UNITED STATES SECURITIES AND EXCHANGE COMMISSION ~~Washington, D.C. 20549~~

Washington, D.C. 20549

FORM 10-Q

[Mark One]

xþ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, ~~2004~~2006


o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period ~~from~~ ~~__________~~ from to ~~__________~~

Commission File No. 1-11775

TIMCO AVIATION SERVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware		65-0665658
Delaware (State or other jurisdiction of incorporation or organization)		65-0665658 (IRS Employer Identification No.)
(State or other jurisdiction of		(IRS Employer
623 Radar Road Greensboro, North Carolina (Address of principal executive offices)		27410 (Zip Code)
incorporation or organization)		Identification No.)
623 Radar Road		27410
Greensboro, North Carolina		(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code: (336) 668-4410 ~~(x3061)~~

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes x þ No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, ~~(as~~or ~~defined~~a non-accelerated filer. See definition of “large accelerated filer”, “accelerated filer” and “non-accelerated filer” in Rule 12b-2 of the Exchange Act). ~~Yes~~ ~~o No x~~

~~Indicate~~Large ~~the~~Accelerated ~~number~~Filer ofo Accelerated ~~shares~~Filer ~~outstanding~~o Non-accelerated ofFiler ~~each of the issuer’s classes of common equity, as of the latest practicable date: 31,640,994 shares of common stock, $.001 par value per share, were outstanding as of August 13, 2004.~~ þ

Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act) o Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 21,441,040 shares of common stock, $.001 par value per share, were outstanding as of August 14, 2006.

TIMCO AVIATION SERVICES, INC.

INDEX

Part I. Financial Information


		Page
	Part I. Financial Information

Item 1.	FINANCIAL STATEMENTS

	Condensed Consolidated Balance Sheets at June 30, 2006 and December 31, 2005 (unaudited)		3-4

	Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2006 and 2005 (unaudited)		5-6

	Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2006 (unaudited)		7

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (unaudited)		8-9

	Notes to Condensed Consolidated Financial Statements		10

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		24

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		35

Item 4.	CONTROLS AND PROCEDURES		35

	Part II. Other Information

Item 1.	LEGAL PROCEEDINGS		36

Item 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS		36

Item 3.	DEFAULTS UPON SENIOR SECURITIES		36

Item 4.	SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS		36

Item 5.	OTHER INFORMATION		36-38

Item 6.	EXHIBITS AND REPORTS ON FORM 8-K		38

		Page
Item 1.	FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 (unaudited)		3-4
	Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2004 and 2003 (unaudited)		5-6
	Condensed Consolidated Statements of Stockholders’ Deficit and Comprehensive Loss for the six months ended June 30, 2004 (unaudited)		7
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited)		8-9
	Notes to Condensed Consolidated Financial Statements		10
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		18
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		26
Item 4.	CONTROLS AND PROCEDURES		26
Part II. Other Information
Item 1.	LEGAL PROCEEDINGS		27
Item 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS		27
Item 3.	DEFAULTS UPON SENIOR SECURITIES		27
Item 4.	SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS		27
Item 5.	OTHER INFORMATION		27
Item 6.	EXHIBITS AND REPORTS ON FORM 8-K		27-28

TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)

	June 30,		December 31,
	2004		2003
	2006		2005
ASSETS
Current Assets:
Cash and cash equivalents	$	~~257~~364	$	1,~~603~~318
Accounts receivable, net		47,619		36,950
Marketable securities		32		13,978
Inventories		25,654		25,724
Accounts receivable, net of allowances of $6,183 at June 30, 2006 and $7,446 at December 31, 2005		49,226		48,643
Net assets of discontinued operations		—		459
Inventories		28,476		28,681
Other current assets		46,~~449~~976		47,~~986~~082
Total current assets		77,979		69,722
Net assets of discontinued operations		—		462
Fixed assets, net		31,558		55,100
Total current assets		85,074		100,164
Fixed assets:
Fixed assets at cost		84,263		82,676
Less accumulated depreciation		55,451		52,585
Fixed assets, net		28,812		30,091
Other Assets:
Goodwill, net		26,124		26,124
Deferred financing costs, net		3,799		1,590
Collateral deposit for debt obligation		5,000		—
Other		579		355
Deferred financing costs, net		1,661		2,251
Total other assets		30,502		28,069
Other		1,493		1,498
Total assets	$	140,039	$	152,891
Total other assets		34,278		29,873
LIABILITIES & STOCKHOLDERS’ DEFICIT
Total assets	$	148,164	$	160,128
LIABILITIES & STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1918,~~913~~468	$	21,~~446~~696
Accrued expenses		1517,~~723~~247		1613,~~854~~087
Customer deposits		16,100		12,586
Accrued interest		812		1,127
Revolving loan		11,674		14,705
Customer deposits		16,685		21,446
Current maturities of capital lease obligations		1,102		1,510
Revolving loan		5,476		8,320
Accrued interest		999		992
New Senior Notes due 2006		1,221		1,221
Current maturities of notes payable to financial institutions		873		291
Junior subordinated notes due 2007, net		686		—
Net liabilities of discontinued operations		184		278
Current maturities of capital lease obligations		320		786
Total current liabilities		66,568		68,662
Current maturities of notes payable to financial institutions		—		1,562
Senior subordinated notes, net:
Other		2,713		3,416
New notes due 2006		115,800		115,800
Total current liabilities		63,628		72,661
Old notes due 2008		16,247		16,247
Term loan with a related party		14,412		8,250
Notes payable to financial institutions, net of current portion		13,527		8,209
Capital lease obligations, net of current portion		4,197		26,188
Junior subordinated notes due 2007, net		3,289		3,063
Deferred income		1,389		1,473
Other long-term liabilities		505		764
Total long-term liabilities		169,366		179,994

Commitments and Contingencies (see notes)
Stockholders’ Deficit:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding, 15,000 shares designated Series A Junior Participating		—			—
Common stock, $.001 par value, 500,000,000 shares authorized, 31,640,994 shares issued and outstanding		32			32
Additional paid-in capital		182,088			182,088
Accumulated deficit		(278,015	)		(277,885	)
Total stockholders’ deficit		(95,895	)		(95,765	)
Total liabilities and stockholders’ deficit	$	140,039		$	152,891

TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

~~The~~CONDENSED ~~accompanying~~CONSOLIDATED ~~notes~~BALANCE ~~are~~SHEETS an– ~~integral~~(Continued) (In ~~part~~Thousands, ofExcept ~~these~~Share ~~condensed consolidated financial statements.~~Data) (Unaudited)


	June 30,			December 31,
	2006			2005
Long-term Liabilities:
Term loan with related parties		25,002			—
Old Senior Notes due 2008		16,247			16,247
Capital lease obligations, net of current portion		3,108			3,187
Notes payable to financial institutions, net of current portion		—			21,197
Junior subordinated notes due 2007, net		—			639

Total long-term liabilities		44,357			41,270

Commitments and Contingencies (See notes)

Stockholders’ Equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding, 15,000 shares designated Series A Junior Participating		—			—
Common stock, $.001 par value, 100,000,000 shares authorized, 21,441,040 voting shares issued and outstanding at June 30, 2006 and December 31, 2005		21			21
Additional paid-in capital		344,877			344,864
Accumulated deficit		(304,719	)		(298,688	)

Total stockholders’ equity		40,179			46,197

Total liabilities and stockholders’ equity	$	148,164		$	160,128

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

TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited)

	For the Three Months
	Ended June 30,
	2004			2003
	2006			2005
Operating revenue:
Revenues, net	$	88,669		$	81,114
Sales, net	$	78,172		$	52,076
Cost of sales		81,890			73,587
Other		—			36
Gross profit		6,779			7,527
		78,172			52,112
Operating expenses		8,056			5,914
Cost of sales		71,164			50,537
(Loss) income from operations		(1,277	)		1,613
Gross profit		7,008			1,575
Interest expense		2,088			2,148
Operating expenses		5,608			3,721
Gain on settlement of bankruptcy claim		—			(1,773	)
Income (loss) from operations		1,400			(2,146	)
Other income — net		(31	)		(11	)
Interest expense		2,144			1,527
(Loss) income from continuing operations before income taxes		(3,334	)		1,249
Other income — net		(352	)		(58	)
Income tax benefit		—			31
Loss before income taxes and discontinued operations		(392	)		(3,615	)
(Loss) income from continuing operations		(3,334	)		1,280
Income tax benefit		—			(710	)
Income from discontinued operations, net of income taxes		92			44
Loss from continuing operations before discontinued operations		(392	)		(2,905	)
Net (loss) income	$	(3,242	)	$	1,324
Income from discontinued operations, net of income taxes		144			2,878
Basic (loss) income per share:
Net Loss	$	(248	)	$	(27	)
(Loss) income from continuing operations	$	(0.15	)	$	0.20
Basic and diluted loss per share:
Income from discontinued operations		—			0.01
Loss from continuing operations	$	(0.01	)	$	(0.09	)
Net (loss) income	$	(0.15	)	$	0.21
Income from discontinued operations		—			0.09
Diluted (loss) income per share:
Net Loss	$	(0.01	)	$	—
(Loss) income from continuing operations	$	(0.15	)	$	0.11
Income from discontinued operations		—			—
Net (loss) income	$	(0.15	)	$	0.11
Weighted average shares outstanding:
Basic and diluted		31,640,994			31,640,994
Basic		21,441,040			6,413,979
Diluted		21,441,040			11,607,592

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

TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited)

	For the Six Months
	Ended June 30,
	2004			2003
	2006			2005
Operating revenue:
Revenues, net	$	173,761		$	171,796
Sales, net	$	161,502		$	103,307
Cost of sales		162,802			154,840
Other		—			89
Gross profit		10,959			16,956
		161,502			103,396
Operating expenses		13,631			12,337
Cost of sales		148,403			98,303
(Loss) income from operations		(2,672	)		4,619
Gross profit		13,099			5,093
Interest expense		3,737			4,279
Operating expenses		10,907			6,671
Gain on settlement of bankruptcy claim		—			(1,773	)
Income (loss) from operations		2,192			(1,578	)
Charge for early conversion of notes		—			400
Interest expense		3,953			3,075
Other income — net		(233	)		(350	)
Other income — net		(516	)		(886	)
(Loss) income from continuing operations before income taxes		(6,176	)		2,063
Loss before income taxes and discontinued operations		(1,245	)		(3,767	)
Income tax benefit		31			368
Income tax benefit		—			(884	)
(Loss) income from continuing operations		(6,145	)		2,431
Loss from continuing operations before discontinued operations		(1,245	)		(2,883	)
Income from discontinued operations, net of income taxes		114			99
Income from discontinued operations, net of income taxes		1,115			3,175
Net (loss) income	$	(6,031	)	$	2,530
Net(loss)income	$	(130	)	$	292
Basic (loss) income per share:
Basic and diluted (loss)income per share:
(Loss) income from continuing operations	$	(0.29	)	$	0.61
Loss from continuing operations	$	(0.04	)	$	(0.09	)
Income from discontinued operations		0.01			0.03
Income from discontinued operations		0.04			0.10
Net (loss) income	$	(0.28	)	$	0.64
Net (loss) income	$	—		$	0.01
Diluted (loss) income per share:
(Loss) income from continuing operations	$	(0.29	)	$	0.27
Income from discontinued operations		0.01			0.01
Net (loss) income	$	(0.28	)	$	0.28
Weighted average shares outstanding:
Basic and diluted		31,640,994			31,640,994
Basic		21,441,040			3,959,757
Diluted		21,441,040			9,154,013

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

TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ ~~DEFICIT AND~~EQUITY ~~COMPREHENSIVE LOSS~~ (In Thousands, Except Share Data) (Unaudited)

										Total
	Common Stock				Additional					Total
										Stockholders'
					Paid-in		Accumulated			Stockholders’
	Common Stock				Additional					Deficit and
	Shares		Amount		Capital		Deficit			Equity
					Paid-in		Accumulated			Comprehensive
Balance as of December 31, 2005		21,441,040	$	21	$	344,864	$	(298,688	)	$	46,197
	Shares		Amount		Capital		Deficit			Loss
Stock compensation expense		—		—		13		—			13
Balance as of
Net loss and comprehensive loss		—		—		—		(6,031	)		(6,031	)
December 31, 2003		31,640,994	$	32	$	182,088	$	(277,885	)	$	(95,765	)
Balance as of June 30, 2006		21,441,040	$	21	$	344,877	$	(304,719	)	$	40,179
Net loss and comprehensive loss		—		—		—		(130	)		(130	)
Balance as of
June 30, 2004		31,640,994	$	32	$	182,088	$	(278,015	)	$	(95,895	)

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

TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) ~~(Unaudited)~~

	For the Six
	Months Ended
	June 30,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(130	)	$	292
Adjustments to reconcile net (loss) income to cash used in operating activities:
Income from discontinued operations		(1,115	)		(3,175	)
Paid-in-kind interest note obligations		1,095			225
Write-off of deferred financing fees		145			—
Gain on Aerocell settlement, net of cash received		—			(455	)
Depreciation and amortization		2,654			2,583
Amortization of deferred financing costs		542			1,164
Provision for (recovery of) doubtful accounts		27			(158	)
Change in working capital:
Accounts receivable		(10,696	)		(12,782	)
Inventories		70			(3,085	)
Other assets		173			(2,272	)
Accounts payable		(2,363	)		6,611
Customer deposits		3,514			1,008
Other liabilities		(1,216	)		(423	)
Net cash used in operating activities		(7,300	)		(10,467	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets, net of transaction expenses		24,861			—
Purchases of fixed assets		(1,139	)		(612	)
Net cash provided by (used in) investing activities		23,722			(612	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior debt facilities		171,787			103,897
Payments under senior debt facilities		(174,818	)		(95,330	)
Proceeds of term loan with related party		6,162			3,050
Proceeds of term loans with financial institutions, net		5,900			—
Payments on capital leases		(24,623	)		(558	)
Payments of deferred financing costs		(2,896	)		(435	)
Net cash (used in) provided by financing activities		(18,488	)		10,624
Net cash provided by discontinued operations		720			254
Net decrease in cash and cash equivalents		(1,346	)		(201	)
Cash and cash equivalents, beginning of period		1,603			339
Cash and cash equivalents, end of period	$	257		$	138

(Unaudited)


	For the Six
	Months Ended
	June 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(6,031	)	$	2,530
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Paid-in-kind interest note obligations		901			1,121
Write-off of deferred financing fees		289			—
Impairment charge for fixed assets		277			—
Non-cash stock compensation expense		13			—
Gain on settlement of bankruptcy claim		—			(1,773	)
Non-cash inducement charge for conversion of notes		—			160
Depreciation and amortization		2,582			2,726
Amortization of deferred financing costs		560			663
(Recovery of) provision for doubtful accounts		(616	)		11
Sale of marketable securities, net		13,946			—
Change in working capital:
Accounts receivable		33			1,243
Inventories		205			(4,660	)
Other assets		(4,889	)		(1,521	)
Accounts payable		(3,228	)		412
Customer deposits		(4,761	)		6,096
Other liabilities		3,477			(2,831	)

Cash provided by activities from continuing operations		2,758			4,177
Cash provided by activities from discontinued operations		462			—

Net cash provided by operating activities		3,220			4,177

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets		(1,580	)		(1,887	)

Net cash used in investing activities		(1,580	)		(1,887	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior debt facilities		170,893			177,936
Payments under senior debt facilities		(173,737	)		(186,354	)
Proceeds of term loan with related parties		6,000			—
Payments on term loan with financial institution		(4,946	)		(581	)
Payments on capital leases		(545	)		(545	)
Payments of deferred financing costs		(259	)		(990	)
Proceeds of term loan with financial institutions, net		—			8,155
Partial exercise of LJH Warrant		—			71

Net cash used in financing activities		(2,594	)		(2,308	)

Net decrease in cash and cash equivalents		(954	)		(18	)
Cash and cash equivalents, beginning of period		1,318			293

Cash and cash equivalents, end of period	$	364		$	275

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	2,422	$	3,012
Income taxes refunded		—	$	174
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES:
Acquisition of property through capital lease	$	2,224	$	—
Value of warrant issued to shareholder in exchange for note payable financing	$	—	$	1,258

TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(In Thousands)
(Unaudited)


	For the Six
	Months Ended
	June 30,
	2006			2005
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	(1,693	)	$	(2,126	)

Income taxes refunded	$	31		$	368


SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:

Common stock issued in connection with conversion of New Senior Notes	$	—		$	54,363

Common stock issued in connection with conversion of Junior Notes	$	—		$	2,642


Available for sale investment equity change	$	—		$	(286	)

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

TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~June 30, 2004 (Unaudited) (Amounts and Shares in Thousands, Except Per Share Data)~~

~~1. DESCRIPTION OF BUSINESS~~June 30, ~~BASIS OF PRESENTATION AND LIQUIDITY~~2006

(Unaudited)

(Amounts and Shares in Thousands, Except Per Share Data)

1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION and LIQUIDITY

DESCRIPTION OF BUSINESS

TIMCO Aviation Services, Inc. (the “Company”), is a Delaware corporation ~~that~~, ~~through~~ ~~its~~is ~~subsidiaries,~~among ~~provides~~the ~~aircraft~~world’s largest independent providers of aviation maintenance, repair and overhaul (~~“MR&O”~~MRO) services tofor major commercial ~~passenger~~ airlines, regional air ~~cargo~~ carriers, aircraft leasing companies, government and military units and air cargo carriers. The Company provides MRO services through its subsidiaries: (i) Triad International Maintenance Corporation (known in the industry as TIMCO), which, with its three active locations, is one of the largest independent providers of aircraft heavy maintenance services in the world and ~~repair~~also ~~facilities~~provides line maintenance services; (ii) Brice Manufacturing, which specializes in the manufacturing and sale of new aircraft seats and aftermarket parts ~~distributors~~and ~~throughout~~in the refurbishment ~~world~~of aircraft interior components; (iii) TIMCO Engineered Systems, which provides engineering services both to the Company’s MRO operations and its customers; and (iv) TIMCO Engine Center, which refurbishes JT8D engines and performs on-wing repairs for both JT8D and CFM-56 series engines. In June 2005, the Company made the decision to integrate its refurbishment of aircraft interior components operations within its other MRO facilities. As a result of this decision, the Company has shut-down its Aircraft Interior Design operations located in Dallas, Texas. Also, subsequent to June 30, 2006, the Company entered into an agreement to sell substantially all of its fixed assets within its Goodyear, Arizona, MRO facility and to terminate its sublease obligation for this facility. As a result of this decision, the Company plans to completely shutdown its operations at this location during the third quarter of 2006 and to integrate certain customer aircraft heavy maintenance services into its three other MRO facilities. See Note 17.

During 2005, the Company completed a significant restructuring of its capital and equity, including a conversion of a majority of its outstanding New Senior Notes and Junior Notes to common stock and the completion of a rights offering. See Notes 12 and 13 for further discussion. Concurrent with the completion of the rights offering, the Company changed its capitalization by reducing the number of authorized shares of common stock from 500,000 to 100,000 and by reducing the number of its issued and outstanding shares of common stock by converting every forty shares of its issued and outstanding common stock into one share of new common stock. All shares and per share data contained herein reflects completion of the one-new-share-for-forty-old-shares reverse stock split.

On February 6, 2006, LJH, Ltd. (“LJH”), an entity controlled by the Company’s principal stockholder, acquired an aggregate of 5,808 shares of the Company’s outstanding common stock, consisting of 3,029 shares acquired from Loeb Partners Corporation and affiliated entities and 2,779 shares acquired from LC Capital Master Fund, Ltd. Subsequent to this transaction, LJH currently owns 15,386 shares, or 71.8%, of the Company’s outstanding common stock. Also, as of June 30, 2006, Owl Creek Capital Management (“Owl Creek”) owns 3,722 shares, or 17.4%, of the Company’s outstanding common stock.

Effective July 31, 2006, the Company entered into a merger agreement with TAS Holding, Inc. (“TAS”), an entity organized and owned by LJH and Owl Creek to merge the Company into TAS in a transaction which the Company’s stockholders, other than LJH and Owl Creek, will receive cash consideration of $4.00 per share in exchange for their outstanding shares. As part of the merger agreement, the Company also agreed to sell TAS 2,400 shares of its common stock at $2.50 per share under certain circumstances. The merger is subject to various closing conditions and there can be no assurance the merger will be completed. See Note 17.

See “Liquidity” below for a description of a recently completed refinancing of the Company’s senior debt.

BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with ~~U.S.~~accounting principles generally accepted ~~accounting~~ ~~principles~~in the United States have been condensed or omitted. The accompanying ~~unaudited~~ unaudited interim ~~condensed consolidated financial statements should be read in~~ conjunction with the Company’s consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (the “Form 10-K”).

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of June 30, 2004, the results of its operations for the three month and six month periods ended June 30, 2003 and 2004 and its cash flows for the six month periods ended June 30, 2003 and 2004. The results of operations and cash flows for the six month period ended June 30, 2004 are not necessarily indicative of the results of operations or cash flows which may be reported for the year ending December 31, 2004.

LIQUIDITY

During the quarter ended June 30, 2004, the Company refinanced all of its senior debt. On April 8, 2004, the Company closed on an agreement with the CIT Group in which the Company obtained a $35,000 senior secured revolving line of credit (the “CIT Group Revolving Line of Credit”) and a $6,400 senior secured term loan (the “CIT Group Term Loan”, and collectively with the CIT Group Revolving Line of Credit, the “CIT Group Credit Facility”). The CIT Group Credit Facility matures on December 31, 2007. Effective on the same date, the Company obtained an $8,000 senior secured term loan from Hilco Capital LP (the “Hilco Term Loan”) and refinanced the $14,412 of aggregate term debt due to its principal stockholder. In addition, on March 31, 2004, the Company sold its office and warehouse facility located in Miramar, Florida and used the proceeds to repay in full the Company’s TROL financing obligation ($23,824 as of March 31, 2004). For details of these events, see Notes 3, 4 and 5.

For the year ended December 31, 2003, the Company incurred a loss from continuing operations of $4,303 (adjusted for the reclassification of income and expenditures related to the Company’s Miramar facility. See Note 2 for particulars). The Company also had a net stockholders’ deficit as of December 31, 2003 and continued to require additional cash flow above amounts currently being provided from operations to meet its working capital requirements. The Company’s ability to service its debt obligations as they come due, including maintaining compliance with the covenants and provisions of all of its debt obligations, is dependent upon the Company’s future financial and operating performance. That performance, in turn, is subject to various factors, including certain factors beyond the Company’s control, such as changes in conditions affecting the airline industry and changes in the overall economy. Additionally, as a result of the state of the general economy, fluctuations in the price of jet fuel, a significant decline but partial resurgence, from calendar year 2000, in passenger airline travel, the currently on-going global war on terrorism, the war in Iraq, and a competitive price reduction in airfare prices has significantly impacted the airline industry, and thus the Company’s customer base. The result for some carriers has been the filing for protection under Chapter 11 of the United States Bankruptcy Code. These factors have also resulted in some of the Company’s competitors exiting the maintenance, repair, and overhaul business.

~~The~~condensed ~~Company~~consolidated isfinancial ~~highly~~statements ~~leveraged~~should ~~and~~be ~~has~~read ~~significant~~in ~~obligations~~conjunction ~~under~~with ~~its~~the ~~outstanding~~Company’s ~~debt~~consolidated ~~agreements.~~financial Asstatements aand ~~result,~~the ~~significant~~notes ~~amounts~~thereto ofincluded ~~cash~~in ~~flow from operations are needed to make required payments of~~ the Company’s ~~debt~~Annual ~~obligations,~~Report ~~thereby~~on ~~reducing~~Form ~~funds~~10-K ~~available~~ for ~~other purposes. Even if~~ the ~~Company~~ isfiscal ~~able~~year toended ~~meet its debt service and other obligations when due~~December 31, ~~the Company may not be able to comply with the covenants and other provisions under its debt instruments. A failure to comply~~2005, ~~unless~~File ~~waived by the lenders and noteholders, would be an event of default and would permit the lenders to accelerate the maturity of these debt obligations~~No. 001-11775 It would also permit the lenders to terminate their commitments to extend additional credit under their financing agreements. If the Company was unable to meet its obligations under its debt instruments, or if the Company could not obtain waivers of defaults under any such agreements (~~including defaults caused by~~ the ~~failure to meet~~“Form ~~financial covenants~~10-K”)~~, the lenders could proceed against the collateral securing these financing obligations and exercise all other rights available to them~~. ~~While the Company expects that it will make all required debt payments and meet all financial covenants in 2004, there can be no assurance that it will be able to do so.~~

2In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of June 30, 2006, the results of its operations for the three and six month periods ended June 30, 2006 and 2005 and its cash flows for the six month periods ended June 30, 2006 and 2005. ~~SALE~~The OFresults ~~ASSETS~~of ~~AND~~operations ~~OPERATING~~and ~~ENTITIES~~cash flows for the six month period ended June 30, 2006 are not necessarily indicative of the results of operations or cash flows which may be reported for the year ending December 31, 2006.

~~In March 2004, the Company sold its office and warehouse facility located in~~LIQUIDITY Miramar, Florida for a sales price of $26,000. See Note 5 for particulars of this sales transaction and resulting repayment of the Company’s TROL financing that was secured by the assets of this facility. The Company has determined that the gain from its sale of the Miramar facility along with the related rental income, depreciation expense and interest expense should be netted with income from discontinued operations. These amounts were reported as part of continuing operations in the Company’s condensed consolidated financial statements for the three months ended March 31, 2004. Had the Company reported these amounts as components of discontinued operations for the quarter ended March 31, 2004 the Company’s loss from continuing operations before discontinued operations would have been $853 ($0.03 per basic share and $0.00 per diluted share) and the Company’s income from discontinued operations would have been $971 ($0.03 per basic share and $0.00 per diluted share).

In ~~December~~April ~~2003~~2006, the Company ~~entered~~closed ~~into~~on ana ~~agreement~~series of transactions with its principal stockholders relating to ~~sell~~its ansenior ~~idle~~debt. First, on April 10, 2006, LJH acquired the $18,313 Monroe Capital ~~facility~~Loans, ~~located~~with affiliates of Owl Creek simultaneously acquiring a 20% participation interest in ~~Covington~~those loans. Additionally, ~~Kentucky.~~on ~~This~~April 20, ~~facility~~2006, ~~was~~in ~~previously~~conjunction ~~part~~with the refinancing of the CIT Group Credit Facility (see below), the Company’s ~~manufacturing~~obtained ~~operations~~a ~~and~~new ~~had~~$6,000 nosenior ~~operations~~secured ~~since~~term ~~fiscal~~loan ~~2000.~~from LJH ~~The~~(collectively ~~net~~with ~~sales~~the ~~price~~Monroe ~~was~~Capital ~~$454~~Loans, ~~and~~the is“LJH ~~included~~Term ~~within~~Loans”). ~~net~~The ~~assets~~LJH ofTerm ~~discontinued operations~~Loans asall ofmature on December 31, ~~2003~~2007, ~~within~~bear ~~the~~interest ~~accompanying~~at ~~condensed consolidated~~LIBOR ~~balance~~plus ~~sheet~~1.75% ~~The~~per ~~resulting~~annum ~~gain~~and are secured by a lien on substantially ~~this~~all ~~sale~~of the Company’s assets. Also, ~~which~~in ~~was recognized~~conjunction with the ~~consummation~~closing of the ~~sale~~LJH ~~during~~Term Loans, the ~~fourth~~Company ~~quarter~~paid in full the CIT Term Loan (from the proceeds of ~~2003~~the new term loan obtained from LJH) and entered into other modifications, including amendments and waivers to debt covenant ~~was~~violations ~~$411~~as of December 31, 2005 and March, 31, 2006, to the CIT Group Credit Facility. The Company ~~cash~~also ~~proceeds~~obtained ~~related~~waivers toof ~~this~~all ~~sale~~defaults ~~were~~and ~~fully~~events ~~funded~~of indefaults ~~February~~from LJH under the LJH Term ~~2004~~Loans. See Notes 7 and 8 for additional information about these financing transactions.

For the year ended December 31, 2005 and the six month period ended June 30, 2006, the Company incurred losses from continuing operations of $22,350 and $6,145, respectively. Also, for the year ended December 31, 2005, the Company continued to require additional cash flow above amounts provided from operations to meet its working capital requirements. Further, while cash flow from operations was $3,220 for the first six months of 2006, it included $13,946 from the sale of marketable securities (relating to the proceeds of the Company’s November 2005 rights offering). Additionally, ~~SENIOR~~at ~~CREDIT~~certain ~~FACILITIES~~times during 2005 and in the first quarter of 2006, the Company was not in compliance with certain financial covenants contained in its CIT Group Credit Facility and Monroe Capital Loans. The senior lenders, however, waived, and in some instances, amended all such events of non-compliance and as of December 31, 2005 and June 30, 2006 the Company was in compliance with all covenant requirements, as amended, for these financing arrangements.

~~Commencing~~The ~~January 30, 2004, the~~ Company ~~entered into a series of two amendments and limited waiver agreements pursuant to which the maturity date of the Company~~’s ~~then~~ability ~~existing~~to ~~senior~~service ~~revolving~~its ~~credit~~debt ~~and~~obligations ~~term~~as ~~loan~~they ~~facilities, which~~come ~~were scheduled to mature on January 31~~due, ~~2004,~~including ~~were extended until July~~maintaining ~~31,~~compliance ~~2004.~~with ~~Through~~the ~~these~~covenants ~~series of amendments~~ and ~~limited~~provisions ~~waiver~~of ~~agreements, the~~all ~~Company~~of ~~temporarily extended~~ its ~~senior~~debt ~~revolving~~obligations ~~credit~~is ~~facility~~dependent ~~and~~upon ~~term~~the ~~loan~~Company’s ~~(the~~future ~~“Amended~~financial ~~Credit~~and ~~Agreement”)~~operating performance. ~~Under~~That ~~the Amended Credit Agreement~~performance, ~~the Company~~in ~~had a $30~~turn,~~000~~ ~~senior~~is ~~secured~~subject ~~revolving line of credit (the “Amended~~to ~~Revolving~~various ~~Credit Facility”) and a $3~~factors,~~500~~ ~~senior~~including ~~secured~~certain ~~term~~factors ~~loan~~beyond (the ~~“Amended Term~~Company’s ~~Loan” and collectively with the Amended Revolving Credit Facility~~control, ~~the “Amended~~such ~~Credit~~as ~~Facility”).~~changes ~~Borrowings under the Amended Credit Facility were~~in ~~secured~~conditions byaffecting ~~a lien on substantially all of~~ the ~~Company’s~~airline ~~assets~~industry and ~~the borrowing~~changes ~~base~~in ~~consisted~~the ~~primarily~~overall ofeconomy. ~~certain~~See of the ~~Company’s~~Form ~~account receivables,~~10-K ~~inventory,~~ and this ~~machinery~~Form ~~and~~10-Q ~~equipment.~~for ~~The~~information ~~interest~~about ~~rate~~factors onthat ~~the Amended~~affect ~~Revolving Credit Facility was, at~~ the Company’s ~~option, (a) prime plus 3% per annum, or (b) LIBOR plus 4~~performance.~~5% per annum. The interest rate on the~~ ~~Amended Term Loan was 12% per annum.~~

OnThe ~~April 8,~~Company ~~2004,~~has ~~the~~significant ~~Company~~obligations ~~closed~~under onits outstanding debt and lease agreements. As a result, ~~refinancing~~a significant amount of ~~its~~cash ~~senior~~flow from operations is needed to make required payments of the Company’s debt asand lease obligations, thereby reducing funds available for other purposes. Even ~~contemplated~~if bythe aCompany ~~financing~~is ~~agreement~~able ~~dated~~to ~~April 5,~~meet ~~2004~~its ~~between~~debt service and other obligations when due, the Company may not ~~and~~be able to comply with the ~~CIT~~covenants ~~Group~~and other provisions under its debt agreements. ~~Under~~A ~~this~~failure ~~financing~~to comply, ~~agreement~~unless waived by the lenders, would be an event of default and would permit the ~~Company~~lenders ~~obtained~~to accelerate the maturity of these debt obligations. It would also permit the lenders to terminate ~~CIT~~their ~~Group~~commitments ~~Revolving~~to ~~Line~~extend ofadditional ~~Credit,~~credit ~~which~~under istheir afinancing ~~$35~~agreements. Additionally,~~000~~ the Company’s senior ~~secured~~credit ~~revolving line~~facilities provide for the termination of ~~credit,~~the financing agreements and repayment ~~the~~of ~~CIT~~all ~~Group~~obligations ~~Term~~in ~~Loan,~~the ~~which~~event isof a ~~$6,400~~material ~~senior~~adverse ~~secured~~change in the Company’s business, ~~term~~as defined in the various loan agreements. ~~The~~If the Company ~~used~~is ~~the~~unable ~~proceeds~~to ~~from~~meet its obligations under its debt agreements, or if the ~~CIT~~Company ~~Group~~can ~~Credit~~not ~~Facility~~obtain waivers of defaults under any such agreements (including defaults caused by the failure to meet financial covenants), the lenders could proceed ~~repay~~against inthe ~~full~~collateral ~~amounts~~securing ~~outstanding~~these ~~under~~financing ~~its~~obligations ~~Amended~~and ~~Revolving~~exercise ~~Credit~~all ~~Facility,~~other rights available to ~~repay~~them. While the ~~warrant~~Company ~~repurchase~~currently ~~obligation~~expects ~~due~~that it will be able to amake ~~previous~~all ~~lender~~required ~~(as~~debt ~~described~~payments and meet all financial covenants in ~~Note~~2006, 7)there ~~and~~can ~~for~~be ~~working~~no ~~capital~~assurance that it will be able to do so.

The CIT Group Revolving Line of Credit is due December 31, 2007 and bears interest, at the Company’s option, at (a) Prime plus an advance rate ranging from 0.00% to 0.75%, or (b) LIBOR plus an advance rate ranging from 2.50% to 4.00%, with the advance rates contingent on the Company’s leverage ratio. The Company has currently elected the Prime option. Also, in accordance with the requirements of EITF 95-22, the Company has presented this revolving line of credit as a short-term obligation. The CIT Group Term Loan is due in quarterly installments of $291, commencing on October 1, 2004, with the final quarterly installment due on December 31, 2007. The CIT Group Term Loan bears interest at the prevailing rate of the CIT Group Revolving Line of Credit plus one percent. Also, the CIT Group Credit Facility contains certain financial covenants regarding the Company’s financial performance and certain other covenants, including limitations on the incurrence of additional debt, and provides for the termination of the CIT Group Credit Facility and repayment of all debt in the event of a change in control, as defined. In addition, an event of default under the Hilco Term Loan (described below) will also result in a default under the CIT Group Credit Facility. Borrowings under the CIT Group Credit Facility are secured by a lien on substantially all of the Company’s assets. Borrowings under the CIT Group Revolving Line of Credit are based on a borrowing base formula that takes into account the level of the Company’s

~~receivables and inventory~~2. ~~Further, the~~STOCK ~~amounts~~COMPENSATION ~~that the Company can borrow under the CIT Group Revolving~~PLANS Line of Credit are affected by various availability reserves that are established by the lenders under the financing agreement, and the Company’s borrowings under the CIT Group Revolving Line of Credit are limited based on the ratio of the Company’s debt to EBITDA. Finally, the agreement relating to the CIT Group Revolving Line of Credit requires that at the time of each additional borrowing, the Company must be in a position to make various representations and warranties to its lenders regarding its business (including several reaffirming that there have been no changes in the status of specific aspects of the Company’s business that could reasonably be expected to have a material adverse effect upon the business, operation, assets, financial condition or collateral of the Company and its subsidiaries taken as a whole), and be in compliance with various affirmative and negative covenants, all as more particularly set forth in the agreement. As of June 30, 2004, the outstanding aggregate amount borrowed under the CIT Group Revolving Credit Facility was $11,674, the outstanding CIT Group Term Loan was $6,400, the amount of outstanding letters of credit under the CIT Group Revolving Credit Facility was $10,064 and $10,063 was available for additional borrowing under the CIT Group Revolving Credit Facility.

~~Additionally~~In January 2006, ~~simultaneous with its obtaining~~ the ~~CIT Group Credit Facility, the~~ Company ~~obtained~~adopted ~~the~~Statement ~~Hilco~~of ~~Term~~Financial ~~Loan,~~Accounting ~~which~~Standards is(“SFAS”) ~~an $8~~No. 123R,~~000 term~~ ~~loan~~“Share-Based Payment”, ~~from~~(“SFAS ~~Hilco~~123R”) ~~Capital~~which ~~LP.~~revises ~~The~~SFAS ~~Company~~No. 123, ~~used~~“Accounting ~~the~~for ~~proceeds from the Hilco Term Loan to~~Stock-Based ~~repay~~Compensation” ~~amounts outstanding under its Amended Revolving Credit Facility~~ and ~~Amended~~ ~~Term~~supersedes ~~Loan.~~Accounting ~~The~~Principles ~~Hilco~~Board ~~Term~~Opinion ~~Loan~~(“APB”) ~~matures on December~~No. 3125, ~~2007~~“Accounting ~~and bears~~for ~~interest~~Stock atIssued ~~Prime~~to ~~plus~~Employees” anfor ~~advance~~our ~~rate~~stock-based ~~ranging~~employee ~~from~~and ~~3.00%~~director ~~and~~compensation 6plans.~~00%~~ ~~with~~SFAS ~~the~~123R ~~advance~~requires ~~rate~~recognition ~~contingent upon our meeting (from time to time) a ratio~~ of the ~~Company’s~~ ~~secured~~cost ~~debt~~of toemployee ~~EBITDA.~~services Inreceived ~~addition,~~in ~~the~~exchange ~~Hilco~~for ~~Term~~an ~~Loan~~award ~~bears~~of ~~PIK~~equity ~~interest~~instruments ~~ranging~~in ~~from 2.00% to 5.00% with~~ the ~~prevailing~~financial ~~rate~~statements ~~also~~over ~~being contingent upon~~ the ~~ratio~~period of the ~~Company’s~~employee ~~level~~is ofrequired ~~secured debt~~ to ~~EBITDA.~~perform Atthe noservices ~~time~~in ~~during~~exchange for the ~~term~~award of(presumptively ~~this~~the ~~loan,~~vesting ~~however,~~period). ~~will~~Prior to the ~~combined~~adoption ~~cash and PIK~~of ~~interest~~SFAS ~~rate be less then 9~~No.~~00%~~ 123R, ~~nor~~as ~~greater~~permitted ~~then~~by ~~18.00%~~SFAS ~~per annum~~No. ~~Also~~ 123, the ~~Hilco~~ ~~Term~~Company ~~Loan~~accounted ~~contains~~for ~~certain~~similar ~~financial~~transactions ~~covenants regarding the Company’s~~in ~~financial~~accordance ~~performance~~with ~~and~~APB ~~certain~~No. 25 ~~other~~which ~~covenants,~~employed ~~including limitations on~~ the ~~incurrence~~ ofintrinsic ~~additional~~value ~~debt,~~method ~~and provides for the termination~~ of ~~the~~measuring ~~Hilco~~compensation ~~Term~~cost. ~~Loan~~Accordingly, ~~and~~no ~~repayment~~compensation ofexpense ~~all~~was ~~debt~~recognized in the ~~event~~statements of aoperations ~~change in control, as~~for ~~defined.~~options Ingranted ~~addition,~~with anexercise ~~event~~prices ofequal ~~default~~to ~~under~~ the ~~CIT~~fair ~~Group~~value ~~Credit~~of ~~Facility (described above) will also result in a default under~~ the ~~Hilco~~Company’s ~~Term~~common ~~Loan. Borrowings~~stock ~~under the Hilco Term Loan are secured by a lien~~ on ~~substantially all~~the date of ~~the Company’s assets~~grant.

InEffective ~~connection~~for ~~with~~ the ~~CIT~~first ~~Group~~quarter ~~Credit~~of ~~Facility~~fiscal ~~and~~2006, the ~~Hilco~~Company ~~Term~~adopted ~~Loan,~~ the ~~Company~~ ~~paid~~fair ~~aggregate~~value ~~fees~~recognition provisions of ~~approximately~~SFAS ~~$2,858~~No. 123R, ~~These~~using ~~fees~~the ~~will~~modified beprospective approach to transition. Accordingly, ~~amortized~~prior asyear ~~deferred~~amounts ~~financing~~have ~~fees~~not ~~over~~been restated. Under the ~~term~~modified ofprospective approach, the ~~new~~provisions of ~~loans~~SFAS No. 123R ~~In addition,~~are asto abe ~~result~~applied ofto ~~these~~new ~~financing~~awards ~~activities~~granted after December 31, ~~the~~2005, ~~Company~~and ~~has~~the ~~expensed~~Company ~~approximately~~is ~~$145~~required ofto ~~deferred~~recognize ~~financing~~compensation ~~costs~~expense infor ~~April 2004~~stock ~~which~~options ~~relate~~granted prior to the adoption of SFAS No. 123R under the ~~Amended~~fair ~~Credit~~value ~~Facility~~method and recognize those amounts over the remaining vesting period of the stock options.

InFor ~~addition,~~ the ~~Company previously~~three ~~had~~month aperiod $5ended June 30,~~000~~ ~~term~~2006, ~~loan~~the ~~with~~Company ~~Bank~~recorded ofcompensation ~~America~~expense ~~(“BofA”),~~related ~~which~~to ~~had~~stock ~~been~~options ~~credit~~that ~~supported~~increased bythe ~~various~~loss ~~parties,~~from ~~including~~operations and the ~~Company’s principal~~net ~~stockholder,~~loss ~~and~~by ~~which~~$4 ~~was~~with ~~scheduled~~a to$0.00 ~~mature~~per share impact on ~~January 31,~~basic ~~2004. In~~and ~~connection~~diluted ~~with~~earnings ~~the~~per ~~above-described~~share. ~~short-term~~For ~~extension~~the ofsix ~~the~~month ~~Amended Credit~~period ~~Facility~~ended June 30, 2006, the Company’s ~~principal~~recorded ~~stockholder~~compensation ~~repaid~~expense ~~BofA~~related ~~and~~to ~~agreed~~stock ~~to extend~~options ~~the~~that ~~term~~increased ofthe ~~this~~loss from ~~loan,~~operations ~~under~~and the ~~same~~net ~~terms~~loss ~~previously extended~~ by ~~BofA, except~~$13 ~~the~~with ~~maturity~~a ~~date~~$0.00 ~~was~~per ~~extended~~share ~~until~~impact ~~July 31,~~on ~~2004.~~basic ~~Under~~and ~~these~~diluted ~~terms,~~earnings ~~this~~per ~~$5,000~~share. ~~related~~This ~~party~~stock ~~term~~option ~~loan~~compensation ~~bore~~expense ~~interest~~is atincluded ~~the~~within ~~rate~~operating ofexpenses ~~LIBOR~~within ~~plus 2%.~~the Inaccompanying ~~April 2004,~~condensed ~~the~~consolidated ~~Company~~statements ~~refinanced~~of ~~all~~operations. As of ~~its~~June 30, ~~previously~~2006, ~~outstanding debt~~unrecognized ~~(principal~~compensation ~~plus~~costs ~~accrued~~related ~~and~~to ~~unpaid~~stock ~~interest),~~options ~~including~~totaled ~~this~~approximately $59,~~000~~ ~~term~~which ~~loan, with~~will ~~its~~be ~~principal~~expensed ~~shareholder.~~during the ~~See~~remainder ~~Note~~of 4fiscal 2006.

4As the Company adopted SFAS 123R using the modified prospective method, information for periods prior to January 1, 2006 have not been restated to reflect the impact of applying the provisions of SFAS 123R. ~~RELATED~~The ~~PARTY~~following ~~TERM~~summary ~~LOAN~~presents the Company’s net income and per share earnings that would have been reported had the Company recorded stock-based employee compensation cost using the fair value method of accounting set forth under SFAS 123.

On May 14, 2003, the Company entered into an agreement with its principal stockholder pursuant to which the principal stockholder loaned the Company $6,050. This term loan was used for working capital requirements. This term loan had a three-year maturity, was secured, and bore paid-in-kind interest at the rate of 16% per annum. From inception through April 8, 2004 (the date the Company refinanced of all of its outstanding related party debt obligations), all interest obligations ($1,127) had been paid-in-kind. Further, the $1,300 loan obtained from the principal stockholder in connection with the acquisition of Brice Manufacturing in October 2002 was combined with and added into this $6,050 loan. This term loan from the Company’s principal stockholder contained cross acceleration provisions if the obligations to the Company’s senior lenders were accelerated.


	Three Months			Six Months
	Ended			Ended
	June 30, 2005			June 30, 2005
Net income – as reported	$	1,324		$	2,530
Additional expense		(19	)		(39	)

Net income – pro forma	$	1,305		$	2,491
Net income per share, basic – as reported	$	0.21		$	0.64
Net income per share, diluted – as reported		0.11			0.28
Net income per share, basic – pro forma		0.20			0.63
Net income per share, diluted – pro forma		0.11			0.27

In connection with the funding of the $6,050 term loan, the Company issued a warrant to its principal stockholder to acquire, for nominal consideration, 30% of the Company’s outstanding common stock (on a fully-diluted basis) as of the day the warrant is exercised. The ~~warrant is exercisable on or before January 31, 2007. The warrant valuation, as determined by an independent business valuation specialist through a~~ fair ~~market~~ value ~~assessment~~ of ~~the~~each ~~Company,~~option ~~was recorded~~grant ~~at $1,258 as of May 14, 2003. The Company has recorded the value of this warrant as deferred financing costs and~~ was ~~amortizing~~estimated ~~this~~on ~~amount to expense over a three-year period (~~the ~~original~~date ~~period~~ of ~~this~~grant ~~loan).~~using ~~As a result of~~ the ~~related party term loan refinancing described below, effective~~Black-Scholes ~~April 8,~~option ~~2004~~pricing ~~the~~model ~~Company~~with ~~reset~~ the ~~amortization~~following ~~period~~weighted ~~for~~average ~~the~~assumptions ~~unamortized deferred financing balance~~ and ~~will amortize this amount over the term of the newly established~~ related ~~party~~fair ~~term loan (January 31, 2008).~~values:

In September 2003, the Company recorded a $900 obligation reflecting the Company’s purchase from its principal stockholder of the aircraft parts inventory located at the Goodyear facility (which inventory was acquired by the Company’s principal stockholder in the AMS bankruptcy proceedings; see Note 7).


	2006 Grants			2005 Grants
Expected life	5		Years	5		Years
Expected volatility		70	%		70	%
Risk-free interest rate		4.83	%		3.99	%
Dividend yield		—			—
Fair values	$	3.05		$	6.40

InThe ~~January 2004,~~expected life of stock options represents the ~~Company’s~~period ~~principal~~of ~~stockholder~~time ~~repaid~~that the stock options granted are expected to be outstanding and was based on the shortcut method allowed under SAB 107 for 2006 and based upon historical trends for 2005. The expected volatility is based on the historical price volatility of the Company’s common stock. The risk free interest rate represents the U.S. Treasury ~~previously~~bill ~~outstanding~~rate ~~$5,000~~for ~~term~~the ~~loan~~expected ~~with~~life ~~BofA~~of ~~and~~the ~~continued~~related tostock ~~extend~~options. ~~this~~No factor for dividend yield was ~~loan~~incorporated in the calculation of fair value, as the Company has historically not paid dividends. Pursuant to the Company’s ~~under~~2003 Stock Incentive Plan (the ~~same~~“Plan”), ~~terms~~unless ~~previously~~otherwise ~~extended~~determined by the ~~BofA~~Compensation Committee of the Company’s Board of Directors, ~~except~~ one-third of the ~~maturity~~options ~~date~~granted under ~~was~~the ~~extended~~Plan ~~until~~are ~~July 31~~exercisable upon grant, ~~2004.~~one-third ~~See~~are ~~Note~~exercisable 3on ~~for~~the first anniversary of ~~particulars~~such grant and the final one-third are exercisable on the second anniversary of such grant.

OnA ~~April 8,~~summary ~~2004,~~of the Company’s ~~combined~~stock ~~all~~option ofactivity ~~its previously outstanding debt (principal plus accrued~~ and unpaid interest) with its principal stockholder into a new $14,412 term loan due on January 31, 2008 (the “LJH Term Loan”). The LJH Term Loan combines the $1,300 loan relating to the Brice acquisition, the $6,050 related ~~party~~information term loan made in May 2003, the $900 obligation related to the AMS inventory purchase, the $5,000 loan which replaced the BofA term loan and PIK interest previously paid on these obligations. See above and Note 3 for ~~a discussion of~~ the ~~outstanding~~six ~~debt~~months ~~components due to the Company’s~~ended ~~principal stockholder that were combined in this new note. The LJH Term Loan bears interest at 18% per annum~~June 30, 6%2006 ~~of which is payable in cash and the balance~~follows: of which will be PIK. The LJH Term Loan is pari-passu with the New Notes, but is secured by a lien on substantially all of the Company’s assets. The LJH Term Loan also contains cross acceleration provisions if the Company’s obligations to the CIT Group and Hilco are accelerated.

5. TAX RETENTION OPERATING LEASE (TROL) FINANCING


				Weighted Average			Remaining
	Options			Exercise Price			Contractual Life
Options outstanding at December 31, 2005		56		$	938.44
Options granted at market price		1			3.05
Options forfeited		(4	)		(33.73	)
Options exercised		—			—

Options outstanding at June 30, 2006		53		$	967.52		1.84 Years

Options exercisable at June 30, 2006		49		$	833.78		1.84 Years

The Company’s TROL financing arrangement was originally utilized to develop two facilities: (i) a corporate headquarters and warehouse facility, which was being subleased to Kellstrom Aerospace, LLC, and (ii) a facility to house the Company’s Caribe operations, which was sold in May 2001. Substantially all of the Company’s subsidiaries had guaranteed the Company’s obligations under the TROL financing arrangement. Payments were at a rate of Prime plus 3.~~25%~~ ~~to 4.00%~~MARKETABLE ~~and the Company was responsible for all property taxes, insurance and~~SECURITIES maintenance of the property. Under the terms of the Amended TROL Financing Agreement, entered into in July 2002, the maturity date of the TROL financing was extended until June 30, 2005 and the base monthly rental under the TROL was increased to the greater of: (i) the amount being received by the Company under its sublease for the Company’s Miramar facility plus, commencing July 1, 2003, an additional monthly payment by the Company, or (ii) $210.

OnThe ~~February 5, 2004, the~~ Company ~~entered~~accounts ~~into~~for ainvestments ~~definitive~~in ~~agreement~~marketable tosecurities ~~sell its office and warehouse facility located~~ in ~~Miramar,~~accordance ~~Florida,~~with ~~and~~SFAS ~~on March~~No. 31115, ~~2004,~~“Accounting ~~the~~for ~~Company~~Certain ~~closed~~Investments onin ~~the~~Debt ~~sale~~and ~~contemplated~~Equity ~~by this definitive agreement~~Securities”. ~~The~~ ~~gross~~In ~~sales~~accordance ~~price~~with ~~was~~SFAS ~~$26,000~~No. ~~The proceeds of the sale were used to repay~~ ~~in full the TROL financing obligation ($23~~115,~~824).~~ ~~The balance, net of transaction expenses and other Miramar property related expenses which~~ the ~~Company~~ ~~was obligated to pay, which approximates $320, was used to repay amounts outstanding under the Amended Term Loan (which repayment occurred in April 2004 as part of~~ Company’s ~~refinance~~has ofdesignated all ofmarketable ~~its~~securities ~~senior debt obligations. See Note 3). Additionally,~~ as atrading ~~result of this sale, the Company has recorded a gain on disposal of fixed assets of $825 in the first quarter~~securities. ~~This~~ ~~gain is included within income from discontinued operations~~Trading securities, ~~net of~~which ~~income~~consisted ~~taxes within the accompanying condensed consolidated statements~~ of ~~operations~~commercial ~~for~~paper ~~the~~at ~~six months ended~~ June 30, ~~2004. Finally,~~2006 asand ~~was required under the Company’s previous senior credit facility~~December 31, in ~~February 2004~~2005, ~~the~~are ~~Company~~carried at ~~entered~~fair ~~into~~value, anwith ~~amendment~~unrealized gains and ~~limited~~losses ~~waiver agreement~~included ~~with~~in ~~its~~earnings ~~previous~~on ~~senior~~a ~~lenders~~current ~~for~~basis. ~~the~~The Company ~~purpose~~determines ofcost ~~releasing~~on ~~the Miramar~~a ~~facility~~specific ~~for~~identification ~~sale~~basis.

6.At ~~SUBORDINATED~~June 30, ~~NOTES~~2006 and December 31, 2005, marketable securities consisted of the following:

8% SENIOR SUBORDINATED PIK NOTES DUE 2006


	June 30,				December 31,
	2006				2005
	Fair Value		Cost		Fair Value		Cost
Trading securities	$	32	$	32	$	13,978	$	13,927

~~On February 28, 2002, in connection with its capital and debt restructuring, the Company issued $100,000 face value, in aggregate, principal amount of 8~~4.~~0% senior~~ ~~subordinated convertible paid-in-kind (“PIK”) notes (“New Notes”), which~~INVENTORIES mature on December 31, 2006. The New Notes bear interest from the date of issuance and are payable at the Company’s option either in cash or paid-in-kind through the issuance of additional New Notes semiannually on June 30 and December 31 of each year. See Note 10 to Notes to Consolidated Financial Statements contained in the Company’s 2003 Form 10-K for particulars of the Company’s February 2002 capital and debt restructuring and for further details of the New Notes.

~~The~~Inventories ~~New Notes~~ are ~~redeemable~~stated ~~for cash~~ at the ~~Company’s~~lower ~~option at the following percentages~~ of ~~par~~cost ~~plus~~or ~~accrued~~market ~~interest on the par~~ value. ~~through~~At ~~the date of redemption: 2004 — 73.0%~~June 30, ~~2005~~2006 ~~— 75.625%~~ and ~~2006 — 77.5%. The New Notes also~~December 31, ~~provide~~2005, ~~that~~inventories ~~the~~consisted ~~holders will receive an aggregate~~ of ~~3,003 shares of common stock if~~ the ~~New Notes are redeemed in 2004, 2005 or 2006.~~following:

If the New Notes have not already been redeemed or repurchased, the New Notes, including those New Notes previously issued as paid-in-kind interest and all accrued but unpaid interest, will automatically convert on December 31, 2006 into an aggregate of 270,276 shares of common stock. Holders of New Notes will not receive any cash payment representing principal or accrued and unpaid interest upon conversion; instead, holders will receive a fixed number of shares of common stock and a cash payment to account for any fractional share.


	June 30,		December 31,
	2006		2005
Finished goods	$	16,283	$	16,374
Work in progress		9,862		10,778
Raw materials		2,331		1,529

	$	28,476	$	28,681

5. DEFERRED FINANCING COSTS

Costs associated with obtaining financing are included in the accompanying condensed consolidated balance sheets as deferred financing costs and are being amortized over the terms of the loans to which such costs relate. The cost and accumulated amortization of deferred financing costs as of June 30, 2006 and December 31, 2005 is as follows:


	June 30,			December 31,
	2006			2005
Original basis	$	8,802		$	8,543
Accumulated amortization		(7,141	)		(6,292	)

	$	1,661		$	2,251

On April 20, 2006, the Company paid in full the CIT Term Loan and entered into other modifications to the CIT Group Revolving Line of Credit (see Note 7). As a part of this refinancing arrangement, the Company wrote-off $289 of deferred financing costs related to the CIT Term Loan and to a portion of the CIT Group Revolving Line of Credit. This charge is included within interest expense within the accompanying condensed consolidated statements of operations for the three and six month periods ended June 30, 2006.

6. DISCONTINUED OPERATIONS

In December 2005, the Company received notice of a payment from the liquidating trust of a former customer of its distribution operations (which were sold in fiscal 2000). The payment related to a previously written off accounts receivable from a customer that filed for bankruptcy protection. The payment, which approximated $462, was received in April 2006. The Company has reflected this amount within net assets of discontinued operations within the accompanying condensed consolidated balance sheet for the period ended December 31, 2005.

7. SENIOR CREDIT FACILITIES

In April 2006, the Company closed on a series of transactions with its principal stockholders relating to its senior debt. See Note 8 for particulars of these related party debt transactions. In conjunction with the closing of the LJH Term Loans, the Company paid the CIT Term Loan in full and amended the CIT Group Revolving Line of Credit (the “Amended CIT Group Revolving Line of Credit”). The Amended CIT Group Revolving Line of Credit is now a $30,000 senior secured revolving line of credit, is due December 31, 2007, and bears interest, at the Company’s option, at either (a) Prime, or (b) LIBOR plus 2.50%. The Company has elected the Prime option for the outstanding revolving line of credit at the present time. Also, in accordance with the requirements of EITF 95-22, the Company has presented the revolving line of credit as a short-term obligation. In addition, the Amended CIT Group Revolving Line of Credit contains certain financial covenants regarding the Company’s financial performance and certain other covenants, including limitations on the incurrence of additional debt and restrictions on the payment of dividends, and provides for the termination of the Amended CIT Group Revolving Line of Credit and repayment of all debt in the event of a change in control, as defined. Also, an event of default under the LJH Term Loans will also result in a default under the Amended CIT Group Revolving Line of Credit.

Borrowings under the Amended CIT Group Revolving Line of Credit are secured by a lien on substantially all of the Company’s assets. Borrowings under the revolving line of credit are based on a borrowing base formula that takes into account the level of the Company’s receivables and inventory. Further, the amounts that the Company can borrow under the Amended CIT Group Revolving Line of Credit are affected by various availability reserves and collateral reserves that can be established by the lenders under the financing agreement. In that regard, as a part of the closing of the Amended CIT Group Revolving Line of Credit, the Company provided a collateral deposit of $5,000, which is included within the accompanying condensed consolidated balance sheet at June 30, 2006 as a non-current asset. Finally, the agreement relating to the Amended CIT Group Revolving Line of Credit requires that at the time of each additional borrowing, the Company must make various representations and warranties to its lenders regarding its business (including several reaffirming that there have been no changes in the status of specific aspects of the Company’s business that could reasonably be expected to have a material adverse effect upon the business operation, assets, financial condition or collateral of the Company and its subsidiaries taken as a whole), and be in compliance with various affirmative and negative covenants, all as more particularly set forth in the agreement. As a part of the Amended CIT Group Revolving Line of Credit, the Company’s senior lender waived and in certain

instances, amended certain financial covenant defaults and as of December 31, 2005 and June 30, 2006 the Company was in compliance with all covenant requirements, as amended.

As of June 30, 2006, the outstanding aggregate amount borrowed under the Amended CIT Group Revolving Line of Credit was $5,476, the amount of outstanding letters of credit under the Amended CIT Group Revolving Line of Credit was $8,804, and $11,489 was available for additional borrowing under the Amended CIT Group Revolving Line of Credit.

8. TERM LOAN FROM A RELATED PARTY

On April 10, 2006, LJH acquired the $18,313 Monroe Capital Loans, with affiliates of Owl Creek simultaneously acquiring a 20% participation interest in that loan. Additionally, effective on April 20, 2006, in conjunction with the refinancing of the CIT Group Credit Facility (see Note 7), the Company obtained a new $6,000 senior secured term loan from LJH (collectively with the Monroe Capital Loans, the “LJH Term Loans”). The LJH Term Loans all mature on December 31, 2007, bear interest at LIBOR plus 1.75% per annum and are secured by a lien on substantially all of the Company’s assets. In addition, an event of default under the Amended CIT Revolving Line of Credit (described in Note 7) will also result in a default under the LJH Term Loans. The Company also obtained waivers of all defaults and events of default from LJH under the LJH Term Loans.

In April 2004, the Company entered into an agreement with its principal stockholder pursuant to which it combined all of its previously outstanding debt (principal plus accrued and unpaid interest) with its principal stockholder into a related party term loan due on January 31, 2008 (the “LJH Original Term Loan”). The LJH Original Term Loan bore interest at 18% per annum, 6% of which was payable in cash (or at the Company’s option, payable-in-kind) and the balance of which was payable-in-kind (“PIK”). Additionally, the PIK interest balance compounded into principal debt semi-annually in January and August. In October 2005, the Company’s registration statement on Form S-1 with respect to a rights offering became effective. As a part of the rights offering, the Company agreed to allow its principal stockholder the use of the LJH Original Term Loan as consideration (on a dollar-for-dollar basis) for the purchase of a portion of the shares that it was permitted to purchase in the rights offering. On November 22, 2005, the Company closed its rights offering and as a part of such closing accepted a subscription from its principal stockholder to purchase 3,960 shares of the Company’s common stock for an aggregate purchase price of $19,007 (the then current balance of the LJH Original Term Loan) using the proceeds of the LJH Original Term Loan. See Note 13 for further details of the rights offering.

9. SUBORDINATED NOTES

8% SENIOR SUBORDINATED PIK NOTES DUE 2006

In February 2002, in connection with a capital and debt restructuring, the Company issued $100,000 face value, in aggregate, principal amount of 8.0% senior subordinated convertible paid-in-kind (“PIK”) notes (“New Senior Notes”), which mature on December 31, 2006. On March 8, 2005, in conjunction with the Company’s January 2005 offering and consent solicitation (see Note 12), the Company received tenders and related consents from holders of 47.0% in aggregate principal amount of the New Senior Notes. Additionally, on October 12, 2005, in conjunction with the Company’s August 2005 offering and consent solicitation (see Note 12), the Company received tenders and related consents from holders of 98% in aggregate principal amount of the then remaining New Senior Notes. After consummation of the tender offers and as of June 30, 2006, $1,221 of New Senior Notes remained outstanding.

The remaining New Senior Notes bear interest from the date of issuance and are payable at the Company’s option either in cash or PIK through the issuance of additional New Senior Notes semiannually on June 30 and December 31 of each year. The New Senior Notes are redeemable for cash at the Company’s option during 2006 at 77.5% of par value, plus accrued interest through the date of redemption. The New Senior Notes also provide that the holders will receive a fixed number of shares of common stock if the New Senior Notes are redeemed in 2006.

If the remaining New Senior Notes have not already been redeemed or repurchased, the New Senior Notes, including those New Senior Notes previously issued as paid-in-kind interest and all accrued but unpaid interest, will automatically convert on December 31, 2006 into 71 shares of common stock. Holders of New Senior Notes will not receive any cash payment representing principal or accrued and unpaid interest upon conversion; instead, holders will receive a fixed number of shares of common stock and a cash payment to account for any fractional shares.

8 1/8% SENIOR SUBORDINATED NOTES DUE 2008

In 1998, the Company sold $165,000 of senior subordinated notes (“Old Notes”) with a coupon rate of 8.125% at a price of 99.395%, which mature on February 15, 2008. On February 28, 2002, $149,000 face value of these notes were cancelled as part of a note exchange in exchange for cash and securities, and substantially all of the covenants contained in the indenture relating to the remaining Old Notes were extinguished. As a result of the 2002 exchange offer and ~~consent~~ consent solicitation, $16,247 in aggregate principal amount, net of unamortized discount, of Old Notes remain outstanding at ~~March~~June 3130, ~~2004~~2006. Interest on the Old Notes is payable on February 15 and August 15 of each year. ~~See~~The ~~Note~~Old 5Senior Notes are general unsecured obligations, subordinated in right of payment to all existing and future senior debt, including indebtedness outstanding under the ~~Notes~~Amended toCIT ~~Consolidated~~Group ~~Financial~~Revolving ~~Statements~~Line ~~contained~~of inCredit and the ~~Form~~LJH ~~10-K~~Term ~~for~~Loans, and under senior credit ~~details~~facilities ~~regarding~~which may replace these facilities in the ~~Old~~future, and the New Senior Notes. In addition, the Old Senior Notes are effectively subordinated to all secured obligations to the extent of the assets securing such obligations, including the Amended CIT Group Revolving Line of Credit and the LJH Term Loans. The Old Notes are redeemable, at the Company’s option, in whole or in part, for 100% of the redemption price, plus accrued and unpaid interest and liquidated damages, if any.

The Old Notes are redeemable, at the Company’s option, in whole or in part, at any time after February 15, 2003, at the following redemption prices, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date: (i) 2004—102.708%; (ii) 2005—101.354%; and (iii) 2006 and thereafter—100%. Upon the occurrence of a change in control, the Company will be required to make an offer to repurchase all or any part of each holder’s senior subordinated notes at a repurchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, thereon to the repurchase date. There can be no assurance that the Company will have the financial resources necessary to purchase the remaining Old Notes upon a change in control or that such repurchase will then be permitted under the Company’s senior credit facilities.

8% JUNIOR SUBORDINATED PIK NOTES DUE 2007

In September 2002, ~~as part of a class action settlement,~~ the Company issued $4,000 face value, in aggregate, ~~new~~ junior subordinated convertible PIK notes (“Junior Notes”). ~~The~~On ~~Junior Notes bear interest at~~ March 8%, ~~and mature on January 2~~2005, ~~2007.~~in ~~Interest~~conjunction onwith the ~~Junior Notes is payable at the~~ Company’s ~~option~~ ~~either~~January 2005 inoffering ~~cash~~and orconsent ~~paid-in-kind~~solicitation ~~through~~(see Note 12), the ~~issuance~~Company ofreceived ~~additional~~tenders ~~notes~~and ~~semiannually~~related onconsents ~~June 30~~from ~~and~~holders ~~December 31~~ of ~~each year~~75.2% ~~Additionally,~~in ~~the~~aggregate ~~Junior Notes~~principal ~~have~~amount ~~been recorded as~~ of ~~September 20, 2002 (~~the ~~effective~~Junior ~~date) at the~~Notes. ~~then~~Additionally, ~~current~~on ~~redemption~~October 12, ~~value of $2~~2005,~~500.~~ ~~The~~in ~~discount~~conjunction iswith ~~being accreted to~~ the ~~maturity~~ ~~redemption~~Company’s ~~value,~~August 2005 ~~due~~offering in(see ~~January 2007~~Note 12), ofthe ~~approximately~~Company ~~$4,400.~~received ~~See Notes~~tenders 5from ~~and~~holder 7 of ~~Notes~~33% ~~to Consolidated Financial Statements contained~~ in ~~the Form~~aggregate ~~10-K~~principal ~~for~~amount ~~particulars~~ of the ~~class action settlement and for further~~then ~~details~~remaining ~~regarding the~~ Junior Notes.

The remaining Junior Notes ~~are~~bear ~~redeemable~~interest ~~for~~at ~~cash~~8% atand ~~the~~mature ~~Company’s~~on ~~option~~January 2, at2007. Interest on the ~~following~~Junior ~~percentages~~Notes ofis ~~par~~payable, ~~plus~~at ~~accrued~~the ~~interest~~Company’s onoption, ~~the~~either ~~par~~in ~~value~~cash or paid-in-kind through the ~~date~~issuance of ~~redemption:~~additional ~~2004~~notes —semiannually ~~73.0%,~~on ~~2005~~June 30 ~~— 75.625%~~ and ~~2006~~December 31 —of 77each year.~~5%.~~ The Junior Notes ~~also~~were ~~provide~~recorded ~~that~~as of September 20, 2002 (the ~~holders~~effective ~~will~~date) ~~receive~~at anthe ~~aggregate~~then ofcurrent ~~104~~fair ~~shares~~value of ~~common~~$2,500. ~~stock~~As ifa result of the Company’s tender offers, the current fair value (as of June 30, 2006) approximates $686. The discount on these Junior Notes ~~are~~is ~~redeemed~~being inaccreted ~~2004,~~to ~~2005~~the orredemption ~~2006~~value of the Junior Notes at maturity in January 2007.

IfThe ~~the~~remaining Junior Notes ~~have~~are ~~not~~redeemable ~~already~~for ~~been~~cash ~~redeemed~~at ~~or repurchased,~~ the ~~Junior Notes,~~Company’s ~~including~~option ~~those~~at ~~Junior~~77.5% ~~Notes~~of ~~previously~~par ~~issued as paid-in-kind interest~~value, ~~and~~plus ~~all~~ accrued ~~but unpaid~~ interest, ~~will~~through ~~automatically~~the ~~convert~~date ~~on January 2, 2007 into an aggregate~~ of ~~9,320 shares of common stock~~redemption. ~~Holders~~The of Junior Notes ~~will~~also ~~not~~provide ~~receive~~that ~~any cash payment representing principal or accrued and~~the ~~unpaid interest upon conversion; instead,~~ holders will receive a fixed number of shares of common stock ~~and~~if athe ~~cash~~Junior ~~payment~~Notes toare ~~account~~redeemed ~~for any fractional~~in ~~shares~~2006.

7.If ~~COMMITMENTS~~the ~~AND~~remaining ~~CONTINGENCIES~~Junior Notes have not already been redeemed or repurchased, the Junior Notes, including those Junior Notes previously issued as paid-in-kind interest and all accrued but unpaid interest, will automatically convert on January 2, 2007 into 39 shares of common stock. Holders of Junior Notes will not receive any cash payment representing principal or accrued and unpaid interest upon conversion; instead, holders will receive a fixed number of shares of common stock and a cash payment to account for any fractional shares.

~~ENVIRONMENTAL~~10. ~~MATTERS~~COMMITMENTS AND CONTINGENCIES

The Company is taking remedial action pursuant to Environmental Protection Agency and Florida Department of Environmental Protection (“FDEP”) regulations at TIMCO-Lake City. Testing and evaluation for all known sites on TIMCO-Lake City’s property is substantially complete and the Company has commenced a remediation program. The Company is currently monitoring the remediation, which will extend into the future. Based on current testing, technology, environmental law and clean-up experience to date, the Company believes that it has established an adequate accrual for the estimated costs associated with its current remediation strategies. Additionally, there are other areas adjacent to TIMCO-Lake City’s facility that could also require remediation. The Company does not believe that it is responsible for these areas; however, it may be asserted that the Company and other parties are jointly and severally liable and are responsible for the remediation of those properties. Based upon the most recent cost estimates provided by environmental consultants, it is estimated that the total remaining

testing, remediation and compliance costs for this facility will be $768. Additionally, during 2003, the Company secured an insurance policy to comply with financial assurances required by the FDEP.

Accrued expenses in the accompanying June 30, 2004 and December 31, 2003 condensed consolidated balance sheets include $768 and $810, respectively, related to obligations to remediate the environmental matters described above. Future information and developments will require the Company to continually reassess the expected impact of the environmental matters discussed above. Actual costs to be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating environmental exposures. These uncertainties include the extent of required remediation based on testing and evaluation not yet completed and the varying costs and effectiveness of remediation methods. In the opinion of management, the ultimate resolution of these environmental exposures will not have a material adverse effect upon the financial condition or results of operations of the Company.

TRANSACTIONS WITH RELATED PARTIES

During December 2002, an entity controlled by the Company’s principal stockholder acquired the operating assets of Aviation Management Systems, Inc. (“AMS”) located in Phoenix, Arizona. Additionally, this entity assumed a lease with the City of Phoenix for facilities previously leased by AMS at the Goodyear Airport. In April 2003, the Company entered into an operating sublease agreement with the principal stockholder to operate the business in the facilities that were previously leased to AMS. The term of the sublease is for three years with rental payments of $432 annually. Under the sublease agreement, the Company is also responsible for insurance, taxes and charges levied by the City of Phoenix under the main lease. In addition, as discussed in Note 4, the Company increased its related party obligation by $900 reflecting the purchase from its principal stockholder of the aircraft parts inventory located at the Goodyear facility (which inventory was acquired by the Company’s principal stockholder in the AMS bankruptcy proceedings). Further, on April 4, 2004, the Company entered into an equipment lease with its principal stockholder with respect to certain equipment and tooling used at the Goodyear facility (which equipment and tooling had been acquired by the Company’s principal stockholder in the AMS bankruptcy proceedings). The lease, which is recorded as a capital lease, is for a two-year term and requires monthly payments of $74. Both the inventory sale and the equipment lease are believed to be on terms not less favorable to the Company than could be obtained from an unaffiliated third party.

During October 2002, the Company sold its real estate and fixtures located at the Company’s Aircraft Interior Design, Inc. (AID) operation in Dallas, Texas, to the Company’s principal stockholder. The gross sale price for these assets was approximately $2,400, which was the estimated fair market value, based on a third party appraisal, on the sale date. Simultaneous with this sale, the Company entered into a lease agreement with the principal stockholder for substantially all of these assets. The term of this lease is ten years. Annual rental payments are approximately $300 per year, with the Company being responsible for, among other things, taxes, insurance and utilities. This lease agreement is believed to be on terms not less favorable to the Company than could be obtained from an unaffiliated third party. The sale and resulting leaseback qualify for sale leaseback accounting pursuant to SFAS No. 98, “Accounting for Leases”. The Company deferred the gain on sale of approximately $1,700 and is amortizing this gain to income over the term of the lease agreement as an offset to rent expense. Deferred income within the accompanying June 30, 2004 and December 31, 2003 condensed consolidated balance sheets includes $1,389 and $1,473, respectively, relating to this sale leaseback transaction.

An entity controlled by the Company’s principal stockholder purchases aircraft for resale and lease, and the Company provides certain services for that entity. Services provided to that entity are charged at not less then the rates that would be charged for such services to an unaffiliated third party. At June 30, 2004, receivables from this entity approximated $790 and are included within the accompanying condensed consolidated balance sheet.

LITIGATION AND CLAIMS

The Company is involved in various lawsuits and contingencies arising out of its operations in the normal course of business. In the opinion of management, the ultimate resolution of these claims and lawsuits will not have a material adverse effect upon the financial condition or results of operations of the Company.

15In November 2005, the Company was named as the defendant in a lawsuit which alleges that the Company breached a purported verbal agreement for indemnification. The suit seeks damages of $6,600, plus interest, costs and attorneys fees. While the Company does not believe that any such indemnification agreement exists, believes that it has meritorious defenses to the claim and intends to vigorously defend the lawsuit, there can be no assurance as to its outcome. As of June 30, 2006, no reserves related to this lawsuit have been recorded within the accompanying condensed consolidated financial statements.

OTHER MATTERS

In connection with a previously outstanding term loan, the Company granted to one of its lenders common stock purchase warrants to purchase 13 shares of the Company’s common stock exercisable for par value at any time until December 31, 2005. The warrants entitled the holder to require the Company to repurchase the warrants or common shares issued upon prior exercise of the warrants at $85.00 per share ($1,079 in the aggregate). In connection with the April 8, 2004 refinancing of the Company’s senior debt (see Note 3), the Company settled its warrant repurchase obligation to its prior lender by paying $870 in cash. As a result of this settlement, the Company recognized a gain of $209. This gain is included within other income-net for the three and six month periods ended June 30, 2004 within the accompanying condensed consolidated statement of operations.

On June 30, 2003, the Company entered into a long-term purchase agreement for various inventory components to be used in the Company’s Oscoda, Michigan engine center. Contingent upon the achievement of guaranteed sales volume to the Company by the third party supply vendor, the Company was committed to this vendor to purchase an aggregate of $2,800 of inventory components over an approximate two-year period. An initial inventory purchase of $500 took place on June 30, 2003. The residual inventory purchase obligation of $2,300 was to occur in $100 monthly increments. These monthly purchase commitments were first to be reduced by inventory used in the normal course of business that is currently on consignment from this third party supplier. Through portions of 2003 and most of 2004, the third party supply vendor did not achieve the guaranteed sales volume levels and thus was in default of this purchase agreement. As a result, during the second quarter ended June 30, 2004, the Company terminated this purchase agreement.

The Company has employment agreements with its executive officers and certain of its key employees. The employment agreements provide that such officers and key employees may earn bonuses, based upon a sliding percentage scale of their base salaries, provided the Company achieves certain financial operating results, as defined. Further, certain of these employment agreements provide for severance benefits in the event of a change of control.

8. WEIGHTED AVERAGE SHARES

	For the Three				For the Six
	Months Ended				Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Weighted average common and common equivalent shares outstanding:
Basic		31,640,994		31,640,994		31,640,994		31,640,994
Effect of dilutive securities		—		—		—		—
Diluted		31,640,994		31,640,994		31,640,994		31,640,994
Common stock equivalents outstanding which are not included in the calculation of diluted earnings per share because their impact is antidilutive		308,514,906		300,736,282		308,501,700		297,301,584

9In January 2006, the Company was sued by its former President and Chief Operating Officer for breach of his employment agreement and for related claims under North Carolina employment law. This ~~STOCK~~lawsuit ~~COMPENSATION~~sought ~~PLANS~~unspecified monetary damages and declaratory relief regarding the scope and applicability of the non-compete contained in the former employee’s employment agreement. In addition, the Company filed a countersuit against the former employee for, among other matters, misrepresentation and breach of contract. In June 2006, the Company entered into a settlement agreement with this former employee in which the Company, among other matters, agreed to pay 18 months of severance. This severance obligation, netted with payments previously paid to this former employee, is included within accrued expenses within the accompanying condensed consolidated balance sheet for the period ended June 30, 2006.

AsENVIRONMENTAL ~~permissible under SFAS No. 123, “Accounting for Stock-Based Compensation”,~~MATTERS ~~the Company accounts for all stock-based compensation arrangements using the~~ intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Certain Transactions Involving Stock Compensation”. Accordingly, no compensation cost is recognized for stock option awards granted to employees at or above fair market value.

The ~~following~~Company ~~table~~is ~~illustrates~~taking ~~the~~remedial ~~effects~~action onpursuant ~~net~~to ~~income~~Environmental ~~(loss)~~ Protection Agency and ~~earnings~~Florida Department of Environmental Protection (~~loss~~“FDEP”) ~~per~~ ~~share~~regulations ifat TIMCO-Lake City. Ongoing testing is being performed and new information is being gathered to continually assess the impact and magnitude of the required remediation efforts on the Company. ~~had~~During ~~applied~~2003, based upon the ~~fair~~most recent ~~value~~cost ~~recognition~~estimates ofprovided ~~FASB~~by environmental consultants, it was estimated that the total ~~Statement~~remaining Notesting, remediation and compliance costs for this facility was approximately $810. ~~123~~ Additionally, during 2003 the Company secured an insurance policy to ~~stock-based~~comply ~~employee~~with ~~compensation:~~the financial assurances required by the FDEP. Subsequent to 2003, the Company has proceeded with its remediation plan with no significant change in the estimated compliance costs and has maintained its insurance policy to comply with the financial assurances required by the FDEP.

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004			2003
Net (loss) income – as reported	$	(248	)	$	(27	)	$	(130	)	$	292
Additional expense		(26	)		(154	)		(208	)		(388	)
Net loss – pro forma		(274	)		(181	)		(338	)		(96	)
Net (loss) income per share, basic – as reported		(0.01	)		—			—			0.01
Net (loss) income per share, diluted – as reported		(0.01	)		—			—			0.01
Net loss per share, basic – pro forma		(0.01	)		(0.01	)		(0.01	)		—
Net loss per share, diluted – pro forma		(0.01	)		(0.01	)		(0.01	)		—

Testing and evaluation for all known sites on TIMCO-Lake City’s property is completed and the Company has commenced a remediation program. The Company is currently monitoring the remediation, which will extend into the future. Based on current testing, technology, environmental law and clean-up experience to date, the Company believes that it has established an accrual for the estimated costs associated with its current remediation strategies. Additionally, there are other areas adjacent to TIMCO-Lake City’s facility that could also require remediation. The Company does not believe that it is responsible for these areas; however, it may be asserted that the Company and other parties are jointly and severally liable and are responsible for the remediation of those properties.

InAccrued ~~December 2002,~~expenses in the ~~FASB~~accompanying ~~issued~~June 30, ~~SFAS~~2006 ~~No.~~and December ~~148~~31, ~~“Accounting~~2005 ~~for~~condensed ~~Stock-Based~~consolidated ~~Compensation~~balance –sheets ~~Transition~~include $670 and ~~Disclosure;~~$650, anrespectively, ~~amendment~~related ofto ~~FASB~~obligations ~~Statement~~to ~~No.~~remediate the ~~123”~~environmental matters described above. ~~This~~As ~~Statement~~of ~~provides~~June 30, ~~alternative~~2006 ~~methods~~and ofDecember 31, ~~transition~~2005, ~~for~~the aCompany has ~~voluntary~~no ~~change~~receivables tofrom the ~~fair~~insurance ~~value~~provider ~~based~~for ~~method~~these ofexposures. ~~accounting~~Future ~~for~~information ~~stock-based~~and ~~employee~~developments ~~compensation.~~will ~~The~~require the Company ~~has~~to ~~currently~~continually ~~decided~~reassess tothe ~~continue~~expected impact of the environmental matters discussed above. Actual costs to ~~use~~be incurred in future periods may vary from the ~~intrinsic~~estimates, ~~value~~given ~~method~~the ~~for~~inherent ~~accounting~~uncertainties ~~for~~in ~~stock-~~evaluating environmental exposures. These uncertainties include the extent of required remediation based ~~employee~~on testing and evaluation not yet ~~compensation~~completed and the varying costs and effectiveness of remediation methods. In the opinion of management, ~~but~~the ~~has~~ultimate ~~adopted~~resolution ~~all~~of ~~disclosure~~these ~~requirements~~environmental ~~for~~exposures ~~reporting~~will innot have a material ~~interim~~adverse effect upon the financial ~~statements~~condition or results of operations of the Company.

OTHER MATTERS

In February 2006, a settlement agreement for unsecured claims was reached with a current customer of the Company (UAL Corporation) relating to their filing for protection under Chapter 11 of the United States Bankruptcy Code in fiscal 2002. Pursuant to the UAL Corporation plan of reorganization, the Company received 5 shares of common stock in the reorganized company based on the Company’s unsecured claim as compared to the total of all unsecured claims. Based on the stock price of the reorganized company on February 2, 2006, which approximated $35.89 per share, the Company recorded an offset to operating expenses of $164 within the accompanying condensed consolidated statement of operation for the six month period ended June 30, 2006. In June 2006, the Company sold these shares in UAL Corporation and recorded a loss of $31 to other income, net within the accompanying condensed consolidated statements of operations for the three and six month periods ended June 30, 2006.

The Company has employment agreements with all of its executive officers and certain of its key employees. The employment agreements provide that such officers and key employees may earn bonuses, based upon a sliding percentage scale of their base salaries, provided the Company achieves certain financial operating results, as defined. Further, certain of these employment agreements provide for severance benefits in the event of a change of control. In December 2005, the Company terminated several executive officers and key employees and in April 2006, the Company entered into a retirement arrangement with its former Chief Executive Officer. Also, in June 2006, the Company settled with certain former executive officers and senior members of management disputed claims regarding severance obligations. As a result of these settlements, the Company reversed approximately $325 of severance accruals that were established as of December 31, 2005. Accrued expenses in the

accompanying June 30, 2006 and December 31, 2005 condensed consolidated balance sheets include $2,700 and $2,100, respectively, related to aggregate severance and retirement obligations due to these individuals. Further, the charges for these severance and retirement benefits was recorded in operating expenses on the condensed consolidated statements of operations for the second quarter of 2006 and the fourth quarter of 2005, respectively.

On November 1, 2005, the Company entered into an operating lease agreement with the Allegheny County Airport Authority (Pittsburgh, PA) for an engine test cell facility to be used for the repair and overhaul of CFM-56 engines. The initial term of the lease is 10 years with a cancellation option after 5 years. The lease arrangement also maintains two 5-year renewal options. Rental payments are contingent upon revenues generated by the Company within this facility and range from $0.50 per square foot to $7.00 per square foot annually.

On April 15, 2005, the Company entered into an operating lease agreement with Maxus Leasing Group for tooling and other equipment to be used for the repair and overhaul of CFM-56 engines. The initial term of the lease is 48 months with a cancellation option, contingent upon the payment of a cancellation fee, after the first 12 months, and purchase options available to the Company at the end of each 12-month period. Rental payments approximate $1,320 per year, with the Company also responsible for insurance, taxes, and other upfront expenditures.

11. RELATED PARTY TRANSACTIONS

As partial consideration for the funding of a $6,050 term loan with the Company’s principal stockholder in 2003, the Company issued a warrant (the “LJH Warrant”) to LJH to acquire, for nominal consideration, 30% of the Company’s outstanding common stock (on a fully-diluted basis) as of the day the warrant is exercised. The warrant is exercisable on or before January 31, 2007. The warrant valuation, as determined by an independent business valuation specialist through a fair market value assessment of the Company, was recorded at $1,258 in 2003. The Company recorded the value of this warrant as deferred financing costs and was amortizing this amount to expense over a three-year period (the original period of this loan). In conjunction with the Company’s rights offering (see Note 13), and as a result of the use by its principal stockholder of the entire balance of the LJH Original Term Loan as consideration for its purchase of shares in the rights offering, the Company wrote-off the unamortized deferred financing balance (approximately $710) at the closing of the rights offering.

In January 2005 and August 2005, the Company extended offers for early conversion of its New Senior Notes and Junior Notes. As part of these offers, LJH agreed to certain amended terms with respect to the LJH Warrant. Upon the completion of the Company’s tender offers, LJH partially exercised the LJH Warrant. As a result of these partial exercises, the Company’s principal stockholder received 1,774 shares and 1,514 shares, during the January 2005 and August 2005 tender offers, respectively, of the Company’s authorized but unissued common stock. Additionally, upon the maturity of the remaining untendered New Senior Notes and Junior Notes, which is to occur on December 31, 2006 and January 2, 2007, respectively, and the automatic conversion of these notes into common stock, LJH will have the right to exercise the remainder of the LJH Warrant to receive an additional 47 shares of common stock. See Note 12 for specifics of these tender offers.

During 2006 and 2005, the Company has obtained some of its contract labor through Aviation Partners, a contract labor firm owned by an immediate family member of the Company’s former Chief Executive Officer. Management believes that the fees charged by Aviation Partners are not less favorable to the Company than those generally made available by unrelated third party contract labor firms. Total contract labor fees paid to Aviation Partners through June 30, 2006 and 2005 were $1,580 and $163, respectively, and as of June 30, 2006, the Company owed Aviation Partners approximately $146, which is included within accounts payable within the accompanying condensed consolidated balance sheet.

The Company’s President and Chief Operating Officer serves as an officer and director and is a stockholder of Human Performance & Safety Consultants, Inc. (“HPSC”). HPSC has in the past and continues to provide advisory services to the Company. During the first half of 2006, the Company was billed $148 for services rendered by HPSC. Management believes that the fees paid for these advisory services were no greater then those that would be charged by an unrelated third party and the Company’s President and COO received no direct compensation for amounts paid to HPSC for performing services on the Company’s behalf.

A member of the Company’s board of directors is a shareholder in Akerman Senterfitt, which has in the past and continues to perform legal services for the Company. Management believes that the fees paid to Akerman Senterfitt were no greater then those that would be charged by an unrelated third party. The Company was billed $237 and $219, respectively, for the services rendered by Akerman Senterfitt in the first half of 2006 and 2005. The Company’s board member received no direct compensation from amounts paid to Akerman Senterfitt for performing services on the Company’s behalf.

An entity in which the Company’s principal stockholder and the Company’s former Chairman and Chief Executive Officer have been involved, purchases aircraft for resale and lease, and the Company has provided aircraft maintenance service work to that entity. Services provided to that entity were charged at not less than the rates that would be charged for such services to an unaffiliated third party. During the six month period ended June 30, 2005, the billings related to the services that were provided to such entity were approximately $960. During 2006, the Company has not provided any aircraft maintenance service work to this entity.

In 2002, an entity controlled by the Company’s principal stockholder acquired the operating assets of Aviation Management Systems, Inc. (“AMS”) located in Phoenix, Arizona. Additionally, this entity assumed a lease with the City of Phoenix for facilities previously leased by AMS at the Goodyear Airport. In 2003, the Company entered into an operating sublease agreement with its principal stockholder to operate its business in these facilities. This sublease expired in April 2006, and the Company continues to lease this facility on a month-to-month lease arrangement. The sublease requires rental payments of $432 annually. Under the sublease agreement, the Company is also responsible for insurance, taxes and charges levied by the City of Phoenix. Management believes that the facility lease is on terms not less favorable to the Company than could be obtained from an unaffiliated third party. Subsequent to June 30, 2006, the Company entered into an agreement to sell substantially all of the fixed assets located at the Company’s Goodyear facility and to terminate this sublease agreement. See Note 17 for further particulars of these activities.

During 2002, the Company sold certain real estate and fixtures located in Dallas, Texas, to the Company’s principal stockholder. The gross sales price for these assets was approximately $2,400, which was the estimated fair market value, based on a third party appraisal, on the sale date. Simultaneous with this sale, the Company entered into a lease agreement with the principal stockholder for substantially all of these assets. The term of this lease was ten years. Annual rental payments were approximately $300 per year, with the Company being responsible for, among other things, taxes, insurance and utilities. The sale and resulting leaseback qualified for sale leaseback accounting pursuant to SFAS No. 98, “Accounting for Leases”. The Company initially deferred the gain on sale of approximately $1,700 and was amortizing this gain to income over the term of the lease agreement as an offset to rent expense. In September 2005, the Company entered into an amendment to this operating lease which, among other matters, converted the lease arrangement to a month-to-month commitment and the Company recognized all of the remaining unamortized deferred gain on this sale leaseback transaction.

12. OFFERING AND CONSENT SOLICITATION

JANUARY 2005 TENDER OFFER

In January 2005, the Company extended an offering and consent solicitation relating to the New Senior Notes and the Junior Notes. Under the contractual terms of the New Senior Notes and the Junior Notes (collectively, the “Notes”), the Notes will automatically convert at their maturity into a fixed number of shares of the Company’s authorized but unissued common stock unless, prior to their maturity, the Notes are redeemed in accordance with their terms for cash and additional shares of common stock.

In the offering and consent solicitation, the Company offered holders of the Notes the right to receive a 15% premium payable in shares of its common stock if the holders agreed to an early conversion of their Notes into common stock during the conversion period, which expired on March 8, 2005. The Company also solicited consents from the holders of its New Senior Notes and Junior Notes to remove all material covenants contained in the indentures, including the covenant restricting the amount of senior debt that the Company may incur and the covenant requiring the Company to redeem the Notes upon a change of control. If the holders tendered their Notes, they automatically consented to the proposed amendments to the indentures. To become effective for each class of Notes, the amendments required the consent of a majority of the holders of the Notes (excluding from this computation the Notes held by the Company’s principal stockholder).

In accordance with the terms of the offer, all Notes that were properly tendered were accepted for early conversion. The Company received consents representing a majority in aggregate principal amount of the outstanding Junior Notes, and accordingly, the proposed amendments to the indenture governing the Junior Notes became effective. Since the Company did not receive consents representing a majority in aggregate principal amount of the outstanding New Senior Notes in this consent solicitation, the indenture governing the New Senior Notes was not amended at the closing of the January 2005 tender offer (see, however, the August 2005 tender offer below).

The Company received tenders and related consents from holders of 47.0% in aggregate principal amount of the New Senior Notes and tenders and related consents from holders of 75.2% in aggregate principal amount of the Junior Notes. Based on the level of premium shares that have been issued (see below), for this offering and consent solicitation, the Company recorded an inducement charge of $160 and incurred related transaction expenses of $240. The aggregate inducement charge of $400 is

included in charge for early conversion of notes within the accompanying condensed consolidated statements of operations for the six month period ended June 30, 2005.

At the closing of the offer, the Company issued 3,648 shares of its authorized but unissued common stock to the holders of the New Senior Notes who tendered in the offer (including 476 premium shares), 201 shares of its authorized but unissued common stock to the holders of the Junior Notes who tendered in the offer (including 26 premium shares), and 1,774 shares to LJH in connection with its partial exercise of the LJH Warrant. See Note 11 for information about the LJH Warrant.

AUGUST 2005 TENDER OFFER

In August 2005, the Company announced an offering to the holders of its remaining New Senior Notes and Junior Notes, and solicited consents from the holders of the remaining New Senior Notes to proposed amendments governing the New Senior Note indenture. If the holders of the New Senior Notes tendered their notes, they were automatically consenting to the proposed amendments to the indenture, which included the removal of all material covenants contained in the indenture, including the covenant restricting the amount of senior debt that the Company may incur and the covenant requiring the Company to redeem the New Senior Notes upon a change of control. No such consent was sought from the holders of the outstanding Junior Notes since the covenant protections related to the Junior Notes were previously eliminated as a result of the Company’s January 2005 tender offer (see above). This offering and consent solicitation, which was amended in September 2005, offered the remaining holders of its New Senior Notes and Junior Notes the right to receive a 15% premium for agreeing to an early conversion of their Notes into shares of the Company’s authorized but unissued common stock.

The Company received tenders and related consents from holders of 98% in aggregate principal amount of its outstanding New Senior Notes and tenders from the holders of 33% in aggregate principal amount of its outstanding Junior Notes. Based on the level of premium shares that have been issued (see below), for this offering and consent solicitation, the Company recorded an inducement charge of $155 and incurred related transaction expenses of $64. The aggregate inducement charge of $219 was included as a charge for early conversion of notes for the year ended December 31, 2005.

At the closing of the offer, the Company issued 4,041 shares of its authorized but unissued common stock to the holders of the New Senior Notes who tendered in the offer (including 527 premium shares), 22 shares of its authorized but unissued common stock to the holders of the Junior Notes who tendered in the offer (including 3 premium shares), and 1,514 shares to LJH in connection with the partial exercise of the LJH Warrant. See Note 11 for information about the LJH Warrant.

After consummation of the January 2005 and August 2005 offers and consent solicitations, approximately $1,221 of the New Senior Notes and $686 of the Junior Notes remain outstanding. Upon maturity of such notes in 2006 and 2007, respectively, the New Senior Notes will automatically convert into 71 shares of the Company’s authorized, but unissued common stock and the Junior Notes will automatically convert into 39 shares of the Company’s authorized, but unissued common stock. At such time, LJH will be able to complete the full exercise of the LJH Warrant and receive 47 shares of the Company’s common stock.

13. RIGHTS OFFERING

In October 2005, the Company’s registration statement on Form S-1 with respect to a rights offering became effective. In the rights offering, stockholders holding shares of the Company’s common stock as of October 19, 2005 (the “record date”) had the right to purchase additional shares of the Company’s post-reverse split common stock for a subscription price of $4.80 per share ($0.12 per pre-reverse split share). For every 40 pre-reverse split shares (one post-reverse split share) of common stock held on the record date, stockholders were granted 1.50 subscription rights. Also, the Company agreed to allow LJH to use amounts due to it under the LJH Original Term Loan (see Note 8 for a description of the LJH Original Term Loan) as consideration (on a dollar-for-dollar basis) for the purchase of a portion of the shares that LJH was permitted to purchase in the rights offering. Finally, the Company effected, simultaneously with the closing of the rights offering, a reverse split of its common stock on a one-new-share-for-forty-old-shares basis. In conjunction with the reverse split, the Company amended its certificate of incorporation to reduce its authorized common stock, $0.001 par value, from 500,000 (on a pre-reverse split basis) to a 100,000 (on a post-reverse split basis) shares.

On November 22, 2005, the Company closed on cash subscriptions to purchase 5,491 shares of the Company’s common stock for an aggregate purchase price of $26,358 and a subscription from LJH to purchase 3,960 shares of the Company’s common stock for an aggregate purchase price of $19,007 using the proceeds of the LJH Original Term Loan. Additionally, the Company incurred $580 of transaction expenses related to the completion of the rights offering. These expenses, which related to professional fees, advisory fees and document production fees, were offset against the cash proceeds received. At the closing of the rights offering, the Company issued an aggregate of 9,451 shares.

On September 20, 2005, the Company entered into a letter agreement relating to the rights offering and tender offer with Owl Creek, which beneficially owned at the time approximately $24,900 in aggregate principal amount of the New Senior Notes. In the letter agreement, Owl Creek agreed to tender the New Senior Notes that it owned in the August 2005 tender offer and to participate in the rights offering to the full extent of its basic subscription privilege. In October 2005, the Company issued 1,489 shares of its common stock to Owl Creek in the August 2005 tender offer, which gave Owl Creek the right to purchase 2,233 shares of the Company’s common stock in the rights offering. Owl Creek also agreed in the letter agreement to lock up the shares that it received in the August 2005 tender offer for 180 days, which lockup has now expired. See Notes 9 and 12 for a description of the Company’s New Senior Notes and for a description of the Company’s tender offers.

14. WEIGHTED AVERAGE SHARES

Basic income per share is computed using the weighted-average number of shares outstanding during the period. Diluted income per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock options, convertible debt instruments and stock warrants calculated using the treasury stock method. Also, the potential effect of diluted securities during periods when the Company is in a loss position for continuing operations are not included as the impact would be anti-dilutive. Weighted average shares used in the computation of basic and diluted income per share is as follows:


	For the Three				For the Six
	Months Ended				Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Weighted average common and common equivalent shares outstanding:
Basic		21,441,040		6,413,979		21,441,040		3,959,757
Effect of dilutive securities
Convertible debt		—		3,642,572		—		3,642,572
Stock warrants and options		—		1,551,041		—		1,551,684

Diluted		21,441,040		11,607,592		21,441,040		9,154,013


Common stock equivalents outstanding which are not included in the calculation of diluted earnings per share because their impact is antidilutive		499,244		388,325		499,350		388,325

15. SEGMENT INFORMATION

The Company’s operations are classified into three business segments: aircraft maintenance, repair and overhaul (MRO), aircraft interiors and engineering services, and other. The MRO segment performs maintenance, repair and modification services on aircraft and aircraft engines at four separate operating facilities. The aircraft interiors segment performs the refurbishment of aircraft interior components and the manufacturing and sale of aftermarket parts and new aircraft seats, and provides aircraft engineering services, modification design, certification, and installation of interior reconfigurations within two separate operating facilities. The other segment consists of corporate selling, general and administrative expenses, interest expense related to the Company’s debt obligations (excluding capital lease obligations which are allocated to the particular segment to which they relate) and results from discontinued operations, which are included to reconcile segment information to the consolidated financial statements.

Operating income (loss) is defined as sales less direct operating costs and expenses, excluding allocation of corporate expenses. Identifiable assets include assets used in the operation of each segment and consists of current assets, property, plant, and equipment, and goodwill.


Three months ended June 30, 2006	MRO		Interiors		Other			Consolidated
Net sales	$	65,324	$	23,345	$	—		$	88,669
Operating income (loss)		1,042		3,010		(5,329	)		(1,277	)
Identifiable assets		115,308		16,434		16,422			148,164
Depreciation and amortization		1,288		39		—			1,327
Capital expenditures		666		19		—			685
Interest expense, net		70		—		2,018			2,088


Three months ended June 30, 2005	MRO		Interiors		Other			Consolidated
Net sales	$	73,397	$	7,717	$	—		$	81,114
Operating income (loss)		4,642		331		(3,360	)		1,613
Identifiable assets		107,320		19,817		16,115			143,252
Depreciation and amortization		1,400		43		—			1,443
Capital expenditures		960		223		5			1,188
Interest expense, net		83		—		2,065			2,148


Six months ended June 30, 2006	MRO		Interiors		Other			Consolidated
Net sales	$	136,894	$	36,867	$	—		$	173,761
Operating income (loss)		1,687		4,216		(8,575	)		(2,672	)
Identifiable assets		115,308		16,434		16,422			148,164
Depreciation and amortization		2,503		79		—			2,582
Capital expenditures		1,554		26		—			1,580
Interest expense, net		142		—		3,595			3,737


Six months ended June 30, 2005	MRO		Interiors		Other			Consolidated
Net sales	$	153,032	$	18,764	$	—		$	171,796
Operating income (loss)		10,602		1,083		(7,066	)		4,619
Identifiable assets		107,320		19,817		16,115			143,252
Depreciation and amortization		2,645		81		—			2,726
Capital expenditures		1,605		249		33			1,887
Interest expense, net		169		—		4,110			4,279

16. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In June 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of SFAS 109 “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006 and as such, the Company will adopt this interpretation starting January 1, 2007. The Company is currently evaluating the impact of adopting FIN 48 on its consolidated financial statements.

17. SUBSEQUENT EVENTS

Effective July 1, 2006, the Company entered into an asset sale agreement in which the Company agreed to sell substantially all of the fixed assets located at the Company’s Goodyear, Arizona MRO facility to an unrelated party. The net sales price for these assets is $1,400 plus the transition period loss (defined below), of which $1,138 plus the transition period loss has been paid in cash and the residual has been fulfilled through the termination of outstanding obligations due from the Company. As of the closing date, approximately $655 of the cash proceeds owed to the Company was placed in escrow until the Company completes certain repairs to the Goodyear facility that are obligations of the Company. The transition period loss will be equal to the difference between the Company’s business revenues and certain expenses during the period from July 1, 2006 and the closing date of this transaction (which was August 4, 2006). In addition, the Company has entered into certain other agreements with the purchaser for the consignment of certain inventories and to provide certain transition services. Also, effective as of the closing date, the purchaser has entered into a sublease arrangement with LJH with respect to the Goodyear facility and the Company has terminated its current month-to-month sublease arrangement with LJH. Finally, the Company intends to relocate certain fixed assets and inventories to its other MRO facilities and to integrate certain customer aircraft heavy maintenance services into its three other airframe heavy maintenance MRO facilities.

For the three and six month periods ended June 30, 2006, the Company recorded charges, within cost of sales in the accompanying condensed consolidated statements of operations, of $277 related to the impairment of certain fixed assets at the Goodyear facility that are either not being acquired or not being relocated to other MRO facilities. Also, the Company has recorded charges, within costs of sales and operating expenses in the accompanying condensed consolidated statements of operations, of $199 related to severance obligations for certain terminated employees at the Goodyear facility. Additionally, the Company anticipates charges of approximately $750 during the third quarter of 2006 related to the shutdown of and exit from the Goodyear facility and related to additional severance charges to be recorded in conjunction with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. These charges will be partially offset by a gain, which will approximate $330, on the sale of assets related to this transaction.

Also, effective as of July 31, 2006, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with TAS Holding, Inc., a Delaware Corporation (“TAS”) under which TAS will be merged (the “Merger”) with and into the Company and the stockholders of the Company (other than LJH and Owl Creek) will receive $4.00 per share in cash for their shares, without interest. TAS is a Delaware corporation. The stockholders of TAS are LJH, which owns approximately 71% of the Company’s outstanding common stock, and Owl Creek, which own approximately 18% of the Company’s outstanding common stock, and the President of TAS is John R. Cawthron, the Company’s Chairman and Chief Executive Officer.

Simultaneous with entering into the Merger Agreement, the Company entered into two additional agreements with respect to the Merger:

	•		A Conversion, Support and Release Agreement, dated as of July 31, 2006, in which, among other matters: (i) the Company agreed (under certain conditions) to sell to LJH and Owl Creek an additional 2,400 shares of the Company’s authorized but unissued common stock at an exercise price of $2.50 per share through the conversion of debt owed by the Company to LJH (the “Option”), and (ii) TAS’s stockholders agreed to support the Merger at any meeting of the Company’s stockholders called to consider and vote upon the Merger; and

	•		An Escrow Agreement, dated as of July 31, 2006, between the Company, TAS and American Bank of Texas, under which TAS has deposited all of the funds required to pay public stockholders the $4.00 per share cash Merger consideration. American Bank of Texas is wholly-owned by Lacy Harber, the principal stockholder of LJH.

The Merger is subject to customary closing conditions and the receipt of required regulatory approvals. The Company expects to complete the Merger by the end of the 2006 fiscal year, although there can be no assurance that the Merger will be completed.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context otherwise requires, references to “TIMCO,” “we”, “our”, and “us”, in this Quarterly Report on Form 10-Q (“Form 10-Q”) includes TIMCO Aviation Services, Inc. and its subsidiaries. This Form 10-Q contains, or may contain, forward-looking statements, such as statements regarding our prospects, strategy and anticipated trends in the industry in which we operate. These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions relating to our operations and results of operations, competitive factors, shifts in market demand, and other risks and uncertainties, including, in addition to those described below and elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, ~~2003~~2005 (the “Form 10-K”), our ability to continue to generate sufficient working capital to meet our operating requirements and service our indebtedness, our ability to meet the financial covenants contained in our credit agreements, our ability to obtain additional working capital as may be required in connection with the operation of our business, our maintaining good working relationships with our vendors and customers, competitive pricing for our products and services, our ability to achieve gross profit margins at which we can be profitable, including margins on services we perform aton a fixed price basis, competition in the aircraft maintenance, repair and overhaul market and the impact on that market and on us of the ongoing global war on terrorism, the ~~Iraq war, the~~ state of the domestic passenger airline industry and the financial condition of our airline customers, our ability to attract and retain qualified personnel in our businesses, utilization rates for our ~~MR&O~~MRO facilities, our ability to effectively integrate future acquisitions, our ability to effectively manage our business, economic factors which affect the airline industry, generally including the amount of aircraft maintenance outsourced by various airlines, and future changes in government regulations. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying our forward-looking statements prove incorrect, actual results may differ significantly from results expressed or implied in any forward-looking statements made by us in this Form 10-Q. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.

The following discussion and analysis should be read in conjunction with the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K.

GENERAL

TIMCO Aviation Services, Inc. is among the world’s largest independent providers of ~~fully integrated~~ aviation maintenance, repair and overhaul (~~MR&O~~MRO) services for major commercial airlines, regional air carriers, aircraft leasing companies, government and military units and air cargo carriers. We provide ~~four~~MRO ~~MR&O~~ services through our subsidiaries: (i) Triad International Maintenance Corporation (known in the industry as TIMCO), which, with its ~~four~~three active locations, is one of the largest independent providers of ~~heavy~~ aircraft heavy maintenance services in the world~~; Aircraft~~ ~~Interior~~and ~~Design~~also ~~and~~provides line maintenance services; (ii) Brice Manufacturing, which ~~specialize~~specializes in the ~~refurbishment~~ ofmanufacturing ~~aircraft~~and ~~interior~~sale ~~components~~of new ~~and~~aircraft ~~the~~seats ~~manufacture~~ and ~~sale of~~ aftermarket parts and ~~new~~in the refurbishment of aircraft ~~seats;~~interior components; (iii) TIMCO Engineered Systems, which provides engineering services to both to our ~~other~~MRO ~~MR&O~~ operations and ~~our~~ our customers; and (iv) TIMCO Engine Center, which refurbishes JT8D engines and performs on-wing repairs for both JT8D and CFM-56 series engines. Visit TIMCO online at www.timco.aero.

~~Our~~Effective ~~strategy~~July 1, is2006, we entered into an asset sale agreement in which we agreed to besell substantially all of the ~~vendor~~fixed ofassets ~~choice~~located toat our ~~customers~~Goodyear, ~~providing~~Arizona ~~aircraft~~MRO facility to an unrelated ~~maintenance~~party. ~~solutions~~The net sales price for these assets was $1,400 plus the transition period loss (defined below), of which $1,138 plus the transition period loss was paid in cash and the residual was fulfilled through the termination of our outstanding obligations to ~~meet~~the purchaser. As of the closing date, approximately $650 was held in escrow pending our ~~customers’~~completion ~~MR&O~~of ~~requirements~~certain repairs to the Goodyear facility that are our obligation. The ~~services~~transition period loss will be equal ~~that~~to wethe ~~offer~~difference ~~allow~~between our ~~customers~~business revenues and certain expenses during the period from July 1, 2006 and the closing date of this transaction (which was August 4, 2006). In addition, we have entered into certain other agreements with the purchaser for the consignment of certain inventories and to ~~reduce~~provide ~~their~~certain ~~costs~~transition byservices. ~~outsourcing~~Also, ~~some~~effective as of the closing date, the purchaser ~~their~~has ~~MR&O~~entered ~~functions~~into a sublease arrangement with LJH with respect to the Goodyear facility and we have terminated our current month-to-month sublease arrangement with LJH. We intend to relocate certain fixed assets and inventories to our other MRO facilities and to integrate certain customer aircraft heavy maintenance services into our three other MRO facilities. See Note 17 of Notes to Condensed Consolidated Financial Statements for further details.

WeOur ~~were~~strategy ~~incorporated~~is into ~~Delaware~~be ~~in 1996 under~~ the ~~name~~vendor ~~“Aviation~~of ~~Sales Company.”~~choice Weto ~~changed~~ our ~~corporate name to “TIMCO Aviation Services~~customers, ~~Inc.”~~providing inaircraft maintenance ~~February 2002.~~solutions ~~Our~~to ~~principal~~meet ~~operating~~our ~~business,~~customers’ ~~TIMCO,~~MRO ~~commenced operations in 1990~~requirements. ~~Our~~The ~~principal~~services ~~executive~~that ~~offices~~we ~~are~~offer atallow ~~623~~our ~~Radar~~customers to ~~Road,~~reduce ~~Greensboro,~~their ~~North Carolina~~costs ~~27410,~~by ~~and~~outsourcing ~~our~~some ~~telephone~~of ~~number~~their isMRO ~~(336) 668-4410~~functions.

1824

At present, approximately 80% of our business is airframe heavy maintenance, and we are one of the largest independent providers of these services in the world. While most of our current MRO business comes from commercial airlines and air freight carriers, we have begun to receive military MRO business, and we hope to expand our military MRO business in the future. We are rapidly expanding our TIMCO Engineered Systems operations. We have also been seeking to expand our line maintenance operations. We hope to significantly expand that business, believing it to be a service that airlines will seriously consider outsourcing in the future. Further, we continue to operate our Brice seat manufacturing operation and our JT8D engine operation. There can be no assurance we can successfully expand our business.

Our principal executive offices are at 623 Radar Road, Greensboro, North Carolina 27410, and our telephone number is (336) 668-4410.

RESULTS OF OPERATIONS

~~General~~GENERAL

Operating revenues consist primarily of service revenues and sales of materials consumed while providing services, net of allowances for any reworks, discounts, or returns. Cost of sales consists primarily of labor, materials, overhead, and freight charges.

~~Our~~These ~~operating~~forward ~~results~~looking ~~have~~statements ~~fluctuated~~are inbased ~~the~~on ~~past~~our current expectations and ~~may~~are ~~fluctuate~~subject to a number ~~significantly~~of inrisks, ~~the~~uncertainties ~~future.~~and ~~Many~~assumptions ~~factors~~relating ~~affect~~to our ~~operating~~operations and results of operations, including, among others:

• the ~~timing~~financial health of ~~repair~~the ~~orders~~U.S. passenger and ~~payments~~freight ~~from~~airline ~~our customers~~industry, and ~~particularly~~the ~~our~~impact ~~large~~of ~~customers, •~~ the ~~state~~financial health of that industry on the ~~economy~~maintenance, repair, and overhaul (“MRO”) industry generally and our business specifically, • the ~~state~~amount of MRO business being outsourced by the airline industry ~~generally,~~in general and our airline customers in particular, • factors that affect the financial ~~condition~~health and ~~MR&O~~well-being ~~requirements~~ of our airline customers, ~~specifically~~such as the September 11, •2001 ~~competition~~terrorist ~~from~~attacks, ~~other~~the ~~third-party~~global ~~MR&O~~war ~~service~~on ~~providers~~terrorism, •and fluctuations in the ~~number~~price of ~~airline~~jet ~~customers~~fuel, ~~seeking~~• ~~repair~~the ~~services~~effect atof ~~any~~competition ~~time~~on our business, •including the ~~impact~~effects of ~~fixed~~competition on the pricing onof the services and goods that we provide, • our ability to achieve gross profit margins at which we can be profitable, including margins on services that we perform on a fixed price basis and our ability to accurately project our costs in a dynamic environment, • our ability to ~~fully~~generate ~~utilize~~sufficient working capital from our ~~hangar~~operations ~~space~~and ~~dedicated~~from our available credit facilities to ~~maintenance~~meet our operating requirements, capital expenditure requirements and ~~repair~~service ~~services~~our indebtedness, • ~~the~~our ~~impact~~maintaining ~~during~~good ~~future~~relations ~~periods~~with onour ~~airline~~customers ~~use~~and ofvendors, ~~out-of-production~~• ~~aircraft~~our ~~(such~~ability asto ~~727,~~fully DCutilize 8,our DChangar 9space ~~and~~dedicated DCto ~~10)~~maintenance and ~~JT8D~~repair ~~engines~~services, as• aour ~~result~~ability ofto ~~increased~~manage ~~fuel~~our ~~costs~~business efficiently and ~~other~~achieve ~~factors~~both positive income and cash flow from our operations, • our ability to attract and retain the services of our executive officers and key employees, • our ability to attract and retain a sufficient number of mechanics to perform the maintenance, overhaul and repair services requested by our customers, ~~and~~ • ~~the~~our ~~timeliness~~ability ofto ~~customer~~integrate ~~aircraft~~future ~~arriving~~acquisitions, ~~for~~and ~~scheduled~~• ~~maintenance~~future changes in government regulations.

~~Large~~A ~~portions~~portion of our ~~cost~~operating ofexpenses ~~operations~~ are relatively fixed. Since we typically do not obtain long-term commitments from our customers, we must anticipate the future volume of orders based upon the historic patterns of our customers and upon discussions with our customers as to their future requirements. Cancellations, reductions or delays in orders by a customer or group of customers have in the past and could in the future have a material adverse effect on our business, financial condition and results of operations.

~~Three~~OPERATING ~~Months and Six Months Ended June 30, 2004 and 2003~~SEGMENTS

~~Operating~~Our ~~revenue~~operations ~~for~~are ~~the~~classified ~~six~~into ~~months~~two ~~ended~~reportable ~~June 30,~~segments: ~~2004~~aircraft ~~increased~~and ~~$58~~engine maintenance,~~106~~ orrepair ~~56.2%~~and tooverhaul ~~$161,502,~~(“MRO”) ~~from~~and ~~$103~~aircraft interiors,~~396~~ ~~for~~including ~~the~~engineering ~~same~~services ~~period in 2003~~(“interiors”). ~~Operating~~Our MRO ~~revenue~~segment ~~for~~performs ~~the~~maintenance, ~~first~~repair ~~half~~and ofmodification ~~2004~~services ~~included~~on ~~$19,107~~aircraft inand ~~revenue~~aircraft ~~from~~engines ~~our~~at ~~Goodyear,~~five ~~Arizona~~separate ~~facility,~~operating ~~which~~facilities. ~~was~~These ~~subleased~~operating ~~from~~facilities ~~our~~provide ~~principal stockholder in April 2003. During~~ the ~~first~~capabilities ~~half~~to ~~of 2003, we generated $4,832 in revenue~~service ~~from~~both ~~this~~wide ~~facility.~~body ~~Without~~and ~~the~~narrow ~~revenue~~body ~~from~~aircraft ~~our~~with ~~Goodyear~~servicing ~~facility,~~capabilities ~~revenue~~ for ~~the~~ ~~six~~older ~~month~~generation ~~period ended June 30, 2004~~ aircraft and ~~2003~~newly ~~would~~developed ~~have~~capabilities ~~been~~to ~~$142,395~~support ~~and $98,564, respectively. Operating revenue for~~ the ~~three~~needs ~~months~~of ~~ended~~today’s ~~June 30, 2004~~newer ~~increased~~generation ~~$26,060 or 50~~aircrafts.~~0% to $78~~ Additionally,~~172,~~ ~~from~~we ~~$52,112~~provide ~~for~~complete ~~the~~repair ~~same~~and ~~period~~overhaul ~~in 2003.~~capabilities ~~Comparative~~for ~~three month revenue without~~ the ~~revenue~~JT8D ~~from~~and ~~the~~JT8D-200 ~~operations~~series ofengine, ~~our~~on-wing ~~Goodyear~~services ~~facility~~to ~~would~~complement ~~have~~these ~~been~~engine ~~$70~~types,~~770~~ ~~for 2004~~ and ~~$48,206 for 2003 (we~~ are ~~providing~~expanding ~~this~~our ~~information~~service capabilities ~~in order~~ to ~~compare~~include ~~the~~CFM-56 ~~revenue~~engines. ~~derived~~Through ~~from~~ these facilities, ~~open~~we inprovide ~~both~~MRO ~~the~~services ~~second quarter and first half of 2004 and the second~~for ~~quarter and first half of 2003).~~

~~The increase in revenue for the three and six month periods ended June 30, 2004~~25 compared to the revenue for the three and six month periods ended June 30, 2003 can primarily be attributed to additional revenue in our airframe heavy maintenance operations (described below), in our engine center operation due to an expanded customer base, in our Goodyear, Arizona facility (as discussed above), and in our Brice operation, which has benefited from the cross sales of our other service offerings and from an expanded customer base for its aircraft seats.

~~Revenue~~major ~~for~~commercial ~~the~~airlines, ~~three~~regional ~~and~~air ~~six months ended June 30~~carriers, ~~2004~~aircraft ~~were~~leasing favorably impacted by a significant influx of airframe heavy maintenance work to our MR&O operations. Adverse market conditions during the first half of fiscal 2003 resulted in delays of maintenance service work by several of our significant customers and adversely impacted our 2003 second quarter and six month results of operations. Many of these delayed maintenance programscompanies, ~~however,~~government ~~were inducted for service during the second half of 2003~~ and ~~have continued through~~ ~~the~~military ~~first~~units ~~half of fiscal 2004. In addition, during the first half of 2004 we have expanded our customer base~~ and, inair ~~some~~cargo ~~instances, increased our share of outsourced maintenance by our existing customers~~carriers. ~~The impact on revenue for~~ ~~the first half of 2004 and for the second quarter of 2004 was an~~

19Our aircraft interiors segment performs the refurbishment of aircraft interior components and the manufacturing and sale of aftermarket parts and new aircraft seats, and provides aircraft engineering, modification design, certification, and installation of interior reconfigurations within two separate operating facilities. These operating facilities provide the capabilities for passenger-to-freighter conversions, aircraft modifications for in-flight entertainment, avionics upgrades and major structural modification programs. Additionally, our interiors segment provides the manufacturing for new aircraft seats, ranging from basic coach to business class and first class seat capabilities. These services are provided to both foreign and domestic commercial airlines and to aerospace original equipment manufacturers.

~~increase~~THREE ~~in revenue~~AND ~~for~~SIX ~~our~~MONTHS ~~airframe~~ENDED ~~MR&O~~JUNE ~~facilities~~30, ~~including~~2006 ~~Goodyear,~~AND ~~over the first half of 2003 and for the~~2005 second quarter of 2003 of approximately $50,804 and $21,687, respectively. This increase in revenues from the operation of our airframe MR&O facilities, coupled with the increased revenue for our engine center operation and our Brice operation, resulted in a $57,105 and $25,780 improvement in revenue for the first half of 2004 and for the second quarter of 2004 over the first half of 2003 and for the second quarter of 2003, respectively.

~~While~~Consolidated ~~significantly~~operating ~~improved over the first six months of 2003 and second quarter of 2003, our~~ revenue for the six month ~~and~~period ~~three month periods~~ ended June 30, ~~2004~~2006 ~~continued~~increased to$1,965, ~~be unfavorably impacted by general economic~~or ~~conditions affecting the airline industry~~1.1% ~~For~~to ~~most of fiscal 2004~~$173,761, ~~these~~from ~~unfavorable impacts include increased jet fuel prices~~$171,796 ~~increased~~for ~~price~~the ~~competition~~same ~~and~~period ~~continued~~in ~~downward pricing pressures from airline customers~~2005. ~~These~~Operating ~~factors~~revenue ~~forced~~for usour ~~during fiscal 2003~~MRO ~~and~~operations ~~the~~decreased ~~first half of 2004~~ to ~~reduce~~$136,894 ~~pricing~~for ~~and~~the ~~take~~six ~~fixed~~month ~~priced~~period ~~work~~ended ~~at lower~~June 30, ~~rates~~2006, ~~which~~compared ~~adversely~~to ~~impacted~~$153,032 for ~~revenues~~the ~~and~~same ~~gross~~period ~~margins. Additionally, instability~~ in ~~the~~2005 ~~Middle~~(a ~~East~~$16,138, ~~the~~or ~~currently on-going war on terrorism~~10.5%, ~~and~~decrease ~~the~~period-over-period). ~~war~~Operating ~~in Iraq have unfavorably impacted airline passenger~~revenue ~~levels~~for ~~during~~our ~~fiscal~~interior ~~2004,~~operations ~~which~~increased ~~has equated~~ to ~~additional~~$36,867 ~~further~~for ~~delays~~the ~~of maintenance~~six ~~service~~month byperiod ~~some~~ended ~~of our customers. Finally~~June 30, ~~changes in customer~~2006, ~~maintenance~~compared ~~schedules~~to ~~have~~$18,764 ~~impacted~~for ~~us in~~ the ~~past~~same ~~and~~period ~~are~~in ~~likely~~2005 to(an ~~impact~~$18,103, ~~us in~~or ~~the~~96.5%, ~~future~~increase period-over-period).

~~Gross~~Consolidated ~~profit~~operating ~~increased~~revenue ~~to $13,099~~ for the ~~six~~three month period ended June 30, ~~2004 compared~~2006 ~~with~~increased ~~a gross profit of~~ $57,~~093 for the six month period ended June 30~~555, or ~~2003~~9.3% ~~Gross~~to ~~profit~~$88,669, ~~increased~~from to $781,~~008~~114 for the ~~three~~same ~~month~~ period ~~ended~~in ~~June 30,~~2005. ~~2004~~Operating ~~compared~~revenue ~~with~~for aour ~~gross~~MRO operations ~~profit~~decreased ofto $165,~~575~~324 for the ~~three~~quarter ~~month period~~ ended June 30, ~~2003.~~2006, ~~The~~compared ~~improvement~~to of$73,397 ~~gross margin results~~ for the same ~~six~~period ~~month and~~in ~~three~~2005 ~~month~~(an ~~periods~~$8,073, ~~ended~~or ~~June 30~~11.0%, ~~2004~~decrease quarter-over-quarter). ~~the~~Operating ~~same~~revenue ~~periods~~ for ~~2003 was~~ ~~spurred~~our byinterior ~~the~~operations ~~receipt~~increased ~~of long-term repetitive customer maintenance programs (referred~~ to in$23,345 for the ~~industry~~quarter asended ~~“nose-to-tail~~June 30, ~~lines”)~~2006, ~~where~~compared ~~greater~~to ~~efficiencies are generally achieved~~$7,717 ~~and~~for bythe ~~higher~~same ~~revenues~~period ~~which allowed~~in us2005 to(a ~~better~~$15,628, ~~leverage~~or ~~our~~202.5%, ~~fixed~~increase ~~costs contained in cost of sales~~quarter-over-quarter).

During the ~~first~~three ~~half~~and ofsix ~~2003,~~month ~~because~~periods ~~we did~~ended ~~not~~June 30, ~~have~~2006, ~~significant~~our ~~nose-to-tail~~revenue ~~lines~~from ~~during~~our ~~this~~MRO ~~period,~~operations declined weas ~~were~~compared ~~forced~~ to ~~take~~the same periods of 2005 as a ~~higher~~result ~~proportion~~of aircraft mix, which included a larger number of ~~single-visit~~smaller ~~customers~~aircraft for which ~~resulted~~we inreceive a ~~deterioration~~ lower hourly rate, a change in the mix of maintenance ~~gross~~services ~~margin~~requested ~~results~~by ~~due~~our customers during 2006 as compared to ~~lower~~2005 ~~productivity.~~(from Inmore ~~addition~~heavy maintenance service checks to ~~the~~less ~~increase~~intensive inand ~~nose~~lower hour maintenance checks), and from the wind-~~to-tail~~down of maintenance ~~programs~~services being offered at our Goodyear, anArizona ~~overall~~facility. ~~increase~~Our inrevenues ~~sales~~from ~~levels~~our Goodyear facility were $12,406 ~~particularly~~and $17,052, respectively, for ~~our~~the ~~engine~~first ~~center~~half ~~operation~~of 2006 and 2005, ~~Brice~~and ~~operation~~$3,558 and $7,634, respectively, for the three months ended June 30, 2006 and 2005. ~~resulted~~Also, our MRO operations have tried to better evaluate the pricing points in anwhich ~~improved~~we will bid and accept heavy maintenance service work, with the goal of improving gross margin results. ~~Gross~~This ~~profit~~more stringent asevaluation ahas ~~percentage~~resulted ofin ~~revenue~~our not accepting certain customer aircraft and/or programs ~~increased~~where we would be unable to ~~8.1%~~achieve ~~and~~levels 9of gross profit sufficient to take on such business.0% ~~for~~A part of this revenue decline within the ~~six~~MRO ~~and~~operations ~~three~~was ~~month~~partially ~~periods~~offset ~~ended~~by the ~~June 30~~induction, ~~2004,~~ ~~respectively~~in late December 2005, ~~from~~of 4our first aircraft under a significant U.9%S. ~~and~~military 3MRO program.0% ~~for~~This program is anticipated to benefit the ~~comparable~~full ~~periods~~year ~~ended~~of ~~in 2003~~fiscal 2006.

~~Gross~~Within ~~profit~~our ~~levels~~interior ~~are~~operations, ~~impacted by the fact that many of the costs of operating~~ our ~~facilities~~six ~~are~~month ~~relatively~~and ~~fixed~~second ~~and~~quarter ~~therefore~~2006 revenues ~~above a certain level~~ have aexceeded ~~more~~those of ~~than~~the ~~proportional~~same ~~favorable~~period ~~impact~~of on2005 ~~gross margins.~~as ~~Further,~~we ~~gross~~have ~~margins~~commenced ~~during~~shipments ~~any~~for ~~particular~~several ~~period~~large ~~are~~customer ~~dependent~~structural ~~upon~~modification ~~the~~programs. ~~number~~These ~~and~~customer ~~type of aircraft serviced~~programs, ~~the contract terms under~~ which ~~services~~ are ~~performed~~a ~~and~~part ~~the~~of ~~efficiencies~~our ~~that~~engineering ~~can~~services business, behave ~~obtained~~resulted in ~~the performance~~increased ofrevenues ~~such~~for ~~services.~~the ~~Significant~~six ~~changes~~month inperiod ~~any~~ended ~~one~~June 30, of2006 ~~these~~over ~~factors~~the ~~could~~same ~~have~~period aof ~~material~~2005 ~~impact~~of on$21,150, ~~the~~or ~~amount~~312%, and ~~percentage~~for ofthe ~~gross~~three ~~profits. Additionally,~~month ~~gross~~period ~~profit~~ended ~~could~~June 30, be2006 ~~impacted in~~ over the ~~future~~same byperiod ~~considerations~~of ~~as to~~2005 ~~the value~~ of ~~our~~$17,201, ~~inventory~~or 1000%. ~~While~~This werevenue ~~believe~~increase ~~that~~for ~~we have appropriately valued our inventory at~~ the ~~lower~~three ofand ~~cost~~six ormonth periods ~~market~~ended ~~value~~June 30, ~~additional allowances~~2006 ~~may~~has bebeen ~~required~~partially inoffset ~~the~~by ~~future,~~lower ~~depending~~sales onvolume ~~the~~within ~~market~~our ~~for aircraft~~seat ~~parts~~manufacturing and ~~the~~overhaul ~~fleet~~operations. ~~types~~In ofthat ~~the~~regard, ~~parts~~ in ~~our~~June 2005 ~~inventory~~we ~~compared~~closed toour ~~the types~~Aircraft ofInterior ~~aircraft~~Design ~~for~~operations ~~which~~in weDallas, ~~are~~TX ~~performing maintenance procedures. We continue to evaluate all market~~ and ~~industry~~integrated ~~exposures~~that inbusiness ~~connection~~within ~~with~~our ~~the~~other ~~establishment~~MRO ~~of appropriate inventory valuation levels~~operations.

~~Operating~~Our ~~expenses~~consolidated revenues and gross profit for the ~~six~~first ~~month~~half and second quarter of 2006 continued ~~period~~to ~~ended~~be ~~June 30,~~unfavorably ~~2004~~impacted ~~were~~by ~~$10~~general economic conditions affecting the airline industry,~~907~~ which has ~~compared~~continued to ~~$6,671~~put ~~for~~pricing ~~the~~pressures ~~six~~on ~~month~~our ~~period~~business, ~~ended~~and ~~June 30,~~by ~~2003.~~continued ~~Operating expenses~~overcapacity ~~for~~in the ~~three~~MRO markets ~~months~~in ~~ended~~which ~~June 30~~we operate. Also, ~~2004~~delays ~~were~~and ~~$5,608~~changes ~~compared~~in tocustomer maintenance schedules have ~~$3,721~~impacted ~~for~~us in the ~~three~~past ~~months~~and ~~ended~~are ~~June 30,~~likely ~~2003~~to impact us in the future. ~~Operating~~In ~~expenses~~addition, as adiscussed below, ~~percentage~~we have recorded certain charges during 2006 related to the shut-down of ~~revenues~~our ~~were~~Goodyear, 6Arizona MRO facility.8% ~~and~~Finally, ~~7.2%~~changes ~~for~~in customers and the ~~six~~addition of new customers and ~~three~~new ~~month~~fleet ~~periods~~types ~~ended~~within ~~June 30,~~several ~~2004,~~of ~~respectively,~~our ~~compared~~airframe tomaintenance ~~6.5%~~facilities ~~and~~have ~~7.1%~~resulted ~~for~~in ~~the~~ramp ~~same~~up and learning curve ~~respective~~issues ~~periods~~that inhave ~~2003~~driven inefficiencies and caused a significant deterioration of gross profit margins.

~~During the second quarter of fiscal 2003, we terminated a lease agreement with~~26 a third party for an abandoned facility in Burnsville, Minnesota. As a result of this lease termination, we eliminated an accrual of $300 previously established for our operating lease commitment. Additionally, during the second quarter of fiscal 2003, we eliminated an environmental reserve that had been established for property sold in the prior year. As it was determined that we no longer had any exposure related to possible environmental matters for this property, we eliminated an accrual of $264 previously established for this exposure. Also, at the end of the second quarter of fiscal 2003, we entered into an operating agreement with a third party vendor. As a result of this agreement and modifications made to an accounts receivable balance due from this vendor within the operating agreement, we eliminated the need for a reserve of $300 against this receivable balance. Each of these eliminations of exposures is reflected as a reduction to operating expenses for the three and six month periods ended June 30, 2003. In addition, during the first quarter of fiscal 2003 we were able to extend a sublease agreement with a third party for a facility that we currently lease in Opa-Locka, Florida. As a result of this sublease extension, we eliminated an accrual previously established for the shortfall in the operating lease commitment and the amount of the original sublease income. The reversal of this accrual resulted in a $300 benefit during the 2003 first quarter. Also, as a result of a revised estimate of workers’ compensation insurance claims, we reduced our accrual for workers’ compensation insurance by $400 during the first quarter of 2003. These reductions in exposures are also reflected as an offset to operating expenses for the

20In September 2005, America West Airlines, a primary customer of our Macon, Georgia MRO facility and a substantial customer of our Lake City, Florida and Goodyear, Arizona MRO facilities, merged with US Airways. In the near term we do not believe that this merger will adversely affect our business with America West. However, in the long term we are unable to predict the impact of this merger on our business. Additionally, on September 14, 2005, one of our largest customers, Delta Airlines, Inc., filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Based on currently available information, we do not expect the bankruptcy filing of Delta Airlines, Inc. to have a material adverse effect on our results of operations or financial position.

~~six~~Consolidated ~~month~~gross ~~period~~profit ~~ended~~decreased ~~June 30~~to $10,959 ~~2003.~~for ~~Had~~the ~~all~~first half of ~~these~~2006, ~~offsets~~compared towith ~~operating~~a ~~expenses~~gross profit ~~not~~of ~~occurred~~$16, ~~the~~956 ~~2003~~for the first half ~~and~~of ~~second~~2005. ~~quarter~~Consolidated ~~operating~~gross ~~expenses~~profit as a percentage of revenue ~~revenues~~decreased ~~would~~to ~~have~~6.3% ~~been~~for 8first half of 2006 compared with 9.09% ~~and~~for 8first half of 2005.8% Consolidated gross profit decreased to $6,779 ~~respectively~~for the second quarter of 2006 compared with a gross profit of $7,527 for the second quarter of 2005. ~~The~~Consolidated ~~combination~~gross profit as a percentage of ~~these~~revenue ~~offsets~~decreased to ~~operating~~7.6% ~~expenses~~for second quarter of 2006 compared with 9.3% for second quarter of 2005. Gross margins during any particular period are dependent upon the ~~first~~number ~~half~~and type of ~~2003~~aircraft serviced, the ~~coupled~~contract ~~with~~terms under which services are performed, the efficiencies that can be obtained in the performance of such services and the timing of shipments related to modification programs that are a part of our engineering services business. Significant changes in any one of these factors could ~~significant~~have ~~increase~~a material impact on the amount and percentage of gross profits in ~~revenues~~any ~~for~~particular period and from period to period. Additionally, gross profit could be impacted in the future by our evaluation of the value of our inventory. During the first ~~half~~six months of ~~2004~~2006, ~~compared~~we continued to evaluate market and industry exposures in connection with the establishment of appropriate reserves ~~first~~for ~~half~~inventory obsolescence. While we believe that we have appropriately valued our inventory at the lower of ~~2003~~cost or market, ~~resulted~~additional allowances may be required in the ~~increased~~future, ~~three~~depending ~~and~~on ~~six~~the market ~~month~~for aircraft parts during any particular period and the applicability of the parts in our ~~operating~~inventory ~~expenses~~compared ~~reflected~~to ~~above~~the types of aircraft for which we are performing maintenance procedures.

AsGross aprofit ~~result~~for ofour ~~these~~MRO ~~factors~~operations declined to $5, ~~income~~015 ~~from~~for ~~operations~~the ~~was~~six months ended June 30, 2006, compared to $214,~~192~~057 for the ~~first half~~six ofmonths ~~2004~~ended June 30, ~~compared~~2005. MRO gross profit as a percentage of revenue decreased to ~~loss~~3.7% ~~from~~for ~~operations~~the first half of ~~$1,578~~2006 compared with 9.2% for the first half of 2005. ~~2003,~~Gross ~~and~~profit ~~income~~for ~~from~~our MRO operations ~~was~~declined to $12,~~400~~934 for the ~~second~~three ~~quarter~~months ofended ~~2004~~June 30, 2006, compared to $6,218 for the three months ended June 30, 2005. MRO gross profit as a ~~loss~~percentage ~~from~~of revenue ~~operations~~decreased to 4.5% for the second quarter of ~~$2,146~~2006 compared with 8.5% for the second quarter of 2005. The quarter-over-quarter and period-over-period decline has resulted from lower levels of nose-to-tail ~~2003~~lines, where greater efficiencies can be achieved, the timing and type of engine sales performed during the first half of 2006 compared to the first half of 2005 within our engine center, a transition in the aircraft fleet type and/or customers that we are servicing, and overall lower revenue. The transition in aircraft fleet types and/or customers has resulted in additional training requirements, learning curve and ramp up issues and operational inefficiencies, thereby adversely impacting gross profit.

~~Interest~~Additionally, ~~expense~~during ~~(excluding~~the ~~amortization~~second quarter of ~~deferred~~2006, ~~financing~~we ~~fees)~~made ~~for~~ the ~~six~~ ~~months~~decision ~~ended~~to ~~June 30,~~wind-down ~~2004~~our ~~increased~~heavy airframe bymaintenance ~~$1,355~~operations orlocated ~~70.9%~~in ~~to $3~~Goodyear,~~266,~~ ~~from $1~~Arizona,~~911~~ ~~for~~and ~~the~~subsequent ~~six~~to ~~months ended~~ June 30, ~~2003.~~2006, ~~Interest expense (excluding~~we ~~amortization~~have ofentered ~~deferred~~into ~~financing~~an ~~fees)~~asset ~~for~~sales ~~the~~agreement ~~second quarter ended June 30, 2004 increased by $800 or 86.9%~~ to ~~$1,721~~sell ~~from~~substantially ~~$921~~all ~~for~~of the ~~second~~fixed ~~quarter ended~~assets ~~June 30,~~located ~~2003.~~at this ~~The~~facility ~~increases~~to ~~for~~an ~~the~~unrelated ~~six~~third ~~and~~party ~~three~~(see ~~month~~Note ~~periods~~17 ~~ended June 30, 2004 as compared to the same periods~~ of ~~2003~~Notes ~~are primarily attributable~~ to ~~non-cash~~Condensed ~~interest~~Consolidated ~~expense (since the original $7,350 related~~Financial ~~party~~Statements ~~term~~for ~~loan~~further ~~was~~details aof ~~PIK~~this ~~instrument~~agreement). onAs ~~our~~a ~~related~~result ~~party~~of ~~term~~this ~~loan (which was substantially funded in July 2003)~~decision, ~~the~~we ~~cash~~have ~~interest and non-cash interest~~recorded ~~expense~~asset onimpairment ~~our~~charges ~~restructured~~related ~~$14,412~~to ~~related~~fixed ~~party~~assets ~~term~~that ~~loan~~are ~~(established~~either ~~April 8,~~not ~~2004),~~being ~~the~~acquired ~~additional~~or ~~cash~~that ~~interest~~are ~~and~~not being ~~non-cash~~relocated ~~interest~~to ~~expense~~other onTIMCO ~~our newly~~facilities ~~established~~of $~~8,000~~277 ~~Hilco~~and ~~Term~~we ~~Loan~~have ~~(established~~recorded ~~April 8,~~severance ~~2004)~~charges ~~and~~of by$199 ~~increased~~related ~~borrowing~~to ~~levels,~~certain ~~year-over-year, under our credit facility~~employees. ~~For~~These ~~the three~~aggregate ~~and~~charges ~~six~~of ~~month~~$476 ~~periods~~have ~~ended~~been ~~June 30,~~recorded ~~2004,~~within ~~our~~cost ~~non-cash PIK interest~~of ~~expense~~sales ~~increased~~ ($~~528~~458) and ~~$868,~~operating ~~respectively,~~expenses as($18) ~~compared~~within to the ~~same~~accompanying ~~periods of~~condensed ~~2003,~~consolidated ~~while~~financial statements ~~our cash interest expense increased~~ for the three and six month periods ended June 30, ~~2004 by $272 and $487, respectively, as compared to the same periods of 2003~~2006.

~~Amortization~~Gross ofprofit ~~deferred~~for ~~financing~~our ~~costs~~interiors ~~was~~operations ~~$687~~increased ~~and~~to $15,~~164~~944 for the six months ended June 30, ~~2004 and 2003~~ 2006, ~~respectively,~~compared ~~and~~to ~~was~~ $~~423~~2,899 ~~and $606~~ for the ~~three months~~same ~~ended~~period ~~June 30,~~of ~~2004~~2005. ~~and~~Gross ~~2003,~~profit ~~respectively.~~as ~~The~~a ~~decrease~~percentage ~~for~~of ~~the six~~revenue ~~and~~increased ~~three~~to ~~month~~16.1% ~~periods~~for ~~ended June 30, 2004, compared to~~ the ~~six~~first ~~and~~half ~~three month~~of ~~periods~~2006 ~~ended~~compared ~~June 30, 2003 are primarily attributable~~ to ~~deferred financing~~15.4% ~~fees~~for ~~related~~the tofirst ~~our~~half ~~July 2002 financing being fully amortized at the end~~ of ~~January 2004~~2005. ~~(the original maturity date for our Amended Credit Facility~~Gross ~~and~~profit ~~BofA~~increased ~~Term Loan) with minimal additional financing fees incurred related~~ to ~~the~~ ~~extension~~$3,845 offor the ~~Amended~~three ~~Credit~~months ~~Facility~~ended ~~through July~~June ~~2004~~30, ~~(see~~2006, ~~Note~~compared 3 to ~~Notes~~ of$1,309 ~~Condensed Consolidated Financial Statements~~ for ~~particulars~~the same period of ~~this short-term extension)~~2005. ~~Partially~~Gross ~~offsetting~~profit ~~this~~as ~~reduction~~a ispercentage ~~amortization~~ of ~~deferred~~ ~~financing~~revenue ~~fees~~remained ~~incurred~~relatively inflat ~~conjunction~~at ~~with~~16.5% ~~our May 2003 amendment to~~for ~~our~~the ~~July 2002~~second ~~credit~~quarter ~~facility~~of ~~and~~2006 ~~TROL~~compared ~~financing~~to ~~arrangement,~~17.0% ~~deferred financing~~for ~~fees~~the ~~incurred~~second inquarter ~~conjunction~~of ~~with~~2005. ~~our~~The ~~newly established credit~~improvement ~~facility~~within ~~and~~our ~~Hilco~~interiors ~~Term~~operation ~~Loan,~~resulted ~~and~~from ~~deferred~~a ~~financing~~96.5% ~~fees~~period-over-period ~~incurred~~increase in ~~conjunction~~ ~~with~~revenue ~~the warrant that was extended to our majority stockholder in~~noted ~~conjunction~~above ~~with~~and ~~securing~~ a ~~portion~~change ofin ~~our~~mix ~~related party term loan. In addition, during the second quarter ended June 30, 2004 we wrote-off $145~~ of ~~deferred~~ ~~financing~~active ~~fees~~programs ~~that~~for ~~related to the above-described short-term extension of~~ our ~~Amended~~ ~~Credit~~engineering ~~Facility~~services business.

~~Other~~Consolidated ~~income~~operating –expenses ~~net was $516 and $352~~ for the six ~~and~~months ~~three-month periods~~ ended June 30, ~~2004,~~2006 ~~respectively~~were $13,631, compared to $~~886~~12,337 ~~and $58~~ for the six ~~and three-month~~months ~~periods~~ ended June 30, ~~2003~~2005. As a percentage of revenues, ~~respectively.~~consolidated operating ~~Other~~expenses ~~income~~were –7.8% ~~net~~and 7.2% for the first half of ~~fiscal~~2006 ~~2004~~and ~~included~~2005, arespectively. Consolidated ~~gain~~operating onexpenses for the ~~settlement~~three ~~relating~~months toended ~~our~~June 30, ~~warrant repurchase~~2006 ~~obligation~~were ($~~209).~~8,056, ~~See~~compared ~~Note~~to $5,914 7for of the ~~Notes~~three tomonths ~~the~~ended ~~Condensed Consolidated~~June 30, ~~Financial Statements~~2005. ~~Other~~As ~~income~~a –percentage ~~net~~of ~~for~~revenues, ~~the first half of~~consolidated ~~fiscal~~operating ~~2003~~expenses ~~was~~were ~~primarily~~9.1% ~~comprised~~and of7.3% afor ~~gain on~~ the ~~settlement~~second quarter of ~~outstanding~~2006 ~~purchase~~and ~~price~~2005, ~~adjustments and~~respectively. ~~other~~Consolidated ~~obligations~~operating ~~and~~expenses ~~funds~~during ~~held~~the inthree ~~escrow~~and ~~related~~six tomonth ~~the~~periods ~~July~~ended June ~~2002~~30, ~~sale~~2006 ~~of our~~were ~~Aerocell~~unfavorably ~~Structure~~impacted ~~operations~~by ~~($570).~~an ~~See~~aggregate ~~Note~~severance 3charge of ~~the~~$1,770 ~~Notes~~related to ~~the~~ ~~Consolidated Financial Statements in our 2003 Form 10-K.~~

~~As a result of the above factors, our loss from continuing operations before~~27 income taxes and discontinued operations for the six months ended June 30, 2004 was $1,245, compared to our loss from continuing operations before income taxes and discontinued operations of $3,767 for the six months ended June 30, 2003. Our loss from continuing operations before income taxes and discontinued operations for the three months ended June 30, 2004 was $392, compared to our loss from continuing operations before income taxes and discontinued operations of $3,615 for the three months ended June 30, 2003.

~~For~~ the ~~first~~retirement ~~half~~ of ~~2003,~~our weformer ~~recognized~~Chief aExecutive ~~$710~~Officer, ~~income~~the ~~tax~~employment ~~benefit~~separation asof acertain ~~result~~members of ~~the~~management ~~Internal~~during ~~Revenue~~2006, ~~Service~~and ~~(“IRS”)~~the ~~completing~~employment ~~audits~~separation of certain employees located in our Goodyear, ~~1996~~Arizona facility due to our decision to wind-down operations at this location. Consolidated operating expense during the first half of 2006, ~~1997~~however, were partially offset by the ~~1998~~collection ~~and~~of ~~1999~~$616 ~~federal~~of ~~income~~accounts ~~tax~~receivable ~~returns.~~that ~~Based~~were oneither previously fully reserved or written off, including the ~~findings~~receipt of common stock in ~~the~~a ~~IRS~~settlement relating to an unsecured claim which we ~~agent~~held in a customer’s ~~report,~~bankruptcy weproceeding ~~eliminated~~(see aNote ~~$400~~10 ~~accrual~~of ~~for~~Notes ~~tax~~to ~~exposure~~Condensed ~~matters~~Consolidated Financial Statements) and ~~established~~ anby ~~income~~the ~~tax~~partial ~~receivable~~reversal ~~for~~of severance accruals ($~~310.~~325) ~~Additionally~~that were established as of December 31, 2005 and reduced during ~~2003,~~2006 wedue to the terms of the settlement that ~~recognized~~was areached ~~tax~~with ~~benefit~~our former President and Chief Operating Officer (see Note 10 of ~~$174~~Notes ~~for~~to Condensed Consolidated Financial Statements) and the ~~receipt~~finalization of ~~miscellaneous~~separation ~~state~~agreement with ~~carryback~~other ~~refunds~~members of senior management terminated in 2005.

21As a result of these factors, our loss from operations was $2,672 for the first half of 2006, compared to income from operations of $4,619 for the first half of 2005, and our loss from operations was $1,277 for the second quarter of 2006, compared to income from operations of $1,613 for the second quarter of 2005.

~~For~~Interest expense (excluding amortization of deferred financing fees) for the ~~reasons~~six ~~set~~month ~~forth~~period ~~above~~ended June 30, ~~our~~2006 ~~loss~~decreased ~~from~~by ~~continuing~~$718 ~~operations~~to $2,898, from $3,616 for the six ~~months~~month period ended June 30, 2005. ~~2004~~Interest ~~was~~expense (excluding amortization of deferred financing fees) for the three month period ended June 30, 2006 decreased by $257 to $1,~~245~~529, orfrom $~~0.04~~1,784 ~~per~~for ~~basic~~the ~~share~~same ~~and~~period ~~diluted~~of 2005. ~~share,~~The decrease during 2006 compared to a2005 ~~loss~~is primarily attributable to the elimination of ~~$2,883,~~interest expense oron ~~$0.09~~our ~~per~~Original ~~basic~~LJH ~~share~~Term Loan (which was used by LJH to participate in the rights offering in November 2005; see Note 13 of Notes to Condensed Consolidated Financial Statements) and ~~diluted~~by the ~~share,~~assignment ~~for~~of the ~~six~~Monroe ~~months~~Capital ~~ended~~Loans ~~June~~to LJH during April 302006 (see Note 8 of Notes to Condensed Consolidated Financial Statements), ~~2003~~which are being extended to us at more favorable interest rates as compared to the Monroe Capital Loans. ~~Our~~The ~~loss~~reduction ~~from~~in ~~continuing~~interest expense through the elimination ~~operations~~of ~~for~~the LJH Original Term Loan and the ~~three~~assignment ~~months~~of ~~ended~~the ~~June 30,~~Monroe ~~2004~~Capital Loans was ~~$392~~partially offset by higher borrowing levels, orin ~~$0.01~~particular ~~per~~the net increase in our overall term loan obligations ~~basic~~(see ~~share~~Notes 7 and ~~diluted~~8 ~~share,~~of ~~compared~~Notes to aCondensed ~~loss~~Consolidated ofFinancial ~~$2,905,~~Statements orfor ~~$0.09~~particulars ~~per~~of ~~basic~~the ~~share~~LJH Term Loans and ~~diluted~~the ~~share,~~pay-off ~~for~~of ~~the~~our ~~three~~previously ~~months~~outstanding ~~ended~~CIT ~~June 30,~~Term ~~2003~~Loan).

~~Income~~Amortization ~~from~~of ~~discontinued~~deferred ~~operations~~financing costs for the ~~six~~first ~~and~~half ~~three~~of ~~month~~2006 ~~periods ended June 30, 2004~~ was $1839,~~115~~ ~~and~~compared to $~~144,~~663 ~~respectively,~~for the orfirst ~~$0.04~~half ~~and~~of $02005.00 ~~per~~Amortization ~~basic share~~of ~~and~~deferred ~~diluted~~financing ~~share,~~costs ~~respectively,~~for ~~compared~~the tosecond ~~income~~quarter of ~~$3,175~~2006 ~~and~~was $2559,~~878, respectively,~~ orcompared ~~$0.10~~to ~~and~~ $~~0.09,~~364 ~~respectively, per basic share and diluted share~~ for the ~~same~~second ~~periods~~quarter of ~~2003~~2005. ~~Income~~The ~~from~~increase ~~discontinued~~in ~~operations~~amortization ~~for~~of ~~the~~deferred ~~first~~financing ~~half~~costs offor ~~2004 is comprised of a gain on~~ the ~~disposition~~ ofthree ~~our office~~ and ~~warehouse~~six ~~facility~~month ~~located~~periods inended ~~Miramar~~June 30, ~~Florida ($825),~~2006 ~~net~~over ~~rental~~prior ~~income~~year same ~~and~~periods ~~expenses~~relates ~~associated with this office and warehouse facility received prior~~ to ~~its~~ ~~disposition~~the ~~($75)~~write-off, ~~and~~as ~~collections~~a onresult ~~receivables retained from the sale~~ of our ~~redistribution~~refinancing ~~operations~~activities ~~that~~in ~~had~~April 2006 ~~been fully~~(see ~~reserved~~Notes 7 and ~~the~~8 ~~sale~~ of ~~residual~~Notes ~~inventory~~to ~~that~~Condensed ~~remains~~Consolidated ~~from~~Financial ~~the~~Statements ~~sale of our redistribution operation and new parts bearings operation. Income from discontinued operations~~ for ~~the~~particulars ~~first half~~ of ~~2003 includes~~these ~~net~~refinancing ~~rental~~activities) ~~income~~of ~~and expenses associated with our Miramar facility (~~$~~86),~~289 ~~collections on receivables retained from the sale~~ of ~~our~~deferred ~~redistribution~~financing ~~operations that~~costs ~~had~~related ~~been~~to ~~fully reserved and~~ the ~~sale~~CIT ofTerm ~~residual~~Loan ~~inventory that remains from the sale of our redistribution operation~~ and ~~new~~to ~~parts~~a ~~bearings~~portion ~~operation. Additionally, income from discontinued operations for the first half~~ of ~~2003 includes $2,700 resulting from~~ the ~~elimination~~CIT ~~and~~Group ~~settlement~~Revolving ofLine ~~contingency exposures and obligations relating to our redistribution operations and new parts bearing operations, based on a current evaluation~~ of ~~those exposures~~Credit.

In August 2004, we entered into a settlement agreement with the entity from which we acquired our Oscoda, Michigan engine and airframe maintenance facilities in 1999. Pursuant to that entity’s plan of reorganization under Chapter 11 of the United States Bankruptcy Code, we were to receive a pro rata portion of 7,000 shares of common stock in the reorganized company based on our unsecured claim as compared to the total of all unsecured claims. In April 2005, we received 1,364 shares of new common stock in the reorganized company in settlement of our claim against that entity’s bankruptcy estate. Based on the stock price of the reorganized company on April 21, 2005, which was $1.30 per share, we recorded a gain of $1,773 for the three and six month periods ended June 30, 2005.

During the first half of 2005, we completed an offering and consent solicitation (the January 2005 tender offer) relating to our New Senior Notes and our Junior Notes. As a result of this tender offer, we recognized an inducement charge of $160 relating to the value of the premium shares issued as a part of the offering. Additionally, we incurred transaction fees related to the offering of $240. See Note 12 of Notes to Condensed Consolidated Financial Statements for specifics regarding this tender offer.

Other income – net was $233 and $350 for the first half of 2006 and 2005, respectively. Other income – net was $31 and $11 for the second quarter of 2006 and 2005, respectively. Other income – net for the first half of 2006 included investment income of $130 related to short-term investment activities performed during 2006. Other income – net for the first half of 2005 included a $250 gain from the receipt of life insurance proceeds on a former key employee.

As a result of the above factors, our loss from continuing operations before income taxes and discontinued operations for the six month period ended June 30, 2006 was $6,176 compared to our income from continuing operations before income taxes and discontinued operations of $2,063 for the six month period ended June 30, 2005. Our loss from continuing operations before income taxes and discontinued operations for the three month period ended June 30, 2006 was $3,343 compared to our income from continuing operations before income taxes and discontinued operations of $1,249 for the three month period

ended June 30, 2005.

During the first half of 2006 and 2005, we recognized an income tax benefit of $31 and $368, respectively. These income tax benefits are primarily the result of income tax refunds for the overpayment of state taxes for our Oscoda, Michigan operations.

For the reasons set forth above, our loss from continuing operations for the six month period ended June 30, 2006 was $6,145, or $0.29 per basic share and diluted share, compared to income from continuing operations for the six month period ended June 30, 2005 of $2,431, or $0.61 per basic share and $0.27 per diluted share. Our loss from continuing operations for the three month period ended June 30, 2006 was $3,343 or $0.15 per basic share and diluted share, compared to income from continuing operations for the three month period ended June 30, 2005 of $1,280 or $0.20 per basic share and $0.11 per diluted share.

Income from discontinued operations for the first half of 2006 was $114, or $0.01 per basic share and diluted share, compared to income of $99, or $0.03 per basic share and $0.01 per diluted share, for the first half of 2005. Income from discontinued operations for the second quarter of 2006 was $92, or $0.00 per basic share and diluted share, compared to income of $44, or $0.01 per basic share and $0.00 per diluted share, for the second quarter of 2005. Results for both the first half of 2006 and 2005 include collections on receivables and the sale of residual inventory that remain after the sale of our redistribution operation and new parts bearings operation, all of which is fully reserved. Since our collections on assets from discontinued operations are winding down, we do not expect that our income from discontinued operations will be significant in future periods.

For the reasons set fourth above, our net loss for the first six months of 2006 was $6,031 ($0.28 per basic share and diluted share), compared to net income of $2,530 for the first six months of 2005 ($0.64 per basic share and $0.28 per diluted share). Our net loss for the second quarter of 2006 was $3,242 ($0.15 per basic share and diluted share), compared to net income of $1,324 for the second quarter of 2005 ($0.21 per basic share and $0.11 per diluted share).

LIQUIDITY AND CAPITAL RESOURCES

~~Developments~~DEVELOPMENTS ~~Concerning~~CONCERNING ~~the~~THE ~~Aviation~~AVIATION ~~Industry~~INDUSTRY ~~and~~AND ~~Our~~OUR ~~Operations~~OPERATIONS

The condition of the airline industry has a substantial effect on our business, since our customers consist of passenger airlines and freight carriers, aircraft leasing companies, maintenance and repair facilities that service airlines, asand ~~well as~~ original equipment manufacturers. Generally, when economic factors adversely affect the airline industry, they tend to reduce the overall demand for maintenance and repair services, causing downward pressure on pricing and increasing the credit risks associated with doing business with airlines. Additionally, the price of jet fuel affects the maintenance and repair markets, since older aircraft, which consume more fuel and which ~~currently~~ currently account for a significant portion of our maintenance and repair services business, become less viable as the price of fuel increases.

The September 11, 2001 terrorist attacks against the United States of America and the resulting increase in airline insurance costs, additional government mandated passenger taxes and fees, and increased airport security costs, have had a severe impact on the aviation industry. These factors, in conjunction with an overall slowdown in the U.S. economy, a reduction in passenger ~~levels~~ levels from fiscal 2001 through ~~portions of~~ fiscal ~~2004~~2003, and the overall instability in the Middle East (including the ~~currently on-going~~ war on terrorism and the war in Iraq) have resulted in operating losses for U.S. airline carriers in excess of $10.3 billion for 2001, $8.6 billion for 2002, ~~and~~$3.6 billion anfor ~~approximate~~2003, $2.5.0 billion for 2004, and $4.8 billion for 2005. In addition to these adverse factors, fiscal 2003 was further impacted by the outbreak of the SARS virus in Asia and fiscal years 2004 and 2005 were impacted by significantly increased fuel costs due to the high price of oil. As a result of these factors, many commercial passenger airlines and air cargo carriers reported significant reductions in their ~~capacity~~ ~~and have taken out of service upwards of 20% of their aircraft~~capacity. This reduction in capacity has lessened the aircraft maintenance required by such airlines (and thereby the amount of maintenance being outsourced to companies ~~like~~ like TIMCO). ~~The~~These ~~impact~~factors ofhave ~~these~~also ~~factors~~caused ~~has~~several ~~resulted~~carriers ~~with~~to ~~the~~file ~~filing~~ for bankruptcy protection under Chapter 11 of the United States Bankruptcy ~~Court by several carriers~~Code. The two most notable for us has been the filing for protection from creditors under Chapter 11 by United Air Lines on December 9, 2002 (United has ~~was~~been our largest customer during the last three fiscal years) and by Delta Airlines on September 14, 2005 (our fourth largest customer during fiscal 2005 and traditionally one of our top 10 largest customers year-over-year). As of the date of this ~~Form 10-Q~~report, United Air Lines has ~~not~~ emerged from protection under the Bankruptcy ~~Court~~Code, while Delta Airlines has not. In addition to ~~United~~those ~~Air~~that have ~~Lines~~already filed, other carriers have publicly discussed the potential of seeking protection from creditors through a voluntary bankruptcy filing. As related to us, current exposures to carriers that are at risk of filing for protection are being continuously evaluated and monitored, though we have in the past, and may in the future, experience losses relating to these credit exposures. Additionally, the Company is positioning itself for potential favorable implications of these Chapter 11 filings and resurgence of the airlines as it is anticipated that additional maintenance outsourcing opportunities could result as these airlines look for cost reduction ~~alternatives~~solutions.

We believe that all of the above factors could continue to have a negative impact on our business in the foreseeable future. InThese ~~response~~events, wewhich have ~~taken steps~~adversely toaffected ~~reduce~~ our ~~costs.~~business, ~~These terrorist attacks and related aftermath events and the overall slowdown in the U.S. economy~~ have also impacted our competition, with several of our competitors exiting the ~~MR&O~~MRO business.

2230

~~Contractual~~CONTRACTUAL ~~Payment~~PAYMENT ~~Obligation~~OBLIGATION ~~and~~AND ~~Other~~OTHER ~~Commercial~~COMMERCIAL ~~Commitments~~COMMITMENTS

Below is a ~~chart~~table setting forth our contractual payment obligations and other commercial commitments as of June 30, ~~2004~~2006, which have been aggregated in order to facilitate a basic understanding of our liquidity (in thousands):

Contractual			Less than			Payments due by period
Obligations	Total		One Year			1-3 years			4-5 years		After 5 years
Revolving Credit Facility	$	115,~~674~~476	$	115,~~674~~476		$	—		$	—	$	—
Long-Term Debt		~~164~~43,~~148~~156		~~873~~1,907	(a)		~~121~~41,~~417~~249	*		~~41,858~~—		—
Capital Leases		53,~~299~~428		~~1,102~~320			~~900~~365			~~336~~431		2,~~961~~312
Operating Leases		23,921		3,530			6,329			4,615		9,447
Operating (b) Leases		19,112		4,327			6,466			2,924		5,395
Total contractual cash obligations	$	205,042	$	17,179		$	128,646		$	46,809	$	12,408
Estimated Interest Obligation (c)		4,875		3,520			1,355			—		—
Other Commercial			Less than			Payments due by period
Total contractual cash obligations	$	76,047	$	15,550		$	49,435		$	3,355	$	7,707
Commitments	Total		One Year			1-3 years			4-5 years		After 5 years
Letters of Credit†		10,064		10,064			—			—		—
Total Other Commercial Commitments	$	10,064	$	10,064		$	—		$	—	$	—

* Included within this amount is $115,800 of our New Senior Subordinated Notes and $3,289 of our Junior Subordinated Notes. If not redeemed or repurchased by the Company prior to the maturity dates of these obligations, these notes automatically convert to 270,276 and 9,320 shares, respectively, of our authorized but unissued common stock.


Other
Commercial			Less than		Payments due by period
Commitments	Total		One Year		1-3 years		4-5 years		After 5 years
Letters of Credit (b)		8,804		8,804		—		—		—

Total Other Commercial Commitments	$	8,804	$	8,804	$	—	$	—	$	—

†(a) This amount reflects $1,221 of our New Senior Notes due 2006 and $686 of our Junior Notes due January 2007. If not redeemed or repurchased by us prior to the maturity dates of these obligations, these notes automatically convert to 71 shares and 39 shares, respectively, of our authorized but unissued common stock. See Note 9 of Notes to Condensed Consolidated Financial Statements for discussion regarding our New Senior Notes and Junior Notes. (b) Outstanding letters of credit primarily relate to security for our ~~obligation~~obligations to make payments on an operating lease requiring ~~annual~~future aggregate principal payments of approximately $167,~~400~~800. This amount is removed from the operating lease and total contractual cash obligations line because it is included ~~with~~within the letters of credit. (c) The estimated interest obligations were calculated using the actual balance of the revolving credit facility at June 30, 2006 and the expected outstanding balances on the short-term and long-term debt obligations, in accordance with payment obligations as detailed in the schedule above. For each debt obligation, we used the individual interest rate that was applicable as of June 30, 2006, which ranged from 6.88% to 8.25%.

We are also committed under employment agreements with all of our executive officers and several of our key employees.

~~Liquidity~~31

~~For the year ended December 31, 2003, we incurred losses from continuing~~LIQUIDITY operations of $4,303 (adjusted for the reclassification of income and expenditures related to our Miramar facility. See Note 2 of the Notes to Condensed Consolidated Financial Statements). We also had a net stockholders’ deficit as of December 31, 2003 and June 30, 2004, and continued to require additional cash flow above amounts currently being provided from operations to meet our working capital requirements.

~~Our~~For ~~ability~~the toyear ~~service~~ended ~~our~~December 31, ~~debt~~2005 and ~~note~~the ~~obligations,~~six asmonth ~~they~~period ~~come~~ended ~~due~~June 30, 2006, we incurred a ~~including~~loss ~~maintaining~~from ~~compliance~~continuing ~~with~~operations ~~the~~of ~~covenants~~$22,350 and ~~provisions~~$6,145, ~~under~~respectively. ~~our~~Also, for the year ended ~~debt~~December 31, ~~instruments~~2005, iswe ~~and~~continued ~~will~~to berequire ~~dependent~~additional ~~upon~~cash ~~our~~flow ~~future~~above ~~financial~~amounts ~~and~~currently being ~~operating~~provided ~~performance.~~from ~~This~~operations ~~performance,~~to inmeet ~~turn,~~our isworking ~~subject~~capital torequirements. ~~various factors~~Further, ~~including~~while ~~certain~~cash ~~factors~~flow ~~beyond~~from operations ~~our~~was ~~control~~$3,220 ~~such~~for asthe ~~changes~~first ~~in conditions~~six ~~affecting~~months ~~the~~of ~~airline~~2006, ~~industry~~it ~~and~~included ~~changes~~$13,946 infrom the ~~overall~~sale ~~economy.~~of ~~Additionally,~~marketable ~~our~~securities ~~customer~~(relating ~~base~~to ~~has~~the ~~been~~proceeds ~~adversely~~of ~~impacted~~the inCompany’s ~~the~~November 2005 ~~past~~rights byoffering). ~~various factors~~Additionally, ~~such~~at ascertain ~~the~~times ~~state~~during of2005 and the ~~general~~first ~~economy~~quarter of 2006, ~~fluctuations~~we were not in ~~the~~compliance ~~price~~with ofcertain ~~jet~~financial ~~fuel,~~covenants acontained ~~significant~~in ~~decline~~our ~~but~~CIT ~~partial~~Group ~~resurgence,~~Credit ~~from~~Facility ~~calendar~~and Monroe Capital ~~year~~Loans. ~~2000~~The senior lenders, inhowever, ~~passenger~~waived, ~~airline~~and ~~travel~~in some instances, ~~the~~amended ~~currently~~all ~~on-going~~such ~~war~~events onof ~~terrorism,~~non-compliance ~~the~~and ~~war~~as inof ~~Iraq~~December 31, ~~the~~2005 ~~outbreak~~and ofJune 30, ~~the~~2006, ~~SARS~~we ~~virus~~were in ~~Asia,~~compliance ~~and~~with aall ~~competitive~~covenant ~~price~~requirements, ~~reduction~~as inamended, ~~airfare~~for ~~prices~~these financing arrangements. ~~These~~See below and ~~other~~Notes ~~factors~~7 ~~may~~and 8 ~~adversely~~of ~~affect~~Notes ~~our~~to ~~customers~~Condensed inConsolidated ~~the~~Financial ~~future~~Statements for particulars.

23Our ability to service our debt and note obligations, as they come due, including maintaining compliance with the covenants and provisions under our debt instruments, is and will be dependent upon our future financial and operating performance. This performance, in turn, is subject to various factors, including certain factors beyond our control, such as changes in conditions affecting the airline industry and changes in the overall economy. Additionally, our customer base has been adversely impacted in the past by various factors, such as the state of the general economy, fluctuations in the price of jet fuel, the war on terrorism, the war in Iraq, and competitive price reductions in airfare prices. These and other factors may adversely affect our customers in the future.

Cash flow from operations ~~service~~is ~~payments~~used ~~due~~to onservice our debt and note obligations, thereby reducing funds available for other purposes. Even if we are able to meet our debt service and other obligations when due, we may not be able to comply with the covenants and other provisions under our debt ~~and note~~ obligations. A failure to comply, unless waived by the lenders ~~and noteholders~~, would be an event of default and would permit the lenders ~~and noteholders~~ to accelerate the maturity of ~~these~~our debt ~~and note~~ obligations. It would also ~~permit~~ permit them to terminate their commitments to extend credit under their financing agreements. If we were unable to repay the debt to the lenders ~~or obligations to the noteholders~~, or otherwise obtain a waiver, the lenders ~~and holders~~ could proceed against the collateral securing the financing obligations ~~and notes~~, and exercise all other rights available to them. While we expect to be in a position to continue to meet our obligations in future periods, ~~there~~ there can be no assurance we will be able to do so.

OnIn April 82006, ~~2004,~~ we ~~completed~~closed ~~the~~on ~~refinancing~~a series of ~~all~~transactions ofrelated to our ~~outstanding~~ senior ~~credit~~ ~~facilities~~debt. ~~Within~~First, ~~our~~on ~~refinancing~~April 10, we2006, ~~obtained~~LJH aacquired ~~new~~the a $3518,~~000~~313 ~~senior secured~~Monroe ~~revolving~~Capital ~~line of credit and a $6~~Loans,~~400~~ ~~senior~~with ~~secured~~Owl ~~term~~Creek ~~loan~~acquiring ~~from~~an aapproximate ~~group~~20% ofparticipation ~~financial~~in ~~institutions~~those ~~led by CIT Group~~loans. Additionally, weeffective ~~obtained an $8~~April 20,~~000~~ ~~senior secured term loan from Hilco Capital~~2006, ~~LP.~~LJH ~~The~~extended ~~proceeds of these new facilities were primarily used~~ to ~~repay~~us ~~amounts~~a ~~outstanding under our~~new ~~previous~~$6,000 ~~revolving~~senior ~~credit~~secured ~~and~~ term loan ~~facilities.~~(collectively ~~Additional~~with ~~borrowings available under~~ the ~~revolving~~Monroe ~~credit~~Capital ~~portion~~Loans, ofthe ~~this~~“LJH ~~new~~Term ~~facility are being~~Loans”) ~~used~~and ~~for working capital. As of August 11, 2004,~~ we ~~had~~modified ~~availability~~the ~~under~~terms ~~our new revolving credit facility~~ of ~~$6,610. Additionally, we have combined~~ all of the ~~previously~~LJH ~~outstanding~~Term ~~debt~~Loans. ~~due~~The toLJH ~~our~~Term ~~principal~~Loans ~~stockholder~~all ~~with~~mature aon December ~~restructured~~31, ~~$14~~2007,~~412~~ ~~term~~bear ~~loan.~~interest ~~Finally,~~at weLIBOR ~~have~~plus ~~recently~~1.75% ~~sold~~per ~~our~~annum ~~office~~ and ~~warehouse~~ ~~facility~~are ~~located~~secured inby ~~Miramar, Florida for~~ a ~~gross~~lien ~~purchase~~on ~~price of~~substantially ~~$26,000.~~all ~~We used a portion~~ of ~~the~~our ~~proceeds~~assets. ~~from~~In ~~the sale to repay the $23~~addition,~~624 outstanding~~ ~~principal~~an ~~balance~~event of ~~our~~default ~~TROL~~under ~~financing arrangement and we used~~ the ~~balance~~ ofAmended ~~the~~CIT ~~proceeds,~~Revolving ~~net~~Line of ~~transaction~~Credit (described ~~expenses~~below) ~~and~~will ~~other~~also ~~property~~result ~~related costs~~in ~~that~~a wedefault ~~were~~under ~~obligated~~the toLJH ~~pay,~~Term toLoans. ~~repay~~As ~~amounts~~a ~~outstanding~~part ~~under~~of ~~our~~these ~~previous~~refinancing ~~term~~activities, ~~loan~~LJH ~~facility.~~waived ~~See~~all ~~Notes~~defaults ~~3, 4~~ and 5events of ~~Notes~~defaults towith ~~Condensed Consolidated~~respect ~~Financial~~to ~~Statements~~the ~~for~~LJH ~~a description of all of these~~Term ~~transactions~~Loans.

In connection with the closing of the LJH Term Loans (described above), we paid in full the CIT Term Loan and amended the CIT Group Revolving Line of Credit (the “Amended CIT Group Revolving Line of Credit”). The Amended CIT Group Revolving Line of Credit is now a $30,000 senior secured revolving line of credit, is due December 31, 2007, and bears interest, at our option, at (a) Prime, or (b) LIBOR plus 2.50%. Also, the Amended CIT Group Revolving Line of Credit contains certain financial covenants regarding our financial performance and certain other covenants, including limitations on the incurrence of additional debt and restrictions on the payment of dividends, and provides for the termination of the Amended CIT Group Revolving Line of Credit and repayment of all debt in the event of a change in control, as defined. In addition, an event of default under the LJH Term Loans (described above) will also result in a default under the Amended CIT Group Revolving Line of Credit. Borrowings under the Amended CIT Group Revolving Line of Credit are secured by a lien on substantially all of our assets. Borrowings under the Amended CIT Group Revolving Line of Credit are based on a borrowing base formula that takes into account the level of our receivables and inventory. Further, the amounts that we can borrow under the Amended CIT Group Revolving Line of Credit are affected by various availability reserves and collateral reserves that can be established by the lenders under the financing agreement. In that regard, as a part of the closing of the Amended CIT Revolving Line of Credit, we provided a collateral deposit of $5,000, which is included within the accompanying condensed consolidated balance sheet at June 30, 2006 as a non-current asset. Finally, the agreement relating to the Amended CIT Group Revolving Line of Credit requires that at the time of each additional borrowing, we must make various representations and warranties to our lenders regarding our business (including several reaffirming that there have been no changes in the status of specific aspects of our business that could reasonably be expected to have a material adverse effect upon the business operation, assets, financial condition or collateral of us and our subsidiaries taken as a whole), and be in compliance with

various affirmative and negative covenants, all as more particularly set forth in the agreement. As a part of the Amended CIT Group Revolving Line of Credit, our senior lender waived and amended certain financial covenant defaults and as of December 31, 2005 and June 30, 2006, we were in compliance with all covenant requirements, as amended, for this financing arrangement.

At August 9, 2006, the outstanding aggregate borrowed on the Amended CIT Group Revolving Line of Credit was $1,607, outstanding letters of credit under the Amended CIT Group Revolving Line of Credit was $8,804 and $11,999 was available for additional borrowing under the Amended CIT Group Revolving Line of Credit.

Additionally, the degree to which we are leveraged could have important consequences to us, including:

•- our vulnerability to adverse general economic and industry conditions; •- our ability to obtain additional financing for future working capital expenditures, general corporate or other purposes, particularly where our current lenders have a lien on all of our assets; •- the requirement that we obtain the consent from our lenders if we wish to borrow additional amounts; and •- the dedication of a significant portion of our cash flow from operations to the payment of principal and interest on indebtedness, thereby reducing the funds available for operations.

In addition, ~~subject to the limitations set forth in the indenture for the New Notes,~~ we and our subsidiaries may incur substantial amounts of additional indebtedness. Finally, our senior credit facilities are secured by a lien on substantially all of our assets.

We believe that we will meet our working capital requirements during ~~2004~~2006 from funds available under our revolving credit agreement and from our operations. We may also sell assets or our equity securities, or borrow additional funds, to the extent required and available. While we expect that required financing will be available to meet our working capital requirements, there can be no assurance of this ~~fact~~expectation.

~~Cash~~SOURCE AND USE OF CASH

Net cash ~~used~~provided inby our continuing operating activities during the six ~~months~~month period ended June 30, 2006 ~~2004~~ was $72,~~300~~758, compared to net cash ~~used~~provided inby continuing operating activities ofduring ~~$10,467 for~~ the same period inof ~~2003.~~2005 ~~Cash~~of ~~used~~$4,177. Decreases in ~~operating activities~~accounts ~~was~~receivable ~~primarily~~and ~~the~~inventory ~~result~~ of ~~earnings,~~$33 ~~adjusted~~and ~~for non-cash charges~~$205, ~~of approximately $3~~respectively,~~218,~~ increases in ~~accounts~~other ~~receivable~~liabilities of $103,~~696~~477, ~~and decreases~~the inreceipt ~~customer deposits~~ of a $36,~~514,~~000 ~~offset~~term byloan ~~decreases~~from ~~in inventories~~LJH, and ~~other~~the ~~current~~proceeds ~~assets,~~from ~~and~~the ~~increases~~net insale ~~accounts~~of ~~payable,~~marketable ~~and~~securities ~~other liabilities~~ of $7013,946 ~~$173,~~were ~~$2,363,~~used ~~and~~to ~~$1,216,~~fund ~~respectively. The increase in accounts receivable provided additional borrowing base for~~ our ~~revolving credit~~ ~~facility~~operations, ~~which~~to ~~funded~~fund ~~this~~increases ~~use~~in ofother ~~cash.~~assets ~~Cash~~ of $234,~~722~~889, ~~was~~to ~~provided~~fund ~~by investing~~decreases ~~activities~~in ~~during~~accounts ~~the~~payable ~~first~~and customer ~~half~~deposits of ~~2004~~$3,228 ~~which~~and ~~included cash proceeds of~~ $244,~~861 from the sale of the Company’s Miramar facility~~761, ~~offset by $1~~respectively,~~139~~ ~~for~~and ~~the~~to ~~purchase~~reduce ofour ~~fixed~~borrowings ~~assets.~~under ~~Cash~~our ~~used in financing activities~~senior ~~during~~credit ~~2004~~facilities ~~was~~by $182,~~488. Net proceeds from our newly established credit facility and term loans~~844, ~~and~~to ~~from~~purchase ~~the~~fixed ~~sale~~assets of ~~our Miramar facility were used for operations~~$1,580, to ~~make~~repay ~~repayments~~$4,946 ~~under~~of our ~~previously~~CIT ~~outstanding Amended~~Term ~~Credit Facility~~Loan, to pay ~~$2,896~~capital oflease ~~bank~~obligations ~~and~~by ~~refinancing~~$545 ~~fees~~ and to pay ~~$24,623 of~~transaction ~~capital~~fees ~~leases~~related ~~obligations,~~to ~~including $23,624 under~~ our ~~TROL financing~~debt ~~arrangement.~~refinancing ~~Cash~~ of $~~720 was provided by our discontinued operations~~259.

24SENIOR CREDIT FACILITIES

~~Senior~~See ~~Credit~~discussion ~~Facilities~~of our senior credit facilities in Note 7 to Notes to Condensed Consolidated Financial Statements.

~~See~~SUBORDINATED ~~discussion of our senior credit facilities in Note 3 to Notes to Condensed~~NOTES ~~Consolidated Financial Statements and in our Form 10-K.~~

~~Subordinated~~See discussion of our subordinated notes in Note 9 to Notes to Condensed Consolidated Financial Statements.

~~See~~RIGHTS ~~discussion of our subordinated note obligations in Note 6 to Notes to~~OFFERING ~~Condensed Consolidated Financial Statements and in our Form 10-K.~~

~~TROL~~See ~~Financing~~discussion of our rights offering in Note 13 to Notes to Condensed Consolidated Financial Statements.

~~See discussion of our TROL financing in Note 5 to Notes to Condensed~~33 ~~Consolidated Financial Statements and in our Form 10-K.~~

CONTINGENCIES

We are involved in various litigation and environmental matters arising in the ordinary course of business. These are discussed in Note 710 of Notes to Condensed Consolidated Financial Statements ~~and in our Form 10-K~~. We maintain insurance coverage against certain potential claims in amounts that we believe to be adequate. Although the final outcome of these legal and environmental matters cannot be determined, based on the facts presently known, it is management’s opinion that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of its financial statements. Our consolidated financial statements include a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements.

See our Form 10-K for a discussion of our critical accounting policies and use of estimates. During the six month period ended June 30, 2006, except for the item noted below, there have been no material changes to our critical accounting policies and use of estimates. As of January 1, 2006, we have become self-insured for health and prescription claims under a group health insurance plan. For this plan, we maintain an insurance reserve for both unpaid claims and an estimate of claims incurred but not reported, based on historical claims information. While we believe our reserve for claims to be adequate, there can be no assurance of this.

2534

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to market risk for changes in interest rates. We have no exposure to foreign currency exchange rates or to commodity price risk. We do not hold or issue any financial instruments for trading or other speculative purposes.

Our obligations ~~as of June 30, 2004~~ under our Amended CIT Group ~~Credit~~Revolving ~~Facility~~Line of Credit and ~~under~~ our ~~Hilco~~LJH Term ~~Loan~~Loans bear interest at floating rates and therefore, we are impacted by changes in prevailing interest rates. However ~~at the same date~~, ~~our~~ ~~$14,412 related party term loan,~~ our New Senior Notes, Old Senior Notes, and Junior Notes all ~~bore~~bear fixed interest rates and therefore ~~were~~we are not subject to the risk of interest rate fluctuations. A 10% change in market interest rates that affect our financial instruments would impact earnings during ~~2004~~2006 by ~~approximately~~ approximately $~~192~~217 before taxes and would change the fair value of our financial instruments by by approximately $166,~~148~~316.

ITEM 4: CONTROLS AND PROCEDURES

(a)	Our Chief Financial Officer and Chief Executive Officer evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, these officers have concluded that as of June 30, 2004 our disclosure controls and procedures were effective in timely alerting them to material information relating to our company (including our consolidated subsidiaries) required to be included in our reports filed or submitted by us under the Exchange Act.	Our Chief Financial Officer and Chief Executive Officer evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, these officers have concluded that as of June 30, 2006 our disclosure controls and procedures were effective in timely alerting them to material information relating to our Company (including our consolidated subsidiaries) required to be included in our reports filed or submitted by us under the Exchange Act.
	As of June 30, 2004, we have carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on such evaluation, our principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective.
		As of June 30, 2006, we have carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on such evaluation, our principal executive officer and principal financial officer concluded that our Company’s disclosure controls and procedures are effective.
(b)	~~There have been no significant changes in our internal controls or in other factors that, have materially affected, or are reasonably likely to affect, our internal controls over financial reporting.~~	There have been no changes in our internal controls or in other factors that could have a material affect, or are reasonably likely to have a material affect to the internal controls subsequent to the date of their evaluation in connection with the preparation of this quarterly report on Form 10-Q.
		Effective April 27, 2006, Fritz Baumgartner is no longer serving as our Vice President, Corporate Controller and Chief Accounting Officer. Just subsequent to this date, we appointed Jason Yaudes as our Corporate Controller and Chief Accounting Officer. The full transition and performance of our internal controls as related to our Chief Accounting Officer has been completed with no impact to the effectiveness of the design and operation of our disclosure controls and procedures.

2635

PART II. OTHER INFORMATION

~~ITEM~~(Amounts 1.and ~~LEGAL~~Shares ~~PROCEEDINGS~~in Thousands, Except Per Share Data)

~~See~~ITEM ~~Note~~1. 7LEGAL ~~to the Company’s Unaudited Condensed Consolidated Financial~~PROCEEDINGS ~~Statements included in this filing.~~

~~ITEM~~See 2.Note ~~CHANGES~~10 INto ~~SECURITIES~~the Company’s Unaudited Condensed Consolidated Financial Statements included in this filing.

~~None~~ITEM 1A. RISK FACTORS

~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES~~None

~~None~~ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS~~None

~~None~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES

~~ITEM 5. OTHER INFORMATION~~None

InITEM ~~June 2004, we named Clyde Kizer to our Board of Directors~~4. ~~Further,~~SUBMISSION ~~during~~OF ~~June 2004,~~MATTERS ~~Stephen~~TO E.A ~~Gorman~~VOTE ~~resigned~~OF ~~from~~SECURITIES ~~our~~HOLDERS ~~Board of Directors.~~

~~ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K~~None

~~(a) Exhibits~~ITEM 5. OTHER INFORMATION

10.1		Financing Agreement dated as of April 5, 2004 between the Company, The CIT Group/Business Credit, Inc. and the Lenders. (2)
10.2		Financing Agreement between the Company and Hilco Capital LP. (2)
10.3		Intercreditor Agreement between The CIT Group/Business Credit, Inc., Hilco Capital LP and the Company. (2)
10.4		Amended and Restated Consolidated Term Promissory Note in favor of LJH, Ltd. (2)
10.5		Amended and Restated Security Agreement between the Company and LJH, Ltd. (2)
10.6		Amended and Restated Guaranty Agreement. (2)
10.7		Intercreditor Agreement between the Company, The CIT Group/Business Credit, Inc., Hilco Capital LP and LJH, Ltd. (2)
10.8		Equipment Lease Agreement between the Company and LJH, Ltd. (2)
31.1		Certification of Chief Executive Officer under Section 302 the Sarbanes-Oxley Act of 2002 (1)
31.2		Certification of Chief Financial Officer under Section 302 the Sarbanes-Oxley Act of 2002 (1)
32.1		Certification of Chief Executive Officer under Section 906 the Sarbanes-Oxley Act of 2002 (1)

Changes in Executive Officers of the Company

27Effective May 31, 2006, Roy T. Rimmer, Jr. retired as the Company’s Chairman and Chief Marketing Officer.

32Effective June 1, 2006, John R.2 ~~Certification~~Cawthron, ofthe Company’s Chief ~~Financial~~Executive Officer, ~~under~~became ~~Section~~the Chairman ~~906~~of the ~~Sarbanes-Oxley~~Board. ~~Act~~From ofApril 24, ~~2002~~2006 (until June 1), 2006, Mr. Cawthron served as Vice Chairman of the Board and Chief Executive Officer.

~~Notes~~Effective June 1, 2006, Gene House was appointed to ~~Exhibits~~serve as Executive Vice President and Chief Marketing Officer of the Company. Mr. House joins the Company after 40 years with United Airlines, where he served in various capacities including engineering, finance, purchasing, planning and sales leadership positions. Most recently, from 1998 to 2005, Mr. House was Managing Director – Sales and Marketing for United Airlines’ MRO businesses.

(1)		Filed herewith
(2)		Incorporated by reference to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2003.

Employment Agreements with John R. Cawthron and Gene House

~~(b)~~On June ~~Reports~~8, on2006, ~~Form~~effective April 822, 2006, the Company entered into a two-Kyear employment agreement with its Chairman and Chief Executive Officer, John R. Cawthron. Pursuant to the employment agreement, Mr. Cawthron will be paid a base salary of $400 per annum. Mr. Cawthron will also have the opportunity to earn an annual bonus equal to 100% of his base salary if the Company achieves goals and objectives set by the Compensation Committee of the Board of Directors. Further, the employment agreement contains a “change of control” severance arrangement if the employee is not retained by the Company after a change of control, as defined in the employment agreement.

~~During~~On ~~the~~June 8, ~~quarter~~2006, ~~ended~~effective June 301, ~~2004~~2006, the Company ~~furnished~~entered into a ~~Current~~two-year ~~Report~~employment agreement onwith ~~Form~~Gene ~~8-K~~House, ~~reporting~~the ~~under~~Company’s ~~Item~~Executive Vice President and Chief Marketing Officer. Pursuant to the employment agreement, Mr. 12House will be paid a base salary of $260 per annum. Mr. House will also have the opportunity to earn an annual bonus equal to 100% of his base salary if the Company’s achieves ~~financial~~goals ~~results~~and ~~for~~objectives set by the Compensation Committee of the Board of Directors. The ~~three~~employment ~~month~~agreement ~~period~~also ~~ended~~contains ~~March 31~~a “change of control” severance arrangement if the employee is not retained by the Company after a change of control, ~~2004~~as defined in the employment agreement.

28The foregoing description of the employment agreements between the Company and John R. Cawthron and the Company and Gene House are not complete and are qualified in their entirety by reference to such agreements, copies of which are attached hereto as Exhibits 10.1 and 10.2, respectively, and are incorporated herein by reference.

~~SIGNATURES~~36

~~Pursuant~~Retirement ~~to the requirements~~ of ~~the~~Roy ~~Securities~~T. ~~Exchange Act of 1934~~Rimmer, ~~the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized~~Jr.

~~TIMCO~~Effective ~~Aviation~~May 31, ~~Services~~2006, ~~Inc~~Roy T. Rimmer, Jr. retired as Chairman and Chief Marketing Officer of the Company. Mr. Rimmer had previously served as Chief Executive Officer of the Company from June 2001 until April 24, 2006, when he became Chief Marketing Officer of the Company. In connection with his retirement, the Company entered into a retirement agreement with Mr. Rimmer pursuant to which Mr. Rimmer resigned as an officer and director of the Company and his employment agreement with the Company was terminated. Further, as part of the retirement agreement, the Company agreed to pay Mr. Rimmer an aggregate retirement payment of $1,425, which is equal to three years of base salary ($475 per annum) under his previous employment agreement with the Company. As part of the retirement agreement, Mr. Rimmer agreed to certain restrictive covenants and the Company and Mr. Rimmer entered into mutual general releases.

	By:	/s/ C. Robert Campbell
		Executive Vice President and Chief
		Financial Officer
		(Principal Financial Officer)
Dated: August 13, 2004

Sale of Assets of the Goodyear, Arizona Facility

29On August 4, 2006, the Company completed the sale of substantially all of the fixed assets of its Goodyear, Arizona to Aeroturbine, Inc. (“Aeroturbine”) pursuant to the terms of an Asset Purchase Agreement, (the “APA”), executed on July 24, 2006 effective July 1, 2006, between Triad International Maintenance Corporation, as seller, and Aeroturbine, as buyer.

~~Exhibit~~Under the APA, the Company sold the furniture, fixtures, equipment and selected inventory of its Goodyear, Arizona MRO facility to Aeroturbine for a purchase price of $1,400. Additionally, Aeroturbine assumed certain of the losses relating to the operation of the Goodyear facility for July ~~Index~~2006 and agreed to employ most of the Company’s employees at the Goodyear facility. Further, the Company and Aeroturbine entered into a consignment agreement with respect to certain inventory at the Goodyear facility and a transition services agreement under which the Company will provide certain transition services to Aeroturbine.

Exhibit
Number		Description
31.1		Certification of Chief Executive Officer under Section 302 the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer under Section 302 the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer under Section 906 the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer under Section 906 the Sarbanes-Oxley Act of 2002

The purchase price was paid as follows:

	•		$1,138 was paid in cash at closing; and

	•		$262 was paid by cancellation of Seller’s outstanding indebtedness to Aeroturbine relating to an engine purchased by the Company from Aeroturbine in March 2006.

Of the funds paid at closing, $655 is being held in escrow to fund certain repairs to the Goodyear facility that are obligations of the Company.

Additionally, as part of the sale of the Goodyear facility, Aeroturbine entered into a sublease with LJH, Ltd. (“LJH”) for the Goodyear facility. Simultaneously, the Company’s month-to-month sublease for the Goodyear facility was terminated.

The foregoing description of the APA is not complete and is qualified in its entirety by reference to such agreement, a copy of which is attached hereto as Exhibit 10.3 and is incorporated herein by reference.

Agreement and Plan of Merger between the Company and TAS Holding, Inc.

Effective as of July 31, 2006, the Company has entered into an Agreement and Plan of Merger (the “Merger Agreement”) with TAS Holding, Inc., a Delaware Corporation (“TAS”) under which TAS will be merged (the “Merger”) with and into the Company and the stockholders of the Company (other than LJH and Owl Creek, which are defined below) will receive $4.00 per share in cash for their shares, without interest.

TAS is a Delaware corporation. The stockholders of TAS are LJH, Ltd. (“LJH”), which owns approximately 71% of the Company’s outstanding common stock, and affiliates of Owl Creek Asset Management, LP (“Owl Creek”), which own approximately 18% of the Company’s outstanding common stock, and the President of TAS is John R. Cawthron, the Company’s Chairman and Chief Executive Officer.

The Merger was approved by the Company’s Board of Directors based upon the recommendation of a Special Committee of independent directors that negotiated the terms of the Merger with TAS on the Company’s behalf. The Special Committee was advised by the investment banking firm of Houlihan Lokey Howard & Zukin, which provided an opinion to the Special Committee with respect to the fairness (from a financial point of view) of the proposed $4.00 per share cash Merger consideration to the public holders of the Company’s common stock.

If the Merger is consummated, TAS will be merged with and into the Company and LJH and Owl Creek will own 100% of the Company’s outstanding common stock. Furthermore, the Company will become eligible for termination of registration pursuant to Section 12(g)(4) of the Exchange Act, the composition of the Company’s board of directors may be changed to include individuals designated by LJH and Owl Creek and the Company’s common stock will no longer be traded or quoted. The Merger is subject to customary closing conditions and the receipt of required regulatory approvals. The Company expects to complete the Merger by the end of the 2006 fiscal year, although there can be no assurance that the Merger will be completed.

Simultaneous with entering into the Merger Agreement, the Company entered into two additional agreements with respect to the Merger:

	•		A Conversion, Support and Release Agreement, dated as of July 31, 2006, in which, among other matters: (i) the Company agreed (under certain conditions) to sell to LJH and Owl Creek an additional 2,400 shares of the Company’s authorized but unissued common stock at an exercise price of $2.50 per share through the conversion of debt owed by the Company to LJH (the “Option”), and (ii) TAS’s stockholders agreed to support the Merger at any meeting of the Company’s stockholders called to consider and vote upon the Merger; and

	•		An Escrow Agreement, dated as of July 31, 2006, between the Company, TAS and American Bank of Texas, under which TAS has deposited all of the funds required to pay public stockholders the $4.00 per share cash Merger consideration. American Bank of Texas is wholly-owned by Lacy Harber, the principal stockholder of LJH.

The foregoing description of the Merger, the Merger Agreement, the Conversion, Support and Release Agreement and the Escrow Agreement, are not complete and are qualified in their entirety by reference to the Merger Agreement, the Conversion, Support and Release Agreement and the Escrow Agreement, copies of which are Exhibits 10.4, 10.5 and 10.6, respectively, to this Quarterly Report on Form 10-Q and are incorporated herein by reference.

ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K

(a) Exhibits


10.1		Employment Agreement between the Company and John R. Cawthron

10.2		Employment Agreement between the Company and Gene House

10.3		Asset Sale Agreement between the Company and Aeroturbine related to the Goodyear facility

10.4		Agreement and Plan of Merger between the Company and TAS (1)

10.5		Conversion, Support and Release Agreement between the Company, TAS, LJH and the affiliates of Owl Creek (1)

10.6		Escrow Agreement between the Company, TAS and American Bank of Texas (1)

31.1		Certification of CEO and CFO under Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of CEO and CFO under Section 906 the Sarbanes-Oxley Act of 2002


(1)		Filed as exhibits to the Form 8-K filed by the Company under Item 1.01 on August 3, 2006.

(b) Reports on Form 8-K

During the quarter ended June 30, 2006, the Company filed (i) a Current Report on Form 8-K reporting under Item 8.01 the assignment of the Monroe Capital Term Loans to LJH, Ltd., (ii) a Current Report on Form 8-K reporting under Item 8.01 the Company’s financial results for the twelve month period ended December 31, 2005 and certain other matters, (iii) a Current Report on Form 8-K reporting under Item 1.01 the Company’s refinancing arrangements with its senior lenders, (iv) a Current Report on Form 8-K reporting under Item 5.02 the appointment of John R. Cawthron as the Company’s Vice Chairman of the Board of Directors and Chief Executive Officer and certain other matters, and (v) a Current Report on Form 8-K reporting under Item 5.02 the appointment of Jason Yaudes as the Company’s Corporate Controller and Chief Accounting Officer.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

TIMCO Aviation Services, Inc.



	By:	/s/ James H. Tate
		Chief Financial Officer
		(Principal Financial Officer)

Dated: August 14, 2006

Exhibit Index


Exhibit
Number		Description
10.1		Employment Agreement between the Company and John R. Cawthron

10.2		Employment Agreement between the Company and Gene House

10.3		Asset Sale Agreement between the Company and Aero Turbine related to the Goodyear facility

10.4		Agreement and Plan of Merger between the Company and TAS (1)

10.5		Conversion, Support and Release Agreement between the Company, TAS, LJH and affiliates of Owl Creek (1)

10.6		Escrow Agreement between the Company, TAS and American Bank of Texas (1)

31.1		Certification of CEO and CFO under Section 302 the Sarbanes-Oxley Act of 2002

32.1		Certification of CEO and CFO under Section 906 the Sarbanes-Oxley Act of 2002


(1)		Filed as exhibits to the Form 8-K filed by the Company under Item 1.01 on August 3, 2006.

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