PRECISION STANDARD INC, 10-K405, 1999-03-31

PRECISION STANDARD INC
10-K405, 1999-03-31
AIRCRAFT

Previous: SEPARATE ACCOUNT FP OF EQUITABLE LIFE ASSUR SOC OF THE US, 24F-2NT, 1999-03-31

Next: ATLANTIC GULF COMMUNITIES CORP, 10-K, 1999-03-31

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934 for the twelve months ended
December 31, 1998

Commission File No. 0-13829

PRECISION STANDARD, INC.
Exact name of Company as specified in its Charter

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

12000 East 47th Avenue
Suite 400
Denver, CO 80239
Address of principal executive offices Zip Code

Company's telephone number, including area code: (303) 371-6525

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

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

Common Stock, $.0001 par value
(Title of Class)

Indicate by check mark whether the Company (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 Company was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No

The aggregate market value of the Common Stock held by non-
affiliates on March 12, 1999 was approximately $6,906,327.

The number of shares of the Company's Common Stock out-
standing as of March 12, 1999 was 3,977,721.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive proxy statement to be
filed pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year (December 31, 1998) are incorporated by
reference in Part III.

Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Company's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. X Yes No

FORM 10-K ANNUAL REPORT

FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996

PRECISION STANDARD. INC.

PART I

Item 1. Business.............................. 3
Item 2. Properties............................ 22
Item 3. Legal Proceedings..................... 25
Item 4. Submission of Matters to a Vote of
Security Holders...................... 28

PART II

Item 5. Market for Company's Common
Equity and Related Stockholder
Matters............................... 28
Item 6. Selected Financial Data............... 29
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................... 30
Item 8. Financial Statements and
Supplemental Data..................... 41
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................. 84

PART III

Item 10. Directors and Executive
Officers of the Company............... 84
Item 11. Executive Compensation................ 84
Item 12. Security Ownership of
Certain Beneficial Owners
and Management........................ 84
Item 13. Certain Relationships and
Related Transactions.................. 84
PART IV

Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K..... 84

SIGNATURES ...................................... 89

-i-

PART I

Item 1. Business.

A. GENERAL

Precision Standard, Inc. ("the Company") is a diversified aviation
and aerospace company with executive offices in Denver, Colorado.
The Company is composed of three operating groups: the Government
Services Group, located primarily in Birmingham, Alabama; the
Commercial Services Group, located in Dothan, Alabama and
Victorville, California; and the Manufacturing and Overhaul Group
with facilities in California, Colorado, and Florida.

The Company provides aircraft maintenance and modification services
for the government and military customers through its Government
Services Group. These services include complete airframe
inspection, maintenance, repair and custom airframe design and
modification. For its military customers, the Company specializes
in providing Programmed Depot Maintenance ("PDM") and Scheduled
Depot Level Maintenance ("SDLM") on large transport aircraft and
helicopters. The Company's competitive strength in the military
market is its ability to provide total airframe repair. In
addition, the Company has a long, successful history of providing
high-quality maintenance, modification, and integration work on a
broad range of military aircraft. The Company believes it is the
most experienced provider in the world on two of the United States
Air Force's ("USAF") most heavily utilized aircraft, the KC-135
tanker aircraft and the C-130 cargo aircraft.

The Company's Commercial Services Group provides commercial
aircraft maintenance and modification services on a contract basis
to the owners and operators of large commercial aircraft. The
Company provides commercial aircraft maintenance varying in scope
from a single aircraft serviced over a few days to multi-aircraft
contracts lasting several years. The Company is able to offer full
range maintenance support services to airlines coupled with the
related engineering and technical services required by these
customers. The Company also has broad experience in modifying
commercial aircraft and providing value-added technical solutions
and holds numerous, proprietary Supplemental Type Certificates
("STCs"). The Company's facilities, tooling, engineering
capabilities, and experienced labor force enable it to perform
virtually any airframe modification a commercial customer may
require. The Company has performed over 250 cargo conversions of
narrow and wide-body commercial aircraft.

The Company's Manufacturing and Overhaul Group designs and
manufactures a wide array of proprietary aerospace products
including various space systems, such as guidance control systems
and launch vehicles; aircraft cargo-handling systems; and precision
parts and components for aircraft. In addition, the Manufacturing
and Overhaul Group provides engine nacelle overhaul and repair and
operates an aircraft parts distribution company. The Company's
well-trained and highly respected research, development, and
engineering staff is an integral part in the winning of
competitively bid aerospace and defense manufacturing contracts
from the United States military and numerous "blue-chip" commercial
customers.

B. SIGNIFICANT DEVELOPMENTS

Sale of Hayes Targets Division

On January 29, 1998, the Company's Pemco Aeroplex subsidiary sold
the assets relating to its Hayes Targets division to affiliates of
Meggitt PLC for approximately $4.8 million. The division, located
in Leeds, Alabama, develops and manufactures supersonic and
subsonic aerial tow targets for weapon system development and wing
tip infrared pods for the protection of military aircraft used by
U.S. and foreign military customers. The consideration for the
sale was based on the estimated fair market value of the assets.

Review of Strategic Alternatives

The Company engaged an investment banking firm during 1998 to
explore strategic alternatives to enhance shareholder value.
Various scenarios are under consideration, including the possible
sale of one or more additional operating units.

Contract Option Exercised by the U.S. Air Force for the KC-135

In the fall of 1998, the U.S. Air Force exercised its option for
the fifth year of its seven year contract for the KC-135 Programmed
Depot Maintenance (PDM) aircraft for the fiscal year beginning
October 1, 1998. At December 31, 1998, the Company had 40 KC-135
(PDM) aircraft at its Birmingham Alabama facility, up from 23
aircraft at December 31, 1997. The Air Force exercised its
contract option to extend KC-135 work with the Company during
fiscal year 1999.

On March 20, 1998, the U.S. Government released a request for
proposal (RFP) for the workload performed by the Sacramento Air
Logistic Center, including work related to its KC-135 aircraft.
The Company's Pemco Aeroplex subsidiary currently performs a
portion of the programmed depot maintenance of the KC-135 workload
included in the RFP. On June 17, 1998, the Company submitted a
protest to the General Accounting Office ("GAO") challenging the
combination, or "bundling," of the KC-135 workload with other
unrelated workloads in the RFP. On September 25, 1998, the GAO
found in favor of the protest filed by Pemco. The GAO recommended
that the Air Force resolicit the contract to comply with the
requirements of federal laws and regulations, and awarded the
Company its protest costs and attorneys' fees.

Notwithstanding the GAO decision, the Air Force announced its award
of the bundled workload to Ogden Air Logistics Center on October 9,
1998, stating that it was proceeding with the award. If the Air
Force's action stands, the KC-135 workload could be included in the
contract awarded to Ogden ALC upon expiration of the Company's
contract. On October 13, 1998, Pemco filed a complaint in U.S.
District Court, Northern District of Alabama against the Air Force
seeking declaratory relief, an injunction, and an order requiring
the Air Force to comply with applicable federal laws as recommended
by the GAO. The Air Force exercised its contract option to extend
KC-135 work with the Company during fiscal year 1999.

Award of Paint Contract for Air Force

In March of 1998, the Company's Pemco Aeroplex subsidiary received
an award from the U.S. Government for the painting and stripping of
an indefinite number of C-130 aircraft. The base contract, which
commenced in April 1998 and ran through September 1998, provides
for two options of one year each. The Company delivered 49
aircraft during 1998. The first of two option years on the contact
was exercised by the U.S. Government.

Agreement with World Airways

An agreement was reached with World Airways on August 8, 1998 to
perform "A", "B", and "C" maintenance checks on their fleet of DC10
and MD11 aircraft at the Company's Dothan, Alabama and Victorville,
California facilities.

Agreements with Air Jamaica

In January 1998, the Company contracted with Air Jamaica of
Kingston, Jamaica, for the maintenance of their fleet of A310
aircraft. All work was performed at the Dothan, Alabama facility
and commenced in the first quarter of 1998. Air Jamaica entered
into another agreement with the Company on September 15, 1998 to
continue performing maintenance on their fleet of aircraft for an
additional two year period.

Agreement with Continental Airlines

On January 21, 1999, the Company signed an agreement with
Continental Airlines to provide maintenance checks on their fleet
of B727, DC9-30, and MD80 aircraft. The term of the agreement is
for three years. All contracted work will be done at the Company's
Dothan, Alabama facility.

New Commercial Maintenance Facility in Victorville, California

In November 1997, the Company's Pemco, Inc. subsidiary leased space
at the former George Air Force Base in Victorville, California, 40
miles northeast of the Ontario County airport and 120 miles from
Los Angeles International Airport. The facility, which includes
two hangars, administrative, and backshop space, received a Repair
Station Certification from the Federal Aviation Administration and
opened on July 19, 1998. This new Company location provides among
others MD-10/MD-11 type aircraft as well as a West Coast presence
for marketing to the Pacific Rim, domestic and foreign air carriers
flying to the area. The first aircraft input was a DC-10 on August
22, 1998.

Extension of DC-10 License Agreement

In October of 1998, the Boeing Company, of Seattle Washington,
formally approved the extension of the Company's Pemco Engineers
operating unit's DC-10 license agreement for another 3 years. The
extension should provide the Company with the opportunity to
generate $3 to $4 million dollars in sales per year.

Changes to Company's Stock Listing

In February 1998, the Company's common stock was moved to the
Nasdaq SmallCap Market as the result of its failure to meet the
Nasdaq National Market Standard for Net Tangible Assets and Minimum
Bid Price and subject to certain conditions and pursuant to certain
exceptions. The Company's trading symbol was changed from PCSN to
PCSNC. Due to this action, the Company solicited and received,
during the second quarter of 1998, shareholder approval for a 1-for
4 reverse stock split in order to meet the Minimum Bid Price
requirements of the Nasdaq SmallCap Market. (See Item 5. Market
for the Company's Common Equity and Related Stock Holder Matters
below)

Stevenson Verdict Reduced

On January 29, 1998, the Alabama court in Stevenson v. Pemco
Aeroplex, Inc. granted the motion by the Company's Pemco Aeroplex
subsidiary to vacate the jury verdict and grant a new trial. On
February 27, 1998, the Court, in response to motions filed by the
plaintiff for reconsideration, upheld the jury's verdict in favor
of the individual defendant, reversed the court's previous decision
granting a new trial, and ordered a reduction of the jury's verdict
to $1 million in compensatory damages. Pemco and plaintiff have
both appealed this decision to the Alabama Supreme Court. (See
Item 3. Legal Proceedings below)

Dismissal of Civil Action

On February 8, 1999, the U.S. Court of Appeals for the 11th Circuit
upheld the U.S. District Court's dismissal of a civil action
brought by the United States of America against the Company's Pemco
Aeroplex subsidiary in 1997 alleging violations of the False Claims
Act and seeking damages for contract claims.

EPA Settlement

In December 1997, the Company received an inspection report from
the Environmental Protection Agency (EPA) documenting the results
of an inspection on September 9, 1997 at the Birmingham, Alabama
facility. The report cited various violations of environmental
laws. The Company has taken action to correct the items raised by
the inspection. On April 2, 1998, the Company received a complaint
and compliance order from the EPA proposing penalties of $225,256.
The Company disagreed with the citations and contested the
penalties. On December 21, 1998, the Company and EPA entered into
a Consent Agreement and Consent Order (CACO) resolving the
complaint and compliance order. As part of the CACO, the Company
has agreed to assess a portion of the Birmingham facility for
possible contamination by certain constituents, remediate such
contamination as necessary, and pay a penalty of $95,000 over a
three year period.

C. INDUSTRY OUTLOOK

In general, demand for aircraft maintenance and modification
services is increasing. As aircraft operators strive to reduce
their operating expenses, both military and commercial operators
are looking to independent service providers. Signs are positive
that the third-party maintenance and modification industry will be
the beneficiary of these trends in the coming years.

Military Maintenance and Modification Industry

Military maintenance and modification contracts are in a state of
uncertainty as the result of Congressional action and political
pressure arising from the closure of certain military bases.
During 1997, Congress included provisions in appropriations bills
which required the combination of certain military contracts,
including airframe maintenance, into larger contracts for bid and
proposal. This practice, referred to as "bundling", requires
smaller companies such as the Company's Pemco Aeroplex subsidiary
to team with one or more other operators in order to provide a bid
for the bundled contract. The Company cannot predict whether
bundling will be fully implemented.

The appropriations legislation also allowed private contractors to
join with military contractors to bid on such bundled projects.
While the public-private teaming arrangement may provide certain
opportunities for the Company, the bundling of contracts prevents
smaller operations like the Company from bidding on the contracts
individually. In addition, military depots are competing against
private contractors for various projects. In March 1998, the C-130
PDM solicitation was canceled and the work taken in-house by the
military, to the exclusion of all private contractors.

The need for immediate rapid deployment of military forces has
insulated the military maintenance and modification industry from
many of the effects of the shrinking defense budget. In fact, it
can be argued that the budget cuts have actually aided the sector.
By limiting future expenditures, the military has been unable to
initiate programs to replace substantial portions of their aging
transport fleets. These aging aircraft require more service than
newer aircraft, generating greater revenue for the military
maintenance and modification sector of the industry.

One of the Company's core competencies for 46 years has been
military aircraft maintenance and modification. Given projected
market conditions, this core competency positions the Company very
favorably to provide services to its military customers and to be
involved in teaming arrangements with public or private operators.
However, the Company could be limited in its ability to compete for
bundled contracts except through teaming or subcontracting
arrangements.

Commercial Maintenance Industry

World air travel is projected to continue to grow during the next
ten years. Forecasts by Airbus Industrie project that passenger
air traffic will increase at a rate of 5.9% annually through the
year 2006, with the active fleet to increase by 83%. Boeing's
World Air Cargo Forecast estimates that the freighter fleet will
nearly double in the next 10 years, while air cargo traffic will
grow at an average of 6.6% per year. Boeing estimates that 70% of
the additional freighters will be passenger-to-cargo conversions.

For commercial maintenance, there are many indicators that point to
the increasing use of third-party maintenance facilities in the
foreseeable future. Airlines continue to search for ways to reduce
costs and maintain profitability. A number of airlines realize
that the work done by third-party companies is, in many instances,
relatively faster, less expensive, and of similar quality as
compared with similar work performed in-house.

Commercial Modification Industry

The rapid increase in worldwide freight shipments has spawned a
demand for dedicated cargo aircraft. The majority (70%) of air
cargo planes have been converted from a pure passenger
configuration. Overnight package delivery, a service which has
experienced much growth in the last fifteen years in the U.S., is
beginning to grow in Europe. These package carriers are a driving
force in commercial modification, and their anticipated success in
Europe and elsewhere is expected to increase the demand for cargo
conversions.

Although air cargo traffic has been forecasted to grow at a rate of
6.6% annually through the next ten years and the number of all-
cargo planes projected to almost double over the next two decades,
the total number of cargo conversions performed during 1998 was
less than 1997. The decrease in conversions may be attributed to
the shortage of reasonably-priced passenger aircraft available for
conversion due to high passenger traffic and possible FAA action
related to converted aircraft. FAA reviews and increased
regulation will limit the entry of competitors to the cargo
conversion business and may increase the cost of conversions to
customers.

D. PRINCIPAL PRODUCTS AND SERVICES

AIRCRAFT MAINTENANCE AND MODIFICATION

General

The Company's aircraft maintenance and modification services
include complete airframe maintenance and repair, and custom
airframe design and modification, coupled with technical
publications and after market support. A majority of the services
are provided under multi-year contracts for both military and
commercial customers. The Company's military customers include the
United States Armed Forces ("Armed Forces") and certain foreign
military services. The Company's commercial customers include the
major global lessors of aircraft as well as airlines, couriers and
air-freight carriers.

The Company employs a large skilled work force and a permanent
engineering, design and analysis staff. The principal services
performed are Programmed Depot Maintenance ("PDM"), Standard Depot
Level Maintenance ("SDLM"), commercial C-level and D-level heavy
maintenance checks, passenger-to-freighter conversions, passenger-
to-quick-change conversions, aircraft stripping and painting,
component overhaul, rewiring, parts fabrication and engineering
support. Some of these services are performed exclusively for the
military while others are performed for the Company's commercial
customers; however, most of these services are offered to both
customer groups.

The Company's competition for military aircraft maintenance
contracts includes Boeing Military Aircraft, Lockheed-Martin
Aeromod, Raytheon-E Systems and Chrysler Technologies and various
military depots. The Company's competition for its commercial work
in the United States consists of Tramco, Dee Howard Company, Timco
and approximately 10 smaller independent repair and modification
operators. However, while many of the Company's competitors tend
to specialize on specific portions of the aircraft, the Company
focuses on total airframe repair, maintenance and conversion.
Outside the United States, the majority of the Company's
competitors are affiliated with an airline.

The Company considers its competitive strengths to be its
substantial capacity, a trained and experienced labor force,
product support, proprietary products, engineering and systems
integration capability, and strong customer base. The Company's
Birmingham, Alabama facility is believed to be the largest third
party maintenance facility in North America. With the addition of
the Victorville, California facility, the Company is strategically
located to provide service to carriers in the western sections of
the U.S. In addition, the Victorville facility provides an
opportunity to provide service to international carriers flying to
the west coast. The Company believes that its competitive position
has been weakened by its limited financial resources which have
hampered the pursuit of expansion opportunities and limited the
profitability of its existing business.

Government Services Group

The Company provides aircraft maintenance and modification services
on a contract basis to the Armed Forces and other agencies of the
U.S. Government, as well as foreign military services through its
Government Services Group. The majority of the aircraft that the
Company services are large transport planes such as the C-130
"Hercules"; or are logistical in nature, such as the KC-135 in-
flight refueling aircraft. Currently, the U.S. KC-135 tanker fleet
is estimated to include over 550 aircraft, and is projected to be
in service through 2040. These aircraft are essential to the Armed
Forces' ability to rapidly mobilize its forces on foreign land when
needed. The demands placed on these aircraft mean that they will
require maintenance services such as those provided by the Company.

Military contracts generally specify a certain number of aircraft
for the duration of the program. In addition to the number of
aircraft originally contracted, the Armed Forces typically
increases this number with aircraft that were not scheduled for
maintenance but which require servicing. These "drop-in" aircraft
generally increase the value of each contract. The Company has a
successful history with the Armed Forces and intends to use its
experience and expertise to retain the contracts that it currently
holds, as well as increase the likelihood of securing additional
contracts in the future.

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

At the onset of the PDM, the aircraft is generally stripped of
paint and the entire airframe, including the ribbings, skins and
wings, undergoes a thorough structural examination, which can
result in modifications to the airframe. The aircraft's avionics,
the electronics that control the flight of the aircraft, receive
examination and repair, replacement or modification as required.
At the completion of the overhaul, the aircraft is repainted.

In order for the Company to efficiently complete its maintenance
procedures, it maintains hydraulic, electrical, sheet metal and
machine shops to satisfy all of its testing and assembly needs and
to fabricate, repair and restore parts and components for aircraft
structural modification. The Company also performs in-house heat-
treatment on alloys used in aircraft modifications and repairs and
has complete non-destructive testing capabilities and test
laboratories.

The Company's skilled work force and engineering staff are familiar
with all aspects of aerodynamics, propulsion, fluid mechanics,
flight operations, fuel and induction systems, controls,
communications, radar, instrumentation and support research and
development functions.

The Company has provided quality maintenance, integration and
modification work on a wide variety of military aircraft over the
past 46 years, including C-130, KC-135, C-9, P-3, T-34, A-10, F-4,
F-15, F-16, T-38 and U.S. Navy H-2 and H-3 helicopters.

KC-135 Aircraft Contract

In August of 1994, the United States Air Force ("USAF") awarded the
Company a new contract for the PDM of its KC-135 aircraft
consisting of one base year and six option years. The KC-135 PDM
program involves a nose to tail inspection and repair program on a
scheduled five-year cycle. In October 1998, the KC-135 program was
extended through fiscal year 1999 by exercise of the fourth option
year. The total value of the contract over a seven year period, if
fully funded, is estimated to be over $389 million. The Company
first performed PDM on the KC-135 in 1968 and has since processed
over 3,000 such aircraft (including drop-in maintenance).

Notwithstanding the GAO decision, the Air Force announced its award
of the bundled workload to Ogden Air Logistics Center on October 9,
1998, stating that it was proceeding with the award. If the Air
Force's action stands, the KC-135 workload could be included in the
contract awarded to Ogden ALC upon expiration of the Company's
contract which may be as late as September 30, 2001. On October
13, 1998, Pemco filed a complaint in U.S. District Court, Northern
District of Alabama against the Air Force seeking declaratory
relief, an injunction, and an order requiring the Air Force to
comply with applicable federal laws as recommended by the GAO.

In addition to the KC-135 PDM maintenance contract, the USAF also
awarded the Company a KC-135 battery system modification contract
in August 1995. As the USAF continues to upgrade and modernize the
KC-135 fleet to ensure its viability through 2040, the KC-135 PDM
program is anticipated to further expand to include additional
upgrades such as new cockpit and avionics systems. The Company has
performed other major upgrades in the past, including wing re-skin,
major re-wire, corrosion prevention control and flight director,
auto pilot and fuel savings advisory system modifications.

H-3 Helicopter Contract

The H-3 helicopter is a utility, search and rescue, anti-submarine
warfare and VIP transport helicopter. The helicopter was built by
Sikorsky and is projected to be serviceable through 2010.

In 1994, the U.S. Navy ("USN") awarded the Company a five year
contract for SDLM work of its H-3 aircraft. This contract is for
a nose to tail inspection and repair program on a four-year cycle.
The USN input only two aircraft in the first year of the contract,
the contract minimum number. During 1996, the Company delivered
two USN SDLM aircraft and six Brazilian modification aircraft. The
Company delivered two USN SDLM aircraft in 1997. Redeliveries of
SDLM aircraft were delayed in 1997 due to delays in the supply of
Government Furnished Material ("GFM") by the U.S. Government. In
1998 the Company delivered two USN SDLM aircraft and three Egyptian
aircraft. Five aircraft were input during 1998.

Commercial Services Group

The Company provides commercial aircraft maintenance and
modification services on a contract basis to both the owners and
operators of large commercial transport aircraft (i.e., leasing
companies, banks, airlines, air cargo carriers) through its
Commercial Services Group. Contracts for commercial maintenance
can range from a single aircraft to multi-aircraft contracts that
can span a year or longer. The principal services performed under
commercial maintenance contracts are "C" and "D" checks, passenger-
to-freighter conversions, passenger-to-quick-change conversions,
combination passenger and freighter conversions (combi); strip and
paint; and interior reconfiguration and fleet standardization.

The "C" check is an intermediate level service inspection that,
depending upon the FAA approved maintenance program being used,
includes systems operational tests, thorough exterior cleaning, and
cursory interior cleaning and servicing. It also includes engine
and operation systems lubrication and filter servicing.

The "D" check requires a more intensive inspection. The "D" check
includes all of the work accomplished in the "C" check but places
a more detailed emphasis on the integrity of the systems and
structural functions. In the "D" check, the aircraft is
disassembled to the point where the entire structure can be
inspected and tested. Once the structure has been inspected and
repaired, the aircraft and its various systems are reassembled to
the detailed tolerances demanded in each system's functional test
series.

The form, function and interval of the "C" and "D" checks are
different with each operator's program. Each operator must have
their particular maintenance program approved by the FAA and there
are a number of variables which dictate the final form of a given
program. Those variables include the age of the aircraft, the
environment in which the aircraft flies, the number of hours that
the aircraft regularly flies, and the number of take-offs and
landings (called flight cycles) that the aircraft regularly
endures. In particular, flight cycles can effect the intervals
required for major components to be changed or overhauled, thus
affecting the amount of work required during any given check.

In addition to the tasks required in the "C" and "D" checks, there
are other associated tasks that are accomplished with these checks.
There are structural inspections, which focus on known problem
areas, that are required by the manufacturers. These are called
Supplemental Structure Inspections (SSI). With the institution of
the Aging Aircraft Programs by the manufacturers, there are also
inspection programs for areas of known corrosion problems that are
called Corrosion Prevention and Control Programs ("CPCP"). These
additional inspections supplement and, in some cases, overlay the
"C" and "D" check tasks.

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

Contracts for commercial aircraft are performed at the Dothan,
Alabama and Victorville, California facilities of the Commercial
Services Group.

The Company holds STCs from the FAA for the conversion of various
aircraft from passenger-to-freighter, passenger-to-quick-change,
and combination passenger and freighter conversions. Each type of
aircraft is certified by the FAA under a specific certificate.
Subsequent modifications to the aircraft require the review,
flight-testing and approval of the FAA and are then certified by an
additional STC. The Company holds passenger-to-freighter
configuration STCs for the conversion of Boeing 727-100, 727-200,
737-200, 737-300, DC-9 aircraft, and BAe-146 aircraft.
Additionally, the Company holds a passenger-to-quick-change
configuration STC for the conversion of Boeing 737-300 aircraft and
a combi configuration STC for the conversion of Boeing 727
aircraft.

MANUFACTURING AND OVERHAUL GROUP

The Company, through its Manufacturing and Overhaul Group designs
and manufactures a wide array of proprietary aerospace products;
various space systems, such as guidance control systems and launch
vehicles; aircraft cargo-handling systems (which the Commercial
Services Group often installs); and high precision parts and
components for aircraft. In addition, the Company provides engine
nacelle overhaul and repair and operates an aircraft parts
distribution company. The Company's well trained and highly
respected research, development, and engineering staff continues to
be instrumental in the Company's winning of competitively bid
aerospace and defense manufacturing contracts from the United
States military and numerous "blue-chip" commercial customers.
This group is comprised of independent niche-manufacturing and
service businesses which are complementary to its aircraft services
businesses. Most of the Company's manufactured products are
proprietary, protected by patents and STCs, and are successful due
to their high standards of performance and innovative design.

SPACE VEHICLES AND SUPPORT SYSTEMS

The Company's Space Vector subsidiary maintains a large research,
development and engineering staff dedicated to the design, and
manufacture and launch of space-related rocket systems. These
systems include scientific sounding rockets, sophisticated guided
target missiles, launch vehicles, guidance and control subsystems,
vehicle structures and recovery systems. The Company serves
primarily as a subcontractor on large U.S. Government Department of
Defense programs. However, the Company also has prime contracts
with NASA in support of space science and does a limited amount of
commercial space work.

The Company's largest current contracts support the National
Missiles Defense (NMD) and the Theater Missile Defense (TMD)
programs.

The HERA program, initiated in 1992 by the U. S. Army Space and
Strategic Defense Command, provides for target vehicles for use
during interceptor testing of various TMD systems through June
1998. The Company, as a subcontractor, completed its seventh
successful flight under the HERA program in March 1997. During the
fourth quarter of 1997, the HERA program was restructured and three
Consolidated Theater Target Services (CTTS) contracts were awarded
to replace the HERA program options. The Company is participating
as a subcontractor to Lockheed on one CTTS contract. This contract
has an indefinite quantity and extends to 2003.

The Company participates in the NMD arena as a subcontractor on the
Payload Launch Vehicle program. The Space Vector subsidiary has
been awarded the procurement for an additional four systems under
this program.

The Space Vector subsidiary is a leader in sophisticated
exoatmospheric control systems and provides systems to NASA. These
systems are used primarily on scientific sounding rockets.

The Company's Space Vector subsidiary is located at Chatsworth,
California with a satellite office at Fountain Valley, California.
The Company's principal markets for its space and missile products
are the U.S. Government, prime contractors to the U.S. Government,
and the scientific community in general. The Company's competition
ranges from very small organizations for the component subsystems
to major corporations for the design and manufacture of spacecraft
and launch vehicles. The Company considers its competitive
strength to be its technical and managerial competence. The
Company's contracts are awarded in accordance with the government's
competitive bidding practices.

CARGO HANDLING SYSTEMS

The Company designs and manufactures on-board cargo-handling
systems for all types of large transport aircraft and certain other
military aircraft. Robotics and fully-computerized machinery are
used to produce a wide variety of aircraft cargo handling systems
as well as individual parts used in the Company's proprietary
systems and in other systems. In 1996, 1997 and 1998, this
operation was named a Gold level contractor by McDonnell Douglas in
recognition of twelve consecutive months of 100% quality and 100%
on-time delivery.

This product line is produced by the Company's Pemco Engineers
Aircraft Cargo Systems division located at Corona, California. The
Company's principal markets for the cargo handling system are all
major United States and foreign airlines and aircraft
manufacturers. The Company has approximately eight competitors and
considers its strengths in this industry to be its innovation,
quality and response time.

PRECISION SPRINGS AND COMPONENTS

The Company manufactures precision springs and components and
employs custom design, tooling and precision stamping in the
production of these high tolerance parts. The springs and
components are used in a variety of industrial, commercial and
residential applications.

This product line is produced by the Company's Pemco Engineers
Springs and Components division. This division is also located at
Corona, California and shares state-of-the-art equipment with Pemco
Engineers Aircraft Cargo System division. The Company markets its
precision springs and components to a wide range of manufacturers
in numerous industries. There are approximately 500 manufacturers
of springs and components in the United States making it a $1
billion industry. The Company's competitors range in size from
"single-machine" shops to companies with revenues exceeding $20
million. Most of the competitors, however, produce a broader mix
of products while the Company focuses on the manufacture of
precision springs and components.

PARTS SUPPORT AND COMPONENT OVERHAULS

The Company's Parts Support and Component Overhaul service provides
a comprehensive source for aircraft spares and component overhauls.
The Company uses its inventory and on-line tracking and sales
system to provide support to the cargo conversion customers of the
Commercial Services Group as well as to users and owners of a wide
range of commercial and military aircraft.

This service is provided by the Company's wholly owned subsidiary,
Pemco Air Support Services, Inc. ("PASS"). PASS is located in
Clearwater, Florida. The Company markets its parts support and
component overhaul service to commercial carriers worldwide as well
as to foreign armed services. In the area of supporting and
selling the Company's designed and manufactured parts, the Company
often benefits from the marketing and customer-base of its other
subsidiaries.

SUPERSONIC AND SUBSONIC AERIAL TOW TARGETS AND WING TIP INFRARED
PODS

Until January, 1998, the Company designed and manufactured
supersonic and subsonic aerial tow targets and wing tip infrared
pods. In January 1998, the assets related to the Hayes Targets
division were sold to affiliates of Meggitt PLC.

NACELLE OVERHAUL AND REPAIR

The Nacelle Overhaul and Repair service provides a comprehensive
source for the overhaul, repair and modification to nacelles and
thrust reversers for engines manufactured by General Electric,
Pratt & Whitney and Rolls-Royce.

This service is provided by the Company's subsidiary, Pemco Nacelle
Services, Inc., which is located in Clearwater, Florida. The
Company markets its nacelle overhaul and repair service to
commercial carriers worldwide and supports turbofan-powered
aircraft manufactured by Airbus, Boeing and McDonnell Douglas.
There are approximately five competitors in the United States and
abroad. The Company entered this line of business in March of 1993
and is seeking to build its competitive strength on turnaround
time, in addition to quality and the convenience of exchange to the
customer.

E. RESEARCH AND DEVELOPMENT

The Company charged directly to earnings the cost it incurred for
Company sponsored research and development costs, which totaled
$0.1 million in 1998, $0.9 million in 1997, and $0.4 million in
1996. The research and development activities in 1998 were
principally in support of the Company's Target's programs, the
assets of which were sold in January 1998. The Company was not
engaged in any customer sponsored research and development efforts
in 1996, 1997, or 1998.

F. SALES

Foreign and Domestic Operations and Export Sales

All of the Company's revenues during 1998 were generated in the
United States and all of the Company's assets were located in the
United States. However, approximately 11% of revenues in 1998 were
to foreign owned entities. During 1997, the Company's wholly owned
subsidiary, Pemco World Air Services, A/S, (the "Danish
subsidiary"), a Danish limited liability company, operated in
Copenhagen, Denmark. In November of 1997, the Maritime and
Commercial Court in Copenhagen, Denmark granted the request of a
supplier to place the Danish subsidiary in bankruptcy. Trustees
were appointed to operate the facility. The Company has guaranteed
certain obligations of the Danish subsidiary; however, the amount
of such guaranties cannot be determined at this time. As a result
of being placed in involuntary bankruptcy, the Danish subsidiary
has been excluded from the Company's consolidated financial
statements effective January 1, 1997.

The Company maintained a sales office in France during 1998 and had
no other foreign locations. In February of 1999 this sales office
was closed. All sales activities are now conducted from U.S.
locations.

The Company provides maintenance and modification services to
foreign-based aircraft owners and operators at its U.S. facilities.
The Company's Space Vector and Nacelle subsidiaries, and its
Aircraft Cargo Systems and former Targets divisions also sell in
export markets. The services and products sold at the Company's
U.S. locations are generally payable in U.S. dollars. (See also
notes to the accompanying financial statement:

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

Product and Service Rendered 1998 1997 (1) 1996

Aircraft Maintenance 83% 77% 75%
and Modification

Supersonic and Subsonic <1% 3% 4%
Aerial Tow Targets and
Wing Tip Pods (former product)

Space Vehicles and 7% 9% 11%
Support Systems

Cargo Handling Systems 6% 6% 6%

Precision Springs 1% 1% <1%
and Components

Parts Support and Component <1% 1% 2%
Overhauls

Nacelle Overhaul and Repair 2% 3% 1%
100% 100% 100%

Export sales 11% 11% 14%
-principally Europe

Major Customers

The following table presents the percentages of total sales for the
Company's largest customers for the last three fiscal years:

1998 1997(1) 1996

U. S. Government 55% 61% 64%
-principally the Air Force,
Army, Navy, and NASA

(1) Excludes the amounts related to the Company's Danish
subsidiary. See Notes to the Consolidated Financial
Statements.

G. BACKLOG

The following table presents the Company's backlog (in
thousands of dollars) at December 31, 1998 and 1997:

1998 1997

U. S. Government $155,861 $124,345
Commercial 30,983 20,515
Total $186,844 $144,860

The above numbers have been adjusted to exclude the backlog for the
Hayes Targets division which was sold in January, 1998. Based on
this adjustment, as of December 31, 1998, 83% of the Company's
backlog was with the U.S. Government compared to 86% at December
31, 1997. Government backlog increased $23.0 million under the
Company's KC-135 contract, primarily due to an increase in aircraft
scheduled to be delivered for PDM work under the third and fourth
option years of the Company's KC-135 contract. The U.S. Government
delivered 34 aircraft under the first option year of the contract,
20 aircraft during 1997 contract year, 35 aircraft in contract year
98, and 37 are currently scheduled to be delivered for PDM work
under the fourth option year of the contract. The Space Vector
subsidiary increased government backlog by $10.3 million due
primarily to contracts with SMC Kirkland AFB and LMM & Space. The
Company's Government backlog increased $0.5 million under its H-3
helicopter contract. These increases were offset by reductions in
government backlog of $2.3 million due to completion or expiration
of various contracts offset partially by additional sales.

The Company's commercial backlog at December 31, 1998 increased 51%
due to increased sales of $10.5 million in commercial contracts.
Commercial backlog increased $10.7 million at the Dothan and
Victorville facilities due to increased commercial maintenance
contracts. This increase was partially offset by a reduction of
$0.2 million in commercial backlog at the Company's Pemco Engineers
subsidiary.

1998 1997

Firm, unfunded Backlog $42.5 million $37.0 million

Estimated sales to be $227 million $185 million
derived from backlog
contracts

The $227 million of estimated backlog is associated with the option
periods for the KC-135 contract and the Space Vector CTTS program.
The Company estimates that $111.5 million of its December 31, 1998
backlog will be filled in 1999.

H. RAW MATERIALS

The Company purchases a variety of raw materials, including
aluminum sheets and plates, extrusion, alloy steel and forgings.
Except as noted below with respect to Government Furnished Material
("GFM"), the Company experienced no significant shortages of raw
material essential to its business during 1998 and does not
anticipate any shortages of critical commodities over the longer
term. Predicting the availability of supplies is extremely
difficult because so many factors causing such possible shortages
are outside the Company's control.

The Company procures many components, parts and equipment items
from various domestic companies. The Company faces some dependence
on suppliers for certain types of parts involving highly technical
processes; however, this risk has lessened in the past few years as
additional high technology suppliers have entered the market. The
Company does not believe this dependence has significance for its
business as a whole; rather, any adverse consequence that might
result from the failure of a sole supplier to provide a particular
part would be felt on an individual contract basis.

A significant portion of the equipment and components used by the
Company in the fulfillment of its services under United States
Government contracts is furnished without charge to the Company by
the U.S. Government. The Company is dependent upon U.S. Government
furnished material to meet delivery schedules, and untimely receipt
of such material adversely affects production schedules and
contract profitability. The Company has encountered late delivery
of GFM in 1994, 1995, 1996, 1997 and 1998, and as a result,
experienced a disruption in scheduled work flow. (See Item 7.
Management's Discussion and Analysis of Financial Conditions and
Results of Operations below)

I. PATENTS, TRADEMARKS, COPYRIGHTS AND STCs

The Company holds approximately 120 FAA-issued STCs which authorize
it to perform various modifications to aircraft. These
modifications include air-stair installation, the conversion of
commercial aircraft from passenger-to-freighter or passenger-to-
Quick Change configurations and ground proximity and wind shear
warning systems. The STCs are applicable to Boeing 707, 727, 737,
747, Douglas DC-6, DC-8, DC-9, BAe-146, Convair 580, General
Dynamics 340/440, Lockheed 382 & 188, Mitsubishi YS-11, Mc Donnell
Douglas C-54 and Airbus A320 series aircraft. Approximately 21 of
the Company's STCs are related to its cargo handling systems for
various types of large transport aircraft. STCs are not
patentable; rather, they indicate a procedure that is acceptable to
the FAA to perform a given air-worthiness modification. The
Company develops its STCs either internally or under licensing
agreements with the original equipment manufacturer.

The Company also holds FAA-issued Parts Manufacturing Approvals
(PMAs) which give it authorization to manufacture parts of its own
design or that of other manufacturers related to its cargo handling
system. The Company holds numerous other PMAs which give the
Company authority to manufacture certain parts used in the
conversion of aircraft from passenger-to-freighter and passenger-
to-Quick Change configurations.

In addition, the Company has a U.S. design patent for a permanent
door sill designed for use in cargo configurations, granted in
1996, and a design patent for a latching device.

The Company does not believe that the expiration or invalidation of
any or all of these patents would have a material adverse impact
upon its financial condition.

The Company holds copyrights to the computer software developed
in-house for the operation of the Power Drive Unit System and Cargo
Door Electro-Mechanical System used in the conversion of commercial
aircraft. These copyrights will begin to expire after the year
2028.

Certain patents and copyrights were transferred to the purchaser
upon the sale of the assets of the Hayes Targets division in
January 1998. The sale included two active utility patents, three
active design patents, and copyrights to the software for the
development of the control computer codes for the TLX-1 sea-
skimming, height-keeping tow target, and the TMX class maneuvering
target.

The Company believes that the value of its patents, trademarks,
copyrights and STCs exceed the amounts of its related intangibles
and deferred inventory.

J. ENVIRONMENTAL COMPLIANCE

In December, 1997, the Company received an inspection report from
the Environmental Protection Agency (EPA) documenting the results
of an inspection on September 9, 1997 at the Birmingham, Alabama
facility. The report cited various violations of environmental
laws. The Company has taken action to correct the items raised by
the inspection. On April 2, 1998, the Company received a complaint
and compliance order from EPA proposing penalties of $225,256. The
Company disagreed with the citations and contested the penalties.

On December 21, 1998 the Company and the EPA entered into a
Consent Agreement and Consent Order (CACO) resolving the complaint
and compliance order. As part of the CACO, the Company has agreed
to assess a portion of the Birmingham facility for possible
contamination by certain constituents, remediate such contamination
as necessary, and pay a penalty of $95,000 over a three year
period.

In response to an inspection conducted by the Environmental
Protection Agency (EPA) in June 1997, the Company entered into
informal discussions regarding alleged violations under the Toxic
Substances Control Act (TSCA) related to PCB-contained electrical
equipment located on the Birmingham, Alabama facility. On October
5, 1998, the Company's Pemco Aeroplex subsidiary was served with a
complaint filed by the EPA regarding such alleged violations of
TSCA and seeking penalties of $144,000. No release to the
environment was alleged and all issues raised by the inspection
were fully addressed. On November 19, 1998, the Company and the
EPA entered into a Consent Agreement and Consent Order (CACO)
resolving the complaint. Under the CACO, the Company agreed to pay
a penalty of $91,800 over a three year period.

The Company is required to comply with environmental regulations at
the federal, state and local levels. These requirements apply
especially to the stripping, cleaning and painting of aircraft.
The requirements to comply with environmental regulations have not
had, and are not expected to have, a material effect on the
Company's capital expenditures, earnings and competitive position.

K. EMPLOYEES

On December 31, 1998, the Company employed 2,170 persons.
Approximately 1,529 of these persons are covered under collective
bargaining agreements with the United Auto Workers (UAW),
International Aerospace and Machinists (IAM), and other unions. Of
the union employees, approximately 1,504 are represented by the UAW
or by the IAM. The Company's contract with its UAW employees
expired in July of 1996 and the employees voted to stop work. On
March 21, 1997, the UAW employees ratified a new three year
agreement ending the work stoppage. The UAW bargaining agreement
covers employees at the Company's Birmingham, Alabama and the
former Leeds, Alabama locations. Union employees at the former
Hayes Targets division who did not accept employment with the
purchaser of the Hayes Targets' assets were transferred to the
Birmingham facility in accordance with the terms of the union
contract.

On August 24, 1997 the IAM employees voted to stop work. On
September 14, 1997, the IAM bargaining unit ratified a new three
year agreement and returned to work on September 15, 1997.

Approximately 25 of the Company's 2,170 employees are employed on
a part-time basis.

Item 2. Properties.

All of the Company's properties are generally well maintained and
in good operating condition.

Precision Standard, Inc. Executive Offices and Pemco World Air
Services Marketing Offices - Denver, Colorado

Precision Standard, Inc. has its executive offices in approximately
2,500 square feet of leased space in Denver, Colorado. The lease
commenced April 4, 1998 and expires April 30, 2003 with an option
to renew at the prevailing market rate for an additional 5 year
term. As part of its plan to reduce operating expenses the Company
relocated its executive offices to this location from downtown
Denver during the second quarter of 1998. The Company sublet its
former office during the third quarter of 1998 for slightly less
than its remaining lease obligation. The lease for the sublet
office space expires in May, 2000. Pemco World Air Services
maintains offices at the same location for Marketing, Sales,
Product Support and Engineering departments and occupy
approximately 7,500 square feet.

The Government Services Group - Birmingham, Alabama

The Government Services Group is located at the Birmingham
International Airport, in Birmingham, Alabama. The Birmingham
facility is located on 204 acres of land with approximately
1,900,000 square feet of production and administrative floor space.
The facility includes ten flow-through bays permitting continual
production line operation. The facility also includes a number of
ancillary buildings such as a paint hangar, a shipping and
receiving warehouse, a wing rehabilitation shop, a sheet metal shop
and a 54,904 square foot general office building which houses the
administrative staff. Available ramp area exceeding 3,000,000
square feet is adjacent to the municipal airport runways.
Additionally, the facility operates a control tower which
supplements the FAA-managed municipal air control tower and a fire
fighting unit which supplements fire fighting equipment operated by
both the City of Birmingham and the Alabama Air National Guard.

The Birmingham facility is in every material respect a complete
aircraft modification and maintenance center. The facility is an
approved FAA and JAA Repair Station and maintains Department of
Defense "SECRET" security clearance.

The facility is leased from the Birmingham Airport Authority. The
lease has been extended for an additional twenty year period under
the same terms and conditions and will expire September 30, 2019.

Commercial Services Group

The Dothan Facility

The Dothan facility of the Commercial Services Group is located at
the Dothan-Houston County Airport, in Dothan, Alabama. The
facility is located on 90.5 acres of land with approximately
521,000 square feet of production and administrative floor space.
The facility includes 352,000 square feet of aircraft hangar space
which is comprised of 13 bays and one wide-body aircraft hangar.
The facility also includes four warehouses, two paint hangars,
support shops and 26,000 square feet of administrative offices.
The facility has 850,000 square feet of aircraft flight line and
parking ramp space and is served by an airport consisting of two
runways of 5,600 and 8,500 feet, a FAA Flight Service Station and
a control tower.

The Dothan facility is an approved FAA, JAA and CAA (United
Kingdom) repair station. The facility is leased from the
Dothan/Houston County Airport Authority under a lease agreement
which, inclusive of a five year option period, expires in June of
2015.

The Victorville Facility

The Company's facility is located at Southern California
International Airport in Victorville, California. This west coast
facility consists of more than 200,000 square feet of hangar,
manufacturing and warehouse space with access to runways, tower
services, and ramp space. The main hangar can fully enclose a MD-
11 aircraft. Located at the former George Air Force Base, the
runways, taxiways and more than four million square feet of ramp
space are capable of handling any aircraft in operation without the
restrictions found at most California airports. The facility
opened and received approval as an FAA repair station on July 19,
1998.

Manufacturing and Overhaul Group

The Clearwater Facility

The Company's Clearwater facility is located at the St.
Petersburg/Clearwater International Airport at Clearwater, Florida.
The facility is located on 22 acres of land with approximately
133,000 square feet of production and administrative floor space.
The facility includes 2 bays of approximately 92,000 square feet as
well as supply and support shops and administrative offices. The
facility has 782,000 square feet of ramp space and is served by
airport facilities consisting of five runways (from 4,000 to 8,500
feet), a FAA Flight Service Station and a control tower. The
facility houses Pemco Nacelle Services, Inc. and a warehouse for
PASS.

The facility is leased from Pinellas County, a political
subdivision of the State of Florida, under a lease agreement that
expires in September 2000, exclusive of four optional renewal
periods of five years each which would extend the lease until
September 2020.

Pemco Nacelle Services, Inc.

Pemco Nacelle Services is located at the Clearwater, Florida
facility (see description under "The Clearwater Facility").

Space Vector Corporation

Space Vector Corporation is located at Chatsworth, California.
This facility consists of two industrial buildings of approximately
67,000 square feet. Space Vector Corporation occupies these
buildings under a lease agreement which expires in April, 1999.

Space Vector also leases a 3,900 square foot research and
development and administrative office in Fountain Valley,
California. Approximately 1,700 square feet is subject to a lease
which expires in October of 2000; the remaining 2,200 square feet
is leased on a monthly basis.

Pemco Engineers Aircraft Cargo Systems and Springs and Components
Divisions

Pemco Engineers is located at Corona, California. The facility
consists of 28,000 square feet and houses production and
administrative functions. The facility is under a lease agreement
which expires in June 30, 2002.

Pemco Air Support Services (PASS)

PASS is located at the Clearwater, Florida facility. Until
December 1997, PASS also maintained administrative offices and a
warehouse at the Pemco World Air Services A/S facility in
Copenhagen, Denmark.

Item 3. Legal Proceedings.

On November 3, 1997, a Jefferson County, Alabama jury returned a
verdict against the Company's Pemco Aeroplex subsidiary in the
amount of $1 million compensatory and $3 million punitive damages
in Stevenson v. Pemco Aeroplex, Inc.. Various post-trial motions
resulted in the trial court reducing the verdict to $1 million in
compensatory damages. Pemco and the plaintiff have both appealed
this decision to the Alabama Supreme Court. Pemco's appeal argues,
among other issues, that the jury's exoneration of the individual
supervisor means that Pemco cannot have any liability to the
plaintiff for the alleged wrongdoing by such individual. The
Company intends to vigorously pursue reversal of this decision.

A purported class action was brought against the Company and its
Pemco Aeroplex subsidiary in May, 1997 on behalf of those persons
hired as replacement workers during the strike by Pemco's United
Auto Workers (UAW) union employees who were terminated upon
settlement of such strike. The Complaint was served on June 3,
1997 in Bradley v. Pemco Aeroplex, Inc., et al. filed in the
Circuit Court of Jefferson County, Alabama. Trial was scheduled
in October, 1998, but that trial date was vacated and no new date
has been set.

The Company's Pemco Aeroplex subsidiary, successor to Hayes
International, is a defendant in several suits seeking damages and
indemnity for claims arising from an Airworthiness Directive issued
by the FAA. That directive restricts the cargo capacity of Boeing
747 aircraft converted pursuant to an STC for such conversions.
Hayes International had performed certain engineering work for the
development of the STC. Refer to the Company's previous filings on
Form 10-K and Form 10-Q for details on the individual cases.

In November, 1997, the Company's Danish subsidiary, Pemco World Air
Services A/S was placed in involuntary bankruptcy in Denmark. On
September 30, 1998, the Company received notice from the bankruptcy
estate that the trustees would assert a claim in the amount of
approximately $2 million against the Company for the alleged
negative equity of the Danish subsidiary. Based on preliminary
information provided to the Company during 1998, additional claims
have been filed by creditors against the bankruptcy estate. While
these additional claims could be as much as $15 million, the
Company believes, based on partial information, that $11 million of
these additional claims is comprised of one or more claims seeking
consequential damages. The Company does not have sufficient
information at this time to determine whether these consequential
damages or other claims could be recovered from the Company under
Danish law. The Company intends to vigorously defend itself
against these claims if and to the extent they are ultimately
asserted against the Company.

On October 9, 1998, an action was brought against the Company by
Sterling Airways A/S in Bankruptcy ("Sterling") in District Court
in and for the City and County of Denver, Colorado state court
alleging breach of contract and seeking payment for parts and
materials supplied to Company's former Danish subsidiary Pemco
World Air Services A/S in bankruptcy. The complaint alleges that
the Company guaranteed certain obligations to Sterling and seeks
damages of approximately $1.4 million. The Company filed a motion
to dismiss the Complaint, which was denied by the court on January
13, 1999.

In May 1998, the Company's Pemco Aeroplex subsidiary was served
with a complaint filed by National Union Fire Insurance Company,
the Company's current insurer, seeking a declaration that the
policies issued by such insurer between 1987 and 1996 are not
required to provide defense costs or indemnity payments with
respect to the litigation arising out of the STCs for Boeing 747
cargo conversions owned by GATX and others. The complaint filed
in U.S. District Court of the Northern District of California, also
names American International Airways, Inc., a plaintiff in one of
the underlying cases, as a defendant. Pemco Aeroplex has filed a
motion to stay the action pending resolution of the underlying
cases.

Various claims alleging employment discrimination, including race,
sex, age and disability, have been made against the Company and its
subsidiary, Pemco Aeroplex, Inc., by current and former employees
at its Birmingham and Dothan, Alabama facilities in proceedings
before the Equal Employment Opportunity Commission and before state
and federal courts in Alabama. Workers' compensation claims
brought by employees of Pemco Aeroplex, Inc. are also pending in
Alabama state court. The Company believes that no one of these
claims is material to the Company as a whole and that such claims
are more reflective of the general increase in employment-related
litigation in the U.S., and Alabama in particular, than of any
actual discriminatory employment practices by the Company or any
subsidiary. Except for workers' compensation benefits as provided
by statute, the Company intends to vigorously defend itself in all
litigation arising from these types of claims.

The Company and its subsidiaries are also parties to other non-
employment related litigation, the results of which are not
expected to be material to the Company's financial condition and
results of operations.

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

There were no matters submitted for a vote of the Company's
shareholders in the fourth quarter of fiscal 1998.

Item 5. Market for Company's Common Equity and Related Stockholder
Matters.

By letter dated November 20, 1997, the Company was notified by the
Nasdaq Stock Market (Nasdaq) of its concern regarding the continued
listing of the Company on the Nasdaq National Market ("National
Market") pursuant to the National Market's corporate governance
rules because of the Company's failure, among other things, to
maintain a minimum bid price of $1.00 per share for the ten
consecutive trading dates prior to the notice. After a hearing on
January 29, 1998 before a Nasdaq Listing Qualifications Panel, (the
"Panel"), the Company was informed by the Panel that the Company
would be moved to the Nasdaq SmallCap Market and that it must
effect a reverse stock split sufficient to meet or exceed the $1.00
minimum bid price requirement on or before April 15, 1998. As a
result, the Company's Shareholders approved a 1-for-4 reverse stock
at a special meeting on April 15, 1998, effective on that date.

As a result of the 1-for-4 reverse stock split, each four issued
shares of the Company's common stock held on the record date was
automatically converted into one share of Common Stock. No
fractional shares were issued and no cash was paid for fractional
shares. Instead, each fractional share was rounded up to a whole
share. As of March 30, 1999, the Company's common stock trades on
the Nasdaq SmallCap Market pursuant to certain exceptions under the
symbol "PCSNC". Approximately 51% of the outstanding shares of
record of the Company's common stock are held by Matthew L. Gold,
the Company's Chairman, President and Chief Executive Officer.

The following table sets forth what the Company believes to be the
range of high and low bid quotations for its common stock on a
quarterly basis for each of the Company's last two fiscal years.
Quotations represent prices between dealers, do not include retail
mark-ups, mark-downs or commissions, and do not necessarily
represent actual transactions.

Bid Quotations (1)
High Low

1997

March 31, 1997 $6-1/2 $4-1/2
June 30, 1997 $6-1/2 $4-1/4
September 30, 1997 $5-3/4 $4
December 31, 1997 $4-1/2 $1-1/2

1998

March 31, 1998 $2-1/4 $3
June 30, 1998 $4 $4
September 30, 1998 $3-7/8 $3-7/8
December 31, 1998 $3-5/8 $3-5/8

(1) All prices reflect the 1-for-4 reverse stock split described
above.

On December 31, 1998, there were 3,977,721 shares of common stock
issued and outstanding held by 220 owners of record, which the
Company believes were held by more than 500 beneficial owners.

The Company has never paid cash dividends on its common stock and
currently intends to continue that policy indefinitely.

Item 6. Selected Financial Data.

Consolidated operating data for the Company is as follows
(in thousands of dollars):

Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/98 12/31/97(1) 12/31/96 12/31/95 12/31/94

Net Sales $141,770 $122,258 $130,858 $154,658 $148,495

Income (loss) 9,389 (22,207) (2,353) 2,583 6,812
from
operations

Net Income 10,054 (33,150) (3,960) (3,811) 11,227
(loss)

Net Income 2.53 (9.19) (1.27) (1.24) 2.68
(loss) per
common share -
diluted

Consolidated balance sheet data for the Company is as
follows (in thousands of dollars):

Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/98 12/31/97(1) 12/31/96 12/31/95 12/31/94

Working $ 3,286 ($27,911) $9,180 $21,122 $14,277
Capital

Total 49,469 46,333 59,274 80,971 80,776
Assets

Long term 21,824 0 11,104 25,787 14,925
debt

Other 3,064 6,157 5,178 10,790 15,671
Liabilities

Stockholders'
equity
(deficit) (6,040) (16,337) 13,128 13,874 12,515

(1) Excludes the amounts related to the Company's Danish
subsidiary. See Notes to the Consolidated Financial
Statements.

Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations.

INTRODUCTION

The following discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto
included herein as Item 8.

During 1998 the Company accomplished the major objective of the
restructuring program which it began to implement in 1997,
restoring the Company to profitability. Net income was $10.1
million for 1998, including the gain on the sale of Hayes Targets
discussed below. The Company plans to continue implementation of
the restructuring program in 1999.

Restructuring Program

In 1997, the Company implemented a company-wide operational,
management, and financial restructuring program to more effectively
organize its operating units and aid the Company in returning to
profitability. This program, coupled with the Company's 1998
retention of Houlihan, Lokey, Howard & Zukin, an investment banking
firm, to explore various strategic alternatives to enhance
shareholder value, including the possible sale of one or more
operating units, demonstrates the commitment of management to take
all necessary measures to restore the Company to profitability.

As part of the restructuring, the Company sold the assets relating
to its Hayes Targets division, eliminated and consolidated the
Executive Group Vice Presidents position and delegating the
function's responsibilities to unit managers, and relocated and
consolidated the product support, engineering, marketing, and sales
functions, and the executive offices located in Denver, Colorado to
less expensive offices.

Sale of Hayes Targets Assets

On January 29, 1998, the Company's Pemco Aeroplex subsidiary sold
the assets relating to its Hayes Targets division to affiliates of
Meggitt PLC for approximately $4.8 million. The division, located
in Leeds, Alabama, developed and manufactured supersonic and
subsonic aerial tow targets for weapon system development and wing
tip infrared pods for the protection of military aircraft used by
U.S. and foreign military customers. The consideration for the
sale was based on the estimated fair market value of the assets.

Results of Operations

KC-135 Contract

The Company first performed Programmed Depot Maintenance (PDM) on
KC-135 aircraft in 1968 and has since processed over 3,000 such
aircraft. In 1994, the Company was awarded a new, seven year PDM
contract (one base year and six option years) and is currently
performing work under the (fourth option year) of those seven
years. Prior to this new contract, the Company had performed PDM on
KC-135 aircraft under a five year contract awarded in 1990. The
Company's KC-135 contract with the U.S. Government accounted for
approximately 39% of the Company's total revenues in 1998, 40% in
1997 and 42% in 1996.

The Company's contract for the third option year of the KC-135
contract was amended in 1997 to include additional pricing,
additional workscope, incentive provisions, and limited
cost/benefit sharing provisions. The U.S. Government delivered 45
aircraft to the Company under the first year of the 1994 contract,
34 aircraft under the first option year, 20 aircraft under the
second option year, and 35 aircraft during the third option year.
The government currently has scheduled 37 aircraft under the fourth
option year, which began on October 1, 1998.

Twelve months ended December 31, 1998
Versus twelve months ended December 31, 1997

Revenues for the year ended 1998 increased approximately 16% from
$122.3 million in 1997 to $141.8 million in 1998. Government sales
increased 9.0% in 1998, from $72.0 million in 1997 to $78.4 in
1998. Commercial sales increased 25.9% in 1998, from $50.3 million
in 1997 to $63.4 million in 1998.

If the Hayes Targets operating unit is eliminated from revenue in
both years the Company's remaining operating units increased
revenues 19.3% from $118.9 million in 1997 to $141.8 million in
1998. Government sales would increase 9.9% in 1998, from $71.3
million in 1997 to $78.4 in 1998. Commercial sales would increase
33.3% in 1998, from $47.5 million in 1997 to $63.4 million in 1998.

The Company's mix of business between government and commercial
customers shifted from 41% commercial and 59% government in 1997 to
45% commercial and 55% government in 1998. Removing Hayes Targets
from the 1998 revenue would not change the mix. Removing Hayes
Targets in 1997 would shift the mix by 1% with commercial
decreasing and government increasing.

The $6.4 million increase in government sales in 1998 was due
primarily to increased throughput and deliveries on the H-3
helicopter contract at the Dothan facility, $4.9 million,
additional sales under the KC-135 PDM contract of $1.3 million, and
drop in work on C-130s, primarily paint and strip, in the amount of
$1.2 million. Other government contracts combined for a net
decrease of approximately $0.9 million from 1997 with the decrease
due principally to the Space Vector facility which decreased $1.1
million.

Commercial aircraft maintenance and modification sales increased
$16.2 million at the Company's operations in Dothan, Alabama and
Victorville, California due primarily to increases in maintenance
related revenues.

Commercial sales for 1998 increased $1.5 million at the Company's
Pemco Engineers division and decreased $1.2 million at Pemco
Nacelle.

Cost of sales decreased from $121.1 million for the year ended
December 31, 1997 to $116.3 million during 1998. The gross margin
percentage increased from 1.0% in 1997 to 17.9% in 1998.

Selling, general and administrative expenses increased from $13.9
million in 1997 to $15.6 million in 1998, but decreased as a
percentage of sales from 11.4% in 1997 to 11.1% in 1998.

Interest expense was $3.4 million in 1998 versus $1.8 million in
1997. Interest for the year was impacted by a higher effective
interest rate on the Company's Revolving Credit facility and
interest payments to vendors. The effective average interest rate
on the Revolving Credit facility was approximately 10.0% during
1997 and 11.25% in 1998. Interest expense was favorably impacted
by the forgiveness of $1.3 million of interest by the Company's
lender, Bank of America, $0.6 million of which was recorded in
1996, $0.3 million in 1997, and $0.1 million in 1998. The balance
of $0.3 million will be reflected as yield adjustment through 2001.

The Company recorded other income of $2.3 million in 1998 versus
$0.4 million of other expense in 1997. The 1998 other income
reflects a gain on the sale of its Hayes Targets operating unit
discussed above of $3.1 million, offset by $.08 million of other
operating expenses.

The Company recorded a $1.7 million tax benefit in 1998 versus a $9
million of income tax expense in 1997. (See Notes to the
Consolidated Financial Statements)

Twelve months ended December 31, 1997
Versus twelve months ended December 31, 1996

In November, 1997, the Company's Pemco World Air Services A/S
subsidiary in Copenhagen, Denmark (the "Danish subsidiary") was
placed in bankruptcy. As a result, the Company's financial
statements for 1997 excluded revenues and operating expenses
generated by the Danish subsidiary with the net impact of
deconsolidation having been classified as a component of the
restructuring charge. (See Notes to the Company's Consolidated
Financial Statements for year ended December 31, 1997)

Revenues for the year ended 1997 decreased approximately 7% from
$130.9 million in 1996 to $122.3 million in 1997. The decrease was
due in part to the deconsolidation of the Danish subsidiary which
had contributed $10.5 million in revenues in 1996. Additionally,
government sales decreased 13% in 1997, $84.1 million in 1996 to
$73.3 in 1997. Commercial sales increased 6% in 1997, from $46.8
million in 1996 to $50 million in 1997. The Company's mix of
business between government and commercial customers shifted from
36% commercial and 64% government in 1996 to 39% commercial and 61%
government in 1997. The mix of business was also impacted by the
elimination of commercial revenues previously generated by the
Danish subsidiary.

A $10.8 million decrease in government sales in 1997 was due
primarily to reduced inputs of aircraft during the strike at the
Birmingham facility. In addition, delays in delivery of Government
Furnished Material for the Company's H-3 contract reduced
deliveries, and thus reduced government sales $3.3 million under
such contract.

Government sales in 1997 also decreased $4 million at the Space
Vector facility due to completion of the Altair program during 1996
and, $1 million due to the expiration of the C-130 PDM contract at
the Birmingham facility.

Commercial aircraft sales increased $3.7 million at the Company's
operations in Dothan, Alabama. This increase occurred
notwithstanding the labor strike at the Dothan facility which
reduced aircraft throughput. Revenues from aircraft conversions
increased slightly in 1997, but conversions remained low due to a
shortage of available aircraft resulting from increased passenger
traffic and possible FAA action related to converted aircraft.
During 1997, the Company redelivered five conversions versus three
in 1996.

Commercial sales for 1997 increased $2.1 million at the Company's
Pemco Engineers division and $3.1 million at Pemco Nacelle. The
increased sales at Pemco Nacelle was due primarily to business
generated from new geographic markets.

Cost of sales increased from $115.7 million for the year ended
December 31, 1996 to $121.0 million during 1997, for a 110 basis
point deterioration in gross margin to 1%. The decrease was due in
large part to the recognition of $17.6 million in sales during 1996
resulting from the settlement of the Company's Request for
Equitable Adjustment (REA) with the U.S. Government, without a
corresponding benefit in 1997. Additionally in 1997, the Company
also suffered from inefficiencies, increased costs, and delays in
aircraft inputs associated with the strike and through-put problems
associated with the KC-135 program at the Birmingham facility.

Selling, general and administrative expenses decreased from $17.1
million in 1996 to $13.9 million in 1997, and decreased as a
percentage of sales from 13% in 1996 to 11% in 1997. These
decreases resulted primarily due to the Company's reduction of
overhead expenses and corporate management changes. Pension
expense increased slightly in 1997 from $1 million in 1996 to $1.4
million.

Interest expense was $1.5 million in 1997 versus $2.5 million in
1996. Interest expense was favorably impacted by the repayment of
certain principal amounts and the forgiveness of $1.3 million of
interest by the Company's lender, Bank of America, $0.6 million of
which was recorded in 1996 and $0.3 million in 1997. The balance
of $0.4 million will be reflected as yield adjustment through 2001.
The effective average interest rate on the new Revolving Credit
facility was approximately 10.0% during 1997 as compared to 10.52%
under the Term Credit facility in 1996. The effective interest
rate in 1996 for the old Revolving Credit facility, which was
repaid in October 1996, was 10.45%.

The Company recorded other expense of $0.4 million in 1997 versus
$3.2 million of other income in 1996. The 1996 other income
reflects amounts received by the Company due to its settlement with
the U.S. Government of the REA of which $3.3 million was reflected
as other income.

The Company recorded $9 million of income tax expense in 1997
versus $2.3 million in 1996. The increase in tax expense resulted
from an increase in the deferred tax valuation allowance to fully
reserve for deferred tax assets at December 31, 1997. (See Notes
to the Consolidated Financial Statements)

LIQUIDITY AND CAPITAL RESOURCES

The Company initially borrowed funds from its primary lender at
that time, Bank of America National Trust and Saving Association
("Bank of America"), beginning in 1988 pursuant to a Credit
Agreement that provided for a term credit facility and a revolving
credit facility (the "Credit Agreement"), and a Senior Subordinate
Loan agreement (the "Subordinated Agreement"). In connection with
these agreements, the Company issued to Bank of America a warrant
to purchase shares of the Company's Common Stock (the "Warrant").

The Warrant permitted Bank of America to purchase from the Company
1,053,938 shares of the Company's Common Stock at an aggregate
purchase price of $0.96 per share, subject to certain adjustments
for changes in the Company's Common Stock and for dilutive
issuances dating back to 1988, any time before September 9, 2000.

The Company subsequently agreed to repurchase the Warrant over a
period of six quarters beginning August 31, 1997 with cash or by
the issuance of Common Stock with a value equal to the redemption
price. The Company was committed to exercise its right to
repurchase the Warrant with shares of Common Stock, only if the
Shares when issued are the subject of an effective registration
statement and immediately publicly tradable. Effective December
31, 1997, the Shares underlying the Warrant were registered with
the Securities and Exchange Commission. On December 31, 1997, the
Company issued 324,538 Shares for the redemption due on August 31,
1997, and 102,941 Shares for the redemption due on October 31,
1997. Also on December 31, 1997, the Company issued 36,858 shares
in payment of interest due under the Warrant. During 1998 the
Company issued approximately 360,000 shares to redeem the balance
of the Warrant. All redemptions were made on a net issuance basis.

The Credit Agreement and the Subordinated Agreement with Bank of
America also provided for the forgiveness of approximately $1.3
million of accrued but unpaid interest in 1996. The Company
recognized approximately $0.6 million of the forgiven interest in
1996 and $0.3 million in 1997. During 1998, the Company recognized
$0.1 million and the balance of the $0.3 million will be recorded
over the period 1999 through 2001 as a yield adjustment on the
remaining debt balance.

On August 8, 1997, the Company executed an agreement with a new
primary lender for a revolving credit facility that allows the
Company to borrow up to $20 million. While this new loan has
provided the Company with significantly greater flexibility in its
cash management, it has not completely cured the Company's
persistent cash flow problems. The amount of funds available to
borrow under the new revolving credit facility is tied to
percentages of accounts receivable and inventory. Interest on the
new revolving credit facility accrues at prime rate plus 1.5% with
provisions for adjustments in the interest rate based on specific
operating performance targets.

As part of the August transaction, the Company repaid in full its
$5 million Term Credit facility under the Credit Agreement and a
portion of the Subordinated Agreement. The Subordinated Agreement
was amended on August 8, 1997 to provide that all scheduled
principal amortization for the portion of the Subordinated Loan
that remains in place has been deferred for the three-year term of
the new revolving credit facility. The Subordinated Loan will be
repaid over five installments commencing on August 31, 2000, due
each subsequent quarter through June 30, 2001.

The above loans are collateralized by substantially all of the
assets of the Company and have various covenants which limit or
prohibit the Company from incurring additional indebtedness,
disposing of assets, merging with other entities, declaring
dividends, or making capital expenditures in excess of certain
amounts in any fiscal year. Additionally, the Company is required
to maintain various financial ratios and minimum net worth amounts,
including those with respect to working capital, tangible net
worth, and losses in a quarter. The Company has informed its
lender of certain violations of such covenants and has obtained
waivers through December 31, 1998. Additionally, the Bank amended
the financial covenants for fiscal year 1999. Based on projections
for 1999, the Company believes it will be in compliance with the
amended covenants throughout 1999. However, there can be no
assurance that the Company will be able to meet the amended
covenants during 1999.

The Company's cash resources in 1998 continued to be strained due
to delays and reductions in progress payments for amounts billed to
the U.S. Government and increased workloads under government and
commercial contracts.

The Company intends to update or replace its outdated, multi-type
financial information systems during 1999. The hardware, software
and implementation costs will be approximately $4.5 million and
will be incurred over a one year period. The costs of the systems
are being financed by various vendors over periods of approximately
36 to 42 months. Currently, the Company has no other commitments
for any material capital expenditures.

The following is a discussion of the significant items in the
Company's Consolidated Statement of Cash Flows for the years ending
December 31, 1998, 1997, and 1996.

The Company generated net income of $10.1 million versus a loss of
$33.2 million in fiscal year 1998 and 1997, respectively. Cash
generated from operations amounted to $4.0 million in 1998 versus
a use of cash amounting to $.5 million in 1997. $8.4 million use
of cash in 1998 related to increases in accounts receivable
compared to $2.2 million use of cash in 1997 related to same. The
Company generated proceeds from the sale of the Hayes Targets
division in the amount of $4.8 million and repaid $2.0 million in
debt in 1998.

Net inventory decreased $1.8 million in 1998, $2.0 million in 1997,
and $3.1 million in 1996. Progress payment balances on U.S.
Government contracts and net commercial customer deposits were
$20.7 million, $17.5 million and $27.9 million and work in process
was $30.2 million, $26.7 million and $43.6 million at December 31,
1998, 1997, and 1996, respectively. Progress payment balances and
net customer deposits as a percent of gross work in process for
each of the three years were 69%, 65%, and 64%, respectively. The
fluctuation in the percentages relates mainly to the Company's U.S.
Government aircraft maintenance contracts. Progress payments on
these contracts are based on costs incurred, and thus the level of
payments received is inversely related to the level of
profitability of the Company's contracts.

Accounts payable and accrued expenses were $29.2 million at
December 31, 1998 versus $31.7 million at December 31, 1997.
Accounts payable and accrued expenses decreased in 1998 due to
efforts of the Company to pay down its trade debt.

Capital improvements amounted to $0.7 million, $0.5 million, and
$1.3 million in 1998, 1997 and 1996, respectively. Additionally,
the Company made principal payments to one of its lenders of $0.6
million, $6.0 million, and $15.0 million in 1998, 1997, and 1996,
respectively, as well as $0.1 million, $0.4 million, and $0.6
million on various capital leases.

Summary of Unaudited Financial Data:
Unaudited quarterly financial information is as follows:

Quarter Ended

March 31, June 30, Sept. 30 Dec. 31,
1998 1998 1998 1998

Net sales $34,453,916 $39,219,256 $32,091,484 $36,005,283
Gross profit 6,640,494 8,515,590 6,088,413 4,188,715
Net income 4,537,682 2,781,927 1,518,691 1,215,496
Net income per
share:
Basic $ 1.23 $ .73 $ .39 $ .30
Diluted $ 1.15 $ .71 $ .38 $ .29

Quarter Ended

March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997

Net sales $35,017,730 $35,715,685 $28,742,054 $22,782,966
Gross profit 3,215,882 1,272,635 (380,425) (2,923,403)
Net loss (2,527,382) (4,989,616) (6,001,744) (19,631,264)
Net loss per
share:
Basic $ (.79) $ (1.56) $ (1.91) $ (4.93)
Diluted $ (.79) $ (1.56) $ (1.91) $ (4.93)

CONTINGENCIES

A material adverse effect on the Company's financial position and
liquidity could result if the Company is not successful in its
defense of its legal proceeding. (See discussion under Item 3.
Legal Proceedings)

Year 2000 Compliance

Background

Some computers, software and other equipment include programming
code which abbreviates calendar year data using only two digits.
As a result, some equipment could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in
frequency and severity as the year 2000 approaches and are commonly
referred to as the "Millennium Bug" or "Year 2000 Problem."

Assessment

The Year 2000 Problem could affect computers, software and other
equipment used by the Company. Accordingly, the Company is
reviewing its internal computer programs and systems to ensure that
such programs and systems will be Year 2000 compliant. The Company
presently believes that its computer systems will be Year 2000
compliant in a timely manner.

Internal Infrastructure

The Company's assessment of existing computer systems has revealed
that a portion of its existing software programs and hardware are
not Year 2000 compliant. The Company believes that it has
identified most of the major computers, software applications and
related equipment used in connection with its internal operations
that must be modified, upgraded or replaced to minimize the
possibility of a material disruption to its business.

Based on information gathered to date, the Company has taken steps
to address the potential impacts of year 2000 compliance on its
financial accounting, manufacturing, and production systems. For
most operating units the primary focus in achieving year 2000
compliance will be relatively minor upgrades to existing systems.

The Company has determined that one of its operating units will
require a major system replacement. A study has been conducted and
a replacement system chosen. Implementation was begun during the
first quarter of 1999 and is currently scheduled for completion at
the end of the third quarter, with cut over to the new system
during the first two weeks of the fourth quarter. The new system
is Oracle based and runs on a Hewlett Packard server.

In addition to the Y2K issue, the system substantially improves the
Maintenance Repair & Overhaul (MRO) process and the Company
anticipates improved efficiencies.

The Company does not presently exchange data electronically with
outside entities and its production capability does not rely on
systems such as Just In Time Inventory. The Company has determined
that its production and manufacturing operations could continue
through the use of manual systems, if necessary, and therefore, the
impact, if any, of Year 2000 failures by outside entities should
not be material to the Company's operation or financial condition.

Systems Other Than Information Technology Systems ("Non-IT
Systems")

In addition to computers and related systems, the operation of the
Company's office and facilities equipment, such as fax machines,
photocopiers, telephone switches, security systems, elevators and
other common devices, may be affected by the Year 2000 Problem.
The Company has been assessing the potential effect of the Year
2000 Problem on its office and facilities equipment. The Company
has relatively few date-sensitive systems in place, and most major
non-IT systems are the responsibility of landlords and other
service providers. It is currently estimated that any requirements
for replacement or modification to non-IT systems will not have a
material effect on the Company's business, financial condition or
results of operations.

Customers and Suppliers

The Company does not foresee any serious Year 2000 Problems
occurring with its vendors and customers. Although the Company has
not yet received any written assurances of compliance, it has
requested statements of Year 2000 compliance from its vendors.
While it is not possible to predict all issues which could arise
relating to a supplier, the Company believes that it has multiple
sources for most of the materials and supplies it presently
procures from vendors or third party contractors. Unless a
national or global problem occurs, the Company believes it will be
able to continue production while it seeks to rectify any supplier
issues that may arise. Because the Company's primary customers
include the U.S. Government and large corporations with substantial
financial resources, the Company believes that these customers are
taking appropriate steps to protect themselves, and indirectly, the
Company from business losses resulting from Year 2000
issues.Although it is not possible to quantify the effects year
2000 compliance will have on the Company's customers or suppliers,
the Company does not anticipate related material adverse effects on
its financial condition, liquidity or results of operations.

Most Likely Consequences of Year 2000 Problems

The Company expects to identify and resolve all Year 2000 Problems
that could materially adversely affect its business, financial
condition or results of operations. However, the Company believes
that it is not possible to determine with complete certainty that
all Year 2000 Problems affecting the Company have been identified
or corrected. The number of devices that could be affected,
directly or indirectly, and the interactions among these devices
are simply too numerous to ensure 100% compliance. Accordingly,
the Company cannot accurately predict how many failures related to
the Year 2000 Problem will ultimately occur or the severity,
duration or financial consequences of such failures. As a result,
the Company expects that there is some risk of the following
consequences:

- A significant number of operational inconveniences and
inefficiencies for the Company and its customers that may divert
management's time and attention and financial and human resources
from its ordinary course of business activities; and

- A number of serious system failures that may require
significant efforts by the Company or its customers to prevent or
alleviate material business disruptions.

Contingency Plans

The Company is currently developing contingency plans to be
implemented as part of its efforts to identify and correct Year
2000 Problems affecting its internal systems. Depending on the
systems affected, these plans could include (1) accelerated
replacement of affected equipment or software, (2) short-to-medium-
term use of backup equipment and software, (3) increased work hours
for Company personnel or the use of contract personnel to correct
any Year 2000 Problems which may arise, (4) manual backup systems
to forestall any interruption of operations resulting from the
failure of automated systems, (5) and other similar approaches. If
the Company is required to implement any of these contingency
plans, such plans could have a material adverse effect on the
Company's business, financial condition or results of operations.

As noted above, however, the Company does not presently believe
that the Year 2000 Problem will have a material adverse effect on
the Company's business, financial condition or results of
operations.

Total hardware, software, networking, and implementation costs for
the Company's year 2000 compliance efforts are estimated at
approximately $4.5 million which will be incurred over a one year
period. The costs are being financed by various vendors over
periods of 36 to 42 months.

While there is no guarantee that the Company will reach Year 2000
compliance by such deadline, the Company believes that it is
applying the resources and effort sufficient to do so.

The Company, as a U.S. Government contractor, is routinely subject
to audits, reviews and investigations by the government related to
its negotiation and performance of government contracts and its
accounting for such contracts. Under certain circumstances, a
contractor can be suspended or debarred from eligibility for
government contract awards. The government may, in certain cases,
also terminate existing contracts, recover damages and impose other
sanctions and penalties. The Company believes, based on all
available information, that the outcome of the U.S. Government's
audits, reviews and investigations will not have a materially
adverse effect on the Company's consolidated results of operation,
financial position or cash flows.

Pending Accounting Pronouncement

The AICPA issued SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This statement
requires capitalization of external direct costs of materials and
services; payroll and payroll-related costs for employees directly
associated; and interests costs during development of computer
software for internal use (planning and preliminary costs should be
expense). Also, capitalized costs of computer software developed
or obtained for internal use should be amortized on a straight-line
basis unless another systematic and rational basis is more
representative of the software's use. This statement is effective
for financial statements for fiscal years beginning after December
15, 1998 and is not expected to have a material effect on the
financial statements.

Item 7A. Quantitative and Qualitative Disclosure about Market Risk

The Company is exposed to market risk from changes in interest
rates as part of its normal operations. The Company maintains
various debt instruments to finance its business operations. The
debt consists of fixed and variable rate debt. The variable rate
debt is related to the Company's revolving line of credit as noted
in Note 7 to the Consolidated Financial Statements and bears
interest at prime plus 1.5% (11.25% at December 31, 1998). If the
prime rate increased 100 basis points, the effect on net income
would approximate a $150,000 reduction in net income.

FORWARD LOOKING STATEMENTS

With the exception of historical facts, statements contained in
Management's Discussion and Analysis are forward looking
statements. Statements contained herein concerning anticipated
results of operations, award of contracts, the outcome of pending
and future litigation, the outcome of audits, reviews and
investigations by the U.S. Government, the outcome of claims filed
with the U.S. Government, estimates of backlog, the outcome of
claims related to the Danish subsidiary, the Company's intent to
take certain action in the future, the impact of Year 2000 issues
on the Company's operations, and the Company's ability to achieve
Year 2000 compliance are forward looking statements, the accuracy
of which cannot be guaranteed by the Company. These forward
looking statements are subject to a variety of business risks and
other uncertainties, including but not limited to the effect of
economic conditions, the impact of competitive products and
pricing, new product development, the actual performance of work
under contract, customer contract awards, estimates of time and
money to assess and address Year 2000 issues, the continuing
availability of experienced personnel to deal with Year 2000
issues, the timely availability of software patches from existing
suppliers of software, the ability of third parties to complete
their own remediations of Year 2000 issues on a timely basis, the
ability to identify and implement contingency plans to deal with
Year 2000 issues, unanticipated problems identified in the
Company's ongoing Year 2000 compliance review, and actions with
respect to utilization and renewal of contracts.

Item 8. Financial Statements and Supplemental Data.

The following financial statements and financial statement
schedules are submitted herewith:

Financial Statements:

Report of Independent Public Accountants

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Stockholders' Equity (Deficit)

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Financial Statement Schedules:

Report of Independent Public Accountants

Schedule II - Valuation and Qualifying Accounts

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Precision Standard, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of
PRECISION STANDARD, INC. (a Colorado corporation) AND SUBSIDIARIES
as of December 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Precision Standard, Inc. and Subsidiaries as of
December 31, 1998 and 1997 and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally
accepted accounting principles.

Denver, Colorado ARTHUR ANDERSEN LLP
March 30, 1999

PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997

ASSETS

1998 1997

Current assets:
Cash and cash equivalents $ 192,777 $ 369,334
Accounts receivable, net 17,433,932 10,138,430
Inventories 15,286,003 17,047,983
Prepaid expenses and other 995,126 1,045,564
Total current assets 33,907,838 28,601,311

Property, plant, and equipment,
at cost:
Leasehold improvements 11,242,095 10,826,369
Machinery and equipment 18,655,984 19,298,310
29,898,079 30,124,679

Less accumulated depreciation (19,251,596) (17,991,714)

Net property, plant and
equipment 10,646,483 12,132,965

Other non-current assets:
Prepaid pension costs 2,888,484 4,106,609
Intangible assets, net 482,751 741,241
Related party receivable 269,824 269,824
Deposits and other 1,274,069 480,593
4,915,128 5,598,267
Total assets $ 49,469,449 $46,332,543

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

PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

1998 1997
Current liabilities:
Current portion of debt $ 1,453,444 $24,784,318
Accounts payable and
accrued expenses 29,168,418 31,728,406

Total current liabilities 30,621,862 56,512,724

Long-term debt 21,823,754 0
Other long-term liabilities 3,063,998 6,156,965
Total liabilities 55,509,614 62,669,689

Commitments and contingencies
(See Notes)

Stockholders' equity (deficit):
Common stock, $.0001 par value,
300,000,000 shares authorized,
3,977,721 issued and outstanding
at December 31, 1998 and
3,614,872 issued and outstanding
at December 31, 1997 398 361
Additional paid-in capital 4,768,370 4,764,224
Accumulated deficit (10,808,933) (20,862,729)
Accumulated other comprehensive
income 0 (239,002)

Total stockholders' deficit (6,040,165) (16,337,146)
Total liabilities and
stockholders' deficit $49,469,449 $46,332,543

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

PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1998, 1997 and 1996

1998 1997 1996

Net sales $141,769,939 $122,258,435 $130,857,722
Cost of sales 116,336,627 121,073,746 115,675,503
Gross profit 25,433,312 1,184,689 15,182,219

Selling, general, and
administrative expenses 15,641,480 13,893,835 17,135,410
Restructuring and other
charges 0 6,926,899 0
Litigation and contingency
provisions 277,763 1,624,800 0
Research and development
expense 124,999 945,779 400,227
Income (loss) from
operations 9,389,070 (22,206,624) (2,353,418)

Other (income) expense:
Interest 3,367,720 1,529,538 2,514,889
Other, net (2,340,509) 405,711 (3,240,904)
Income (loss) before
income taxes 8,361,859 (24,141,873) (1,627,403)
Provision (benefit) for
income taxes (1,691,937) 9,008,133 2,332,143

Net income (loss) $ 10,053,796 $(33,150,006) $ (3,959,546)

Net income (loss) per
common share:
Basic $ 2.65 $ (9.19) $ (1.27)
Diluted $ 2.53 $ (9.19) $ (1.27)

Weighted average common
shares outstanding:
Basic 3,801,000 3,608,000 3,119,000
Diluted 3,980,000 3,608,000 3,119,000

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

<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1998, 1997 and 1996
(Dollars and shares in thousand's)
Accumu-
lated-
Minimum Other Compre-
Add'l Ret. Pension Deferred Compre- hensive
Common Stock Paid-in Earn. Liab. Treas. Stock Compensa- hensive Income
Shares Capital (Def.) Adjust. Shares Amount tion Income (Loss)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1995 3,198 $5,144 $ 16,247 $(7,017) 84 $(559) $(87) $ 146 $

Exercise
of stock
options 14 3 0 0 0 0 0 0

Issuance of
restricted
shares 3 12 0 0 0 0 0 0

Retirement of
treasury
shares (84) (559) 0 0 (84) 559 0 0

Amortization
of deferred
compensation 0 0 0 0 0 0 87 0

Minimum
pension
liability
adjustment 0 0 0 3,097 0 0 0 0 3,097

Foreign
currency
translation
adjustment 0 0 0 0 0 0 0 14 14

Net loss 0 0 (3,959) 0 0 0 0 0 (3,959)

Comprehensive
loss 0 0 0 0 0 0 0 0 (848)

Balance,
December 31,
1996 3,131 4,600 12,288 (3,920) 0 0 0 160

Exercise
of stock
options 20 0 0 0 0 0 0 0

Issuance of
shares for
warrants 464 164 0 0 0 0 0 0

Minimum
pension
liability
adjustment 0 0 0 3,920 0 0 0 0 3,920

Foreign
currency
translation
adjustment 0 0 0 0 0 0 0 (399) (399)

Net loss 0 0 (33,150) 0 0 0 0 0 (33,150)

Comprehensive
loss 0 0 0 0 0 0 0 0 (29,629)

Balance,
December 31,
1997 3,615 4,764 (20,862) 0 0 0 0 (239)

Exercise
of stock
options 2 4 0 0 0 0 0 0

Issuance of
shares for
warrants 361 0 0 0 0 0 0 0

Foreign
currency
translation
adjustment 0 0 0 0 0 0 0 239 239

Net income 0 0 10,054 0 0 0 0 0 10,054

Comprehensive
income 0 0 0 0 0 0 0 0 10,293

Balance,
December 31,
1998 3,978 $4,768 $(10,809) $ 0 0 $ 0 $ 0 $ 0

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

</TABLE>

PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996

1998 1997 1996

Cash flows from operating
activities:
Net income (loss) $ 10,053,796 $(33,150,006) $ (3,959,546)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 2,395,659 2,515,680 2,763,419
Provision (benefit) for
deferred taxes (2,525,231) 8,864,625 2,136,392
Restructuring and other charges 0 6,926,899 0
Litigation and environmental
contingencies 277,763 1,624,800 0
Pension cost in excess of
funding 1,218,125 1,403,779 77,034
Provision for losses on
receivables 293,583 793,129 290,852
Provision for warranty expense 0 0 173,778
Provision for reduction in
inventory valuation 0 0 346,027
Provision for losses on
contracts-in-process 1,657,137 727,687 1,286,669
Interest expense - warrants 0 163,999 0
Loss (gain) on sale of division (3,119,799) 0 233,499
Changes in assets and liabilities:
Accounts receivable, trade (8,381,091) (2,197,281) 4,521,541
Request for Equitable
Adjustment (REA) 0 0 12,244,522
Inventories 133,581 1,949,978 (3,145,912)
Prepaid expenses and other (38,028) (151,436) 62,191
Deposits and other (793,476) 0 0
Accounts payable and accrued
expenses (3,279,514) 539,742 (704,474)

Total adjustments (12,161,291) 23,161,601 20,285,538

Net cash provided by (used
in) operating activities (2,107,495) (9,988,405) 16,325,992
Cash flows from investing
activities:
Proceeds from sale of assets 0 0 393,320
Proceeds from sale of division 4,790,000 0 0
Capital expenditures (746,300) (495,829) (1,325,481)
Net cash provided by
(used in) investing
activities 4,043,700 (495,829) (932,161)

Cash flows from financing
activities:
Proceeds from issuance of
common stock 0 0 2,567
Proceeds from exercise of
stock options 4,183 0 0
Payment of debt issuance
costs 0 (719,848) 0
Net borrowings (repayments)
under revolving credit
facility (878,736) 16,427,130 0
Principal payments under
long-term borrowings (1,238,209) (6,036,914) (15,625,127)
Net cash provided by
(used in) financing
activities (2,112,762) 9,670,368 (15,622,560)

Net decrease in cash
and cash equivalents (176,557) (813,866) (228,729)
Cash and cash equivalents,
beginning of year 369,334 1,183,200 1,411,929
Cash and cash equivalents,
end of year $ 192,777 $ 369,334 $ 1,183,200

Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest $ 3,425,146 $ 1,776,935 $ 869,683
Income taxes $ 315,566 $ 28,508 $ 137,000
Supplemental disclosure of
noncash investing and
financing activities:
Interest capitalization $ 0 $ 0 $ 2,207,799
Capital lease obligations
incurred $ 125,852 $ 950,000 $ 119,245
Conversion of accounts
payable to debt $ 483,973 $ 0 $ 0
Forgiveness of debt
for land $ 70,000 $ 0 $ 0

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

PRECISION STANDARD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1998, 1997 AND 1996

1. ORGANIZATION, OPERATIONS, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

Organization and Operations - Precision Standard, Inc. through
its operating subsidiaries and divisions (the "Company") is
primarily engaged in the maintenance and modification of large
transport aircraft; the development and manufacture of rocket
launch vehicles and guidance systems; the design and
manufacture of cargo handling systems; and the manufacture of
precision springs and components. On January 29, 1998, the
Company sold its Hayes Targets Division which designed,
developed and manufactured aerial target systems. (See Note
19)

Principles of Consolidation - The consolidated financial
statements include the accounts of the Company and its
subsidiaries, except for its Danish subsidiary, all of which
are wholly owned. All significant intercompany accounts and
transactions have been eliminated. Effective January 1, 1997,
the Company's Danish subsidiary has been excluded from the
consolidated presentation as a result of a Danish court's
decision to grant a supplier's request to place it into
bankruptcy. (See Note 19)

Restructuring and Other Charges - During 1997, the Company
implemented a strategic restructuring plan to increase its
liquidity and return to profitability. As part of this plan,
the Company engaged a financial advisor to explore strategic
alternatives which included an evaluation of the sale of one
or more of its operating units, ceased funding of its Danish
facility upon its being placed in involuntary bankruptcy and
reduced overhead.

In connection with its change in strategy, the Company
re-evaluated the carrying amount of deferred costs related to
certain long-term programs. As a result of this
re-evaluation, the Company recognized a charge of $4.3 million
in 1997. Further, in 1997 the Company reclassified losses
incurred on its Danish subsidiary primarily related to funding
made subsequent to deconsolidation of $2.6 million.

Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Material
estimates which may be subject to significant change in the
near term include those associated with evaluation of the
ultimate profitability of the Company's contracts, recognition
of losses associated with pending litigation and realization
of certain assets, including deferred tax assets. Actual
results could differ from those estimates. Further, the
financial statements do not include any adjustments relating
to the recoverability of assets, carrying amounts or the
amount and classification of liabilities should the Company be
unable to continue as a going concern.

Contract and Program Accounting - The Company recognizes
revenue on aircraft principally under the percentage-of-
completion method of accounting using an output measure of
progress, units of delivery for contracts with provisions for
multiple deliveries, and an input measure by which the extent
of progress is measured by the ratio of cost incurred to date
to the estimated total cost of the contract (cost to cost),
for contracts where the units of delivery method is not
appropriate. The Company's contracts for its rocket launch
vehicles and guidance systems are primarily cost reimbursement
contracts. As such, revenues are recorded as costs are
incurred and as fees are earned. Provision is made to
recognize estimated losses in the period in which it is
determined that the estimated total contract costs will exceed
the estimated total contract revenues. An amount equal to
contract costs attributable to claims is included in revenues
when realization is probable and the amount becomes reasonably
estimable.

Major commercial aircraft conversion programs are planned,
committed and engineered based on long-term delivery
forecasts, normally for quantities in excess of contractually
firm orders. Cost of sales for commercial aircraft programs
is determined based on estimated average total cost and
revenue for the current program commitment quantity. For new
commercial aircraft programs, the program quantity is
initially based on an established number of units representing
what is believed to be a conservative market projection.
Program commitment quantities generally represent deliveries
up to 10 years. The program method of accounting effectively
amortizes or averages tooling and special equipment costs, as
well as unit production costs, over the estimated program
quantity. Because of the higher unit production costs
experienced at the beginning of a new program and the
substantial investment required for design and engineering,
initial tooling and special equipment, new commercial aircraft
programs normally have lower operating profit margins than
established programs. While the costs associated with the
initial design, production and tooling of a program are
amortized over the estimated program quantity, the Company
periodically reassesses the profitability of the program and
records losses if inherent in the program. (See Note 3)

Research and Development, General and Administrative Expenses-
Research and development and general and administrative
expenses are charged directly to earnings as incurred except
to the extent estimated to be directly recoverable under U.S.
Government contracts.

Inventories - Materials and supplies are stated at the lower
of average cost or market (replacement cost). Work in process
includes materials, direct labor, manufacturing overhead, and
other indirect costs incurred under each contract, less
progress payments, amounts in excess of estimated realizable
value, and amounts charged to cost of goods sold on units
delivered or progress completed. Inventoried costs on long-
term commercial programs and U.S. Government fixed price
contracts include direct engineering, production and tooling
costs, and applicable overhead. In addition, inventoried
costs on U.S. Government fixed price contracts include
research and development and general and administrative
expenses estimated to be recoverable. In accordance with
industry practices, inventoried costs are classified as
current assets and include amounts related to contracts having
production cycles longer than one year.

Property, Plant, and Equipment - Leasehold improvements and
machinery and equipment are stated at cost, less accumulated
depreciation. Depreciation and amortization are computed
using the straight-line method over the following estimated
useful lives:

Classification Useful Life In Years

Leasehold improvements 5 - 20
Machinery and equipment 3 - 12

Maintenance and repairs are charged to expense as incurred,
while major renewals and improvements are capitalized.

The cost and related accumulated depreciation of assets sold
or otherwise disposed of are deducted from the related
accounts and resulting gains or losses are reflected in
operations. Depreciation charged to operations amounted to
$2,137,169, $2,397,161, and $2,652,453 for the years ended
December 31, 1998, 1997, and 1996, respectively.

Provision for Warranty Expenses - The Company provides
warranties on certain work performed for a given time period,
in accordance with the terms of each specific contract. The
Company provides for anticipated warranty claims based on
historical experience, current warranty trends, and specific
warranty terms. This reserve is management's best estimate of
anticipated costs related to aircraft that were under warranty
at December 31, 1998 and 1997. Periodic adjustments to the
reserve will be made as events occur which indicate changes
are necessary.

Cash Equivalents - For purposes of the consolidated statements
of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three
months or less to be cash equivalents.

Foreign Currency Translation - The financial statements of the
Company's foreign subsidiary in Copenhagen, Denmark were
measured using local currency as the functional currency which
resulted in foreign currency translation adjustments which
were recorded in a separate component of stockholders' equity.
As further discussed in Note 19, for purposes of the 1997 and
1998 consolidated financial statement presentation, the Danish
subsidiary has been excluded from the financial statements as
a result of it being placed into involuntary bankruptcy and
the cumulative translation adjustment has been eliminated.

Stock Options and Warrants - The Company uses the intrinsic
value method for stock options granted employees under which
no compensation is generally recognized for options granted at
or above the fair market value of the underlying stock. Stock
options, warrants and other equity instruments granted to
non-employees are recorded at the fair value of the instrument
or the consideration received, whichever is more readily
determinable.

Pending Accounting Pronouncement

The AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.
This statement requires capitalization of external direct
costs of materials and services; payroll and payroll-related
costs for employees directly associated; and interests costs
during development of computer software for internal use
(planning and preliminary costs should be expense). Also,
capitalized costs of computer software developed or obtained
for internal use should be amortized on a straight-line basis
unless another systematic and rational basis is more
representative of the software's use. This statement is
effective for financial statements for fiscal years beginning
after December 15, 1998 and is not expected to have a material
effect on the financial statements.

Reclassifications - Certain amounts in the 1997 and 1996
consolidated financial statements have been reclassified to
conform to the 1998 presentation.

2. NET INCOME (LOSS) PER COMMON SHARE - The following table
represents the reconciliation of the number of weighted
average shares outstanding basic to the number of weighted
average shares outstanding diluted:

For the Year Ended Per Share
December 31, 1998 Income Shares Amount

Basic earnings per share $10,053,796 3,801,000 $2.65
Dilutive securities - 179,000 .12
Diluted earnings per
share $10,053,796 3,980,000 $2.53

Dilutive securities include 5,000 options and 174,000
warrants. Due to losses in 1997 and 1996, the number of
potentially dilutive securities outstanding that were excluded
from EPS because they were antidilutive are as follows:

1997 1996

Warrant 626,460 1,053,938
Options 17,914 157,015
644,374 1,210,953

Options to purchase 578,843, 216,823, and 201,344 shares of
common stock related to 1998, 1997, and 1996, respectively
were excluded from the computation of diluted income (loss)
per share because the option exercise price was greater than
the average market price of the shares.

3. TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable as of December 31, 1998 and 1997
consist of the following:

1998 1997
U.S. Government:
Amounts billed $5,418,977 $ 2,390,060
Recoverable costs and
accrued profit on progress
completed - not billed 4,550,909 2,227,495
Commercial customers:
Amounts billed 8,079,863 6,060,495
Recoverable costs and
accrued profit on
progress completed -
not billed 48,180 640,365
18,097,929 11,318,415
Less allowance for doubtful
accounts (663,997) (1,179,985)
Trade accounts receivable,
net $17,433,932 $10,138,430

Recoverable costs and accrued profit not billed consist
principally of amounts of revenue recognized on contracts, for
which billings had not been presented to the contract owners
because the amounts were not billable at December 31, 1998 and
1997.

4. INVENTORIES

Inventories as of December 31, 1998 and 1997 consist of the
following:

1998 1997

Work in process $30,185,239 $26,732,001
Finished goods 3,323,814 3,125,830
Raw materials and supplies 2,967,373 5,987,419
Total 36,476,426 35,845,250
Less progress payments
and customer deposits (20,707,662) (17,451,262)
Less allowance for estimated
losses on work in
process (Note 9) (482,761) (1,346,005)
$15,286,003 $17,047,983

A portion of the above inventory balances relates to U.S.
Government contracts. The Company receives progress payments
on the majority of its government contracts. The title to all
inventory on which the Company receives these payments is
vested in the government to the extent of the progress payment
balance.

Included in work in process are unrecovered costs at the
estimated recoverable values of $0 and $899,076 at December
31, 1998 and 1997, respectively. These costs relate primarily
to certain over-and-above type work performed on certain
government and commercial contracts. Recoverability of these
costs is subject to future determination through negotiation
or other procedures not complete at the balance sheet dates.
All of the unrecovered costs at December 31, 1997 were either
evaluated to be not realizable and written off or were settled
during 1998.

Also included in work in process is $1,776,854 and $1,821,640
of deferred production, initial tooling, and related
nonrecurring costs (collectively referred to as deferred
costs) at December 31, 1998 and 1997, respectively. These
costs are related primarily to the Company's 727 and 737
conversion programs. The recovery of these deferred costs is
dependent on the number of conversions performed and actual
contract prices. Sales significantly under estimates or costs
significantly over estimates could result in the realization
of substantial losses. Realization of the above is primarily
dependent on the profitability of anticipated contracts.
Based on studies by the Company, management believes there
exists a sufficient market to enable the Company to recover
these costs.

At December 31, 1996, the Company estimated that its Dothan
facility would derive a significant portion of their revenue
for the following two years in connection with their quick
change conversion program. At December 31, 1996,
approximately $3,000,000 was deferred and included in work in
process. Such deferred costs included production costs,
engineering and tooling costs incurred since the inception of
the program less the cost of units delivered based on
anticipated average costs of producing the anticipated units
under the program. During 1997, the $3,687,743 in deferred
costs associated with this program were written off because
the principal customer under this program did not exercise its
option for the additional ships.

The amount of general and administrative costs remaining in
inventories at December 31, 1998 and 1997 amounted to
$1,864,401 and $1,912,140, respectively, and are associated
with government contracts.

Inventory related to modification and maintenance of aircraft
is subject to technological obsolescence and potential
decertification due to failure to meet design specifications.
The Company actively reserves for obsolete inventory.
However, future technological changes could render some
inventory obsolete. No estimate can be made of a range of
amounts of loss that are reasonably possible should current
design specifications change.

5. INTANGIBLE ASSETS

Intangible assets as of December 31, 1998 and 1997 consist of
the following:

1998 1997

Supplemental type certificates,
("STCs") net of accumulated
amortization of $268,076 and
$249,536, respectively. $ 102,832 $ 121,372
Deferred debt costs, net 379,919 619,869
$ 482,751 $ 741,241

STCs are granted by the Federal Aviation Administration
("FAA") and are being amortized on a straight line basis over
20 years. Amortization charged to operations amounted to
$18,540, $18,540, and $148,953 for the years ended December
31, 1998, 1997, and 1996, respectively. Deferred debt costs
are being amortized by a method which approximates the level
yield method and amounted to $239,950 in fiscal 1998 and
$99,979 in fiscal 1997.

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of December 31, 1998
and 1997 consist of the following:

1998 1997

Accounts payable $ 9,595,586 $14,529,307
Accrued liabilities - payroll
related 8,056,022 8,706,990
Current portion of self-insured
workers' compensation reserve 1,449,461 1,251,834
Accrued liabilities - other 10,067,349 7,240,275
$29,168,418 $31,728,406

7. DEBT

Debt as of December 31, 1998 and 1997 consists of the
following:

1998 1997

Revolving credit facility $15,548,394 $ 16,427,130

Senior Subordinated Loan;
interest at 13.5%, 6,150,000 6,700,000

Note due to individual;
repaid in 1998 0 277,202

Other obligations; interest from
6% to 18%, collateralized
by security interests in
certain equipment 1,578,804 1,379,986

Total debt 23,277,198 24,784,318

Less portion reflected
as current 1,453,444 24,784,318

Long-term debt, net of
current portion $21,823,754 $ 0

On August 8, 1997, the Company entered into a three-year
revolving credit facility with a new lender. As part of this
transaction, the Company repaid its $5 million Term Credit
facility under the Credit Agreement with Bank of America and
$500,000 of its Senior Subordinated loan under the Loan
Agreement. The amount of funds available to borrow under the
new $20 million revolving credit facility is tied to
percentages of accounts receivables and inventory and, as a
result of certain subordination provisions, cannot exceed $17
million. There was $1,049,000 available under the facility at
December 31, 1998, based on the calculation which defines the
borrowing base. Interest rates on the Revolving Credit
facility were 11.25% and 10% at December 31, 1998 and 1997,
respectively. Interest on the revolving credit facility
accrues at prime rate plus 1.5% with provisions for both
reductions in the interest rate based on specific operating
performance targets and increases related to certain events of
default. Interest is accrued and charged to the loan balance
on a monthly basis.

All scheduled principal amortization for the Senior
Subordinated loan has been deferred for the three-year term of
the new revolving credit facility. The Senior Subordinated
loan will be repaid over five installments commencing on
August 31, 2000, due each subsequent quarter through June 30,
2001. As a result of the Company selling its Hayes Targets
Division (See Note 19), the Company repaid $550,000 of the
Senior Subordinated loan.

The above loans are collateralized by substantially all of the
assets of the Company and have various covenants which limit
or prohibit the Company from incurring additional
indebtedness, disposing of assets, merging with other
entities, declaring dividends, or making capital expenditures
in excess of certain amounts in any fiscal year.
Additionally, the Company is required to maintain various
financial ratios and minimum net worth amounts. As a result
of its net worth, the Company was in violation of such
covenants at December 31, 1998. On March 30, 1999, the
Company's primary lender waived the financial debt covenant
violations at December 31, 1998. Additionally, the Bank
amended the covenants for fiscal year 1999. However, there
can be no assurance that the Company will be able to meet the
amended covenants during 1999.

As a result of renegotiated terms and conditions of its debt
and warrant agreements in March 1997, the new agreements in
part provided for forgiveness of approximately $1.3 million of
accrued but unpaid interest which is being recognized
prospectively as a yield adjustment.

8. STOCK WARRANT

In connection with the Company's debt financing in 1988, a
detachable stock warrant was issued by the Company to its
primary lender at that time to purchase 1,053,938 shares of
common stock at an exercise price of $.96 per share.

The Company and its lender modified the warrant agreement in
late 1996. The agreement stated that the warrant shall be
redeemed on a net basis in installments commencing on August
31, 1997, and the last day of each successive October,
January, April, July, and October 31, 1998 on which date the
warrant shall be fully redeemed. These redemptions could be
made in cash or stock at the option of the Company.
Additionally, if the redemptions were not made on the
respective redemption dates, the Company must pay interest on
the redeemable amount up to the actual redemption date based
on the average price of the Company's common stock during the
respective period. During 1997, this interest requirement
totaled $164,000 and was satisfied with the issuance of 36,858
shares of Company common stock on December 31, 1997, the date
on which the Company issued 427,479 shares of common stock for
the August 31, 1997 and October 31, 1997 redemptions. During
1998 the Company redeemed the remaining warrants on the
applicable redemption dates by issuing approximately 360,000
shares of common stock.

9. ALLOWANCE FOR ESTIMATED LOSSES ON CONTRACTS IN PROCESS

The Company provides for losses on uncompleted contracts in
the period in which it is determined that the estimated total
contract costs will exceed the estimated total contract
revenues. These estimates are reviewed periodically and any
revisions are charged or credited to operations in the period
in which the change is determined.

The allowance for estimated losses on contracts in process as
of December 31, 1998 and 1997 amounted to $1,657,137 and
$2,014,356, respectively. Of these amounts at December 31,
1998 and 1997, $482,761 and $1,346,005, respectively, is
reflected as a reduction of work in process inventory. See
Note 4. The remaining amounts at December 31, 1998 and 1997
of $1,174,376 and $668,351, respectively, related to
commitments to fulfill loss contracts at December 31, 1998 and
1997.

During 1998, 1997, and 1996, the provisions for estimated
losses on contracts in process in the amounts of $1,346,005,
$727,687, and $1,286,669, respectively, were recognized
through charges to operations.

10. INCOME TAXES

The provision (benefit) for income taxes for the years ended
December 31, 1998, 1997, and 1996 is as follows:

1998 1997 1996

Current:
Federal $ 212,444 $ 0 $ 0
State 620,850 143,508 195,751
833,294 143,508 195,751
Deferred:
Federal (2,151,851) 9,416,615 1,974,219
State (373,380) (551,990) 162,173
(2,525,231) 8,864,625 2,136,392
$(1,691,937) $ 9,008,133 $ 2,332,143

The differences between the tax benefits at the federal
statutory rate and the provision for income taxes for the
years ended December 31, 1998, 1997, and 1996 are primarily
due to (decreases)/increases in the deferred tax asset
valuation allowance of $(5,034,275), $16,127,650, and
$2,503,602, respectively.

Deferred tax assets (liabilities) are comprised of the
following:
1998 1997

Prepaid pension costs $ (1,156,370) $ (1,622,111)
Percentage of completion (351,232) (903,120)

Gross deferred tax
liabilities (1,507,602) (2,525,231)

Accrued vacation 1,616,419 1,462,231
Inventory, accounts
receivable and other reserves 4,875,702 5,598,688
Federal and state loss
carryforwards 6,859,193 10,051,245
Intangible assets 23,503 27,453
Property, plant, and equipment 554,083 548,400
Alternative minimum tax credit
carryforwards 927,731 695,287
Foreign corporation net losses 4,425,621 4,425,621
Gross deferred tax assets 19,282,252 22,808,925
Deferred tax asset valuation
allowance (17,774,650) (22,808,925)
Net deferred tax liability $ 0 $ (2,525,231)

The Company established a valuation allowance primarily for
net operating loss carryforwards and foreign corporation net
losses for which realization was considered uncertain. As a
result of the Company's losses during 1997 the Company
provided an additional valuation allowance through its tax
provision to fully reserve for its deferred tax assets at
December 31, 1997. In 1998 the Company returned to
profitability and generated taxable income for which net
operating loss carryforwards were utilized.

At December 31, 1998, the Company had tax effected federal and
state operating loss carryforwards of approximately
$6,859,193. The loss carryforwards expire at various dates
between 2002 and 2012. These loss carryforwards are
completely reserved for through the deferred tax valuation
allowance.

The alternative minimum tax credit carryforwards of $927,731,
tax effected included in the deferred tax assets at December
31, 1998 do not expire.

11. STOCK OPTIONS AND RESTRICTED SHARE PLANS

Stock Options - On May 29, 1996, the Company's stockholders
approved amendments to the Incentive Stock Option and
Appreciation Rights Plan and the Nonqualified Stock Option
Plan, pursuant to which a maximum aggregate of 750,000 shares
of common stock have been reserved for grant to key personnel.
The plans expire by their terms on July 10, 1999 and September
8, 1999, respectively.

Under both plans, the option price may not be less than the
fair market value of the stock at the time the options are
granted. Generally, these options become exercisable over
staggered periods but expire ten years after the date of
grant.

Had compensation expense for the Company's stock option plans
been determined based on the options fair market value at the
grant date, the Company's net income (loss) and net income
(loss) per share would have been as reflected in the pro forma
amounts indicated below:

1998 1997 1996

Net income (loss) -
as reported $ 10,053,796 $(33,150,006) $(3,959,546)

Net income (loss) -
pro forma 9,500,895 (33,177,660) (4,095,768)

Net income (loss)
per share, basic
- as reported 2.65 (9.19) (1.27)

Net income (loss)
per share, diluted
- as reported 2.53 (9.19) (1.27)

Net income (loss)
per share, basic
- pro forma 2.50 (9.20) (1.31)

Net income (loss)
per share, diluted
- pro forma 2.39 (9.20) (1.31)

The following table summarizes the changes in the number of
shares under option pursuant to the plan described above:

Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Ex. Ex. Ex.
12/31/98 Price 12/31/97 Price 12/31/96 Price
Outstanding
beginning
of year 234,736 $8.76 358,359 $8.60 298,909 $8.96
Granted 383,000 3.53 8,833 5.32 93,500 5.48
Exercised (1,762) 2.37 (19,874) 5.12 (13,590) 2.64
Forfeited (16,664) 2.45 (112,582) 8.60 (20,460) 3.96
Outstanding
end of year 599,310 5.53 234,736 8.76 358,359 8.60

Exercisable
end of year 343,040 224,777 321,309
Estimated
weighted
average
fair
value of
options
granted $2.33 $2.16 $2.36

The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in
1998, 1997 and 1996, respectively: dividend yield of 0% for
each year; expected volatility of 96%, 72% and 72%; risk-free
interest rate of 4.51% to 5.52%; and expected life of 3.43
years for each year. The 1997 and 1996 options granted vest
25% each year, 250,000 of the 1998 options granted vest during
1999 based on performance criteria, not related to the
Company's stock price, the remaining 133,000 vested
immediately.

The following table summarizes information about stock options
outstanding at December 31, 1998:

Options Outstanding

Number of Weighted- Weighted-
Range of Outstanding Average Average
Exercise Options Remaining Exercise
Prices 12/31/98 Life Price
2.25 - 3.38 20,467 2.4 2.57
3.39 - 5.06 454,024 7.0 3.65
5.07 - 7.59 78,485 4.4 6.69
17.08 - 25.63 46,334 3.5 18.50
599,310 6.3 5.16

Options Exercisable
Number of Weighted-
Range of Exercisable Average
Exercise Options at Exercise
Prices 12/31/98 Price

2.25 - 3.38 20,467 2.57
3.39 - 5.06 201,504 3.92
5.07 - 7.59 74,735 6.76
17.08 - 25.63 46,334 18.5
343,040 6.43

Deferred Compensation - In December 1994, the Company adopted
a Restricted Share Plan (the Plan) designed to attract,
retain, and motivate executive officers of the Company. The
Plan authorizes the issuance of 421,628 common shares of
beneficial interest pursuant to restricted shares issued under
the Plan. In connection with the grant of shares under the
Plan, the Compensation Committee determines any vesting
requirements. In December of 1994 the Company issued $700,000
of restricted shares which amount was amortized over the
period earned by the employee.

12. EMPLOYEE BENEFIT PLANS

In 1998 the Company adopted FASB Statement No. 132 Employers'
Disclosure about Pensions and Other Postretirement Benefits.

Pension - The Company has a defined benefit pension plan in
effect, which covers substantially all employees at its
Birmingham, Dothan, and Leeds, Alabama facilities who meet
minimum eligibility requirements. Benefits for nonunion
employees are based on salary and years of service, while
benefits for union employees are based upon a fixed benefit
rate and years of service. The funding policy is consistent
with the funding requirements of federal law and regulations
concerning pensions. Pursuant to this practice, the Company
made a contribution of $937,503 in 1996. No contributions
were made in 1997 or 1998. Plan assets consist primarily of
stocks, bonds, and cash equivalents.

Effective for fiscal 1998 based on prior years negotiations
with the union, the Plan was amended. The amendment mandates
a benefit increase of $1.00 per employee, and a service year
increase of 30 to 35 years.

Changes during the year in the projected benefit obligations
and in the fair value of plan assets were as follows:

Projected
Benefit Obligations
1998 1997
(in thousands)

Balance at beginning of year $ 98,096 $94,290
Service cost 1,324 1,248
Interest cost 6,875 7,070
Plan amendments 709 0
Benefits paid (8,792) (8,392)
Actuarial loss 4,466 3,880
Balance end of year $102,678 $98,096

Plan Assets
1998 1997
(in thousands)

Balance at beginning of year $ 97,785 $90,701
Return on plan assets 11,788 15,476
Benefits paid (8,792) (8,392)
Balance end of year $100,781 $97,785

The accrued pension costs recognized in the Consolidated
Balance Sheets were as follows:
1998 1997
(in thousands)

Funded status $ (1,897) $ (311)
Unrecognized prior service cost 3,884 3,832
Unrecognized net gain 901 586
Prepaid asset recognized in the
Consolidated Balance Sheets $ 2,888 $ 4,107

Components of the plans' net cost were as follows:

1998 1997 1996
(in thousands)

Service cost $ 1,324 $ 1,248 $ 1,287
Interest cost 6,875 7,070 6,688
Expected return on
plan assets (7,819) (7,697) (7,639)
Recognized net gain 142 125 98
Net amortization 657 658 581
Net pension cost $ 1,179 $ 1,404 $ 1,015

The weighted average rates assumed in the actuarial
calculations for the pension plan was:

1998 1997 1996

Discount 7.00% 7.25% 7.75%
Annual salary increase 5.00 5.00 4.50
Long-term return on plan
assets 9.50 9.50 9.50

Nonpension Postretirement Benefits - The Company accrues the
estimated cost of retiree benefit payments, other than
pensions, during employees' active service period. The
Company provides health care benefits to both salaried and
hourly retired employees at its Birmingham, Leeds, and Dothan
facilities. The retirees' spouse and eligible dependents are
also entitled to coverage under this defined benefit plan, as
long as the retiree remains eligible for benefits. To be
eligible for coverage the retiree must have attained age 62
and the benefits cease once age 65 is reached.

The retirees pay premiums based on the full active coverage
rates. These premiums are assumed to increase at the same
rate as health care costs. Benefits under the plan are
subject to certain deductibles, co-payments, and yearly and
lifetime maximums. Currently, the plan is unfunded.

Changes during the year in the projected benefit obligations
and in the fair value of plan assets were as follows:

Projected
Benefit Obligations
1998 1997
(in thousands)
Balance at beginning of year $724 $619
Service cost 45 38
Interest cost 51 52
Benefits paid (72) (119)
Actuarial loss 27 134
Balance end of year $775 $724

The accrued postretirement costs recognized in the
Consolidated Balance Sheets were as follows:

1998 1997
(in thousands)

Funded status $(775) $(724)
Unrecognized transition
obligation 296 328
Unrecognized net loss (gain) 61 34
Accrued liability recognized in the
Consolidated Balance Sheets $(418) $(362)

Components of the plans' net cost were as follows:

1998 1997 1996
(in thousands)

Service cost $ 45 $ 38 $ 32
Interest cost 51 52 44
Transition obligation 0 116 45
Net amortization 32 32 31
Net postretirement cost $128 $238 $152

An additional assumption used in measuring the accumulated
postretirement benefit obligation was a weighted average
medical care cost trend rate of 8% for 1998, decreasing
gradually to 5% through the year 2004, and remaining at that
level thereafter. The weighted average discount rate assumed
in the actuarial calculation for the postretirement benefit
plan was 7.00%, 7.25%, and 7.75% for the years ended December
31, 1998, 1997 and 1996, respectively.

Self-Insurance - It is generally the policy of the Company to
act as a self-insurer for certain insurable risks consisting
primarily of employee health insurance programs and workers'
compensation. Losses and claims are accrued as incurred.

The Company maintains a self-insured health insurance plan for
the Birmingham and Dothan divisions of its Pemco Aeroplex
subsidiary. The Company has reserves established in the
amounts of $840,857 and $1,221,027 for reported and incurred
but not reported claims at December 31, 1998 and 1997,
respectively.

The Company also has a self-insured workers' compensation
program. The Company has a self-insured retention of $250,000
per occurrence. Claims in excess of this amount are covered
by insurance. Included in deposits and other, at December 31,
1998 and 1997, is $415,000 and $415,000, respectively, that
has been placed on deposit with the state of Alabama in
connection with the Company's self-insured workers'
compensation plan. Use of these funds is limited by the
state. The Company has reserves of $4,439,000 and $4,884,000
for reported and incurred but not reported claims at December
31, 1998 and 1997, respectively.

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

Defined Contribution Plan - The Company maintains a 401(k)
savings plan for employees who are not covered by any
collective bargaining agreement, have attained age 21, and
have completed one year of service. Employee and Company
matching contributions are discretionary. The Company made no
matching contributions during 1998, 1997, or 1996. Employees
are always 100 percent vested in their contributions.

13. COMMITMENTS AND CONTINGENCIES

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

Future minimum rental payments required under operating leases
that have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 1998 are as follows:

Vehicles
And
Facilities Equipment Total

Year Ending:
1999 $ 1,363,654 $ 738,982 $ 2,102,636
2000 1,187,362 160,576 1,347,938
2001 1,004,716 73,775 1,078,491
2002 889,856 46,875 936,731
2003 833,120 31,799 864,919
Thereafter 5,858,860 0 5,858,860

Total minimum
future rental
commitments $11,137,568 $1,052,007 $12,189,575

Total rent expense charged to operations for the years ended
December 31, 1998, 1997, and 1996 amounted to $2,106,537,
$3,181,677, and $3,857,375, respectively. Contingent rental
amounts based on a percentage of sales included in rent
expense amounted to $477,264, $556,860, and $784,852 for the
years ended December 31, 1998, 1997, and 1996, respectively.

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

On March 20, 1998, the U.S. Government released a request for
proposal ("RFP") seeking proposals for all work related to its
KC-135 aircraft. The Company's Pemco Aeroplex subsidiary
currently performs the airframe maintenance portion of the KC-
135 workload, which is included in the RFP. On June 17, 1998,
the Company submitted a protest to the General Accounting
Office ("GAO") challenging the combination, or "bundling," of
the KC-135 workload with other unrelated workloads in the RFP.
On September 25, 1998, the GAO found in favor of the protest
filed by Pemco. The GAC recommended that the Air force
resolicit the contract to comply with the requirements of
federal laws and regulations, and warded the Company its
protest costs and attorneys' fees.

Notwithstanding the GAO decision, the Air Force announced its
award of the bundled workload to Ogden Air Logistics Center on
October 9, 1998, stating that it was proceeding with the
award. If the Air Force's action stands, the KC-135 workload
could be included in the contract awarded to Ogden ALC upon
expiration of the Company's contract. October 13, 1998, Pemco
filed a complaint in the U.S. District Court, Northern
District of Alabama against the Air Force seeking declaratory
relief, an injunction, and an order requiring the Air force to
comply with applicable federal laws as recommended by the GAO.
If the Company was to lose its complaint, resulting in the
loss of the KC-135 contract, which exceeds 40% of the
Company's revenues, it would likely have a material adverse
effect on the operations of the Company.

U.S. Government Request for Equitable Adjustments ("REA") -
At December 31, 1995, the Company had a receivable totaling
$12.2 million in anticipation of settlement of contract REAs
involving the KC-135 Programmed Depot Maintenance ("PDM")
contract. The REA was submitted to the U.S. Government and
was for equitable adjustment of the cost effect of late
delivery of government-furnished materials ("GFM"), excess
major structural repairs and other changes to the contract.
The disruption in scheduled work flow, which occurred as a
result of late delivery of GFM, began in the second quarter of
1993 and continued to impact ships through December 31, 1995.
During 1996, the Company received $33.1 million in
satisfaction of all REAs involving the KC-135 PDM contract.
This amount satisfied the $12.2 million in receivables
recorded at December 31, 1995, with the remaining $20.9
million recorded in income in the accompanying 1996
consolidated statement of operations. Of this amount, $17.6
million has been reflected as sales and $3.3 million has been
reflected as other income.

The Company is preparing an REA related to its H-3 helicopter
contract with the U.S. Government. The primary grounds for
this REA are delays in GFM, increased cost of pilot services,
and late delivery of technical data. The Company's
independent management consultant has determined a cost impact
under the H-3 contract of approximately $400,000.

Litigation - A purported class action was brought against the
Company and its Pemco Aeroplex subsidiary on behalf of those
persons hired as replacement workers during the strike by
Pemco's United Auto Worker ("UAW") union employees who were
terminated upon settlement of such strike. The complaint
alleges fraud, breach of contract, and civil conspiracy and
seeks both compensatory and punitive damages. The Company
believes the plaintiffs' claims have no factual basis and will
vigorously defend the case.

The Company's Pemco Aeroplex subsidiary, successor to Hayes
International, is a defendant in several suits seeking damages
and indemnity for claims arising from an Airworthiness
Directive issued by the FAA. That Directive restricts the
cargo capacity of Boeing 747 aircraft converted pursuant to an
STC for such conversions. Hayes International had performed
engineering for the development of the STC. Certain of the
suits also allege fraud, misrepresentation and violations of
the Racketeer Influenced and Corrupt Organization Act.
Management believes that Pemco has no liability under the
claims.

On November 3, 1997, a Jefferson County, Alabama jury returned
a verdict against the Company's Pemco Aeroplex subsidiary in
the amount of $1 million compensatory and $3 million punitive
damages. The case involved an employee who alleged a
supervisor had made sexual advances against her. Pemco was
sued for the actions of its employee undertaken in the course
of employment. However, the jury found in favor of the
supervisor and against Pemco. Various post-trial motions
resulted in the trial court reducing the verdict to $1 million
in compensatory damages. Pemco has appealed this decision.
The Company believes it will successfully reverse the decision
upon appeal as the supervisor was not found liable. However,
an accrual was established in the fourth quarter of 1997 for
the compensatory damage award pending outcome of the appeal.

On October 9, 1998, the Company was served with a complaint
filed by Sterling Airways A/S in bankruptcy ("Sterling") in
the District Court for the City and County of Denver, Colorado
alleging breach of contract. The complaint seeks payment for
parts and materials supplied to the Company's Danish
subsidiary Pemco World Air Services A/S, which was placed in
involuntary bankruptcy in November 1997. The complaint
alleges that the Company guaranteed certain obligations to
Sterling and seeks damages of approximately $1.4 million. On
November 2, 1998, the Company filed a motion to dismiss the
complaint which was denied by the court on January 13, 1999.

In May 1998, the Company's Pemco Aeroplex subsidiary was
served with a complaint filed by National Union Fire Insurance
Company, the Company's current insurer, seeking a declaration
that the policies issued by such insurer between 1987 and 1996
are not required to provide defense costs or indemnity
payments with respect to the litigation arising out of the
STCs for Boeing 747 cargo conversions owned by GATX and
others. The complaint filed in U.S. District Court of the
Northern District of California, also names American
International Airways, Inc., a plaintiff in one of the
underlying cases, as a defendant. Pemco Aeroplex has filed a
motion to stay the action pending resolution of the underlying
cases.

In November 1997, the Company's Danish subsidiary, Pemco World
Air Services A/S, was placed in involuntary bankruptcy in
Denmark. On September 30, 1998, the Company received notice
from the bankruptcy estate that the trustees would assert a
claim in the amount of approximately $2 million against the
Company for the alleged negative equity of the Danish
subsidiary. Based on preliminary information provided to the
Company in October 1998, additional claims have been filed by
creditors against the bankruptcy estate. While these
additional claims could be as much as $15 million, the Company
believes, based on partial information, that $11 million of
these additional claims is comprised of one or more claims by
a former customer of the Danish subsidiary seeking
consequential damages. Based on the information currently
available, the Company believes that such claims may or may
not be assertive against the Company. The Company has not
made any reserves related to these claims.

In addition to the above, the Company is involved in various
legal proceedings arising in the normal course of business.
Management does not believe the ultimate outcome of all such
litigation will have a material adverse effect on the
consolidated financial position or results of operations.

Environmental Compliance - In December 1998, the Company
executed a Consent Agreement and Consent Order ("CACO") with
the Environmental Protection Agency ("EPA"). The terms of the
CACO require the Company to remit a $95,000 penalty and
perform certain environmental remediation activities. The
Company has recorded an accrual for the above penalties and
certain other related charges.

In response to an inspection conducted by the Environmental
Protection Agency (EPA) in June 1997, the Company entered into
informal discussions regarding alleged violations under the
Toxic Substances Control Act (TSCA) related to PCB-contained
electrical equipment located on the Birmingham, Alabama
facility. On October 5, 1998, the Company's Pemco Aeroplex
subsidiary was served with a complaint filed by the EPA
regarding such alleged violations of TSCA and seeking
penalties of $144,000. No release to the environment was
alleged and all issues raised by the inspection were fully
addressed. On November 19, 1998, the Company and the EPA
entered into a Consent Agreement and Consent Order (CACO)
resolving the complaint. Under the CACO, the Company agreed
to pay a penalty of $91,800 over a three year period.

14. RELATED PARTY TRANSACTIONS

During 1996, the Company's principal shareholder provided a
guarantee of up to $7.2 million of the Company's debt. No
advances were made under this guarantee during 1996.

This guarantee was released as part of the Company's
refinancing of its bank debt in August, 1997.

The related party receivable reflected in the consolidated
balance sheet consists of various notes receivables from an
officer who is also a director, and majority stockholder of
the Company.

15. CAPITAL LEASES

The Company conducts part of its operations with leased
machinery which includes data processing equipment and
production machinery. Remaining lease terms range from one to
five years.

The following is an analysis of the leased property under
capital leases by major classes:

December 31,
Classes of Property 1998 1997

Data Processing $1,004,000 $ 979,000

Production Equipment 855,499 807,817
Less: Accumulated amortization (574,755) (472,769)
$1,284,744 $1,314,048

The following is a schedule by years of minimum lease payments
for capital leases together with the present value of the net
minimum lease payments as of December 31, 1998:

Year ended December 31:

1999 694,734
2000 662,516
2001 139,121
2002 34,349
2003 7,735
Thereafter 0

Total minimum lease payments 1,538,455
Less: Amount representing
interest (259,178)
Present value of minimum
lease payments $1,279,287

16. LABOR CONTRACTS

The Company's contract with the UAW at its Pemco Aeroplex,
Inc. subsidiary in Birmingham, Alabama and its former Hayes
Targets division in Leeds, Alabama expired in July, 1996.
Following contract expiration, the Company's approximately 900
UAW employees voted to stop work at these facilities. The
primary disagreement between the Company and its UAW employees
centered on the Company's proposal to modify job
classifications and descriptions which the Company deemed
critical to its ability to increase efficiency and remain
competitive. Production and shipments continued by using
management and supervisory personnel and by employment of
temporary replacement workers.

On March 21, 1997, the UAW voted to accept the Company's
proposed three year labor term, ending the strike. The terms
included the modification in job classifications sought by the
Company but also provided for employee training in performing
different jobs. Additionally, the strike provided for wage
increases, improvements in vacation, overtime and insurance
benefits.

The Company's contract with the International Association of
Machinists and Aerospace Workers Union ("IAM") at its Pemco
Aeroplex, Inc. subsidiary in Dothan, Alabama expired in July,
1997. Following a brief work stoppage, on September 14, 1997,
management and the IAM agreed to a new three year agreement
which provides increases in wages, but maintains benefit
levels and reduces job classifications.

17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

As of December 31, 1998 and 1997, the carrying amounts of the
Company's financial instruments are estimated to approximate
their fair values, due to their short term nature, and variable
or market interest rates.

The Company does not hedge its interest rate or foreign
exchange risks through the use of derivative financial
instruments.

18. FOURTH QUARTER ADJUSTMENTS

In the fourth quarter of 1998, the Company recorded a benefit
of approximately $1.7 million to reduce its valuation
allowance for deferred taxes. The 1998 reduction of the
valuation allowance was due primarily to utilization of net
operating loss carryforwards. Also, during the fourth quarter
the Company revaluated the profitability of contracts-in-
process and recorded an additional charge of approximately $.9
million. The impact of the two 1998 fourth quarter
adjustments was to increase the fourth quarter of 1998 by
approximately $.8 million.

In the fourth quarter of 1997, the Company recorded a
provision of approximately $9.4 million to raise its valuation
allowance account to fully reserve for its deferred tax
assets. The Company considered the need for such a provision
in connection with its strategic restructuring. Also, during
the fourth quarter of 1997 the Company evaluated realization
of program and other deferred costs and wrote off costs
totaling $4.4 million. The write off of the program costs
resulted from failure by the Company's principal customer to
exercise its options for additional ships because of delays
associated with their evaluation of such conversions which
were a result of a work stoppage at the customer's facilities.
Finally, the Company recorded other charges totaling $1.6
million, primarily to establish a litigation and environmental
reserve related to developments during the fourth quarter of
1997. The impact of the above was to increase the fourth
quarter net loss by approximately $15.4 million.

19. TRANSACTIONS AFFECTING SUBSIDIARY OPERATIONS

On November 11, 1997, a supplier filed a request for
bankruptcy against Pemco World Air Services A/S ("PWAS"), the
Company's Danish subsidiary. On November 20, 1997, the
Maritime and Commercial Court in Copenhagen granted that
supplier's request and appointed trustees to operate the
facility. The Company has guaranteed certain obligations of
PWAS. As a result of the subsidiary being placed in
involuntary bankruptcy, effective January 1, 1997, PWAS has
been excluded from the Company's consolidated financial
statement presentation. Related to the deconsolidation, the
Company recognized net charges of $2.6 million in 1997. The
Company continues to maintain a liability of $0.9 million
related to its basis in the Company at time of bankruptcy for
claims which may be made against the Company. The Company has
not made any reserves related to these claims as the amount of
loss, if any, is not estimable at this time.

Net sales, expenses, and net loss of PWAS which are included
in the consolidated statements of operations for the year
ended December 31, 1996 are as follows:

1996

Net Sales $ 8,762,038
Expenses 12,665,111
Net Loss $(3,903,073)

During the year, the Company sold the net assets of its Hayes
Targets division in Leeds, Alabama. The sale, which was
closed on January 29, 1998, yielded net proceeds of
approximately $4,790,000 and resulted in a gain of $3,120,000.

Net sales and operating income contributed by the Hayes
operation for the years ended December 31, 1998, 1997 and 1996
are as follows:

1998 1997 1996

Net Sales $ 27,000 $3,404,000 $5,189,000
Operating
Income (loss) (486,000) 256,000 1,409,000

20. SEGMENT AND RELATED INFORMATION

The Company adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, in 1998 which
changes the way the Company reports information about its
operating segments. The Company has provided this segment
information for fiscal year 1998; however, the Company has not
provided such information for prior years as it is not
practical to capture the relevant information for prior years
due to the Company's restructuring during 1998.

The Company has three reportable segments: Government Services
Group, Commercial Services Group, and Manufacturing and
Overhaul Group. The Government Services Group, located
primarily in Birmingham, Alabama, provides aircraft
maintenance and modification services for the government and
military customers through its Government Services Group. The
Commercial Services Group, located in Dothan, Alabama, and
Victorville, California provides commercial aircraft
maintenance and modification services on a contract basis to
the owners and operators of large commercial aircraft. The
Manufacturing and Overhaul Group, located in California,
Colorado and Florida, designs and manufactures a wide array of
proprietary aerospace products including various space
systems, such as guidance control systems and launching
vehicles; aircraft cargo-handling systems; and precision parts
and components for aircraft. For reporting purposes, segments
other than government, commercial and manufacturing and
overhead are combined as an other segment. These additional
segments perform engineering and support services for the
three main business segments.

The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
The Company evaluates performance based on total (external and
intersegment) revenues, gross profits and operating income.
The Company accounts for intersegment sales and transfers as
if the sales or transfers were to third parties, that is at
current market prices. The Company does not allocate income
taxes, interest income and interest expense to segments.
The amount of intercompany profit is not material.

The Company's reportable segments are strategic business units
that offer different products and services. They are managed
separately because each business requires different operating
and marketing strategies. However, the Commercial and
Manufacturing and Overhaul segments may generate sales to
Governmental entities and the Government segment may generate
sales to commercial entities. Sales to Governmental entities
in fiscal 1998, 1997 and 1996 were $78.4 million, $73.3
million, and $84.1 million, respectively.

The following table presents information about segment profit or loss:

Mfg. and
Government Commercial Overhaul Other Consolidated

Revenues from
external,
domestic
customers $63,450,000 $41,073,821 $21,008,179 $1,311,939 $126,843,939
Revenues from
external
foreign
customers 0 12,351,000 2,575,000 0 14,926,000
Intersegment
revenues 147,416 0 168,370 10,892 326,678
Total
Segment
Revenues $63,597,416 $53,424,821 $23,751,549 $1,322,831 $142,096,617
Elimination (326,678)
Total Revenues $141,769,939

Gross Profit 10,758,409 9,156,912 5,397,333 120,658 25,433,312
Segment Op
Inc. 3,024,952 3,982,235 2,333,785 48,098 9,389,070
Interest
Expense (3,367,720)
Other 2,340,509
Benefit
for Income
Taxes 1,691,937
Net Income $ 10,053,796

Assets $31,095,891 $10,688,510 $ 6,141,219 $1,543,829 $ 49,469,449
Deprec/Amort 1,401,079 544,830 449,750 0 2,395,659
Cap. Additions 453,846 68,315 224,139 0 746,300

SUPPLEMENTARY INFORMATION

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTARY INFORMATION

To Precision Standard, Inc. and Subsidiaries:

Our audits were made for the purpose of forming an opinion on the
basic consolidated financial statements as of December 31, 1998 and
1997 and for the years then ended taken as a whole. The schedule
listed in the index of financial statements as of December 31,
1998, 1997 and 1996 and for the years then ended is presented for
purposes of complying with the Securities and Exchange Commissions
rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated
financial statements as of December 31, 1998 and 1997 and for the
years then ended and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a
whole.

Denver, Colorado ARTHUR ANDERSEN LLP
March 30, 1999

PRECISION STANDARD, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the periods ended December 31, 1998, 1997 and 1996

Balance At Additions Balance
Beginning Charged To Charged To At End of
Description Of Period Expense Assets Deductions Period

1998

Allowance
for
doubtful
accounts $1,179,985 $ 293,583 $ 0 $ (809,571) $ 663,997

Reserve for
contracts
commitments 668,351 1,174,376 0 (668,351) 1,174,376

Estimated
losses on
work in
process 1,346,005 482,761 0 (1,346,005) 482,761

Reserve for
obsolete
inventory 2,974,908 0 0 (479,305) 2,495,603

Reserve for
warranty
expense 674,135 0 0 0 674,135

Deferred
tax asset
valuation
allowance 22,808,754 0 0 (5,034,104) 17,774,650
Total $29,652,138 $1,950,720 $ 0 $(8,337,336) $23,265,522

1997

Allowance
for
doubtful
accounts $ 735,307 $ 793,129 $ 0 $ (348,451) $1,179,985

Reserve for
contracts
commitments 87,766 668,351 0 (87,766) 668,351

Estimated
losses on
work in
process 1,286,669 1,346,005 0 (1,286,669) 1,346,005

Reserve for
obsolete
inventory 3,042,836 0 0 (67,928) 2,974,908

Reserve for
warranty
expense 858,856 0 0 (184,721) 674,135

Deferred
tax asset
valuation
allowance 6,681,104 16,127,650 0 0 22,808,754
Total $12,692,538 $18,935,135 $ 0 $ (1,975,535) $29,652,138

1996

Allowance
for
doubtful
accounts $ 426,150 $ 290,852 $ 18,305 $ 0 $ 735,307

Reserve for
contract
commitments 203,922 0 0 (116,156) 87,766

Estimated
losses on
work in
process 1,274,676 1,286,669 0 (1,274,676) 1,286,669

Reserve for
obsolete
inventory 4,986,013 346,027 0 (2,289,204) 3,042,836

Reserve for
warranty
expense 1,178,636 173,778 0 (493,558) 858,856

Deferred
tax asset
valuation
allowance 4,177,502 2,503,602 0 0 6,681,104
Total $12,246,899 $4,600,928 $ 18,305 $ (4,173,594) $12,692,538

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the
incorporation of our report, included in this Form 10-K, into the
Company's previously filed Registration Statements on Form S-8
(File Nos. 33-34206 and 33-79676 and 333-30491) and on Form S-3
(File No. 333-33933).

Denver, Colorado ARTHUR ANDERSEN LLP
March 30, 1999

Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.

None.

PART III

Item 10. Directors and Executive Officers of the Company.

Information regarding the directors and executive
officers of the Company is incorporated by reference from the
"ELECTION OF DIRECTORS" section of the Company's definitive 1998
Proxy Statement.

Item 11. Executive Compensation.

Information regarding management remuneration and
transactions is incorporated by reference from the "EXECUTIVE
COMPENSATION" section of the Company's definitive 1998 Proxy
Statement.

Item 12. Security Ownership of Certain Beneficial Owners and
Management.

Information regarding the security ownership of certain
beneficial owners and management is incorporated by reference from
the "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" section of the Company's definitive 1998 Proxy
Statement.

Item 13. Certain Relationships and Related Transactions.

Information regarding certain relationships and related
transactions is incorporated by reference from the "TRANSACTIONS
WITH MANAGEMENT AND OTHERS" section of the Company's definitive
1998 Proxy Statement.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.

Financial Statement Schedules. The Financial Statement
Schedules listed below appear in Part II, Item 8 hereof.

a. Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

Schedule II. Valuation and Qualifying Accounts.

All other financial statement schedules have been
omitted, as the required information is inapplicable or the
information is presented in the financial statements or the notes
thereto.

b. Reports on Form 8-K. No Reports on Form 8-K were filed
with the Commission during the quarter ended December 31, 1998.

c. Exhibits.

2 Not applicable.

3.1 Amended and First Restated Articles of
Incorporation of the Company. (1)

3.2 Amended and First Restated Bylaws of the
Company. (1)

3.3 Articles of Amendment to the Articles of
Incorporation. (2)

4.1 Asset Sales and Purchase Agreement dated
July 19, 1984, among Monarch Equities, Inc., Pemco Engineers, Inc.,
Robert D. Lang, Georgia L. Lang and Monarch Aviation, Inc. (3)

4.2 Promissory Note dated July 17, 1987, from
Monarch Equities, Inc., to Pemco Engineers, Inc. (3)

4.3 Specimen Certificate for Common Stock.
(4)

4.4 Second Amended and Restated Credit Agreement
between Precision Standard, Inc. and Bank of America National Trust
and Savings Association entered into as of December 31, 1997. (7)

4.5 Second Amended and Restated senior Subordinated
Loan Agreement between Precision Standard, Inc. and Bank of America
National Trust and Savings Association entered into as of December
31, 1997. (7)

4.6 Amended and Restated Warrant issued by
Precision Standard, Inc. to the Bank of America National Trust and
Savings Association entered into as of December 31, 1997. (7)

4.7 First Amendment to Second Amended and Restated
Senior Subordinated Loan Agreement between Precision Standard, Inc.
and Bank of America National Trust and Savings Association entered
into as of August 8, 1997. (9)

4.8 Account Receivable Management and Security
Agreement between Precision Standard, Inc. and BNY of the Americas
entered into as of August 8, 1997. (9)

Pursuant to Paragraph (b)(4)(iii) of Item 601 of
Regulation S-K, the Company has not filed certain instruments with
respect to other long-term debt of the Company or its consolidated
subsidiaries. Copies of such documents will be furnished to the
Commission upon request.

9 Not applicable.

10.1 Sale of Assets Agreement dated June 2, 1986
among Monarch Equities, Inc., Pemco Engineers, Inc., Monarch
Aviation, Inc., Rolando Sablon and Matthew Gold. (3)

10.2 Amendment to Sale of Assets Agreement and
Closing Statement dated June 3, 1986, among Monarch Equities, Inc.,
Pemco Engineers, Inc., Monarch Aviation, Inc., and SG Trading Corp.
(3)

10.3 Assignment and Assumption Agreement executed
July 30, 1987, effective June 4, 1986, between SG Trading Corp. and
Matthew Gold. (3)

10.4 Purchase Agreement dated December 31, 1986,
between the Company and Matthew Gold. (3)

10.5 Purchase Agreement executed August 6, 1987,
effective April 30, 1987, between the Company and Matthew Gold.
(3)

10.6 Contract No. N68520-87-0007 between Monarch
Aviation, Inc., and the United States Navy. (3)

10.7 Novation Agreement between Monarch Aviation,
Inc., and the Company dated August 6, 1987. (5)

10.8 Lease dated November 1, 1986, between Monarch
Properties and Pemco Engineers, Inc. (3)

10.9 Amended Executive Employment Agreement between
the Company and Walter M. Moede effective June 1, 1993, as amended
March 11, 1994. (6)

10.10 Amended Executive Employment Agreement between
the Company and Matthew L. Gold effective June 1, 1993, as amended
March 11, 1994. (6)

10.11 Executive Employment Agreement between the
Company and C. Fredrik Groth effective June 1, 1993. (6)

10.12 Precision Standard, Inc. Nonqualified Stock
Option Plan. (8)

10.13 Precision Standard, Inc. Incentive Stock and
Appreciation Rights Plan. (8)

11 Not applicable.

12 Not applicable.

13 Not applicable.

16 Not applicable.

18 Not applicable.

21 Subsidiaries of the Company.

22 Not applicable.

23 Consent of Arthur Andersen LLP

24 Not applicable.

27 Financial Data Schedule - Electronic Data
Gathering Analysis and Retrieval (EDGAR).

99 Not applicable.
____________________

(1) Filed as exhibits to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988, and incorporated
by reference herein.

Filed as an exhibit to the Company's Registration Statement on
Form S-8 dated June 1, 1994, and incorporated by reference
herein.

(2) Filed as exhibits to the Company's Annual Report on Form 10-K
for the fiscal year ended April 30, 1987, and incorporated by
reference herein.

(1) Filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989, and
incorporated by reference herein.

(5) Filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended April 30, 1988, and incorporated
by reference herein.

(6) Filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993, and
incorporated by reference herein.

(7) Filed as an exhibit to the Company's Annual Report on Form 10-
Q for the quarter ended March 3, 1997, and incorporated by
reference here in.

(8) Filed as an exhibit to the Company's Registration Statement on
Form S-3 dated July 1, 1997, and incorporated by reference
herein.

(9) Filed as an exhibit to the Company's Form 10-Q for the quarter
ended June 30, 1997, and incorporated by reference herein.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Company has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.

PRECISION STANDARD, INC.

Dated: / / By:/s/Matthew L. Gold
Matthew L. Gold, President
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange
Act of 1934, this Report has been signed below by the following
persons on behalf of the Company and in the capacities and on the
dates indicated.

Signature Capacity Date

/s/Matthew L. Gold Chairman, President 03/31/99
Matthew L. Gold Chief Executive Officer
and Director
(Principal Executive Officer
and Principal Financial and
Accounting Officer)

/s/Donald C. Hannah Director 03/31/99
Donald C. Hannah

/s/George E. R. Kinnear II Director 03/31/99
George E. R. Kinnear II

/s/Thomas C. Richards Director 03/31/99
Thomas C. Richards

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 192,777
<SECURITIES> 0
<RECEIVABLES> 17,433,932
<ALLOWANCES> 663,997
<INVENTORY> 15,286,003
<CURRENT-ASSETS> 33,907,838
<PP&E> 29,898,079
<DEPRECIATION> (19,251,596)
<TOTAL-ASSETS> 49,469,449
<CURRENT-LIABILITIES> 30,621,862
<BONDS> 0
0
0
<COMMON> 398
<OTHER-SE> (6,040,165)
<TOTAL-LIABILITY-AND-EQUITY> 49,469,449
<SALES> 141,769,939
<TOTAL-REVENUES> 141,769,939
<CGS> 116,336,627
<TOTAL-COSTS> 132,268,369
<OTHER-EXPENSES> (2,340,509)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,367,720
<INCOME-PRETAX> 8,361,859
<INCOME-TAX> (1,691,937)
<INCOME-CONTINUING> 10,053,796
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,053,796
<EPS-PRIMARY> 2.65
<EPS-DILUTED> 2.53

</TABLE>