ~~three~~35% ~~months or less when purchased. Due~~ to the Company’s ~~short~~provision ~~maturity~~for ofincome ~~these~~tax ~~instruments,~~expense ~~carrying~~(benefit) ~~value~~from oncontinuing ~~the~~operations ~~company’s~~is ~~consolidated~~as ~~balance~~follows: ~~sheets approximates fair value.~~

Inventories - Materials and supplies are stated at the lower of cost or net realizable value, with cost principally determined by the average cost method. Work-in-process includes materials, direct labor, manufacturing overhead, and other indirect costs incurred under each contract, less amounts in excess of estimated realizable value. Pursuant to contract provisions, agencies of the U.S. Government and certain other customers have title to, or a security interest in, inventories related to such contracts as a result of advances and customer deposits. Such advances and deposits are reflected as an offset against the related inventory balances to the extent costs have been accumulated. Inventoried costs on long-term commercial programs and U.S. Government fixed price contracts include direct engineering, production and tooling costs, and applicable overhead. (In ~~addition,~~Thousands) inventoried costs on U.S. Government contracts include general and administrative expenses estimated to be recoverable. In accordance with industry practices, inventoried costs are classified as current assets and include amounts related to any contracts having production cycles longer than one year.

Machinery, Equipment, and Improvements - Leasehold improvements and machinery and equipment are stated at cost, less accumulated amortization and depreciation. Capital expenditures during 2003, 2002 and 2001 included capitalized interest cost of $0, $76,000 and $417,000, respectively. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives (in the case of leasehold improvements, the useful life is the shorter of the lease period or the economic life of the improvements):


	2008			2007
Income tax benefit at federal statutory rate	$	(416	)	$	(2,610	)
State income tax benefit		(164	)		(365	)
Increase in valuation allowance related to operations		337			9,472
Other, net		84			(228	)

Income tax (benefit) expense	$	(159	)	$	6,269

Classification		Useful Life In Years
Machinery and equipment		3 - 12
Leasehold improvements		5 - 20

At December 31, 2008 and 2007, the Company had estimated tax effected federal and state operating loss carry-forwards of approximately $2.3 million and $0.3 million, respectively. The federal loss carry-forwards expire beginning in 2026. These loss carry-forwards are partially reserved for through the deferred tax valuation allowance. The alternative minimum tax credit carry-forwards of $1.9 million included in the deferred tax assets at December 31, 2008 and 2007 do not expire.

~~Maintenance~~8. ~~and repairs~~STOCK ~~are~~OPTION ~~charged~~PLANS ~~to expense as incurred, while major renewals and improvements are capitalized.~~

On May 14, 2003, the Company’s stockholders approved amendments to the Company’s Nonqualified Stock Option Plan (the “Stock Option Plan”), pursuant to which a maximum aggregate of 2,000,000 shares of Common Stock have been reserved for grants to key personnel. The ~~cost~~Stock Option Plan expires by its terms on September 8, 2009. The Company’s Incentive Stock Option and ~~related~~Appreciation ~~accumulated~~Rights ~~depreciation~~Plan ofexpired ~~assets~~during ~~sold~~fiscal oryear ~~otherwise~~2000 ~~disposed~~with ofoutstanding ~~are~~options ~~deducted~~being ~~from~~combined with the ~~related~~Stock ~~accounts~~Option Plan. Options granted under the Stock Option Plan become exercisable over staggered periods and ~~resulting~~expire ~~gains~~ten oryears ~~losses~~after the date of grant. On March 30, 2009, the Company filed with the SEC post-effective amendments to its registration statements on Form S-8 in order to remove from registration under the Securities Act of 1933 any of the securities that remained unsold under each such registration statement as of March 30, 2009. The Board of Directors are ~~reflected~~considering indifferent ~~operations~~stock option alternatives.

~~Long~~The Company follows the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share Based Payment, which revises SFAS No. 123, Accounting for Stock-~~Lived~~Based ~~Assets~~Compensation. –Prior to the adoption of SFAS No. 123(R), stock-based compensation expense related to stock options was not recognized in the results of operations if the exercise ~~The~~price ~~company~~was ~~continually~~at ~~evaluates~~least ~~whether~~equal ~~events~~to ~~and~~the ~~circumstances~~market ~~have~~value ~~occurred~~of ~~that~~the ~~indicate~~Common Stock on the ~~carrying~~grant date, in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) requires the Company to recognize expense related to the fair value of ~~long~~its stock-~~lived~~based ~~assets~~compensation ~~and~~awards, ~~certain~~including ~~identifiable~~employee ~~intangibles~~stock ofoptions, over the ~~company~~service ~~may~~period ~~not~~(generally bethe ~~recoverable~~vesting period) in the consolidated financial statements. ~~Recoverability~~SFAS ofNo. 123(R) ~~long-lived~~permits ~~assets~~entities to beuse ~~held~~any ~~and~~option-pricing ~~used~~model isthat ~~evaluated~~meets bythe afair ~~comparison~~value ofobjective in the ~~carrying~~Statement. ~~amount~~For ofoptions with graded vesting, the ~~asset~~Company tovalues ~~future~~the ~~net~~stock ~~undiscounted~~option ~~cash~~grants ~~flows~~and ~~expected~~recognizes tocompensation beexpense ~~generated~~as byif each vesting portion of the ~~asset~~award was a separate award. IfUnder the ~~carrying~~modified ~~amount~~prospective ofmethod, anawards ~~asset~~that ~~exceeds~~were ~~its~~granted, ~~estimated~~modified, ~~undiscounted~~or ~~future~~settled on or after January 1, 2006 are measured and accounted for in accordance with SFAS No. 123(R). Unvested equity-classified awards ~~cash~~that ~~flows~~were granted prior to January 1, an2006 ~~impairment~~will ~~charge~~continue isto ~~recognized~~be accounted for ~~the~~in ~~excess~~accordance ofwith SFAS No. 123, except that all awards are recognized in the ~~carrying~~results ~~amount~~of operations over the remaining vesting periods. The compensation cost recorded for these awards will be based on their grant-date fair value ofas calculated for the ~~asset~~pro forma disclosures required by SFAS No. 123. The ~~fair~~impact ~~value~~ of ~~the~~forfeitures ~~asset~~that ormay ~~asset~~occur ~~group~~prior to vesting is ~~measured~~also byestimated ~~quoted~~and ~~market~~considered ~~prices~~in the amount recognized. In addition, ifthe ~~available~~realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity, orrather bythan ~~utilizing~~as ~~present~~an ~~value techniques~~operating activity as in the past.

~~Intangible Assets -~~ The ~~company~~following ~~amortizes~~table ~~intangible~~summarizes ~~assets~~Stock ~~over~~Option ~~their~~Plan ~~estimated~~activity ~~lives.~~for ~~The company’s intangible assets consist primarily of capitalized loan origination fees and an intangible pension asset related to~~ the ~~company’s~~years ~~unfunded~~ended ~~pension liability (see Note 9). The loan origination fees had a balance of approximately $0.2 million and $0.3 million at~~ December 31, ~~2003~~2008 and ~~2002, respectively, with 20% of the fee amortizing over the five-year life of the term loan and 80% of the amount amortizing over the two-year original term of the revolving credit facility.~~ ~~There~~2007: ~~is no direct amortization of the intangible pension asset.~~

~~Deferred~~(In ~~Compensation – The company has a deferred compensation arrangement for certain key executives which generally provides for payments upon retirement~~Thousands, ~~death~~Except orExercise ~~termination~~Price ofPer ~~employment.~~Share ~~The~~Information) company funds the deferred compensation liability by making contributions to a rabbi trust. The contributions are invested in money market and mutual funds, and do not include company common stock. The company classifies all of the assets in the trust as available for sale. Pursuant to Emerging Issues Task Force Issue No. 97-14 “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested” and SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”, the company records these assets at their fair market values with the resulting unrealized gains and losses, net of income tax, reported as other comprehensive income. Realized gains and losses and investment income are recognized in current earnings. The fair market values of the assets at December 31, 2003 and 2002 were $1.5 million and $0.6 million, respectively, and are reflected in deposits and other in the accompanying consolidated balance sheets. The deferred compensation obligation is adjusted, with a corresponding charge or credit to compensation cost, to reflect changes in the fair market value of the assets in the rabbi trust. The amounts accrued under this plan were $1.5 million and $0.6 million at December 31, 2003 and 2002, respectively, and are reflected in other long-term liabilities in the accompanying consolidated balance sheets.

Income Taxes – The company accounts for income taxes under the asset and liability method. Federal and state income taxes are computed at current tax rates, less tax credits. Taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, plus changes in deferred tax assets and liabilities that arise because of temporary differences between the time when items of income and expense are recognized for financial reporting and income tax purposes. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.


	2008			Weighted Average Exercise Price		2007			Weighted Average Exercise Price
Outstanding beginning of year		1,157		$	18.49		1,071		$	20.29
Granted		164			5.90		202			8.35
Exercised		—			—		(3	)		2.85
Forfeited		(59	)		18.06		(113	)		17.89

Outstanding end of year		1,262			16.87		1,157			18.49

Exercisable end of year		1,174					1,079
Estimated weighted average fair value of options granted	$	1.20				$	3.90

~~Reserve for Warranty Expenses -~~ The ~~company~~following ~~provides~~table ~~warranties~~summarizes oninformation ~~certain~~about ~~work~~stock ~~performed~~options ~~for~~outstanding a given time period, generally between three and ten years, in accordance with the terms of each specific contract. The company provides a reserve for anticipated warranty claims based on historical experience, current warranty trends, and specific warranty terms. This reserve is management’s best estimate of anticipated costs related to aircraft that were under warranty at December 31, ~~2003 and 2002. Periodic adjustments to the reserve are made as events occur that indicate changes are necessary. The~~ ~~liability~~2008: ~~for warranty reserves was approximately $816,000 and $629,000 at December 31, 2003 and 2002, respectively.~~

(In Thousands, Except Remaining Life and Exercise Price Per Share Information)


Range of Exercise Prices	Number of Outstanding Options at 12/31/2008	Weighted Average Remaining Life	Weighted Average Exercise Price		Number of Exercisable Options at 12/31/2008	Weighted Average Exercise Price
$ 4.58 - $4.58	11	9.95	$	4.58	11	$	4.58
$ 6.00 - $6.00	153	9.19		6.00	106		6.00
$ 8.35 - $8.35	174	8.20		8.35	140		8.35
$ 8.72 - $10.13	129	1.00		9.01	129		9.01
$10.59 - $13.24	149	2.11		11.38	149		11.38
$16.49 - $16.49	147	3.17		16.49	147		16.49
$17.38 - $22.95	124	6.02		19.49	117		19.61
$24.53 - $24.53	152	4.16		24.53	152		24.53
$26.15 - $29.25	61	5.88		27.17	61		27.17
$35.70 - $35.70	162	5.16		35.70	162		35.70

	1,262	5.09	$	16.87	1,174	$	17.55

The weighted average remaining term for outstanding stock options was 5.09 years at December 31, 2008. The aggregate intrinsic value at December 31, 2008 and 2007 was $0 for stock options outstanding and $0 for stock options exercisable. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date.

The fair value of the options granted during the years ended December 31, 2008 and 2007, were $1.20 and $3.90, respectively, and were estimated on the date of grant using the binominal method using the following weighted-average assumptions:


	Year Ended December 31, 2008		Year Ended December 31, 2007
Risk-free interest rate	2.60	% - 3.49%	4.54	%
Expected volatility	75	%	60	%
Expected term	5.10		4.38
Dividend yield	0	%	0	%
Exercise factor	2.00		2.00
Post-Vest %	4.65	%	5.04	%

~~Pensions~~The -options ~~The~~pricing ~~company’s~~model ~~funding~~used ~~policy~~to ~~for~~calculate ~~pension~~the ~~plans~~fair isvalue toof ~~contribute,~~the atoptions agranted ~~minimum,~~requires the input of ~~statutorily~~subjective ~~required~~assumptions ~~amount~~that towill anusually ~~irrevocable~~have ~~trust~~a significant impact on the fair value estimated. ~~Benefits~~Risk-free ~~under~~interest rates reflect the ~~plans~~yield ~~are~~on ~~generally~~zero-coupon U.S. Treasury securities with a remaining term equal to the full term of the options granted. Expected volatilities are based on ~~age~~historical atvolatility ~~retirement~~of the Company common stock since January 1, ~~average~~2000. ~~annual~~Expected ~~compensation~~terms ~~during~~are ~~the~~based ~~last~~on 5historical ~~years~~terms of ~~employment,~~grantee exercise behavior. Expected dividend yield is zero because the Company has not and ~~years~~does ofnot ~~service~~expect to declare dividends. The ~~actuarial~~exercise ~~cost~~factors ~~method~~are ~~used~~based ~~in determining~~on the ~~net~~historical ~~periodic~~rate ~~pension~~by ~~cost~~which isthe price must increase before the ~~projected~~grantee ~~unit~~is ~~credit~~expected ~~method~~to exercise. The post-vest % is based on historical rate of post-vest terminations.

~~Customer~~SFAS ~~Deposits~~No. 123(R) inrequires ~~Excess~~the recognition of ~~Cost~~stock-based –compensation Infor the ~~normal~~number ~~course~~ of ~~business~~awards that are ultimately expected to vest. As a result, ~~the~~for ~~company~~most ~~may~~awards, ~~receive~~recognized ~~payments~~stock-based ~~from~~compensation ~~customers~~was inreduced ~~excess~~for ofestimated ~~costs~~forfeitures ~~that~~prior itto ~~has~~vesting ~~expended~~primarily based on ~~contracts.~~historical ~~These~~annual ~~payments~~forfeiture ~~are~~rates ~~generally associated~~of ~~with~~approximately ~~milestone~~10%. ~~payments,~~Estimated ~~work-~~forfeitures will be reassessed in~~-process~~ subsequent orperiods ~~deposits~~and tomay ~~hold~~change ~~production~~based ~~slots.~~on Tonew ~~the~~facts ~~extent~~and ~~that~~circumstances. ~~the~~As ~~company~~of ~~has~~December 31, ~~deposits~~2008, inapproximately ~~excess~~$84,077 of ~~expended~~unrecognized ~~cost~~stock oncompensation arelated ~~contract,~~to ~~the~~unvested ~~amount~~awards in(net ~~excess~~ of ~~cost~~estimated forfeitures) is ~~reflected~~expected asto be recognized over a ~~liability~~weighted-average period of one year.

~~Stock Options - The company uses the fair value method for stock options granted for services rendered by non-employees in accordance with SFAS No~~9. ~~123~~EMPLOYEE ~~“Accounting~~BENEFIT ~~for~~PLANS ~~Stock Based Compensation”.~~

The ~~company~~Company ~~uses~~follows the ~~intrinsic~~provisions ~~value~~of ~~method~~SFAS ~~prescribed~~No. 158, byEmployers’ Accounting ~~Principles~~for ~~Board~~Defined ~~Opinion~~Benefit ~~No.~~Pension 25and ~~“Accounting~~Other ~~for~~Postretirement ~~Stock~~Plans—an ~~Issued~~Amendment toof ~~Employees”~~FASB Statements 87, 88, 106, and 132(R). SFAS ~~for~~158 ~~stock~~requires ~~option~~an ~~grants~~employer to ~~individuals~~recognize the funded status of a defined benefit postretirement plan as ~~employees.~~an ~~Accordingly,~~asset noor ~~compensation~~liability ~~expense~~in isits ~~recognized~~statement ~~for~~of ~~options~~financial ~~granted~~position atand orto ~~above~~recognize ~~the~~changes ~~fair~~in ~~market~~that ~~value~~funded ofstatus in the ~~underlying~~year ~~stock~~in onwhich the ~~grant~~changes ~~date~~occur in accumulated other comprehensive income. The ~~following~~adjustment ~~table~~to ~~illustrates~~accumulated ~~what~~other ~~the effect~~comprehensive onincome represents the net ~~income~~actuarial losses and ~~earnings~~net ~~per~~prior ~~share~~service ~~would~~costs. ~~have~~These ~~been~~amounts ~~had~~subsequently will be recognized as periodic net pension cost pursuant to the ~~company~~Company’s ~~applied~~historical accounting policy for amortizing such amounts. Additionally, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension costs in the ~~fair~~same ~~value~~periods ~~recognition~~will ~~provisions~~be subsequently recognized as a component of ~~FASB~~accumulated ~~Statement~~other ~~No.~~comprehensive ~~123~~income toin ~~stock~~the ~~option~~same ~~grants~~manner toas ~~employees~~prior amounts.

~~(In~~Pension—The Company ~~Thousands~~has ~~Except~~a ~~Per~~defined ~~Share~~benefit ~~Information~~pension plan (the “Pension Plan”) in effect, which covers substantially all employees at its Birmingham, Alabama facility who meet minimum eligibility requirements. Benefits for non-union employees are based upon salary and years of service, while benefits for union employees are based upon a fixed benefit rate and years of service. The Company froze the Pension Plan effective December 31, 2007 for all non-union employees. The funding policy is consistent with the funding requirements of federal laws and regulations concerning pensions. The Company uses a December 31 measurement date in accounting for the Pension Plan.

	2003			2002			2001
Net Income – as reported	$	9,984		$	8,841		$	14,862
Stock based compensation under fair value method, net of tax effect using 38% tax rate		(1,545	)		(1,316	)		(808	)
Net income – pro forma	$	8,439		$	7,525		$	14,054
Net income per share, basic – as reported	$	2.47		$	2.24		$	3.69
Net income per share, diluted – as reported	$	2.27		$	2.02		$	3.50
Net income per share, basic – pro forma	$	2.09		$	1.91		$	3.49
Net income per share, diluted – pro forma	$	1.92		$	1.72		$	3.31

Revenue Recognition - Revenue at the company’s GSS is derived principally from aircraft maintenance and modification services performed under contracts or subcontracts with government and military customers. The GSS recognizes revenue and associated costs under such contracts on the percentage-of-completion method as prescribed by Statement

ofChanges ~~Position~~during 81-1 (“SOP 81-1”), “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”. These contracts generally provide for basic and fixed price elements and time-and-material elements based upon estimated labor hours at fixed hourly rates. The company segments the ~~basic~~year ~~and~~in ~~fixed price elements and~~ the ~~time-and-material~~benefit ~~elements for purposes of accumulating costs and recognizing revenue. For basic and fixed price elements of a contract~~obligation, ~~the~~fair ~~company uses the units-of-delivery method as the basis to measure progress toward completion, with revenue recorded based upon the unit sales~~ value ~~stated~~ ~~in the contract and costs~~ of ~~sales~~plan ~~recorded based upon actual unit cost. An aircraft is considered delivered when work is substantially complete and acceptance by the customer has occurred. For time-and-material elements of a contract~~assets, ~~the company~~funded ~~uses an output measure based upon units of work performed to measure progress toward completion~~status, ~~with revenue recorded based upon the stated hourly rates in the contract~~ and ~~costs of sales recorded based upon estimated average costs. The~~amounts ~~company considers each hour chargeable to the customer as a unit of work performed. Revenue and costs of sales are~~ recognized ~~upon completion of all performance obligations~~ in ~~accordance with~~ the ~~contract~~statements ~~and~~of ~~acceptance~~financial bycondition ~~the~~at ~~customer.~~December 31 ~~Such~~were ~~work~~as ~~is performed~~follows: ~~and completed throughout the PDM process.~~

~~Revenue at~~(In ~~the~~Thousands) company’s CSS is derived principally from aircraft maintenance, modification, and conversion programs under contracts with the owners and operators of large commercial airlines. The CSS recognizes revenue and associated costs for all work performed under such contracts on a percentage-of-completion method, as prescribed by SOP 81-1, using units-of-delivery as the basis to measure progress toward completion. Revenue is recorded based upon the unit sales value stated in the contract and costs of sales are recorded based upon actual unit cost.

The company’s MCS derives a significant portion of its revenue from cost-reimbursement type contracts accounted for under the principles prescribed by SOP 81-1 and from sales of precision parts and components. Revenue on cost-reimbursable contracts is recognized to the extent of costs incurred plus a proportionate amount of estimated fee earned. For certain other fixed-price contracts revenue is recognized when performance milestones have been achieved in accordance with contract terms. Revenue related to sales of individual components and parts is recognized upon delivery to the customer, and when the product price is fixed and determinable and collection of the resulting receivable is reasonably assured.


	2008			2007
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year	$	106,527		$	136,004
Effect of sale of PWAS		—			(30,644	)
Service Cost		1,133			1,803
Interest Cost		6,373			6,422
Curtailment/Amendment		—			(1,575	)
Discount rate changes		1,533			(2,523	)
Mortality assumption changes		—			4,277
Actuarial (gain) loss		(358	)		2,322
Benefits paid		(8,477	)		(9,559	)

Benefit obligation, end of year	$	106,731		$	106,527


CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year	$	97,301		$	117,233
Effect of sale of PWAS		—			(25,214	)
Actual return on plan assets		(18,906	)		5,916
Employer contribution		3,882			9,059
Plan expenses paid		(178	)		(134	)
Benefits paid		(8,477	)		(9,559	)

Fair value of plan assets, end of year	$	73,622		$	97,301


Funded status at end of year	$	(33,109	)	$	(9,226	)

~~The~~AMOUNTS ~~company~~RECOGNIZED ~~provides~~IN ~~for~~THE ~~losses~~STATEMENT onOF ~~uncompleted~~FINANCIAL ~~contracts~~POSITION in the period in which management determines that the estimated total costs under the contract will exceed the estimated total contract revenues. These estimates are reviewed periodically and any revisions are charged or credited to operations in the period in which the change is determined. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the amount can be reasonably estimated.

Comprehensive Income - Comprehensive income consists primarily of net income, the after-tax impact of additional minimum pension liabilities, and the after-tax impact of unrealized gains and losses on investments. Income taxes related to components of other comprehensive income are recorded based on the company’s estimated effective tax rate.


	2008			2007
Long-term pension and postretirement liabilities	$	(33,109	)	$	(9,226	)

AMOUNTS RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME


	2008		2007
Net actuarial loss	$	55,824	$	29,306
Prior service cost		2,982		3,742

Net amount recognized	$	58,806	$	33,048

~~Earnings~~The ~~Per~~accumulated ~~Share~~benefit -obligation ~~Basic and diluted per share results~~ for ~~all periods presented were computed based on~~ the ~~net~~Pension ~~earnings~~Plan ~~or loss for the respective periods. The weighted average number of common shares outstanding during the period~~ was ~~used in the calculation of basic earnings per share~~$106.7 Inmillion ~~accordance~~and ~~with SFAS No~~$106.5 ~~128,~~million ~~“Earnings Per~~at ~~Share~~December 31,” ~~the~~2008 ~~weighted~~and ~~average~~2007, ~~number~~respectively. ofInformation ~~common~~for ~~shares used in~~ the ~~calculation~~Pension ofPlan ~~diluted~~with ~~per~~an ~~share~~accumulated ~~amounts~~benefit isobligation ~~adjusted~~in ~~for~~excess ~~the dilutive effects~~ of ~~stock~~plan ~~options based on the treasury stock method only if the company records earnings from continuing operations (i.e.~~assets, ~~before~~as ~~discontinued~~of ~~operations~~December 31, ~~extraordinary~~2008 ~~items~~ and ~~cumulative effects of changes in accounting)~~2007, was as ~~such~~follows: ~~adjustments would otherwise be anti-dilutive to earnings per share from continuing operations.~~

~~Treasury~~(In ~~Stock~~Thousands) ~~– Treasury stock is accounted for by the cost method. Treasury stock activity is presented in the consolidated statements of stockholder’s equity.~~

Reclassifications – Certain amounts in the 2002 and 2001 consolidated financial statements have been reclassified to conform to the 2003 presentation.


	2008		2007
Projected benefit obligation	$	106,731	$	106,527
Accumulated benefit obligation		106,731		106,527
Fair value of plan assets		73,622		97,301

~~Recently~~Components ~~Issued Accounting Standards - In April 2003, the FASB issued SFAS 149, Amendment~~ of ~~Statement 133 on Derivative Instruments and Hedging Activities, which amends SFAS 133 for certain decisions made by~~ the ~~FASB~~Pension Derivatives Implementation Group. In particular, SFAS 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (2) clarifies when a derivative contains a financing component, (3) amends the definition of underlying to conform it to language used in FASB interpretation number (FIN) 45, and (4) amends certain other existing pronouncements. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, most provisions of SFAS 149 are to be applied prospectively. SFAS No. 149 does not currently impact the companyPlan’s ~~financial~~net ~~position,~~periodic ~~results~~benefit ofcost ~~operations,~~were oras ~~cash~~follows: ~~flows.~~

(In ~~May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”~~Thousands). SFAS 150 establishes how an issuer classifies and measures certain freestanding financial instruments with characteristics of both liabilities and equity and requires that such instruments be classified as liabilities. SFAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 for those existing financial instruments subject to its provisions. In its October 2003 meeting, the FASB Board decided to defer the effective date of certain provisions of SFAS 150. The company has not entered into any financial instruments within the scope of SFAS 150 since May 31, 2003. Accordingly, SFAS 150 had no impact on the company’s consolidated financial statements for the year ended December 31, 2003.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. In December 2003, the FASB issued FIN 46R (revised December 2003), which replaces FIN 46. FIN 46R clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not


	2008			2007
Service cost	$	1,133		$	1,803
Interest cost		6,373			6,422
Expected return on plan assets		(7,996	)		(7,853	)
Amortization of prior service cost		761			966
Amortization of net loss		1,735			2,049

Net periodic benefit cost		2,006			3,387
Effect of curtailment		—			826

Total recognized in net periodic pension benefit cost	$	2,006		$	4,213

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income were as follows:

(In Thousands)


	2008			2007
Net loss (gain)	$	26,738		$	(7,547	)
Amortization of prior service cost		(761	)		(4,020	)

		25,977			(11,567	)

Effect of sale of PWAS		—			6,868

Total recognized in other comprehensive income	$	25,977		$	(4,699	)


Total recognized in net periodic pension benefit cost and other comprehensive income	$	27,983		$	(486	)

The estimated net loss and prior service cost for the Pension Plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0.7 million and $2.3 million, respectively.

The weighted average assumptions used to determine benefit obligations under the Pension Plan at December 31 were as follows:


	2008		2007
Discount rate	6.10	%	6.25	%
Rate of compensation increase	0.00	%	0.00	%

~~have~~The ~~the~~weighted ~~characteristics~~average ofassumptions aused ~~controlling financial interest or do have sufficient equity at risk for the entity~~ to ~~finance~~determine ~~its~~net ~~activities~~periodic ~~without~~pension ~~additional subordinated~~cost ~~support~~were ~~from other parties. FIN 46R is required to be applied to entities that are considered special-purpose entities no later than~~ as offollows: the end of the first reporting period that ends after December 15, 2003. Since the company does not have any special-purpose entities, the accompanying consolidated financial statements for 2003 were not affected by FIN 46R. FIN 46R is required to be applied by March 31, 2004 to entities not considered to be special-purpose entities. The company is currently evaluating this impact of FIN 46R and does not anticipate a material impact from such entities on financial position, results of operations, or cash flows.

2. NET INCOME PER COMMON SHARE


	2008		2007
Discount rate	6.25	%	6.00	%
Expected long-term return on plan assets	8.50	%	8.50	%
Rate of compensation increase	0.00	%	3.50	%

~~Computation~~The expected long-term rate of ~~basic~~return on Pension Plan assets was determined based upon historical market returns, expectations of future long-term capital market appreciation, and ~~diluted~~the ~~earnings~~Pension ~~per~~Plan’s ~~share:~~target asset allocations. In estimating the discount rate, the Company considered rates of return on high quality fixed-income investments currently available, and expected to be available, during the period to maturity of the pension benefits.

~~(In~~The ~~Thousands~~Company’s ~~Except~~weighted average ~~Per~~asset ~~Share~~allocations ~~Information)~~at December 31, 2008 and 2007, by asset category, are as follows:

For the Year Ended December 31, 2003	NetIncome		Shares	Per ShareAmount
Basic earnings and per share amounts	$	9,984	4,042	$	2.47
Dilutive securities			353		0.20
Diluted earnings and per share amounts	$	9,984	4,395	$	2.27
For the Year Ended December 31, 2002	NetIncome		Shares	Per ShareAmount
Basic earnings and per share amounts	$	8,841	3,943	$	2.24
Dilutive securities			437		0.22
Diluted earnings and per share amounts	$	8,841	4,380	$	2.02
For the Year Ended December 31, 2001	NetIncome		Shares	Per ShareAmount
Basic earnings and per share amounts	$	14,862	4,031	$	3.69
Dilutive securities			217		0.19
Diluted earnings and per share amounts	$	14,862	4,248	$	3.50

Pension Plan Asset Allocation:

Options to purchase -0-, -0-, and 45,146 shares of common stock related to 2003, 2002, and 2001, respectively, were excluded from the computation of diluted earnings per share because the option exercise price was greater than the average market price of the shares.


	2008		2007
Domestic equity funds	36.0	%	31.9	%
International equity funds	8.3	%	8.7	%
Domestic fixed income funds and cash equivalents	55.7	%	50.0	%
Other	0.0	%	9.4	%

The basic goal underlying the Company’s investment policy is to ensure the assets of the Pension Plan are invested in a prudent manner. The Company’s investment objectives with regards to its pension plan assets include achieving a rate of return that is competitive with returns achieved by similar pension portfolios and by market averages. The Company’s strategy for achieving its desired total rate of return while reducing risk to an acceptable level includes appropriate diversification of Pension Plan assets. The Company believes diversification across different asset classes and different capital markets allows the portfolio to take advantage of a variety of economic environments and at the same time acts to reduce risk by dampening the portfolio’s volatility of returns. The Company’s target asset allocation guidelines at December 31, 2008 were as follows:


		Target Allocation Ranges
Equity funds		25%-75%
Domestic fixed income funds and cash equivalents		25%-50%
Other		0%-10%

The Plan’s assets were more heavily weighted with cash equivalents and more lightly weighted with equity funds at December 31, 2008 due to the unusual volatility of the equity markets during 2008.

The Company’s investment policy prohibits investment activity in municipal or tax exempt securities; commodities; securities of the Pension Plan Trustee or Investment Manager, including affiliates; unregistered or restricted stock; short sales; and margin purchases. The Pension Plan does not own any shares of the Company’s Common Stock.

3.The ~~ACCOUNTS~~following ~~RECEIVABLE~~benefit payments, ~~NET~~which reflect expected future service as appropriate, are expected to be paid:

Accounts receivable, net as of December 31, 2003 and 2002 consist of the following:

(In Thousands)

	2003			2002
Expected Benefit Payments:
U.S. Government:
2009	$	8,430
Amounts billed	$	14,800		$	13,419
2010		8,384
Recoverable costs and accrued profit on progress completed - not billed		11,022			5,917
2011		8,340
Commercial Customers:
2012		8,310
Amounts billed		6,479			8,457
2013		8,311
Recoverable costs and accrued profit on progress completed - not billed		3,558			2,715
2014 – 2018		40,980
		35,859			30,508
Less allowance for doubtful accounts		(817	)		(346	)
Accounts receviable, net	$	35,042		$	30,162

~~Recoverable~~On ~~costs~~February 29, ~~and accrued~~2008, ~~profit~~the ~~not~~Company ~~billed~~applied ~~consist~~to ~~principally~~the ofInternal ~~amounts~~Revenue Service (“IRS”) for a waiver of ~~revenue~~contributions ~~recognized~~for the 2007 plan year which concluded on ~~contracts~~September 15, ~~for~~2008. ~~which~~On ~~billings~~September 15, ~~had~~2008, ~~not~~the ~~been~~Company ~~presented~~contributed $3.9 million to the ~~contract~~Defined ~~owners~~Benefit ~~because~~Pension Plan (the ~~amounts~~“Pension ~~were~~Plan”), ~~not~~fully ~~billable~~satisfying the atcontribution ~~December~~requirements 31for the 2007 plan year. On March 30, ~~2003~~2009, ~~and~~the ~~2002~~IRS granted the waiver request resulting in a deferral of required contributions for the 2007 plan year being spread over the next five years. As a result of the waiver, the pension payment for the 2007 plan year is now considered a payment for the 2008 plan year. The remaining amount owed for the 2008 plan year of $0.5 million was made during the first quarter of 2009. As a result of the missed quarterly contributions while the waiver request was under consideration, the Pension Benefit Guaranty Corporation (“PBGC”) filed liens on the Company’s assets. The PBGC will maintain a lien on the Company’s assets over the time period of the deferral of the 2007 plan year contributions, which will be approximately five years.

AtPostretirement ~~December~~Benefits—The Company ~~31,~~accrues ~~2003~~the ~~and~~estimated ~~2002~~cost of retiree benefit payments, ~~the~~other ~~company~~than ~~has~~pensions, ~~included~~during ~~approximately~~the ~~$1.0 million~~employees’ ~~and~~active $0service period.3 ~~million,~~The ~~respectively,~~Company inprovides ~~Unbilled~~health ~~Receivables~~care ~~pertaining~~benefits to aboth ~~claim~~salaried ~~for~~and anhourly ~~outstanding~~retired ~~Request~~employees ~~for~~at ~~Equitable~~its ~~Adjustment~~Birmingham, ~~(“REA”)~~Alabama facility. onThe ~~its~~retirees’ ~~H-3~~spouse ~~Helicopter~~and ~~contract~~eligible ~~with~~dependents ~~the~~are ~~United~~also ~~States~~entitled ~~Navy.~~to Atcoverage ~~December~~under ~~31,~~this ~~2003,~~defined ~~the~~benefit ~~company has~~plan ~~included~~as ~~approximately~~long ~~$0.7~~as ~~million~~the inretiree ~~Unbilled~~remains ~~Receivables~~eligible ~~pertaining~~for tobenefits. aTo ~~claim~~be eligible for ancoverage ~~outstanding~~the ~~REA~~retiree ~~related~~must tohave ~~its~~attained ~~former~~age ~~KC-135~~62 ~~program~~and asthe benefits acease ~~prime~~once ~~contractor~~age to65 ~~the~~is Ureached.S. ~~Government.~~

4The retirees pay premiums based on the full active coverage rates. ~~INVENTORIES~~These premiums are assumed to increase at the same rate as health care costs. Benefits under the plan are subject to certain deductibles, co-payments, and annual and lifetime maximums. Currently, the plan is unfunded. The Company uses a December 31 measurement date in accounting for its other postretirement benefit plan.

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

(In Thousands)

	2003			2002
Work in process	$	31,679		$	26,181
Finished goods		2,058			2,347
Raw materials and supplies		9,677			4,153
Total		43,414			32,681
Less reserves		(2,473	)		(2,545	)
Less milestone payments and customer deposits		(15,437	)		(13,844	)
	$	25,504		$	16,292

A substantial portion of the above inventories relate to U.S. Government contracts or sub-contracts. The company receives milestone payments on the majority of its government contracts. The title to all inventories on which the company receives milestone payments is vested in the government to the extent of the milestone payment balance.

The amount of general and administrative costs remaining in inventories at December 31, 2003 and 2002 amounted to $2.4 million and $2.5 million, respectively, and are associated with government contracts.

~~The~~Changes ~~majority~~in of the ~~company’s~~benefit ~~inventory~~obligation, ~~Work-in-Process~~plan assets, isand ~~not~~funded ~~subject~~status toduring ~~technological obsolescence~~the year and ~~potential~~amounts ~~decertification.~~recognized in the statements of financial condition at December 31 were as follows:

Raw Material and Finished Goods inventories related to the modification and maintenance of aircraft are subject to technological obsolescence and potential decertification due to failure to meet design specifications. The company actively reserves for these obsolete inventories, which amounted to approximately $2.5 million at December 31, 2003 and 2002. During 2003, the company disposed of $1.1 million of fully reserved inventories. Future technological changes could render some additional inventories obsolete. No estimate can be made of the loss that would occur should current design specifications change.

5. DEBT

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

(In Thousands)

	2003			2002
	2008			2007
Revolving credit facility; interest at LIBOR plus 2.50% (3.67% at December 31, 2003)	$	14,966		$	10,873
CHANGE IN BENEFIT OBLIGATION
Bank Term Loan; interest at LIBOR plus 2.75% (3.92% at December 31, 2003)		4,000			5,000
Benefit obligation, beginning of year	$	427		$	820
Treasury Stock Term Loan; Interest at LIBOR plus 3.00% (4.17% at December 31, 2003)
Effect of Sale of PWAS		—			(286	)
Airport Authority Term Loan; interest at BMA plus 0.36% (1.48% at December 31, 2003)		2,500			2,105
Service cost		17			52
Capital Lease Obligations; interest from 8.4% to 11.0%, collateralized by security interest in certain equipment		88			206
Interest cost		23			36
Total long-term debt		21,554			18,184
Participant contributions		55			—
Less portion reflected as current		(1,255	)		(1,103	)
Actuarial (gain) loss		57			(93	)
Long term-debt, net of current portion	$	20,299		$	17,081
Benefits paid		(179	)		(102	)
Benefit obligation, end of year	$	400		$	427
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year	$	—		$	—
Employer contribution		124			102
Participant contributions		55			—
Benefits paid		(179	)		(102	)
Fair value of plan assets, end of year	$	—		$	—
Funded status at end of year	$	(400	)	$	(427	)
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
	2008			2007
Long-term pension and postretirement liabilities	$	(400	)	$	(427	)
AMOUNTS RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
	2008			2007
Net actuarial loss	$	107		$	50
Prior service cost		(1	)		(2	)
Net amount recognized	$	106		$	48

OnInformation ~~December~~for ~~16, 2002,~~ the ~~company~~postretirement ~~executed~~benefit aplan ~~Credit~~with ~~Agreement that provides for~~ a ~~revolving~~benefit ~~credit~~obligation ~~facility~~in ~~and~~excess ~~a term loan (the “Revolving Credit Facility” and “Bank Term Loan”, respectively). The Revolving Credit Facility had an original term~~ of ~~two years.~~plan The company amended the Credit Agreement on December 16, 2003, which increased borrowing capacity under the Revolving Credit Facility from $20.0 million to $25.0 million and extended the maturity date from December 16, 2004 to December 16,assets ~~2005.~~is ~~The Revolving Credit Facility bears interest at LIBOR plus 2.00% to 2.75%, determined based on the ratio of adjusted funded debt to earnings before interest, taxes, depreciation and amortization, each~~ as ~~defined~~follows: ~~in the Credit Agreement.~~

~~The~~(In ~~Bank~~Thousands) Term Loan has a term of 5 years and bears interest at LIBOR plus 2.25% to 3.00%, determined based on the ratio of adjusted funded debt to earnings before interest, taxes, depreciation and amortization, each as defined in the Credit Agreement. The


	2008		2007
Benefit obligation	$	400	$	427
Fair value of plan assets		—		—

~~principal~~Components ~~amount~~ of ~~$5.0~~the ~~million~~plan’s isnet ~~payable~~periodic inbenefit 60cost ~~monthly~~were ~~installments~~as offollows: ~~$83,333 plus interest, which began January 31, 2003.~~

On May 22, 2003, the company amended the Credit Agreement to create a line of credit for the repurchase of the company’s common stock (“Treasury Stock Term Loan”). The company may draw upon the Treasury Stock Term Loan up to $5.0 million through May 22, 2004, and the borrowings may be used to make purchases of the company’s common stock from any person who is not or has never been an affiliate of the company. The line of credit can be drawn in increments of $0.5 million and bears interest at LIBOR plus 3.00%. The company had no outstanding balance under the Treasury Stock Term Loan at December 31, 2003. The loan will be repaid, if drawn, in equal monthly installments over 43 months commencing on May 22, 2004.

The Airport Authority Term Loan was originated on November 26, 2002, has a term of 15 years, and bears interest at BMA plus 0.36%. The amount outstanding under the Airport Authority Term Loan at December 31, 2003 was $2.5 million and will be repaid over 14 annual installments of approximately $180,000 commencing on September 30, 2004. A 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 approximately $15.0 million outstanding under the Revolving Credit Facility at December 31, 2003. Remaining borrowing capacity available under the facility at December 31, 2003, based upon the calculation that defines the borrowing base, totaled approximately $10.0 million. All of the facilities have provisions for increases in the interest rate during any period when an event of default exists.

Principal maturities of debt over the next five years and in the aggregate thereafter are as follows:

(In Thousands)

2004	$	1,255
	2008			2007
2005		16,159
Service cost	$	30		$	52
2006		1,180
Interest cost		25			36
2007		1,180
Amortization of prior service cost		(1	)		(1	)
2008		180
Amortization of net transition obligation		—			11
Thereafter		1,600
Net periodic benefit cost	$	54		$	98
	$	21,554

AOther ~~significant~~Changes ~~portion of~~in ~~the~~Plan ~~2005~~Assets maturity of debt listed above relates to the expiration of the 2-year term of the Revolving Credit Facility, as amended. The company expects that it will renew the agreement for an additional 2-year term on December 16, 2004, and ~~continue~~ toBenefit doObligations soRecognized ~~each year, although there can be no assurances~~ in ~~that~~Other ~~regard.~~Comprehensive ~~Notwithstanding~~Income ~~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~~were ~~operations,~~as orfollows: ~~other potential financing sources, prior to the scheduled maturity.~~

(In Thousands)


	2008			2007
Actuarial gain	$	(120	)	$	(43	)
Amortization of prior service cost		1			1
Transition asset		—			(81	)
Amortization of net transition asset		—			(11	)

		(119	)		(134	)
Effect of Sale of PWAS		—			(249	)

Total recognized in other comprehensive income	$	(119	)	$	(383	)


Total recognized in net periodic pension benefit cost and other comprehensive income	$	(65	)	$	(285	)

The weighted-average assumptions used to determine the benefit obligation at December 31 are as follows:


	2008		2007
Discount rate	6.43	%	5.75	%

The weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31 are as follows:


	2008		2007
Discount rate	5.75	%	6.00	%

An additional assumption used in measuring the accumulated postretirement benefit obligation was a weighted average medical care cost trend rate of 7.0% for 2009, decreasing gradually to an ultimate rate of 5.0% in year 2013, and remaining at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in assumed health care cost trend rates would have the following effects:

(In Thousands)


	1 - Percentage Point Increase				1 - Percentage Point Decrease
	12/31/08		12/31/07		12/31/08			12/31/07
Effect on total service and interest cost components	$	3	$	5	$	(3	)	$	(5	)
Effect on postretirement benefit obligation	$	32	$	41	$	(29	)	$	(37	)

The ~~above~~Company ~~loans~~expects ~~are~~to ~~collateralized~~contribute by$20,000 ~~substantially~~to ~~all of~~ the ~~assets~~postretirement ofbenefit ~~the~~plan ~~company~~during ~~and~~2008. ~~have~~The ~~various~~following ~~covenants~~benefit ~~which limit or prohibit the company from incurring additional indebtedness~~payments, ~~disposing~~which ofreflect ~~assets,~~expected ~~merging~~future ~~with~~service ~~other~~as ~~entities~~appropriate, ~~declaring~~are ~~dividends,~~expected ~~or making capital expenditures in excess of certain amounts in any fiscal year. Additionally, the company is required~~ to ~~maintain~~be ~~various~~paid: ~~financial ratios and minimum net worth amounts.~~

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

The company conducts part of its operations with leased machinery under capital lease agreements. Remaining lease terms range from one to two years. The following is an analysis of property under capital leases by major class:

(In Thousands)

Class of Property	2003			2002
Expected Benefit Payments:
Production Equipment	$	550		$	666
2009	$	37
Less: Accumulated Amortization		(234	)		(238	)
2010		31
	$	316		$	428
2011		34
2012		40
2013		37
2014 – 2018		170

6Self-Insurance—The Company acts as a self-insurer for certain insurable risks consisting primarily of employee health insurance programs and workers’ compensation. ~~ALLOWANCE~~Losses ~~FOR~~and ~~ESTIMATED~~claims ~~LOSSES~~are ONaccrued ~~CONTRACTS-IN-PROCESS~~as incurred.

The Company ~~allowance~~maintains ~~for estimated losses on contracts~~self-~~in-process,~~insured ~~included~~health ~~in accrued liabilities—other in the accompany consolidated balance sheets, as of December 31, 2003 amounted to $3.6 million~~ and ~~was~~dental ~~related~~plans tofor ~~commitments~~employees ~~to fulfill loss contracts~~ at ~~the~~its ~~company’s~~Alabama ~~GSS~~facilities. ~~This~~The ~~accrual~~Company ishas ~~based~~reserves ~~upon~~established ~~management~~in ~~assumptions and estimates, and includes~~ the ~~application~~amounts of ~~the~~$0.4 ~~company’s~~million ~~normal cost accounting methods~~ and ~~provisions for performance penalties~~$0.5 Itmillion isfor ~~possible~~reported ~~that actual results could differ from those assumptions used by management~~ and ~~changes~~for toincurred ~~those~~but ~~assumptions~~not ~~could~~reported ~~occur~~claims ~~in the near term~~at December 31, ~~which~~2008 ~~could~~and result in the realization of additional losses. Management believes these assumptions are a reasonable estimate of the losses to be incurred on the respective loss contract activity through completion. There were no losses identified on contracts as of December 312007, ~~2002~~respectively.

Through April 30, 2008, the Company had a self-insured workers compensation program with a self-insured retention of $300,000 per occurrence. Claims in excess of the retention level are fully insured. Included in deposits and other in the accompanying consolidated balance sheets at December 31, 2008 and 2007, is $130,000 deposited with the State of Alabama in connection with the Company’s self-insured workers’ compensation programs. The Company recorded reserves of $0.4 million for workers’ compensation claims related to the self-insured programs at December 31, 2008 and 2007. A Letter of Credit of $0.6 million with Wachovia Bank supports the self-insured workers’ compensation programs.

Self-insurance reserves are developed based on prior experience and consider current conditions to predict future experience. These reserves are estimates and actual experience may differ from these estimates.

Defined Contribution Plan—The Company maintains a 401(k) savings plan for employees who are not covered by any collective bargaining agreement and have attained age 21. Employee and Company matching contributions are discretionary. The Company maintains a 401(k) savings plan for firefighter and security employees who are covered by a collective bargaining agreement. A matching contribution of $8,000 and $9,000 was made in 2008 and 2007, respectively to the 401(k) savings plan for firefighter and security employees. Employees are always 100 percent vested in their contributions. Effective January 1, 2009, the Company implemented a 50% match on the first 6% of contributions by qualified participants.

10. COMMITMENTS AND CONTINGENCIES

Operating Leases—The Company’s manufacturing and service operations are performed principally on leased premises owned by municipal units or authorities. The principal lease for the facility in Birmingham, Alabama expires on September 30, 2019. The Birmingham lease provides for basic rentals, plus contingent rentals based upon a graduated percentage of sales. The Company also leases vehicles and equipment under various operating and capital leasing arrangements.

7.Future ~~INCOME~~minimum ~~TAXES~~rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2008 are as follows:

The provision for (benefit from) income taxes for the years ended December 31, 2003, 2002, and 2001 is as follows:

(In Thousands)

	2003		2002		2001
Year Ending	Facilities		VehiclesAndEquipment		Total
Current:
2009	$	160	$	103	$	263
Federal	$	356			$	(45	)
2010		160		90		250
State	$	177	$	50		(202	)
2011		160		75		235
		533		50		(247	)
2012		160				160
Deferred:
2013		160		—		160
Federal		4,666		4,745		252
Thereafter		917		—		917
State		660		623		(102	)
Total minimum future rental commitments	$	1,717	$	268	$	1,985
		5,326		5,368		150
	$	5,859	$	5,418	$	(97	)

~~Deferred~~Total ~~tax~~rent ~~assets and~~expense ~~liabilities~~charged ~~are~~to ~~recognized~~continuing operations for the ~~future~~years ~~tax~~ended ~~effects~~December 31, of2008 ~~temporary~~and 2007 ~~differences~~amounted ~~between~~to ~~the~~$0.8 ~~tax~~million ~~basis of an asset or liability~~ and ~~its~~$1.0 ~~reported~~million, ~~amount~~respectively. inContingent ~~the~~rental ~~financial~~amounts ~~statements.~~based ~~The~~on ~~measurement~~a percentage of ~~deferred~~sales ~~tax~~included ~~assets~~in ~~and~~rent ~~liabilities~~expense isamounted ~~based~~to ~~on enacted~~$0.4 ~~tax~~million ~~laws~~ and ~~rates~~$0.5 ~~currently~~million, infor ~~effect in each of~~ the ~~jurisdictions~~years inended ~~which~~December 31, ~~the~~2008 ~~company~~and ~~operates~~2007, respectively. ~~Deferred~~The ~~tax~~minimum ~~assets~~rent ~~(liabilities)~~for ~~are~~the ~~comprised~~facilities ofin ~~the~~Birmingham, ~~following~~Alabama atis ~~December~~$159,500 ~~31:~~per year.

~~(In~~United ~~Thousands)~~States Government Contracts—The Company, as a U.S. Government contractor, is subject to audits, reviews, and investigations by the U.S. 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 contract 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 pending U.S. government audits, reviews, and investigations of which it is aware would not have a materially adverse effect on the Company’s consolidated financial position or results of operations.

	2003			2002
Pension costs	$	(6,576	)	$	(4,034	)
Machinery, equipment, and improvements		(1,535	)		(645	)
Net maintenance and service costs		(6,260	)		(6,759	)
Deferred compensation plan investments		(85	)
Gross Deferred tax liabilities		(14,456	)		(11,438	)
Accrued vacation		2,096			1,916
Accrued worker’s compensation		249			451
Inventory reserves		945			974
Contingency reserves		598			495
Pension minimum liability		11,584			12,184
Deferred income		1,784			2,155
Federal and state operating loss carry-forwards		944			4,338
Other accruals and reserves		2,926			1,936
Alternative minimum tax credit carry-forwards		1,378			1,281
Gross deferred tax assets		22,504			25,730
Deferred tax asset valuation allowance		(825	)		(1,200	)
Net deferred tax asset	$	7,223		$	13,092

Concentrations

~~For~~In ~~tax purposes,~~ the ~~company~~ ~~deducts~~ordinary ~~direct~~course ~~labor,~~of ~~overhead~~business, ~~general~~the ~~and~~Company ~~administrative~~extends ~~costs,~~credit ~~supplies~~to ~~and~~many ~~replacement~~of ~~parts as incurred. This tax accounting differs from GAAP accounting for these items creating a temporary difference which is reflected as net~~its ~~maintenance and service costs in the table above~~customers. ~~The~~As ~~accumulated~~of ~~temporary difference for these items at~~ December 31, ~~2003~~2008 and ~~2002 is $16.4 million and $17.7 million~~2007, ~~respectively.~~accounts ~~Using~~receivable ~~the~~from ~~tax~~two ~~rates~~customers ~~for~~amounted ~~deferred~~to ~~taxes for each year results in deferred tax liabilities of~~ $6.3.8 million and $64.8 million ~~for December 31~~, ~~2003 and 2002,~~ respectively.

A small number of the Company’s contracts account for a significant percentage of its revenues. Contracts and sub-contracts with the U.S. Government comprised 100% of the Company’s revenues from continuing operations in 2008 and 2007, respectively. The KC-135 program in and of itself comprised 83% and 74% of the Company’s total revenues from continuing operations in 2008 and 2007, respectively. Termination or a disruption of any of these contracts (including by way of option years not being exercised), or the inability of the Company to renew or replace any of these contracts when they expire, could have a material adverse effect on the Company’s financial position or results of operations.

Litigation

GECAS Lawsuits

On January 16, 2004, the Company filed a complaint in the Circuit Court of Dale County, Alabama against GE Capital Aviation Services, Inc. (“GECAS”) for monies owed for modification and maintenance services provided on six 737-300 aircraft, all of which were re-delivered to GECAS during 2003 and are in service. On January 20, 2004, the Company received service of a suit filed against the Company’s former subsidiary, Pemco

~~The~~ World ~~company~~Air ~~maintains~~Services aInc., ~~valuation~~in ~~allowance~~New ~~for~~York ~~its~~state ~~deferred~~court, ~~income~~claiming ~~taxes~~breach ~~unless~~of ~~realization~~contract ~~is considered~~with ~~more~~regard ~~likely~~to ~~than~~two ~~not.~~of ~~The~~the ~~ultimate~~aircraft ~~realization~~re-delivered, ofas ~~deferred~~well ~~tax~~as ~~assets~~fraud isand conversion. ~~dependent~~On ~~upon~~March 5, 2004, the ~~generation~~Company offiled ~~future~~a ~~taxable~~motion ~~income~~to ~~during~~dismiss the ~~periods~~claims filed by GECAS in ~~which~~New ~~those~~York ~~temporary~~state ~~differences~~court, ~~become~~which ~~deductible~~was denied. ~~The~~On ~~company~~March 24, ~~considers~~2004, ~~projected~~the Circuit Court of Dale County, Alabama denied a motion filed by GECAS to dismiss ~~future~~or ~~taxable~~stay ~~income~~the ~~and~~proceedings. ~~tax~~GECAS ~~planning~~subsequently ~~strategies~~paid in ~~making~~full ~~this~~charges ~~assessment~~owed on four of the six aircraft. The ~~company~~New ~~has~~York ~~recorded~~state acourt ~~valuation~~ordered ~~allowance~~mediation toin ~~reflect~~ the ~~estimated~~matter. ~~amount~~Mediation oftook ~~deferred~~place ~~tax~~on ~~assets~~October 6, ~~that~~2004, ~~may~~but ~~not~~was beunsuccessful ~~realized~~in ~~due~~bringing toresolution. Thereafter, the ~~expiration~~Company ofand ~~certain~~GECAS ~~net operating~~amended ~~losses~~to ~~and~~add ~~tax~~additional ~~credit~~claims ~~carryovers~~and counterclaims, respectively. The ~~reduction~~case inwas ~~the~~again ~~valuation~~mediated ~~allowance~~on ~~during~~October 6, ~~2003~~2006 ~~resulted~~without ~~from~~success. ~~the~~On ~~company’s~~October 16, ~~generation~~2006, ofthe Alabama ~~taxable~~state ~~income~~court ~~during~~granted the ~~year~~Company ~~and~~partial summary ~~the~~judgment ~~consequent~~as ~~utilization~~to two of ~~Alabama~~the ~~net~~eight ~~operating~~GECAS ~~loss carryforwards~~counterclaims. ~~that~~Trial ~~had~~of ~~previously~~the ~~been~~case ~~subject~~commenced toin aAlabama ~~valuation~~state ~~allowance.~~court, ~~The reduction~~ in the ~~valuation~~Circuit ~~allowance~~Court ~~during~~of ~~2001~~Dale ~~was~~County, ~~due~~on toMarch 30, ~~the~~2009. ~~company~~The ~~securing~~New ~~the~~York ~~KC-135~~state ~~subcontract~~court ~~from~~has ~~Boeing.~~scheduled ~~The~~the ~~projected~~case ~~income~~for ~~from~~trial ~~this~~on ~~contract~~June 10, 2009 asin ~~well~~the asevent the ~~company’s~~ ~~demonstrated~~matter ~~profitable~~is ~~performance~~not ~~over~~resolved in the ~~past~~Alabama ~~few~~proceeding. ~~years,~~Management ~~indicates~~believes there is a remote chance that the ~~realization~~outcome of ~~deferred~~these ~~tax~~lawsuits ~~assets,~~will ~~net~~have ofa ~~valuation~~material ~~allowances,~~impact ~~through~~on ~~future~~the ~~profitability~~Company’s isfinancial ~~more~~position ~~likely~~or ~~than~~results ~~not.~~of operations.

AEmployment ~~reconciliation~~Lawsuits ~~from income tax expense computed at the U.S. federal statutory rate of 35% to the company’s provision for income tax expense (benefit) from continuing operations is as follows:~~

On March 14, 2009, a federal jury in the United States District Court for the Northern District of Alabama (InSouthern ~~Thousands~~Division) returned a verdict against the Company for $250,000 in compensatory damages and $250,000 in punitive damages in a case involving a former employee who was terminated for unethical conduct involving the threatening touching of a female employee. In July 2005 the terminated employee filed EEOC charges against the Company for race and gender discrimination and retaliation for having been a plaintiff in a 2002 case brought against the Company. The jury found no evidence of retaliation, but found the Company liable on the basis of race and gender discrimination in the employee’s termination. The Company maintains its position as to the appropriateness of steps taken and intends to vigorously pursue appeal of the matter. The case is believed to be covered by Company’s employer liability insurance coverage.

	2003			2002		2001
Income tax expense at federal statutory rate	$	5,545		$	4,991	$	5,168
State income tax expense, net of federal tax benefit		544			35		(197	)
Reduction in valuation allowance		(375	)				(5,940	)
Other, net		145			392		872
Income tax expense	$	5,859		$	5,418	$	(97	)

Various claims alleging employment discrimination, including race, sex, disability, and age 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 are also pending in Alabama state court. The Company believes that none of these claims, individually or in the aggregate, is material to the Company 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 Company’s financial position or results of operations.

AtEnvironmental ~~December~~Compliance 31, 2003 and 2002, the company had tax affected federal and state operating loss carryforwards of approximately $0.9 million and $4.3 million, respectively. The loss carryforwards expire at various dates between 2004 and 2022. These loss carryforwards are partially reserved for through the deferred tax valuation allowance.

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 ~~alternative~~report ~~minimum~~cited ~~tax~~various ~~credit~~violations ~~carryforwards~~of environmental laws. The Company has taken actions to correct the items raised by the inspection. 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 $1the CACO, the Company agreed to assess a portion of the Birmingham facility for possible contamination by certain constituents and remediate such contamination as necessary.4 ~~million~~During 1999, ~~included~~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 (“Phase II Plan”) was submitted to the ~~deferred~~EPA ~~tax~~in ~~assets~~2001 upon receiving the agency’s response to the 1999 samples. The Phase II Plan was approved in January 2003, wells installed and favorable sampling events recorded. The Company compiled the results and submitted a revised work plan to the agency which was accepted on July 30, 2004. The Media Clean-up Standard Report, as required, was submitted to the EPA in January 2005. It is the Company’s policy to accrue environmental remediation costs when it is probable that such costs will be incurred and when a range of loss can be reasonably estimated. The Company reviews the status of all significant existing or potential environmental issues and adjusts its accruals as necessary. The Company recorded liabilities of approximately $100,000 related to the Phase II Plan at ~~December~~both December 31, ~~2003~~2008 and 2007, dowhich ~~not~~are ~~expire.~~included in

8. STOCK OPTION PLANS

On May 14, 2003, the company’s stockholders approved amendments to the company’s Nonqualified Stock Option Plan (the “Plan”), pursuant to which a maximum aggregate of 2,000,000 shares of common stock have been reserved for grants to key personnel. The Plan expires by its terms on September 8, 2009. The company’s Incentive Stock Option and Appreciation Rights Plan expired during 2000 with outstanding options being combined with the Nonqualified Stock Option Plan. Options available to be granted under the Plan amounted to approximately 628,000 at December 31, 2003.

~~Under~~ accrued ~~the~~liabilities—other ~~Plan,~~on the ~~option~~accompanying ~~price~~Consolidated ~~may~~Balance ~~not~~Sheets. beThe ~~less~~Company ~~than~~anticipates ~~50% of~~ the ~~fair~~total ~~market~~costs ~~value~~ of the ~~stock~~Phase atII ~~the time~~Plan ~~the~~to ~~options~~be approximately ~~are granted. The foregoing notwithstanding~~$550,000, ~~the option price~~ of ~~options~~which ~~granted to directors and officers of~~ the ~~company~~Company ~~must~~had bepaid ~~equal~~approximately to$450,000 ~~100%~~as of ~~the~~December 31, ~~fair~~2008. ~~market~~Management ~~value~~believes ofthat the ~~stock~~results onof the ~~date~~Phase ofII ~~grant.~~Plan ~~Generally,~~will ~~these~~not ~~options become~~have ~~exercisable~~a ~~over~~material ~~staggered~~impact ~~periods~~on ~~but~~the ~~expire~~Company’s ~~ten~~financial ~~years~~position ~~after~~or ~~the date~~ results of ~~grant~~operations.

In March 2005, Pemco Aeroplex received notice from the South Carolina Department of Health and Environmental Control that it was believed to be a potentially responsible party (“PRP”) with regard to contamination found on the Philips Service Corporation (“PSC”) site located in Rock Hill, South Carolina. Pemco was listed as a PRP due to alleged use by the Company of contract services in disposal of hazardous substances. The ~~following~~Company ~~table~~joined ~~summarizes~~a ~~Plan~~large ~~activity~~group of existing PRP notification recipients in retaining environmental counsel. The Company believes it is possible that paint chips were disposed of with this contractor beginning in 1997. PSC filed for bankruptcy in 2003. It is noted that contamination seems to be primarily linked to a diesel fuel tank leak whereby over 200,000 gallons of diesel product was lost or released into the environment ~~years~~at ~~ended~~the ~~December~~Rock ~~31:~~Hill site. The database of manifests located on-site at PSC has been reviewed and the waste-in compilations have been completed, but remain subject to revision. The PRP group continues to increase. It is believed that the Company’s potential liability will not exceed $50,000. The Company believes it is adequately insured in this matter. Management believes that the resolution of the above matter will not have a material impact on the Company’s financial position or results of operations.

(In ~~Thousands~~addition, ~~Except~~in ~~Per~~conjunction ~~Share~~with ~~Information)~~the sale of PWAS, WAS and the Company contracted for division of any environmental liability that may be required to meet applicable environmental remediation standards at the Company’s former Dothan, Alabama facilities such that, in the event significant environmental remediation is required, WAS will bear the risk of the first $1.0 million dollars of such losses and the Company will bear the risk of any such losses in excess of $1.0 million but not to exceed $2.0 million in the aggregate. As a result, WAS would be responsible for all losses in excess of $3.0 million. The funds required to meet the Company’s obligations have been escrowed for a five-year period. No portion of the amount required to be escrowed in connection with the sale of PWAS was considered as a portion of the gain recognized in connection with the sale. The Company considers the amount held in escrow to be a contingent asset and is not included in the Company’s balance sheet.

	2003			Weighted Average Exercise Price		2002			Weighted Average Exercise Price		2001			Weighted Average Exercise Price
Outstanding beginning of year		699		$	12.04		784		$	9.10		629		$	8.42
Granted		273			24.13		257			16.69		207			10.57
Exercised		(24	)		10.93		(320	)		8.51		(38	)		5.94
Forfeited		(16	)		8.06		(22	)		13.03		(14	)		9.48
Outstanding end of year		932			15.68		699			12.04		784			9.10
Exercisable end of year		655					467					575
Estimated weighted average fair value of options granted	$	9.98				$	8.94				$	6.02

~~The~~Furthermore, ~~fair~~the ~~value~~Company ~~of each option grant~~ is ~~estimated~~subject onto ~~the~~various ~~date~~environmental ofregulations ~~grant~~at ~~using~~ the ~~Black-Scholes~~federal, ~~option-pricing model with the following weighted-average assumptions used for grants in 2003~~state, ~~2002~~ and ~~2001~~local levels, ~~respectively:~~particularly ~~dividend yield of 0% for each year; expected volatility~~with ofrespect ~~66%, 71% and 72%; risk-free interest rate of 1.79%~~ to ~~4.53%;~~the ~~and expected life of 2.5~~stripping, ~~3.6~~cleaning, and ~~4.0~~painting ~~years~~of ~~for each year respectively~~aircraft. ~~During~~Compliance ~~2001,~~with ~~the~~environmental ~~company~~regulations ~~granted~~have ~~207,000~~not ~~options~~had, ~~of which 127,000 vested immediately,~~ and ~~the~~are ~~remaining~~not ~~80,000 vest~~expected ~~over 2~~ to ~~3 years. In 2002 the company granted 257~~have,~~000~~ ~~options,~~a ofmaterial ~~which~~effect ~~147,000~~on ~~vested immediately and~~ the ~~remaining~~Company’s ~~110,000~~financial ~~vest~~position ~~over~~or 3results ~~years. During 2003, the company granted 273,000 options,~~ of ~~which 100,000 vested immediately and the remaining 173,000 vest over 2 to 4 years~~operations.

11. RELATED PARTY TRANSACTIONS

On April 23, 2002, the Company loaned Ronald A. Aramini, its President and Chief Executive Officer (“CEO”), approximately $0.4 million under the terms of a promissory note. The promissory note carried a fixed interest rate of 5% per annum and was payable within 60 days of Mr. Aramini’s termination of employment with the Company. On March 26, 2007. Mr. Aramini paid the accumulated interest on the promissory note. On February 1, 2008, the Company forgave in full the loan represented by the promissory note, including all accrued and unpaid interest to date, in recognition of Mr. Aramini’s dual role as CEO of the Company and as acting President of the Company’s former subsidiary, PWAS, including Mr. Aramini’s critical role in the successful sale of PWAS.

On December 28, 2006, the Company and Mr. Aramini entered into a Second Amendment (the “Second Amendment”), to the Executive Deferred Compensation Agreement, dated as of May 3, 2002 (the “Agreement”), between the Company and Mr. Aramini. The ~~following~~Agreement, ~~table~~as ~~summarizes~~amended, ~~information~~provided ~~about~~for ~~stock~~annual ~~options~~contributions ~~outstanding~~by atthe Company ~~December~~to 31an associated rabbi trust for the benefit of Mr. Aramini over the term of his employment agreement. The Company contributed $359,861 ~~2003:~~during January 2007 for the 2006 calendar year. Pursuant to the Second Amendment to the Agreement, the Company’s final obligation to make the $380,326 lump sum trust contribution for the 2007 calendar year was eliminated. Company contributions to the trust are invested by the trustee and are to be disbursed to Mr. Aramini in accordance with the terms of the Agreement.

On February 15, 2006, the Company entered into a Note Purchase Agreement with Silver Canyon Services, Inc. (In“Silver ~~Thousands~~Canyon”), ~~Except~~pursuant ~~Per~~to ~~Share~~which ~~Information~~the Company issued to Silver Canyon a senior secured note in the principal amount of $5.0 million (the “Note”). On July 31, 2006, Silver Canyon assigned the Note Purchase Agreement and sold the Note to Special Value Bond Fund, LLC, which is managed by Tennenbaum Capital Partners, LLC. Michael E. Tennenbaum is the Senior Partner of Tennenbaum Capital Partners, LLC and is Chairman of the Board of Directors of the Company. The Note Purchase Agreement was amended on January 28, 2009 to extend the maturity date of the Note to February 15, 2010.

Range of Exercise Prices	Number ofOutstandingOptions at12/31/2003	WeightedAverageRemainingLife	WeightedAverageExercisePrice		Number ofExercisableOptions at12/31/2003	WeightedAverageExercisePrice
$2.85 - $6.63	20	4.13	$	4.29	20	$	4.29
$8.72 - $9.75	200	6.05		9.11	169		9.12
$10.13 - $13.24	218	7.01		11.08	196		11.13
$16.49 - $17.35	211	8.13		16.51	138		16.52
$21.09 - $24.53	283	9.17		24.04	132		24.40
	932	7.65	$	15.68	655	$	14.23

12. LABOR CONTRACTS

9On December 31, 2008, the Company had 613 employees. ~~EMPLOYEE~~Approximately ~~BENEFIT~~467 ~~PLANS~~of these employees are covered under collective bargaining agreements primarily with the United Automobile, Aerospace, and Agricultural Implement Workers of America (“UAW”). Negotiations took place with the union in 2005 and the Company’s agreement with the UAW was ratified for a new five-year period and will expire on March 21, 2010.

Pension – The company has a defined benefit pension plan (the “Plan”) in effect, which covers substantially all employees at its Birmingham and Dothan, Alabama facilities who meet minimum eligibility requirements13. ~~Benefits~~DISCLOSURES ~~for~~ABOUT ~~non-union~~FAIR ~~employees~~VALUE ~~are~~OF ~~based~~FINANCIAL ~~upon~~INSTRUMENTS salary and years of service, while benefits for union employees are based upon a fixed benefit rate and years of service. The funding policy is consistent with the funding requirements of federal laws and regulations concerning pensions. The company uses a December 31 measurement date in accounting for its defined benefit pension plan.

~~Changes~~As ~~during~~of December 31, 2008 and 2007, the ~~year~~carrying inamounts of the ~~benefit~~Company’s ~~obligation,~~financial ~~fair~~instruments ~~value~~are ofestimated ~~Plan~~to approximate their fair values, ~~assets~~due to their short-term nature, and ~~funded~~variable ~~status~~or ~~were~~market asinterest ~~follows:~~rates. The Company does not hedge its interest rate or foreign exchange risks through the use of derivative financial instruments.

~~(In~~14. ~~Thousands~~FOURTH QUARTER ADJUSTMENTS (UNAUDITED)

	2003			2002
Benefit obligation at beginning of year	$	110,914		$	105,149
Service cost		2,307			1,877
Interest cost		7,397			7,293
Benefits paid		(9,183	)		(9,185	)
Assumption changes		4,547			5,740
Actuarial loss		3,272			40
Benefit obligation at end of year		119,254			110,914
Fair value of plan assets at beginning of year		72,880			89,559
Return on plan assets		18,090			(9,084	)
Company contribution		11,001			1,590
Benefits paid		(9,183	)		(9,185	)
Fair value of plan assets at end of year		92,788			72,880
Unfunded status		(26,466	)		(38,034	)
Unrecognized prior service cost		4,539			5,410
Unrecognized actuarial loss		32,588			34,484
Net amount recognized	$	10,661		$	1,860

During the fourth quarter of 2008, the Company recorded a $1.9 million impairment charge to adjust the value of its investment in Space Vector Corporation to the net realizable value from the sale.

During the fourth quarter of 2007, the Company recorded $0.9 million of legal and accounting fees related to the protest of the KC-135 contract, $0.8 million of pension expense related to freezing the Pension Plan for salaried employees at December 31, 2007 and $0.3 million of expense related to the estimated obsolescence of raw material inventory.

~~The $32~~15.6 ~~million~~SUMMARY ~~unrecognized~~OF ~~actuarial~~QUARTERLY ~~loss~~FINANCIAL ~~represents~~DATA ~~the~~(UNAUDITED) cumulative value of Plan asset and liability gains and losses. Of this amount, approximately $11.0 million is attributable to asset gains and losses not yet recognized in the market related value of Plan assets at December 31, 2003, which, pursuant to Paragraph 31 of SFAS No. 87, is not subject to the minimum amortization requirements of Paragraphs 32 and 33 of SFAS No. 87. To the extent the remaining unrecognized actuarial loss exceeds 10% of the greater of the Plan’s Projected Benefit Obligation or the Plan’s asset value at December 31, 2003, such amounts will be amortized in accordance with Paragraphs 32 and 33 of SFAS No. 87.

~~Components~~The ofCompany’s unaudited consolidated quarterly financial data for the ~~Plan’s~~years ~~net~~ended ~~periodic~~December 31, ~~pension~~2008 ~~cost~~and ~~were~~2007 asare ~~follows:~~presented below.

(In Thousands, Except Per Share Information)

	2003			2002			2001
	QuarterEnded3/31/08			QuarterEnded6/30/08			QuarterEnded9/30/08			QuarterEnded12/31/08
Service cost	$	2,307		$	1,877		$	1,487
Revenue	$	19,611		$	12,508		$	6,773		$	14,607
Interest cost		7,397			7,293			7,767
Gross Profit		4,584			1,213			82			1,810
Expected return on plan assets		(8,553	)		(8,752	)		(8,985	)
Income (Loss) from Continuing Operations		1,323			(1,064	)		(1,110	)		(241	)
Amortization of prior service cost		872			1,116			1,116
Income (Loss) from Continuing Operations per Share:
Amortization of net (gain) loss		177
Basic	$	0.32		$	(0.26	)	$	(0.27	)	$	(0.06	)
Net pension cost	$	2,200		$	1,534		$	1,385
Diluted	$	0.32		$	(0.26	)	$	(0.27	)	$	(0.06	)
	QuarterEnded3/31/07			QuarterEnded6/30/07			QuarterEnded9/30/07			QuarterEnded12/31/07
Revenue	$	19,637		$	15,776		$	13,903		$	15,745
Gross Profit (Loss)		2,679			677			(331	)		786
Loss from Continuing Operations		(186	)		(1,180	)		(10,856	)		(1,050	)
Loss from Continuing Operations per Share:
Basic	$	(0.05	)	$	(0.29	)	$	(2.63	)	$	(0.25	)
Diluted	$	(0.05	)	$	(0.29	)	$	(2.63	)	$	(0.25	)

~~Amounts~~16. ~~recognized~~DISCONTINUED ~~in the~~OPERATIONS ~~statement of financial position consist of:~~

	2003			2002
Net accrued liability	$	(24,187	)	$	(35,615	)
Intangible asset		4,539			5,410
Accumulated other comprehensive income		30,309			32,065
Net amount recognized	$	10,661		$	1,860

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the business operations of Space Vector Corporation and Pemco World Air Services, Inc. are reported as discontinued operations in these consolidated financial statements and, accordingly, income and losses from discontinued operations have been reported separately from continuing operations. Revenue and income from discontinued operations for the years ended December 31, 2008 and 2007 were as follows:

The accumulated benefit obligation (“ABO”) was $117.0 million and $108.5 million at December 31, 2003 and 2002, respectively. As a result of unfavorable investment returns related to the Plan during 2002 and 2001, coupled with an increase in the actuarial liability resulting principally from lower interest rates, the ABO exceeded the fair value of plan assets at December 31, 2003 and 2002 by $24.2 million and $35.6 million, respectively. As a result of the unfunded ABO, the company recognized an additional minimum liability and recorded the following amounts, net of tax, in other comprehensive income:


	2008			2007
	(In Thousands)
Revenue	$	4,474		$	91,499
(Loss) Income before income taxes	$	(4,694	)	$	5,000
Income tax expense		—			2,211

(Loss) Income from discontinued operations	$	(4,694	)	$	2,789

~~(In~~The ~~Thousands)~~Company recorded a $1.9 million impairment charge during the fourth quarter of 2008 to adjust the value of its investment in SVC to the net realizable value from the sale. Included within the results from discontinued operations is an allocation of interest expense. Interest expense allocated to discontinued operations was approximately $0.0 million and $2.3 million for the years ended December 31, 2008 and 2007, respectively.

		2003			2002				2001
Decrease (increase) in minimum liability included in other comprehensive income		$	1,756		$	(23,265	)		$	(8,800	)

~~The~~To ~~weighted~~conform ~~average~~with ~~assumptions~~this ~~used~~presentation, toall ~~determine~~prior ~~benefit~~periods ~~obligations~~have been reclassified. As a result, the assets and liabilities of the discontinued operations have been reclassified on the balance sheet from the historical classifications and presented under the ~~company’s~~captions ~~defined~~“assets of discontinued operations” and “liabilities of discontinued ~~benefit~~operations,” ~~pension~~respectively. ~~plan~~As atof December 31, ~~were~~2008 asand ~~follows~~2007, net assets of discontinued operations, substantially all of which relate to Space Vector Corporation, consisted of the following:

	2003			2002
	December 31,2008				December 31,2007
Discount rate	6.25	%		6.75	%
Current assets:
Annual salary increase	3.50	%		5.00	%
Accounts receivable, net		2,395				3,966
Inventories, net		328				1,487
Deferred income taxes		—				—
Prepaid expenses and other		36				33
Total current assets		2,759				5,486
Machinery, equipment and improvements at cost:
Machinery and equipment		1,539				1,358
Leasehold improvements		296				206
		1,835				1,564
Less accumulated depreciation and amortization		(1,493	)			(1,305	)
Net machinery, equipment and improvements		342				259
Deposits and other		42				55
Total non-current assets		384				314
Total assets	$	3,143			$	5,800
Current liabilities:
Current portion of long-term debt		11				75
Accounts payable—trade		142				429
Accrued health and dental		—				—
Accrued liabilities—payroll related		122				113
Impairment on investment in Space Vector		1,898				—
Customer deposits in excess of cost		87				52
Total current liabilities		2,260				669
Other long-term liabilities		—				—
Total liabilities		2,260				669
Net Assets	$	883			$	5,131

The weighted average assumptions used to determine net periodic pension cost were as follows:

	2003		2002		2001
Discount rate	6.75	%	7.25	%	7.50	%
Annual salary increase	4.50	%	5.00	%	5.00	%
Long-term return on plan assets	8.75	%	9.50	%	9.50	%

The expected long-term rate of return on Plan assets was determined based upon historical market returns, expectations of future long-term capital market appreciation, and the Plan’s target asset allocations. In estimating the discount rate, the company considered rates of return on high quality fixed-income investments currently available, and expected to be available, during the period to maturity of the pension benefits.

The company’s weighted average asset allocations at December 31, 2003 and 2002, by asset category, are as follows:

	2003		2002
Domestic equity funds	47.4	%	57.5	%
International equity funds	7.7	%	6.7	%
Domestic fixed income funds	44.9	%	35.8	%

The basic goal underlying the company’s investment policy is to ensure the assets of the Plan are invested in a prudent manner. The company places a high priority on benefit security and recognizes that total rate of return objectives should not subject the assets to overly aggressive investment strategies which may expose the fund to severe depreciation in asset value during adverse markets. The company’s investment objectives with regards to its pension plan assets include achieving a rate of return that is competitive with returns achieved by similar pension portfolios and by market averages. The company’s strategy for achieving its desired total rate of return while reducing risk to an acceptable level includes appropriate diversification of Plan assets. The company believes diversification across different asset classes and different capital markets allows the portfolio to take advantage of a variety of economic environments and at the same time acts to reduce risk by dampening the portfolio’s volatility of returns. The company’s target asset allocation guidelines at December 31, 2003 were as follows:

		TargetAllocation
Domestic equity funds		33% - 82%
International equity funds		5% - 10%
Domestic fixed income funds		20% - 55%

~~The~~SUPPLEMENTARY ~~company~~INFORMATION believes the long-term expected rate of return on this strategic allocation compares favorably with the actuarial target rate of return assumption utilized in the Plan’s actuarial valuation and to the investment objectives described above. The company’s investment policy prohibits investment activity in municipal or tax exempt securities; commodities; securities of the Plan Trustee or Investment Manager, including affiliates; unregistered or restricted stock; short sales; and margin purchases. The Plan does not own any shares of the company’s stock.

~~The~~ALABAMA ~~company~~AIRCRAFT ~~expects~~INDUSTRIES, ~~to contribute $8~~INC.6 ~~million~~AND toSUBSIDIARIES ~~the Plan during 2004. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:~~

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

For the Periods Ended December 31, 2008 and 2007

(In Thousands)

2004	$	9,351
			Additions
2005		9,407
Description	Balance atBeginningof Period		Charged toCosts andExpenses		Chargedto OtherAccounts		Deductions			Balance atEnd ofPeriod
2006		9,427
2008
2007		9,463
Allowance for doubtful accounts	$	1,333	$	—	$	—	$	(3	)	$	1,330
2008		9,479
Reserve for contract commitments, losses		1,847		3,434		—		(5,102	)		179
2009 - 2013		48,075
Reserve for obsolete inventories		2,375		1,462		—		(627	)		3,210
2007
Allowance for doubtful accounts	$	1,333	$	20	$	—	$	(20	)	$	1,333
Reserve for contract commitments, losses		3,202		1,432		—		(2,787	)		1,847
Reserve for obsolete inventories		1,128		1,608		—		(361	)		2,375

~~Postretirement Benefits - The company accrues the estimated cost of retiree benefit payments, other than pensions, during the employees’ active service period~~Item 9. ~~The~~Changes ~~company~~in ~~provides health care benefits to both salaried~~ and ~~hourly~~Disagreements ~~retired~~with ~~employees~~Accountants aton ~~its Birmingham~~Accounting and Dothan, Alabama facilities. The retirees’ spouse and eligible dependents are also entitled to coverage under this defined benefit plan, as long as the retiree remains eligible for benefits. To be eligible for coverage the retiree ~~must~~Financial ~~have~~Disclosure ~~attained age 62 and the benefits cease once age 65 is reached.~~

~~The retirees pay premiums based on the full active coverage rates~~None. These premiums are assumed to increase at the same rate as health care costs. Benefits under the plan are subject to certain deductibles, co-payments, and yearly and lifetime maximums. Currently, the plan is un-funded. The company uses a December 31 measurement date in accounting for its other postretirement benefit plan.

Item 9A(T). Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation and the issues discussed below, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are operating effectively and are properly designed to ensure that required information is properly disclosed.

(b) Management’s report on internal control over financial reporting.

Under Section 404 of The Sarbanes-Oxley Act of 2002, our management is required to assess the effectiveness of the Company’s internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company’s internal control over financial reporting is effective.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements.

~~Changes~~Under ~~during~~the supervision and with the ~~year~~participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of the Company’s internal control over financial reporting as of the end of the period covered by this report. In this assessment, the Company applied criteria based on the “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. These criteria are in the ~~benefit~~areas ~~obligation~~of ~~were~~control environment, risk assessment, control activities, information and communication, and monitoring. The Company’s assessment included documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting. Based upon this evaluation, our management concluded that our internal control over financial reporting was effective as ~~follows:~~of December 31, 2008.

~~(In~~This ~~Thousands)~~annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary SEC rules that permit the Company to provide only management’s report in this annual report.

	2003			2002
Benefit obligation at beginning of year	$	509		$	607
Service cost		42			30
Interest cost		33			27
Benefits paid		(30	)		(41	)
Actuarial loss (gain)		2			(78	)
Plan amendments					(36	)
Benefit obligation at end of year	$	556		$	509

~~The~~In ~~accrued postretirement~~addition ~~costs~~to ~~recognized~~management’s evaluation of disclosure controls and ~~included~~procedures as discussed above, in connection ~~accrued~~with ~~liabilities~~the –audits ~~other~~of inour financial statements for the ~~accompanying~~fiscal ~~Consolidated~~years ~~Balance~~ended ~~Sheets~~December 31, ~~were~~2008 asand ~~follows:~~2007, we are continuing to review and enhance policies and procedures involving accounting, information systems and monitoring.

~~(In~~The ~~Thousands)~~Company experienced a significant level of turnover of financial personnel in 2007 and 2008 and experienced a reduction of full-time finance employees. The Company re-evaluated the staffing of its accounting function both in terms of number of personnel and level of expertise during the second quarter of 2008. As a result of this re-evaluation, the Company has added an additional certified public accountant and a senior accountant to its staff of accounting personnel to address the lack of resources in the financial close and reporting processes. The Company has determined that the material weakness due to the lack of financial resources which existed through the third quarter of 2008 has been remediated as of December 31, 2008.

	2003			2002
Funded status	$	(556	)	$	(509	)
Unrecognized transition obligation		140			156
Unrecognized net gain		(99	)		(105	)
Accrued liability	$	(515	)	$	(458	)

Except as noted above, there have been no changes to the Company’s internal control over financial reporting that occurred during the Company’s fourth quarter ended December 31, 2008 that are reasonably likely to materially affect the Company’s internal control over financial reporting.

~~Components~~Item 9B. ofOther ~~the plan’s~~Information ~~net cost were as follows:~~

~~(In~~Sale ~~Thousands)~~ of Space Vector

	2003			2002			2001
Service cost	$	42		$	30		$	40
Interest cost		33			27			42
Amortization of unrecognized transition obligation		16			16			32
Recognized actuarial gain		(4	)		(13	)		(4	)
Net postretirement cost	$	87		$	60		$	110

On March 31, 2009, the Company sold all of the outstanding stock in SVC, a wholly-owned subsidiary of AAII-Birmingham, Inc., to a group of investors. The historical financial results of SVC have been presented in the accompanying financial statements as discontinued operations for all periods presented. The Company received $250,000 at closing. The Company also retained an interest in a portion of certain contract settlements which may be received by SVC in the future. All of the proceeds from the sale of SVC will be used to reduce the Company’s long-term debt. The Company recorded a $1.9 million impairment charge during the fourth quarter of 2008 to adjust the value of its investment in SVC to the net realizable value from the sale.

The weighted average discount rate used to determine benefit obligations under the company’s postretirement benefit plan at December 31 was as follows:

		2003			2002
Discount rate		6.25	%		6.75	%

The weighted average discount rate used to determine net periodic benefit cost was as follows:

		2003			2002			2001
Discount rate		6.75	%		7.25	%		7.50	%

AnPART ~~additional~~III assumption used in measuring the accumulated postretirement benefit obligation was a weighted average medical care cost trend rate of 9.5% for 2003, decreasing gradually to an ultimate rate of 5.0% in year 2012, and remaining at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in assumed health care cost trend rates would have the following effects:

~~(In~~Item 10. ~~Thousands)~~Directors, Executive Officers and Corporate Governance

	1 - Percentage Point Increase						1 - Percentage Point Decrease
	12/31/03		12/31/02		12/31/01		12/31/03			12/31/02			12/31/01
Effect on total service and interest cost components	$	7	$	5	$	28	$	(6	)	$	(5	)	$	(23	)
Effect on postretirement benefit obligation	$	39	$	43	$	122	$	(34	)	$	(39	)	$	(108	)

Board of Directors

~~Self-Insurance~~The Company’s Board of Directors currently consists of seven directors that are divided into three classes, with staggered terms -of office. The ~~company~~term ~~acts~~of asoffice aof ~~self-insurer~~each ~~for~~class ~~certain~~expires ~~insurable~~in ~~risks~~successive ~~consisting~~years. ~~primarily~~The ofterm ~~employee~~for ~~health~~the ~~insurance~~Class ~~programs~~I directors, ~~workers’~~Messrs. ~~compensation~~Aramini, Bowling and aYates, ~~life~~will ~~insurance~~expire ~~program~~in 2010. The term for athe ~~limited~~Class ~~number~~II ofdirectors, ~~individuals~~Messrs. ~~not~~Wilson ~~provided~~and ~~coverage~~Richards, bywill ~~the~~expire in ~~company’s~~2011. ~~life~~The ~~insurance~~term ~~carrier~~for ~~due~~the toClass ~~transition~~

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