LMI AEROSPACE INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.

For the fiscal year ended December 31, 2002

[] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.

For the transition period from ________________ to ________________.

Commission file number 000-24293
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LMI AEROSPACE, INC.
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(Exact Name of Registrant as Specified in Its Charter)

Missouri 43-1309065
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)

3600 Mueller Road, St. Charles, Missouri 63301
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(Address of Principal Executive Officer) (ZIP Code)

(636) 946-6525
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(Registrant's Telephone Number, Including Area Code)

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

Common stock, $0.02 par value
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(Title of Class)

Indicate by check mark whether registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant'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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X]

The aggregate market value of the voting common equity held by non-affiliates
computed by reference to the average bid and asked price of such common equity
as of June 28, 2002, the last business day of the registrant's most recently
completed second fiscal quarter, was $11,907,154.

There were 8,181,786 total shares of common stock outstanding as of April 3,
2003

Documents Incorporated by Reference

Part III incorporates by reference portions of the Proxy Statement for
the Registrant's 2003 Annual Meeting.

TABLE OF CONTENTS

PART I

The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. The Company makes forward-looking
statements in this Annual Report on Form 10-K and in the public documents that
are incorporated herein by reference, which represent the Company's expectations
or beliefs about future events and financial performance. When used in this
report and the documents incorporated herein by reference, the words "expect,"
"believe," "anticipate," "goal," "plan," "intend," "estimate," "may," "will" or
similar words are intended to identify forward-looking statements. These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions, including those referred to under "Risk Factors" in this Annual
Report on Form 10-K and otherwise described in the Company's periodic filings.

All predictions as to future results contain a measure of uncertainty,
and accordingly, actual results could differ materially. Among the factors that
could cause actual results to differ from those contemplated, projected or
implied by the forward-looking statements (the order of which does not
necessarily reflect their relative significance) include:

o the financial well-being of the Boeing Company, Lockheed
Martin, Gulfstream and Cymer, orders from whom comprise a
majority of the Company's consolidated revenues;

o the effect of terrorism and other factors that adversely
affect the commercial travel industry;

o difficulties with the implementation of the Company's growth
strategy, such as acquisition integration problems and
unanticipated costs relating to the Company's manufacture of
new parts for its current customers and new customers;

o competitive pressures, such as pricing pressures relating to
low-cost foreign labor and industry participation commitments
made by the Company's customers to foreign governments;

o changes in the quality, costs and availability of the
Company's raw materials, principally aluminum;

o the Company's ability to stay current with technological
changes, such as advancements in semiconductor and laser
component technology and the development of alternative
aerospace materials;

o difficulties in plant operations, and in particular,
difficulties relating to the Company's manufacturing
facilities located in St. Charles, Missouri;

o governmental funding for those military programs that utilize
the Company's products;

o asserted and unasserted claims, and in particular, the
Company's ability to successfully negotiate claims relating to
cost over runs of work performed on certain customer
contracts;

o changes in employee relations;

o environmental matters;

o changes in accounting principles or new accounting standards;

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o compliance with laws and regulations;

o other unforeseen circumstances; and

o the risk factors described in Item 1 of this Annual Report on
Form 10-K and in the Company's other periodic filings with the
Securities and Exchange Commission.

In light of these risks, uncertainties and assumptions, the
forward-looking events discussed may not occur. In addition, actual results
could differ materially from those suggested by the forward-looking statements.
Accordingly, investors are cautioned not to place undue reliance on the
forward-looking statements. Except as required by law, the Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. Investors should,
however, review additional disclosures made by the Company from time to time in
its periodic filings with the Securities and Exchange Commission.

This Annual Report on Form 10-K and the documents incorporated herein
by reference should be read completely and with the understanding that the
Company's actual future results may be materially different from what the
Company expects. All forward-looking statements made by the Company in this
Annual Report on Form 10-K and in the Company's other filings with the
Securities and Exchange Commission are qualified by these cautionary statements.

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PART I

ITEM 1. BUSINESS

General Overview

LMI Aerospace, Inc. (the "Company") is a leader in fabricating, machining,
finishing and integrating formed, close tolerance aluminum and specialty alloy
components and sheet metal products for use by the aerospace, technology and
commercial sheet metal industries. Aerospace components manufactured by the
Company include leading edge wing slats, flaps and lens assemblies; cockpit
window frame assemblies; fuselage skins and supports; and passenger and cargo
door frames and supports. The Company manufactures more than 20,000 aerospace
components for integration into a variety of civilian and military aircraft
platforms manufactured by leading original equipment manufacturers ("OEMs") and
prime subcontractors ("Primes"). In addition, the Company produces components
and assemblies for laser equipment used by semiconductor and medical equipment
manufacturers in the technology industry. The Company also produces sheet metal
products for various companies in the commercial sheet metal industry. In
addition to manufacturing quality components, the Company provides its customers
with value-added services related to the design, production and finishing of its
components.

For most of its history, the Company's primary focus had been the manufacture
and sale of components to the commercial aircraft market of the aerospace
industry. In recent years, the Company has expanded its operations through a
number of acquisitions. In April of 2001, the Company acquired the operating
assets of Tempco Engineering Inc. and its affiliate, Hyco Precision, Inc
("Tempco"). This acquisition expanded the Company's aerospace product line and
added technology components used in the manufacture of semiconductors and
medical equipment as new product lines. In May of 2002, the Company acquired
Versaform Corporation and its Canadian affiliates ("Versaform"), producers of
large formed metal components for the regional jet, business jet and military
markets of the aerospace industry. The Company acquired the metal fabrication
assets of Stretch Forming Corporation in June of 2002, an aerospace sheet metal
manufacturer, which manufactures components for the military market of the
aerospace industry. Finally, in September of 2002, the Company acquired the
operations and certain assets of the aerospace division of Southern Stretch
Forming and Fabrication, Inc., a manufacturer of aerospace sheet metal for the
corporate and regional markets.

The Company's business was founded in Missouri in 1948. The Company's
headquarters are located at 3600 Mueller Road, St. Charles, Missouri.

Business Segments

As a result of its acquisition of Tempco, the Company's business is now divided
into two segments, the Sheet Metal segment and the Machining and Technology
segment. The Sheet Metal segment, which is the Company's dominant segment,
services the aerospace and commercial sheet metal industries and is comprised of
all of the Company's subsidiaries other than Tempco. The Sheet Metal segment
accounted for $61.4 million, or 75.5%, of the Company's net sales in 2002.

The business of the Machining and Technology segment, which utilizes a machining
process rather than a forming process to manufacture its product line, is
conducted entirely by Tempco and serves the aerospace and technology industries.
More than 50% of Tempco's revenue is derived from technology industries. The
Company originally acquired Tempco to serve as a supply arm to the Company.
However, as the Tempco business evolved, it became an autonomous unit with
regard to virtually all aspects of its business, which led the Company to
categorize it as a distinct business segment. The

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Machining and Technology division accounted for $20.0 million, or 24.5%, of the
Company's net sales in 2002.

Please see Note 14 of the Consolidated Financial Statements included as part of
this Annual Report on Form 10-K for specific financial information relating to
the Company's business segments.

Risk Factors

The Company's business, financial condition, results of operations and cash
flows can be impacted by a number of factors, including, but not limited to,
those factors set forth below and elsewhere in this Annual Report on Form 10-K,
any one of which could cause the Company's actual results to vary materially
from recent results or from the Company's anticipated future results.

Covenant restrictions in our credit facility and other debt instruments could
limit our ability to operate our business.

The Company currently maintains a credit facility with a financial institution.
This facility is secured by all of the Company's domestic property, including,
but not limited to, accounts receivable, inventories, buildings, and equipment,
and includes certain restrictive covenants relating to various financial
measures. As discussed more thoroughly in Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources, the Company was not in compliance with certain of these
restrictive financial covenants at December 31, 2002. In April 2003, the Company
obtained a waiver of these violations and an amendment of its credit facility,
which among other things, provided new financial and non-financial covenants for
2003 to more accurately track the current financial performance and internal
forecasts of the Company.

In addition to the above described credit facility, the Company has executed
various notes in favor of third parties other than the Company's primary lender.
The Company has executed a note in favor of a former owner of Versaform
Corporation, now a director of the Company, in connection with the Company's
purchase of Versaform. This note is secured by a pledge of 65% of the
Company's interest in its Canadian subsidiary, and as part of its obligations
under this note, the Company's Canadian subsidiary is subject to various
restrictive covenants relating to the financial performance of the Company's
Canadian subsidiary.

If the Company were to fail in the future to comply with the restrictive
covenants in the amended credit facility or in the promissory note, the
Company's operations and the Company's ability to take advantage of potential
business opportunities could be negatively affected. Moreover, the Company's
failure to comply with these restrictive financial and other covenants could
result in an event of default that, if not cured or waived, could cause the
Company to be required to repay its borrowings before their due date. If the
Company were unable to make this repayment or otherwise refinance these
borrowings, the Company's creditors could foreclose on the assets securing its
borrowings.

The Company's outstanding indebtedness may adversely impact the Company's cash
flow and ability to raise necessary capital.

The existence of the Company's outstanding indebtedness could limit the
Company's ability to obtain additional financing and will require that
significant portions of the Company's cash flows from its business operations be
used to service outstanding obligations on such indebtedness. If the Company is
unable to obtain necessary financing in the future and the diversion of the
Company's cash flows are used to service debt obligations, the Company may have
limited ability to fund: (i) working capital requirements; (ii) future
acquisitions that would benefit the Company's growth strategy; (iii) capital
expenditures; (iv) debt service requirements; and (v) other general business
requirements.

4

The Company's business is dependent on only a few customers.

In 2002, 66% of the Company's aggregate sales were dependent on relationships
with four major customers: Boeing, Lockheed Martin, Gulfstream and Cymer.
Although a majority of the Company's sales are made pursuant to multi-year
contracts, such contracts are generally terminable upon 30 days notice by the
customer and typically do not require the customer to purchase any specific
quantity of products. Accordingly, there can be no assurance that sales to
customers that have in the past accounted for significant sales individually or
as a group will continue, or if continued, will reach or exceed historical
levels in any future periods. The loss of any one of these customers, or a
significant reduction in the amount of orders received from any one of these
customers, could cause a significant decrease in the Company's net sales and
profitability. The Company anticipates that a small number of large customers
will continue to dominate its sales for the foreseeable future.

The Company's business is dependent on the aerospace industry and is therefore
susceptible to factors that affect that industry such as acts of terrorism and
general economic factors.

The Company derives approximately 86% of its sales and operating income from the
services and components sold to the aerospace industry. As a result of the
events of September 11, 2001, the commercial airline industry has suffered a
significant decline in operational efficiency and financial condition.
Consequently, the Company experienced a decrease in orders for new commercial
aircraft and replacement components. The Company is unable to predict when the
financial outlook of the airline industry might rebound, or when orders for new
aircraft and replacement components might increase. And while in some instances
since September 11, 2001 the Company has seen an increase in orders from certain
customers, particularly producers of military and corporate and regional
aircraft, the overall effect of a prolonged downturn in the commercial airline
industry will be a potentially severe reduction in demand for the Company's
aerospace products. Additional acts of sabotage or terrorism or adverse results
to the U.S. in its military conflicts, such as the current conflict in Iraq,
would likely lead to even further reduced demand for the Company's products and
services.

In addition, the Company's business is directly affected by certain
characteristics and trends of the aerospace industry that affect its customers,
such as (i) fluctuations in the aerospace industry's business cycle, (ii)
varying fuel and labor costs, (iii) intense price competition and regulatory
scrutiny, (iv) certain trends including a possible decrease in aviation
activity, a decrease in outsourcing by aircraft manufacturers or the failure of
projected market growth to materialize or continue, and (v) changes in military
budgeting and procurement for certain military aircraft. In the event that these
characteristics and trends adversely affect customers in the aerospace industry,
they would reduce the overall demand for the Company's products and services,
thereby decreasing the Company's sales and operating income.

The Company may experience cost over-runs related to orders for new products and
changes to existing products.

The Company generally sells its products under firm, fixed-priced contracts
providing for a fixed price for the products sold by the Company, regardless of
the production costs incurred by the Company. As a result, inaccurate pricing,
manufacturing inefficiencies, start-up costs and other factors may result in
cost over-runs and losses on contracts. The cost of producing products also may
be adversely affected by increases in the cost of labor, materials, overhead and
changing product standards. In many cases, the Company makes multiyear firm,
fixed-price commitments to its customers, without assurance that the Company's
anticipated production costs will be achieved. In some instances, the Company
has been successful in obtaining the agreement of a customer to reprice a
particular product and recoup previous losses, primarily when incomplete or
inaccurate engineering data or out of tolerance tooling has contributed to these
cost over-runs. With respect to future claims there can be no assurance that the
Company will be successful in obtaining the necessary re-pricing in order to
make a particular product profitable to the Company.

5

Risks associated with acquisitions could result in increased costs and
production inefficiencies.

A key element of the Company's growth strategy is expansion through the
acquisition of complementary businesses involved in the aerospace industry and
strategic acquisitions that would provide the Company with access to new
industries. The Company's ability to expand by acquisition is dependent upon,
and may be limited by, the availability of suitable acquisition candidates and
the Company's capital resources. Acquisition risks include assimilation of the
operations and personnel of acquired companies, difficulties associated with new
product lines and meeting new tolerance requirements, an inability to accurately
price new products, the potential loss of key employees of the acquired
companies, the incurrence of substantial, additional indebtedness in funding
such acquisitions, and goodwill impairment. Furthermore, although the Company
will investigate the business operations and assets of entities that it
acquires, there may be liabilities that the Company fails or is unable to
discover, and for which the Company as a successor owner or operator may be
liable. The Company evaluates acquisition opportunities from time to time, but
there can be no assurance that the Company will be able to consummate
acquisitions on satisfactory terms, or at all, or that it will be successful in
integrating any such acquisitions into its operations.

The Company's industries are characterized by intense competition.

The Company's components sold to the aerospace industry are provided by a large
fragmented group of companies, including certain business units or affiliates of
the Company's customers. However, the Company is unaware of any single company
in the aerospace industry with which it competes in all of the Company's
processes. The Company believes that competition within the aerospace industry
will increase substantially as a result of industry consolidations and trends
toward favoring greater outsourcing of components and reducing the number of
preferred suppliers. The Company also believes that foreign aerospace
manufacturers will become an increasing source of competition, due largely to
foreign manufacturers' access to low-cost labor and the increased prevalence of
industry participation commitments, pursuant to which domestic OEMs and Primes
agree to award production work to manufacturers from a foreign country in order
to obtain orders from that country. In contrast to the aerospace industry, the
Machining and Technology division has only a few competitors for the products it
produces. Certain of the Company's competitors in all of its industries, have
substantially greater financial, production and other resources than the
Company. These competitors may have (i) the ability to adapt more quickly to
changes in customer requirements and industry conditions or trends, (ii)
stronger relationships with customers and suppliers and (iii) greater name
recognition than the Company. There can be no assurance that competitive
pressures will not materially and adversely affect the Company's business,
financial condition or results of operation.

Decreases in the availability, or increases in the cost, of the Company's raw
materials would increase the Company's operating costs.

Most of the Company's components are manufactured from aluminum products. From
time to time the Company, and the aerospace components industry as a whole, has
experienced shortages in the availability of aerospace quality aluminum. In
addition, the Company's Machining and Technology segment utilizes materials
that, in some cases, may be provided by a limited number of suppliers. Raw
material shortages could inhibit the Company's ability to deliver products to
its customers on a timely basis. However, there can be no assurance that the
Company will be able to purchase sufficient quantities of aluminum products or
other materials to meet its production needs in the future, or that necessary
materials will be available on satisfactory terms or at reasonable prices. Any
such material shortage or price escalation would increase the Company's
operating costs, which would likely reduce profits.

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The Company's long-term success and growth strategy depend on its senior
management and the Company's ability to attract and retain qualified personnel.

The Company has entered into written employment agreements with all of its
senior management personnel and maintains key man life insurance policies on the
lives of certain of such personnel. However, the loss of service of one or more
of the Company's senior management personnel could result in a loss of
leadership and an inability to successfully pursue the Company's long-term
success and growth strategy.

The Company's success and future growth also depends on management's ability to
attract, hire, train, integrate and retain qualified personnel in all areas of
its business. Competition for such personnel is intense and the Company's
inability to adequately staff its operations with such personnel could render
the Company less efficient, thereby slowing its rate of production. In addition,
rising costs associated with certain employee benefits, and in particular the
rising costs associated with providing employee health coverage, could limit the
ability of the Company to provide certain employee benefits in the future. The
Company's inability to provide a competitive employee benefits package could
limit the ability of the Company to recruit and retain qualified personnel.

Compliance with and changes in environmental, health and safety laws and other
laws that regulate the operation of the Company's business could increase the
cost of production and expose the Company to regulatory claims.

The Company's operations are subject to extensive and frequently changing
federal, state and local laws and substantial regulation by government agencies,
including the United States Environmental Protection Agency ("EPA"), the United
States Occupational Safety and Health Administration ("OSHA") and the Federal
Aviation Administration ("FAA"). Among other matters, these agencies impose
requirements that regulate the operation, handling, transportation and disposal
of hazardous materials generated or used by the Company during the normal course
of its operations, govern the health and safety of the Company's employees and
require the Company to meet certain standards and licensing requirements for
aerospace components. This extensive regulatory framework imposes significant
compliance burdens and risks on the Company and, as a result, may substantially
affect its operational costs. In addition, the Company may become liable for the
costs of removal or remediation of certain hazardous substances released on or
in its facilities without regard to whether or not the Company knew of, or
caused, the release of such substances. The Company believes that it currently
is in material compliance with applicable laws and regulations and is not aware
of any material environmental violations at any of its current or former
facilities. There can be no assurance, however, that its prior activities did
not create a material environmental situation for which the Company could be
responsible or that future uses or conditions (including, without limitation,
changes in applicable environmental laws and regulation, or an increase in the
amount of hazardous substances generated or used by the Company's operations)
will not result in any material environmental liability to the Company or result
in a material adverse effect to the Company's financial condition or results of
operations.

The operations of the end-users of the product platforms into which the
Company's components are integrated could expose the Company to product
liability claims.

Although the Company assists its customers in the design of a limited number of
parts, components and sub-assemblies, the Company's business may still be
exposed to possible claims of personal injury, death or property damage that may
result from the failure or malfunction of any component or subassembly
fabricated by the Company. The Company currently has in place aviation products
liability and premises insurance, which the Company believes provides coverage
in amounts and on terms that are generally consistent with industry practice.
The Company has not experienced any product liability claims related to its
products. However, the Company may be subject to a material loss, to the extent
that a claim is

7

made against the Company that is not covered in whole or in part by insurance,
which could have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, there can be no assurance that
insurance coverages can be maintained in the future at a cost acceptable to the
Company.

The Company's facilities are located in regions that suffer from natural
disasters.

Several of the Company's facilities are located in regions that have an
increased risk of earthquake activity, and one of the Company's facilities has
experienced damage due to floods in the past. Although the Company maintains
earthquake and standard blanket flood loss insurance where necessary, an
earthquake, flood or other natural disaster could have a material adverse effect
on the Company's business or its operating results.

The market price of the Company's common stock may be volatile.

The market price of the Company's common stock could be subject to wide
fluctuations in response to quarterly variations in operating results, changes
in financial estimates by security analysts or failure of the Company to meet
such estimates and other events or factors. In addition, the stock market has
experienced volatility that has affected the market prices of equity securities
of many companies. The resulting changes in such market prices are often
unrelated to the operating performance of such companies. Accordingly, market
volatility could adversely affect the market price of the Company's common
stock.

Certain provisions in the Company's charter documents may have the effect of
delaying, deterring, or preventing certain potential acquisitions or a change in
control of the Company.

The Company's Restated Articles of Incorporation and Amended and Restated Bylaws
contain certain provisions that reduce the probability of a change of control or
acquisition of the Company. These provisions include, but are not limited to (i)
the ability of the Board to issue preferred stock in one or more series with
such rights, obligations and preferences as the Board may determine, without any
further vote or action by the shareholders; (ii) advance notice procedures for
shareholders to nominate candidates for election as directors of the Company and
for shareholders to submit proposals for consideration at shareholders'
meetings; (iii) the staggered election of directors; and (iv) restrictions on
the ability of shareholders to call special meetings of shareholders. In
addition, the Company is subject to Section 459 of the General and Business
Corporation Law of Missouri, which, under certain circumstances, may prohibit a
business combination between the Company and a shareholder owning 20% or more of
the outstanding voting power of the Company.

Customers and Products.

Customers

The Company's principal customers serviced by the Sheet Metal segment are
Boeing, Lockheed Martin and Gulfstream, leading OEMs and Primes in the
commercial, corporate and regional and military aircraft markets of the
aerospace industry. During 2002, direct sales to these customers accounted for a
total of approximately 62%, of the segment's sales. According to industry
sources, Boeing alone holds approximately a 50% share of the worldwide
commercial aircraft market.

Typically, the Company conducts its aerospace business under contracts that
provide for: (i) payment on a net 30 day basis; (ii) termination for convenience
upon 30 days notice; (iii) reasonable manufacturing lead time for delivery of
components; (iv) limitations on and specifications for the scope of work to be
performed; and (v) pricing of components by quotes. In addition, these contracts
are typically

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"requirements" contracts under which the purchaser commits to purchase all of
its requirements of a particular component from the Company. Specific orders are
placed with the Company on a periodic basis.

The Machining and Technology segment's principal customer is Cymer, a
manufacturer of semi-conductor equipment in the technology industry. During
2002, Cymer accounted for 51.7% of the Machining and Technology segment sales.

Products.

The Company fabricates, machines, and integrates formed, close tolerance
aluminum and specialty alloy components for use by the aerospace, technology,
and commercial sheet metal industries. All components are fabricated from
designs and specifications prepared and furnished by its customers. Because the
Company manufactures thousands of components, no one component accounts for a
significant portion of the Company's sales. The following table describes some
of the principal products manufactured by each of the Company's segments, and
the models into which they are integrated:

9

Manufacturing Process

The manufacturing facilities are organized by work centers focusing on a
particular manufacturing process. Depending on the component, the Company
utilizes either a forming process or a machining process. Each work center is
staffed by a team of operators who are supported by a supervisor, lead operators
and quality inspectors. Throughout each stage of the manufacturing and finishing
processes, the Company collects, maintains and evaluates data, including
customer design inputs, process scheduling, material inventory, labor,
inspection results and completion and delivery dates. The Company's information
systems employ this data to provide accurate pricing and scheduling information
to its customers as well as to establish production standards used to measure
internal performance.

In manufacturing some components for the Sheet Metal division, the Company uses
several forming processes to shape or "form" a "work piece" (aluminum, stainless
steel or titanium sheet metal and extrusion) into components by applying
pressure through impact, stretching or pressing the raw material (sheet metal or
extrusion) to cause conformance to a die. The shapes may be simple with a single
angle, bend or curve, or may be complex with compound contours having multiple
bends and angles. Some processes incorporate heat to soften the metal prior to
or during forming. Forming processes include: drop hammer, fluid cell press,
sheet metal and extrusion stretch, skin stretch, stretch draw, hot joggle, brake
forming, roll forming and radial draw.

Additionally, certain products manufactured by the Sheet Metal segments and
virtually all of the Machining and Technology segment products are produced
using close tolerance machining methods. Various metals are machined such as
stainless, aluminum, monel, kevlar, and numerous varieties of steel and castings
for small to medium sized parts in heat treated and non-heat treated conditions.
Parts are processed through conventional and computer numerical control
machining methods, also known as CNC, from raw material or castings up to and
through assembly processes. In addition, complex machining of parts is
accomplished through experience in engineering set-ups to produce intricate and
close tolerances, with very restricted finish requirements. Each machining
facility is also set up to complete turnkey, research and development projects
to better support engineering changes from customers.

Value-Added Services

In addition to the products the Company sells, each segment offers its customers
various value-added services that are intended to result in both cost and time
savings. These services may include the production of tooling, heat treating and
aging of components, computer inspection and engineering of components, chemical
milling, metal finishing, polishing and painting, assembly, prototyping and
warehousing, distribution and kitting.

Backlog

The Company's backlog for each of its business segments is displayed in the
following table:

10

Machining and Technology Segment (1)

Total $ 11.9 $ 12.9

Portion deliverable within 12 months $ 10.5 $ 12.5

- ----------

(1) The Company acquired Tempco Engineering, which comprises the
Machining and Technology segment, in April of 2001.

The Company's customers often modify purchase orders to accelerate or delay
delivery dates. The level of unfilled orders at any given time during the year
will be materially affected by the timing of the Company's receipt of orders and
the speed with which those orders are filled. Moreover, sales during any period
may include sales which are not part of the backlog at the end of the prior
period.

Raw Materials and Procurement Practices

Most of the Company's aerospace components are manufactured from aerospace
quality aluminum sheet metal and extrusion. From time to time the Company, and
the aerospace components industry as a whole, has experienced shortages in the
availability of aerospace quality aluminum sheet metal and extrusion. Such
shortages could inhibit the Company's ability to deliver products to its
customers on a timely basis.

A strategy adopted by the commercial division of Boeing, requires that Boeing
subcontractors purchase aluminum sheet, aluminum extrusion and titanium sheet
from TMX Aerospace (Boeing designated raw material service provider). This
supply chain approach is intended to control raw material pricing and assure
adequate levels of inventory for both Boeing and its supply base. Additional
designated material source strategies are used by several of the Company's
customers. Like the Boeing arrangement, these customers provide the Company with
access to an assured supply of materials at competitive pricing.

The Company obtains its raw materials for the technology portion of its
Machining and Technology segment from a variety of vendors and distributors.

The Company believes its sources of raw materials and its relationships with its
suppliers are satisfactory. While the loss of any one supplier could have a
material adverse effect on the Company until alternative suppliers are located
and have commenced providing products, alternative suppliers exist for
substantially all of the products and services purchased by the Company.

Quality Assurance and Control

The Company continually seeks to maintain high quality standards in the
fabrication and processing of its products. Accordingly, the Company employs 70
full time quality control and assurance personnel. Each work order introduced to
the Company's manufacturing facilities contains an inspection plan specifying
required inspection points. Quality inspectors are assigned to each work center
and are trained in the testing required in connection with products passing
through the assigned work center. Although a large percentage of the Company's
products are 100% inspected immediately prior to shipment by a customer employee
or a customer designated Company employee, Boeing has approved a sampling
inspection program for certain components using statistical process control data
maintained by the Company.

In March 2002, the Company was certified as compliant with Boeing's new D6-82479
quality assurance standard. Certain facilities have received their ISO 9002,
NADCAP and AS9100 third party certifications while others are still involved in
the certification process. During 2003 the Company will continue to review all
procedures to ensure they meet the latest revisions of the ISO and AS standards
as required for

11

2004 compliance. The Company will continue with its ongoing employee training
program and use of lean manufacturing techniques to assist employees in becoming
familiar with any changes in the Company's procedures. The Company has continued
to develop a robust internal auditing program for each of the facilities to
ensure that the training is effective and to ensure ongoing compliance to
customer required standards.

Sales and Marketing

The Company has realigned its sales and marketing organization into four market
sectors: Commercial Aerospace, Military Aircraft, Business/Regional Jets, and
Non-Aerospace (which includes sales to the technology and commercial sheet metal
industries). Within these sectors one Sales and Marketing Director, two Market
Sector Directors, and five Program Managers support the Company and its
customers in the conduct of business. At each of the Company's facilities,
customer service representatives establish and maintain an associate business
relationship between customers and the Company's production and fabrication
business units, with a focus on customer satisfaction. Additionally, three
independent sales representatives conduct business on behalf of the Company, two
of whom are located in the United States and one in the United Kingdom.

A majority of the Company's sales to existing customers are awarded after
receipt of a request for quotation ("RFQ"). On receipt, the RFQ is preliminarily
reviewed by a team consisting of members of the Company's senior management, a
program manager, an estimator and the plant manager. If the Company determines
the program is adequately compatible with the Company's capabilities and
objectives, a formal response is prepared by a member of the Company's estimator
group. Although a substantial percentage of programs are awarded on a
competitive bid basis, the Company has recognized a recent trend favoring
reverse auctions for simple aerospace components.

Competition

Components for customers in the aerospace industry are provided by a large
fragmented group of companies, including certain business units or affiliates of
the Company's customers. The Company believes participants in the aerospace
industry compete primarily with respect to delivery, price and quality. To the
contrary, the Company believes that there are only a few producers of components
similar to the principal technology components manufactured by the Company's
Machining and Technology segment. The Company believes that engineering
capability, responsiveness and price are key aspects of competition in the
technology industry. In all industries in which the Company competes, certain of
the Company's competitors, including business units affiliated with the
Company's customers, have substantially greater financial, production and other
resources than the Company. The Company has also recognized a trend by certain
of its customers to outsource production to foreign countries, where labor costs
are significantly lower. This trend has been exacerbated by the expanded use of
industry participation arrangements, pursuant to which OEMs and Primes agree to
outsource certain manufacturing contract work to a foreign country in return for
orders for new aircraft.

Governmental Regulations; Environmental Compliance

The Company's operations are subject to extensive and frequently changing
Federal, state and local laws and substantial regulation by government agencies,
including the United States Environmental Protection Agency ("EPA"), the United
States Occupational Safety and Health Administration ("OSHA") and the Federal
Aviation Administration ("FAA"). Among other matters, these agencies impose
requirements that regulate the handling, transportation and disposal of
hazardous materials generated or used by the Company during the normal course of
its operations, govern the health and safety of the Company's employees and
require the Company to meet certain standards and licensing requirements for
aerospace

12

components. This extensive regulatory framework imposes significant compliance
burdens and risks on the Company and, as a result, may substantially affect its
operational costs.

In addition, the Company may become liable for the costs of removal or
remediation of certain hazardous substances released on or in its facilities
without regard to whether or not the Company knew of, or caused, the release of
such substances. The Company believes it currently is in material compliance
with applicable laws and regulations and is not aware of any material
environmental violations at any of its current or former facilities. There can
be no assurance, however, that its prior activities did not create a material
environmental situation for which the Company could be responsible for or that
future uses or conditions (including, without limitation, changes in applicable
environmental laws and regulation, or an increase in the amount of hazardous
substances generated or used by the Company's operations) will not result in any
material environmental liability to the Company or result in a material adverse
effect to the Company's financial condition or results of operations.

Employees

As of December 31, 2002, the Company had 884 permanent employees, of whom 18
were engaged in executive positions, 117 were engaged in administrative
positions and 749 were engaged in manufacturing operations. None of the
Company's employees is subject to a collective bargaining agreement, and the
Company has not experienced any material business interruption as a result of
labor disputes since it was formed. The Company believes it has an excellent
relationship with its employees.

The Company strives to continuously train and educate its employees, thereby
enhancing the skill and flexibility of its work force. Through the use of
internally developed programs, which include formal classroom and on-the-job,
hands-on training, independently developed programs, and certain Company funded
tuition reimbursement programs, the Company seeks to attract, develop and retain
the personnel necessary to achieve the Company's growth and profitability
objectives.

ITEM 2. PROPERTIES.

Facilities

The following table provides certain information with respect to the Company's
headquarters and manufacturing centers:

Sheet Metal Segment

13

2629-2635 Esthner Ct. Manufacturing Center 31,000 Owned
Wichita, Kansas

2621 W. Esthner Ct. Administrative Offices and Storage 39,883 Leased(4)
Wichita, Kansas

2104 N. 170th St. E. Ave. Finishing and Manufacturing Facility 75,000 Owned
Tulsa, Oklahoma

1120 Main Parkway Distribution Center 40,000 Leased(5)
Catoosa, OK

2205 and 2215 River Hill Machining Facility 8,400 Leased(6)
Road, Irving, Texas

6221 202nd Street #6 Office and Manufacturing 10,835 Leased(7)
Langley, British Columbia
Canada

1315 S. Cleveland Street Office and Manufacturing 19,000 Leased(8)
Oceanside, California

1938-A Avenida Del Oro Office and Manufacturing 20,314 Leased(9)
Oceanside, CA

Machining and Technology Segment

- ----------

(1) Subject to a yearly rental amount of $120,266, expiring on February
28, 2004.

(2) Subject to yearly payments of $80,300, expiring May 31, 2003.

(3) Subject to graduated yearly payments of $353,640 to $418,800 during
the life of the lease. The lease expires in 2005, but the Company
retains the option to extend the lease through June 30, 2008 at the
monthly rate of $39,090.

(4) Subject to graduated yearly payments of $134,196 to $148,620 during
the life of the lease. The lease expires in 2009, but the Company
retains an option to extend the lease term for an additional 5 years.

(5) Subject to yearly payments of $109,596. The lease expires on
September 30, 2003 but the Company retains the option to extend the
lease for an additional year.

(6) Month to month lease of $3,750 subject to a six-month cancellation
notice.

(7) Subject to yearly payments of $92,168, expiring September 30, 2004.

(8) Subject to yearly payments of $86,400. The lease expires on January
31, 2005, but the Company retains an option to extend the lease term
for five successive periods of four years each, for a total of twenty
years. The landlord for this property is Edward D. Geary, the father of
Brian Geary, a member of the Company's Board of Directors.

(9) Subject to yearly payment of $107,258. The lease expires on June
30, 2003, but the Company retains the option to extend the lease for
two additional thirty-six month periods.

(10) Subject to yearly payments of $172,920, expiring March 31, 2006
The landlord for this property is Starwood Company, a company
beneficially owned in part by Ernest L. Star, the father of Ernest R.
Star, an officer of the Company.

14

(11) Subject to yearly payments of $141,427, expiring March 31, 2006.
One of the landlords for this property is a trust for the benefit of
Ernest L. Star, the father of Ernest R. Star, an officer of the
Company. Ernest R. Star is a co-trustee of this trust.

ITEM 3. LEGAL PROCEEDINGS.

The Company is not a party to any legal proceedings, other than routine claims
and lawsuits arising in the ordinary course of its business. The Company does
not believe such claims and lawsuits, individually or in the aggregate, will
have a material adverse effect on the Company's business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT.

The following is a list of the current executive officers of the Company, their
ages, their positions with the Company, and their principal occupations for at
least the past five years.

Set forth below are biographies of each executive officer of the Company.

Ronald S. Saks has served as President and as a director of the Company since
1984. Prior to his employment with the Company, Mr. Saks was an Executive Vice
President with Associated Transports, Inc. for eight years and was a Tax Manager
with Peat Marwick Mitchell & Co., now known as KPMG Peat Marwick LLP, for the
eight years prior thereto. Mr. Saks obtained his Bachelor's degree in Business
Administration from Washington University in 1966. He also studied engineering
at the Massachusetts Institute of Technology, and completed an executive
education program at Stanford University. Mr. Saks is a Certified Public
Accountant.

Duane E. Hahn joined the Company in 1984 and served as its Assistant General
Manager until 1988, at which time he moved to Auburn, Washington to set up and
manage the Auburn facility as Vice President

15

and General Manager. In 1996, Mr. Hahn became the Vice President of
Manufacturing and Regional Manager of the Company. Prior to joining the Company,
Mr. Hahn served as a supervisor for Associated Transport, Inc. Mr. Hahn received
his Associate's Degree from Nebraska Technical College in 1971. He has extensive
continuing education experience in lean manufacturing, just-in-time, and other
world class manufacturing techniques. Mr. Hahn became a director of the Company
in October 1990.

Lawrence E. Dickinson has been the Chief Financial Officer of the Company since
1993. He served as a Financial Analyst and Controller for LaBarge, Inc. from
1984 to 1993 and as a Cost Accountant with Monsanto from 1981 to 1984. Mr.
Dickinson received his Bachelor's degree in Accounting from the University of
Alabama and received his Master's degree in Business Administration from
Washington University in 1994.

Michael Biffignani has served as the Chief Information Officer of the Company
since August 1999. He is responsible for corporate wide Information Technology
strategy and implementation. Before joining the Company, Mike held several
positions at Boeing in Information Technology and Business Management. He
attended the McDonnell Douglas Executive Development Program from July 1995 to
August 1996 and completed the Boeing Executive Program in 1999. He also worked
for the Sony Corporation from 1979 to 1983 as an engineer and materials manager.
He received his bachelor degree in electrical engineering from the University of
Missouri - Rolla in 1979.

Robert T. Grah joined the Company in 1984 as Production Control Manager. Mr.
Grah has held various management positions with the Company, including
Purchasing and Contracts Manager, Maintenance Manager, Facilities Manager,
General Manager of LMI Finishing, Inc., and was promoted to his current position
as Vice President - Central Region in December 2002. Prior to joining the
Company, Mr. Grah was a supervisor for Associated Transports, Inc., and a
manager for Beneficial Finance. Mr. Grah's education has included Florissant
Valley Community College, and numerous continuing education courses in
management, total preventative maintenance, and various environmental and
technical subjects.

Phillip A. Lajeunesse joined the Company in 1988 as the Corporate Quality
Assurance Manager. In 1990, he became the Plant Manager of the Company's St.
Charles facility, and in 1996, he became the General Manager of the Company's
Wichita facility. Prior to joining the Company, Mr. Lajeunesse was a supervisor
for Kaman Aerospace for nine years, and for six years was a supervisor for
United Nuclear Corporation. Mr. Lajeunesse obtained an Associate's degree in
Chemical Engineering from Thames Valley State Technical College in 1973, an
Associate's degree in Business Administration from Bryant College in 1984, and a
Master's of Business Administration from Washington University in 1994.

Bradley L. Nelson joined the Company as a Production Supervisor in the Auburn
facility in 1990. In 1994, he was promoted to Manufacturing Manager, and in 1996
he assumed his current position as General Manager of the Auburn facility.
Previously, Mr. Nelson was Production Manager for Fabrication Technologies from
1989 to 1990, the owner of Totem Lake Service Center from 1984 to 1989, and
Plant Manager for Tonoro Growers from 1981 to 1984. Mr. Nelson's continuing
education courses include general management and manufacturing management and
methods.

Ernest R. Star joined the company as General Manager of Tempco Engineering,
Inc., following the Company's acquisition of Tempco in 2001. His employment with
Tempco began in 1978, and prior to the acquisition, he served in various
positions at Tempco including Production Control Manager, Quality Control
Manager, and Executive Vice President. Mr. Star served as Tempco's President
from 1994 to 2001. He received his Bachelor of Arts degree in Political Science
in 1976 from California State University, Northridge, and Juris Doctor Degree in
1979 from Loyola-Marymount University, Los Angeles. Mr. Star has been a member
of the California Bar Association since 1980.

16

Ed Campbell joined the Company in 2002 through the acquisition of Versaform
Corporation in April 2002. In October of 2002 Mr. Campbell was assigned the
position of Director of Marketing and Sales. Mr. Campbell joined the management
team at Versaform as the General Manager in 1996, and took on the additional
assignment of sales and marketing in 2000. Prior to his assignment with
Versaform, Mr. Campbell was the General Manager for R&D Manufacturing after
retiring from the U.S. Marine Corps.

17

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

Market Information. The Company's common stock is traded on the NASDAQ National
Market under the symbol "LMIA". The following table sets forth the range of high
and low bid prices for the common stock for the periods indicated during the
Company's past two fiscal years:

The foregoing quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.

Holders. As of April 11, 2003, the reported closing price for the Company's
common stock was $2.03. As of March 26, 2003, there were approximately 57
holders of record of the Company's common stock.

Dividends. The Company has not declared or paid cash dividends on any class of
its Company's common stock in the past two years and does not anticipate paying
any cash dividends in the foreseeable future. The credit facility between the
Company and its financial institution prohibits the Company from declaring a
dividend with respect to its capital stock without the financial institution's
approval. The Company currently intends to retain its earnings, if any, and
reinvest them in the development of its business.

Securities Authorized for Issuance Under Equity Compensation Plans. The
Company's only compensation plan under which the Company's common stock is
authorized for issuance to employees or directors in exchange for goods and
services, the Amended and Restated LMI Aerospace, Inc.1998 Stock Option Plan,
was approved by the Company's shareholders.

18

The following table summarizes information about our equity compensation plan as
of December 31, 2002. All outstanding awards relate to the Company's common
stock.

EQUITY COMPENSATION PLAN INFORMATION

19

ITEM 6. SELECTED FINANCIAL DATA.

Year Ended December 31,
(in thousands, except Shares and per share data)

20

(1) EBITDA represents earnings before interest, income taxes,
depreciation and amortization (including goodwill impairment charges),
realized and unrealized investment gains and losses. EBITDA is a widely
accepted, supplemental financial measurement used by many investors and
analysts to analyze and compare companies' performance. EBITDA as
presented may not be comparable to similarly titled indicators reported
by other companies because not all companies necessarily calculate
EBITDA in an identical manner, and, therefore, it is not necessarily an
accurate means of comparison between companies. EBITDA should only be
read in conjunction with all of the Company's financial data summarized
above and its Consolidated Financial Statements prepared in accordance
with generally accepted accounting principles ("GAAP"), appearing
elsewhere herein. EBITDA is not intended to represent cash flows (as
determined in accordance with GAAP) or funds available for management's
discretionary use for the periods listed, nor has it been presented as
an alternative to operating income (as determined in accordance with
GAAP) and should not be considered in isolation or as a substitute for
indicators of performance prepared in accordance with GAAP. EBITDA is
presented as additional information because management believes it to
be a useful indicator of the Company's ability to meet debt service and
capital expenditure requirements and because certain debt covenants of
the Company utilize EBITDA to measure compliance with such covenants.

(2) Includes the operating results of Tempco Engineering subsequent to
the acquisition on April 1, 2001.

(3) Includes the operating results of Versaform subsequent to the
acquisition on May 16, 2002, the results of SFC subsequent to the
acquisition on June 12, 2002 and the results of SSFF subsequent to the
acquisition date, September 30, 2002.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

The Company manufactures formed and machined components for use in the
aerospace, technology and commercial sheet metal industries. The Company
primarily sells its product to the commercial aircraft, military, corporate and
regional aircraft markets, and technology markets within the aerospace and
technology industries. Historically, the Company's business was primarily
dependent on the commercial aircraft market, with Boeing as the Company's
principal customer. In order to diversify its product and customer base, the
Company implemented an acquisition and marketing strategy in the late 1990's
that has broadened the number of industries to which the Company sells its
components, and, within the aerospace industry, has diversified its customer
base to reduce the Company's dependence on Boeing. The following table
illustrates the Company's sales over the last three years to its primary
industries and markets.

- ----------

(1) Includes commercial sheet metal and various aerospace
products.

Beginning in 2001, the Company began an aggressive acquisition campaign that
resulted in the

21

consummation of four transactions through 2002. In April 2001, the Company
acquired Tempco Engineering Inc. ("Tempco") and its affiliates, which expanded
the Company's aerospace product line and introduced the Company to the
technology industry. In 2002, the Company acquired Versaform Corporation
("Versaform") and its affiliates, as well as Stretch Forming Corporation ("SFC")
and Southern Stretch Forming and Fabrication, Inc. ("SSFF"). The Versaform
acquisition significantly increased the Company's presence in the corporate and
regional aircraft market, while adding some military products to the Company's
product line. The SFC acquisition further supplemented the Company's military
product line. Finally, the Company's acquisition of SSFF increased the Company's
business in the corporate and regional market.

As a result of the development of Tempco's business, the Company determined that
Tempco should operate and be managed as an autonomous unit, and accordingly as a
business segment separate from the Company's other businesses. The Tempco
business, which sells machined components to both the aerospace and technology
industries, is referred to in this discussion as the Machining and Technology
segment and the Company's other businesses are referred to as the Sheet Metal
segment.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

The following table provides the comparative data for 2002 and 2001 for each of
the Company's segments.

THE SHEET METAL SEGMENT

NET SALES. Net sales for the Sheet Metal segment were $61.4 million in 2002
compared to $60.5 million in 2001, an increase of 1.3%. The increase resulted
from the Company's three acquisitions in 2002, significantly offset by reduced
sales to the commercial aircraft market. The Company's acquisition of Versaform
contributed $9.4 million in net sales, primarily in the corporate and regional
aircraft market. Additionally, the acquisition of SSFF contributed $1.1 million
of net sales to the corporate and regional markets in 2002. The acquisition of
SFC added $0.7 million to net sales, primarily in the military market. Excluding
acquisitions, the Sheet Metal division experienced a 17.2 % decrease in net
sales to $50.1 million in 2002 from $60.5 million in 2001. The following table
summarizes the Company's Sheet Metal division's net sales by market, with and
without 2002 acquisitions:

Because substantially all of the segment's net sales are attributable to the
aerospace industry markets, the

22

Sheet Metal segment is heavily influenced by various factors that influence the
demand patterns of the Company's aerospace customers.

The events of September 11, 2001, influenced the commercial aircraft market
significantly and is primarily responsible for the segment decline in sales.
Shortly after September 11, 2001, Boeing, the Company's dominant customer in the
commercial aircraft market, scaled back its production rates on all of its
models. As a result, sales of products used on Boeing aircraft dropped 37.4% to
$22.9 million, excluding acquisitions, in 2002 from $36.6 million in 2001. Net
sales on the 737 aircraft were $11.8 million in 2002, down 34.8% from $18.1
million in 2001 resulting from production rate declines and inventory management
by Boeing and its subcontractors. Additionally, net sales on the 747 aircraft
declined by 41.2% to $5.0 million in 2002 from $8.5 million in 2001 for similar
reasons. The Sheet Metal segment experienced similar percentage declines on
Boeing's 757, 767 and 777 aircraft. Versaform added $0.1 million in sales to the
commercial aircraft market.

The Company's net sales for corporate and regional aircraft, excluding
acquisitions, increased 16.4% to $12.8 million in 2002 from $11.0 million in
2001. This increase was primarily attributable to new orders from Gulfstream,
resulting from the closing of a Gulfstream facility. Excluding acquisitions, net
sales for products used on Gulfstream aircraft were $10.3 million in 2002, an
increase of 56.1% from $6.6 million in 2001. The increase in Gulfstream sales
was partially offset by a decline in net sales to Learjet due to production rate
cutbacks. Net sales to Learjet were $0.5 million in 2002, down from $2.0 million
in 2001. Versaform contributed net sales to the corporate and regional aircraft
market of $6.1 million. Net sales for products used on Gulfstream aircraft were
$4.4 million from Versaform and $1.0 million from SSFF. Additionally,
Versaform's net sales to Cessna were $1.2 million.

Excluding acquisitions, net sales on military programs were up 14.1% to $9.7
million in 2002 from $8.5 million in 2001. This increase is attributable to
sales to Lockheed Martin for new work on the C-130 aircraft and a combination of
production rate increases and new work on the F-16. Versaform's net sales on
military programs were $1.3 million, predominantly derived from a program to
refurbish nacelles on B-52 bombers.

GROSS PROFIT. The Sheet Metal segment experienced a gross profit of $7.1 million
(11.6% of net sales) in 2002 compared to $13.9 million (22.9% of net sales) in
2001. Versaform added $2.5 million (27.7% of the net sales of Versaform) to
gross profit. Excluding Versaform, the Sheet Metal segment generated a gross
profit of $4.5 million (7.0% of the net sales of the Sheet Metal segment
excluding Versaform).

The decline in gross profit was caused by cost over-runs on certain new programs
during 2002. The Company encountered significant difficulties with a new package
of components from a military customer. Additional production difficulties were
encountered on military components obtained in the Company's acquisition of SFC
in June 2002. The utilization of furnished tooling on both programs created high
levels of scrap and large amounts of inefficient labor, which, along with
inadequate pricing, resulted in accrued losses in the production of these
components and a $1.1 million write-down of components not yet completed at year
end. The Company has presented this customer with a claim for certain of these
costs incurred and has requested re-pricing of several of the components to
provide an adequate return on future deliveries. However, because management
believes that the collection of this claim is not yet probable, no benefit of
this claim has been recorded in 2002. If the Company cannot come to an agreement
with this customer that is reasonably acceptable to the Company, the Company
will take other measures to avoid future losses including the return of the work
statement to its customer.

Additionally, the Sheet Metal segment experienced production difficulties with a
new corporate and regional aircraft program it received in 2002. The
difficulties resulted primarily from excessive amounts of scrap and problems
with a subcontractor critical to the production of these components. These
difficulties resulted in losses on completed product and accrued losses of $0.2
million

23

on components in process at year end. Subsequent to year end the Company
notified the customer of its intention to no longer manufacture these
components. The Company may agree to provide certain forming services for these
components at prices acceptable to the Company.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Sheet Metal segment incurred
selling, general, and administrative expenses ("SGA") of $11.3 million in 2002,
an increase from $9.2 million in 2001. The acquisition of Versaform and SSFF
added $2.0 million in SGA, primarily related to salaries, wages and professional
fees to support the integration of the acquired business. Excluding the
acquisitions, increased professional fees of $0.4 million in 2002 offset the
benefit of not amortizing goodwill under SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142")

GOODWILL IMPAIRMENT. The segment recorded an impairment charge of $5.1 million
to reflect the write off of goodwill as determined under SFAS No. 142. See Note
6 of the Consolidated Financial Statements included as part of this Annual
Report on Form 10-K and "Critical Accounting Estimates" set forth later in this
discussion for more information on the testing process and assumptions made by
the Company

INTEREST EXPENSE. The Sheet Metal segment incurred interest expenses of $0.6
million in 2002, up from $0.1 million in 2001, due to the $12.6 million in debt
incurred to finance the acquisition of Versaform and additional borrowing under
the Company's revolving line of credit made in order to fund working capital
needs.

THE MACHINING AND TECHNOLOGY SEGMENT

NET SALES. The Machining and Technology segment had net sales of $20.0 million
in 2002, up from $10.3 million in 2001. A portion of this increase was
attributable to the fact that 2001 sales only included nine months of activity
after the acquisition of Tempco in April 2001. The rest of the segment's growth
resulted from an increase in sales to both the technology and aerospace
industries.

Net sales to the technology industry were $12.7 million, of which $11.4 million
was for product used in excimer laser applications (57.1% of net sales) in 2002
compared to $5.0 million (48.5% of net sales) in 2001. This increase was
attributable to increased production demand and new product development orders
from its technology customers.

Net sales to the aerospace industry were $7.3 million. Products used in the
military market increased to $6.3 million (31.5% of net sales) for 2002 from
$3.5 million (34.0% of net sales). These sales primarily related to components
used on the Apache helicopter for Boeing and its prime subcontractors and
guidance systems for various military applications for Northrop. Net sales for
these programs were stronger in the first half of 2002 as the United States
military was involved in the conflict in Afghanistan, but moderated in the
second half of the year.

GROSS PROFIT. Gross profit for the Machining and Technology segment was $5.1
million (25.5% of net sales) in 2002, an increase from $2.1 million (20.4% of
net sales) in 2001. The additional volume and mix of work afforded better
coverage of fixed costs for the segment.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $1.6 million (8.0% of net sales) in 2002
from $1.0 million (9.7% of net sales) in 2001. This increase was primarily
attributable to the inclusion of only nine months of expenses in 2001 and
additional payroll of approximately $0.2 million for new management positions
created in 2002. As required by SFAS No. 142, the Company conducted an annual
impairment test of goodwill and ceased amortizing goodwill, a benefit of $0.3
million in 2002. See note 6 to the Consolidated Financial Statements included as
part of this Annual Report on Form 10-K.

24

INTEREST EXPENSE. In order to finance the purchase of Tempco, the Company
secured term debt in the amount of $14.3 million bearing a variable rate of
interest with a floor of 7% and a cap of 8.5%. Interest expense resulting from
this indebtedness was $0.9 million in 2002 compared to $0.8 million in 2001.
Only nine months of expense were recorded in 2001. Interest expense from 2001 to
2002 reduced slightly as interest rates have declined on this variable rate
debt.

NON-OPERATING EXPENSES

OTHER EXPENSE. Included in other, net is a charge of $0.6 million to write down
the value of available for sale securities. These securities have exposure to
the aerospace industry. The value of these securities declined as the overall
market declined after the events of September 11, 2001 and did not improve as
difficult conditions continued to plague the commercial aerospace industry.
Therefore, the Company determined the decline in value to be other than
temporary and recorded an adjustment to write off the carrying value of these
securities.

INCOME TAXES. The income tax benefit in 2002 was $0.7 million compared to an
expense of $1.8 million in 2001 due to operating losses. During 2002, the
Company's effective tax rate was 8.7% compared to 37.3% in 2001. The decrease in
effective tax rate is predominantly attributable to the impairment of
non-deductible goodwill recorded in 2002. See note 11 to the Consolidated
Financial Statements included as part of this Annual Report on Form 10-K for
further information on the Company's effective tax rate.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Effective January 1, 2002,
the Company adopted SFAS No. 142, under which goodwill will no longer be
amortized but instead be tested for impairment. The Company completed the
required transitional impairment test and recorded a $1,767 charge ($1,104 net
of tax for the impairment of the Sheet Metal segments goodwill as of January 1,
2002. See note 6 to the Consolidated Financial Statements included as part of
this Annual Report on Form 10-K for further information.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

THE SHEET METAL SEGMENT

NET SALES. Net sales for 2001 were $60.5 million, an increase of 8.6% from the
$55.7 million in 2000. In the commercial aircraft market, the segment generated
increases in net sales on all Boeing models that the segment supports. Net sales
for the 737 aircraft were $18.1 million (29.9% of net sales) in 2001, up from
$14.9 million (26.8% of net sales) in 2000. Net sales for the 747 aircraft were
$8.5 million (14.0% of net sales) in 2001, up from $7.0 million (12.6% of net
sales) in 2000. This growth in net sales was due to production rate increases at
Boeing.

Net sales to the corporate and regional aircraft market were $11.0 million
(18.2% of net sales) in 2001, down from $11.9 million (21.4% of net sales) in
2000. The Company's sales to this market reflected declines with Gulfstream and
Bombardier's Canadair and Learjet divisions. The Company experienced declines in
this market in the fourth quarter of 2001 as companies delayed shipments in the
aftermath of the events of September 11, 2001.

Net sales to the military market were $8.5 million (14.0% of net sales), up from
$6.1 million (11.0% of net sales) in 2001. New part awards and increased
production rates on existing components on the F-16 resulted in sales of $4.6
million (7.6% of net sales) in 2001, an increase from $2.6 million (4.7% of net
sales) in 2000.

GROSS PROFIT. The division's gross profit was $13.9 million (22.9% of net
sales), up from $7.4 million (13.3% of net sales). The segment increased gross
profit by improving efficiencies. The segment

25

increased net sales by $4.8 million while manufacturing labor and fringe costs
remained flat at $25.9 million in both 2001 and 2000. Additionally, the
increased revenue provided better coverage of fixed costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses of $9.2 million in 2001, unchanged from 2000, decreased
as a percent of sales due to higher sales volume.

THE MACHINING AND TECHNOLOGY SEGMENT

NET SALES. The segment did not exist prior to the acquisition of Tempco in April
2001 and therefore did not have operating results in 2000. Net sales were $10.3
million for the nine months of 2001 subsequent to the acquisition. Net sales of
technology components and assemblies for use in excimer laser applications were
$5.0 million (48.5% of net sales). The segment had net sales of $3.5 million to
the military market of the aerospace industry, principally for use in Boeing's
AH-64 Apache attack helicopter and various guidance products for Northrop.

GROSS PROFIT. Gross profit generated by this segment was $2.1 million (20.4% of
net sales).

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The segment had selling, general
and administrative expenses of $1.0 million in 2001. Significant expenses in
this category are goodwill amortization of $0.3 million, labor of $0.1 million
and professional services of $0.1 million.

INTEREST EXPENSE. Interest expense was $0.8 million in 2001 from a term loan
used to finance the purchase of Tempco Engineering.

NON-OPERATING EXPENSES

OTHER, NET. Other expense was $0.2 million during 2001, as compared to other
income of $0.2 million in 2000. This change of $400,000 resulted primarily from
a $0.3 million charge related to the Company's assessment that certain
investments treated as available for sale securities had declined in value on a
basis that was other than temporary. The value of these securities decreased as
the stock markets declined after the attacks of September 11, 2001. The value of
these securities did not recover in the fourth quarter and were therefore
written down to market value.

INCOME TAXES. The effective tax rate increased in 2001 to 37.3 % from 35% in
2000 due to a tax reserve of $0.1 million which offset the deferred tax benefit
generated by the write down of the investment in available for sale securities.

LIQUIDITY AND CAPITAL RESOURCES

The Company's operations used $2.1 million of cash in 2002. The Company
experienced a loss of $8.3 million, which included non-cash goodwill impairment
charges of $6.9 million, depreciation and amortization expenses of $4.4 million
and unrealized losses on available for sale securities of $0.6 million.
Excluding acquisitions, accounts receivable and inventories increased by a total
of $3.5 million. The state of the aerospace industry and the overall slowing of
the economy has caused several of the Company's customers to slow their payments
and purchasing patterns. In addition, inventory increased due to new programs
begun in the second half of 2002.

In April 2002, the Company settled a purchase price adjustment related to the
purchase of Tempco Engineering with the payment of $0.3 million in cash. In May
2002, the Company purchased Versaform and its affiliates for cash of $10.5
million and the issuance of a note payable of $1.3 million to the seller. The
$10.5 million was funded by a three year term note with the Company's primary
lender amortized

26

over seven years. The Company funded the acquisition of SFC of $0.8 million in
June 2002 by drawing down on its revolving line of credit. The Company purchased
SSFF in September 2002 for $0.1 million in cash and 90,000 shares of the
Company's common stock.

The Company purchased $2.3 million of property, plant and equipment during 2002.
These purchases were primarily for computerized milling equipment and the
creation of a web portal for communicating with the Company's customers and
suppliers.

The net losses experienced by the Company in the third and fourth quarters of
2002 primarily as a result of product issues associated with new work in the
St. Charles plant, caused the Company to violate certain restrictive financial
covenants in its bank credit agreement with its primary lender. Additionally,
subsequent to year end, the Company exhausted its available borrowings under its
revolving credit facility of $7.0 million, peaking at $7.5 million. The Company
provided forecasts of operations and cash flows to the bank and, in April 2003,
negotiated revised covenants, secured an increase in its revolving credit
facility to $10.0 million, subject to a borrowing base calculation, and extended
the maturity date of the revolving credit facility to January 5, 2004. As a part
of the negotiations, the bank also required an increase in the interest rate on
the revolving credit facility of 0.25%, restrictions on capital expenditures,
and a fee of $25,000. Additionally, the bank required the Company to retain a
financial consultant to work with management to analyze operations and cash
management. Independently, the Company has undertaken a plan to reduce operating
expenses at all facilities with primary emphasis on the St. Charles facility.
These immediate cost savings include reductions in overtime worked and
controllable expenses. As required by its amended credit facility, management,
in conjunction with the financial consultant, will submit to the bank by June
15, 2003, a plan for improving operating performance. This plan may include, but
is not limited to, headcount reductions, downsizing or closing of facilities,
and elimination of or reduction in specific customers or production processes.

Based on forecasted operating results and cash flows, management believes that
cash flow from operations and the expanded capacity under the Revolving Credit
Agreement, as described in Note 7 of the financial statements, will be adequate
to fund the Company's operations in 2003. The forecasted operating results and
cash flows are dependent on management's ability to improve performance in the
St. Charles plant and accomplish certain expected reductions in operating
expenses. While management believes this forecast is achievable, to the extent
that management does not improve operating performance and reduce expenses, the
Company may have to seek alternative sources of financing. There can be no
assurances that the Company can obtain alternative financing on reasonable and
acceptable terms.

CRITICAL ACCOUNTING POLICIES

Certain accounting issues require management estimates and judgements for the
preparation of financial statements. The Company believes that the estimates,
assumptions and judgments involved in the accounting policies described below
have the greatest potential impact on the Company's financial statements.
Therefore, the Company considers these to be its critical accounting estimates.
The Company's management has discussed the development and selection of these
critical accounting estimates with the Audit Committee of the Company's Board of
Directors and the Audit Committee has reviewed the Company's disclosure relating
to these estimates in the "Management Discussion and Analysis." The Company's
most significant estimates and judgements are listed below.

ACCOUNTS RECEIVABLE RESERVE. The Company evaluates the collectibility of its
accounts receivable based on a combination of factors, including historical
trends and industry and general economic conditions. In circumstances where the
Company is aware of a specific customer's inability to meet its financial
obligations (e.g., bankruptcy filings, substantial downgrading of credit
scores), a specific reserve for bad debts is recorded against amounts due to
reduce the net recognized receivable to the amount the Company reasonably
believes will be collected. The Company's evaluation also includes reserves for
billing adjustments, pricing changes, warranty claims and disputes. If
circumstances change (i.e., an unexpected material adverse change in a major
customer's ability to meet its financial obligations to the Company), estimates
of the recoverability of amounts due the Company could be reduced by a material
amount. The Company applies this policy to its acquired businesses and makes
adjustments to existing bad debt reserves based upon its evaluation.

As discussed in Note 1 to the consolidated financial statements, the Company
generates a significant portion of its revenues and corresponding accounts
receivable from sales to a limited number of customers in the aerospace and
technology industries. If these customers experience significant adverse
conditions in their industries or operations, including the continued impact of
the current downturn in

27

demand for aerospace and technology products, these customers may not be able to
meet their ongoing financial obligations to the Company for prior sales or
purchase additional products under the terms of existing contracts.

INVENTORY. The Company values its inventories at the lower of cost or market
using actual cost for raw materials and average cost for finished goods and
work in process. In assessing the ultimate realization of inventories, the
Company makes judgments as to future demand requirements based upon customer
orders in backlog, historical customer orders, customer and industry analyst
estimates of aircraft production rates, and other market data available to the
Company. Additionally, in the aviation industry, these future demand
requirements depend on estimates of aircraft lives and the need for spare parts
over the course of the aircraft life. The Company has recorded charges in recent
periods due to discontinuances of product lines, losses of customer contracts,
lack of order activity, or changes in expectations of future requirements.

The Company sells much of its product under fixed price arrangements.
Occasionally, costs of production may exceed the market values of certain
products and product families which require the Company to adjust its inventory
value. In these circumstances, management is required to make estimates of costs
not yet incurred to determine the ultimate cost of these products which are in
work in process. Changes in the assumptions and estimates of such factors as
expected scrap, costs of material, labor, and outside services; and the amount
of labor required to complete the products may result in actual results that
vary from management's estimates.

At times, the Company accepts new orders for products from its customers in
which actual production costs may differ from the Company's expectations when it
quoted the product. Additionally, customers may request engineering changes or
quality acceptance changes in products that may alter the cost of products
produced by the Company. In these circumstances, the Company notifies the
customer of these issues and seeks reimbursement for costs incurred over and
above the selling price of the products and re-pricing of the product on future
deliveries. The Company's inventory valuation considers the estimated recovery
of these costs. Actual negotiation of the claim amounts may result in outcomes
different from those estimated by the Company and may have material impacts upon
the operating results of the Company. During the fourth quarter of 2002,
significant cost over-runs were incurred on certain products for which the
Company submitted a claim to its customer. At year end, the Company could not
estimate the probable recovery of any amounts covered by this claim. Therefore,
excess inventory costs were written off and margins in 2002 were negatively
impacted. Subsequent recovery of this claim could have a material impact upon
future operating results of the Company

GOODWILL. In June 2001, the Financial Accounting Standards Board issued SFAS No.
142 which addresses financial accounting and reporting for acquired goodwill and
other intangible assets and was adopted by the Company effective January 1,
2002. The statement requires that goodwill not be amortized but instead be
tested at least annually for impairment and expensed to the extent the fair
value of a reporting unit, including goodwill, is less than its carrying amount.

The Company determined its operating segments to be its reporting units under
SFAS No. 142. The application of the transitional impairment test resulted in a
cumulative effect of a change in accounting principle of $1.8 million ($1.1
million net of tax) and the annual impairment test resulted in an impairment
charge of $5.1 million for the Sheet Metal Segment, as described in Note 6 of
the financial statements. The Company established the fair value of its
reporting units with the assistance of an outside expert that used Company
provided forecasts of operations by reporting unit, independent review of the
assumptions in these forecasts, evaluations of the carrying value of certain
assets and liabilities, and independent appraisals of the Company's fixed
assets. These forecasts required the Company to estimate future sales prices and
volumes of its reporting units. The Company used its internal budgets, customer
order backlog, historical customer ordering patterns, customer and industry
projections of demand and other market information as well as current cost of
production to estimate future cash flows. Actual results may vary significantly
from the Company's projections and may result in material adjustments to the
goodwill balance on the Company's financial statements.

28

SELF INSURED RESERVES. The Company provides health insurance for many of its
employees through an insurance arrangement that requires the Company to fund all
claims incurred up to certain limits. The Company purchases an insurance policy
to limit the amount of claims that it will be responsible to fund on any
specific claim as well as a policy that limits the total claims that the Company
would be responsible to fund in a specific plan year. Since time delays occur
between delivery of medical services and ultimate payment of these services, the
Company is required to estimate the incurred claims that have not yet been
settled by the administrator that adjusts these claims. The administrator of the
claims provides the Company information such as historical claim values, trends
in medical costs, and time lags between service dates and ultimate payment
dates. The Company uses this information to estimate the amount of claims that
may have been incurred but are not yet reported in order to establish a
liability on its financial statements.

Additionally, the Company provides workers' compensation insurance for certain
of its employees that requires the Company to pay for actual losses plus an
administrative fee for all claims and expenses incurred. The Company has
negotiated minimum and maximum amounts that it may be required to fund with its
insurance carrier. The Company is provided such information as claim losses,
estimated amounts that the insurance company feels will be required to settle
the claim, and estimates of time delay between injuries and notification of
injuries. The Company uses this information to estimate its liability under this
arrangement.

Actual claim experience under these insurance plans may vary from estimates made
by the Company and could have material impacts upon its financial statements.

RELATED PARTY TRANSACTIONS

In May of 2002, the Company acquired the outstanding capital stock of Versaform
Corporation, a California corporation, and the capital stock of its subsidiary,
541775 B.C., Ltd., a corporation incorporated in the Province of British
Columbia, Canada. At the time 541775 B.C., Ltd. owned all of the outstanding
capital stock of Versaform Canada Corporation, a corporation incorporated in the
Province of British Columbia, Canada. The Company has since consolidated 541775
B.C., Ltd. and Versaform Canada Corporation, with its own wholly-owned Canadian
subsidiary, LMIV Holding Ltd., a corporation incorporated in the Province of
British Columbia, Canada. All of the capital stock of Versaform was owned
directly by Brian Geary, an individual residing in the State of California. In
June of 2002, the Company appointed Mr. Geary to serve on its Board of
Directors. As part of the transaction pursuant to which it acquired Versaform,
the Company executed a non-negotiable, subordinated promissory note in favor of
Mr. Geary, in the principal amount of $1.3 million. This promissory note is
payable in thirty-six monthly installments beginning on July 1, 2002, and bears
interest at a rate of seven percent per annum. The note is secured by a pledge
of 65% of the Company's interest in its Canadian subsidiary, and pursuant to
such pledge, the Company's Canadian subsidiary is required to meet certain
financial and other restrictive covenants. Also as part of the transaction, the
Company is required to pay Mr. Geary additional consideration of up to five
percent of the Company's annual net sales exceeding $3 million received under
agreements between Versaform and Hamilton Sundstrand, a customer of Versaform.

In September 2002, the Company acquired from Mr. Geary the operations and
certain of the assets of the aerospace division of SSFF, an aerospace sheet
metal manufacturer based in Denton, Texas. The Company paid Mr. Geary
consideration consisting of 90,000 shares of the Company's Common Stock for
machinery and equipment, issued pursuant to a private placement conforming with
the safe harbor provisions of Rule 506 of Regulations D promulgated under the
Securities Act of 1933, as amended, $115,000 cash for all inventories.

The Company negotiated each of the above transactions on an arms-length basis.
Although Mr. Geary

29

was not a director at the time of the Company's acquisition of Versaform, the
Company received an opinion from George K. Baum & Company stating that the
Company's acquisition of Versaform was fair from a financial point of view to
the holder's of the Company's common stock. Because the Company's acquisition of
SSFF occurred following Mr. Geary's appointment to the Company's Board of
Directors, and because of the potential conflict of interest created by the
Company's acquisition of assets from Mr. Geary, the Company's audit committee
reviewed the following specific factors relating to the Company's acquisition of
SSFF:

o whether or not the potential conflict of interest arising from
the Company's proposed transaction with SSFF and indirectly
with Mr. Geary had been fully disclosed and revealed to the
Audit Committee;

o whether or not the proposed transaction had been negotiated at
arm's length;

o whether or not Mr. Geary had participated in the negotiation
of the proposed transaction on behalf of the Company; and

o whether or not the terms of the proposed transaction were fair
to the Company and its shareholders.

After full discussion and deliberation of these factors, the members of the
Company's Audit Committee unanimously determined that all relevant facts
regarding a potential conflict of interest had been fully disclosed to the Audit
Committee, that the terms of the proposed transaction were fair and in the best
interests of the Company and its shareholders, and that the transaction had been
negotiated at arm's length, without participation by or influence of Mr. Geary
with respect to the Company's interest.

The Company leases its facility located at 11011-11021 Olinda Street in Sun
Valley, California from multiple landlords, one of whom is a trust for the
benefit of Ernest L. Star, the father of Ernest R. Star, an officer of the
Company. Ernest R. Star is a co-trustee of this trust. Pursuant to the terms of
the applicable lease agreement, the Company pays the owners of this property
aggregate annual rent payments of $141,427 for the lease of a facility with
square footage of 20,320. In addition, the Company leases property located at
8866 Laurel Canyon Blvd. in Sun Valley, California from Starwood Company, a
company beneficially owned in part by Ernest L. Star. Pursuant to the terms of
the applicable lease agreement, the Company pays Starwood Company aggregate
annual rent of $172,920 for the lease of a facility having a square footage of
26,200. The leases governing the Company's occupancy of the above described
properties were entered into at the time of the Company's acquisition of Tempco
Engineering. Both leases were negotiated on an arms-length basis, prior to the
time that Ernest R. Star became an officer of the Company.

The Company leases property located at 1315 S. Cleveland Street in Oceanside,
California from Edward D. Geary, the father of Brian Geary, a member of the
Company's Board of Directors. Pursuant to the applicable lease arrangement, the
Company pays Edward D. Geary annual aggregate rent payments of $86,400 for the
lease of a facility with a square footage of 19,000. This lease was assumed by
the Company as part of its acquisition of Versaform Corporation.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risk primarily due to fluctuation in interest
rates. The Company does not utilize any particular strategy or instruments to
manage its interest rate risk.

30

The Company's outstanding credit facility carries an interest rate that varies
in accordance with LIBOR. The Company is subject to potential fluctuations in
its debt service as LIBOR changes. Based on the amount of the Company's
outstanding debt as of the end of the 2002 fiscal year, a hypothetical 1% change
in the interest rate of the Company's outstanding credit facility would result
in a change in the Company's annual interest expense of approximately $0.2
million during the next fiscal year.

The Company's potential exposure to interest rate market risk increased during
the 2002 fiscal year due to the Company's increased borrowings under its
outstanding credit facility. On May 16, 2002, the Company incurred an additional
$11 million of debt as part of a term loan borrowed under its current credit
facility. These funds were used by the Company to acquire Versaform Corporation,
and its affiliated entities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The following financial statements are included in Item 8 of this report:

31

Report of Independent Auditors

The Board of Directors and Stockholders
LMI Aerospace, Inc.

We have audited the accompanying consolidated balance sheets of LMI Aerospace,
Inc. (the "Company") as of December 31, 2001 and 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted
in the United States. 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 LMI Aerospace,
Inc. at December 31, 2001 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.

As described in Note 1 to the financial statements, in 2000 the Company changed
its method of accounting for revenue recognition and in 2002 the Company changed
its method of accounting for goodwill.

/s/ Ernst & Young LLP

St. Louis, Missouri
April 15, 2003

32

LMI Aerospace, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)

See accompanying notes

33

LMI Aerospace, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share data)

See accompanying notes.

34

LMI Aerospace, Inc.
Consolidated Statements of Stockholders' Equity
(Amounts in thousands, except share and per share data)

See accompanying notes.

35

LMI Aerospace, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)

See accompanying notes.

36

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

1. ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

LMI Aerospace, Inc. (the "Company") fabricates, machines, and integrates formed,
close tolerance aluminum and specialty alloy components for use by the
aerospace, semiconductor and medical products industries. The Company is a
Missouri corporation with headquarters in St. Charles, Missouri. The Company
maintains facilities in St. Charles, Missouri; Seattle, Washington; Tulsa,
Oklahoma; Wichita, Kansas; Irving, Texas; Sun Valley, California; Oceanside,
California; and Langley, British Columbia.

The accompanying financial statements include the consolidated financial
position, results of operations, and cash flows of the Company and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.

OPERATING RESULTS AND MANAGEMENT'S PLAN

The Company experienced net losses in the third and fourth quarters of 2002
primarily as a result of product issues associated with new work in the St.
Charles plant which caused the Company to violate certain restrictive financial
covenants in its bank credit agreement with its primary lender as of December
31, 2002. Additionally, subsequent to year end, the Company exhausted its
available borrowings under its revolving credit facility of $7.0 million,
peaking at $7.5 million. The Company provided forecasts of operations and cash
flows to the bank and, in April 2003, negotiated revised covenants, secured an
increase in its revolving credit facility to $10.0 million, subject to a
borrowing base calculation, and extended the maturity date of the revolving
credit facility to January 5, 2004. As a part of the negotiations, the bank also
required an increase in the interest rate on the revolving credit facility of
0.25%, restrictions on capital expenditures, and a fee of $25,000. Additionally,
the bank required the Company to retain a financial consultant to work with
management to analyze operations and cash management. Independently, the Company
has undertaken a plan to reduce operating expenses at all facilities with
primary emphasis on the St. Charles facility. These immediate cost savings
include reductions in overtime worked and controllable expenses. This plan may
include, but is not limited to, headcount reductions, downsizing or closing of
facilities, and elimination of or reduction in specific customers or production
processes.

Based on forecasted operating results and cash flows, management believes that
cash flow from operations and the expanded capacity under the Revolving Credit
Agreement, as described in Note 7, will be adequate to fund the Company's
operations in 2003. The forecasted operating results and cash flows are
dependent upon management's ability to improve performance in the St. Charles
plant and accomplish certain expected reductions in operating expenses. While
management believes this forecast is achievable, to the extent that management
does not improve operating performance and reduce expenses, the Company may have
to seek alternative sources of financing. There can be no assurances that the
Company can obtain alternative financing on reasonable and acceptable terms.

CUSTOMER AND SUPPLIER CONCENTRATION

Direct sales to the Company's largest customer accounted for 48.0%, 40.0%, and
25.4% of the Company's total revenues in 2000, 2001 and 2002, respectively.
Accounts receivable balances related to direct sales to this customer were 29.0%
in 2001 and 7.8% in 2002. Indirect sales to the Company's largest customer
accounted for 13.0%, 11.0%, and 8.7% of the Company's total sales in 2000, 2001,
and 2002, respectively.

Direct sales to the Company's second largest customer accounted for 10.4%, 4.6%
and 17.5% of the Company's total revenues in 2000, 2001 and 2002 and represented
3.1% and 21.1% of the accounts receivable balance at December 31, 2001 and 2002,
respectively.

The Company purchased approximately 63% and 34% of the materials used in
production from three suppliers in 2001 and 2002, respectively.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions. These estimates and assumptions affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand, amounts due from banks, and all
highly liquid investment instruments with an initial maturity of three months or
less.

37

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

INVENTORIES

Inventories are stated at the lower of cost or market using actual cost for raw
materials and average cost for work-in-process and finished goods.

REVENUE RECOGNITION

Revenues are recorded when services are delivered or when products are shipped,
except for long-term contracts which are recorded on the
percentage-of-completion method (units-of-delivery basis). Sales from long-term
contracts were approximately 17% of sales in 2000, less than 10% in 2001, and
zero in 2002.

In the fourth quarter of 2000, the Company changed its method of accounting for
revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. Previously, the Company recognized
revenue on certain product prior to customer acceptance. The Company had
performed testing to ensure the product met customer specifications and had
routinely obtained customer acceptance in the past, but customer acceptance was
required per the Company's contract with the customer. Under the new accounting
method adopted retroactive to January 1, 2000, the Company now recognizes
revenue upon customer acceptance. The cumulative effect of the change on prior
years resulted in a charge to income of $164, net of income tax benefit of $88,
which is included in income for the year ended December 31, 2000. The effect of
the change on the year ended December 31, 2000 was to increase income before the
cumulative effect of the accounting change by $89 ($.01 per share). Pro forma
results for prior years are not disclosed due to immateriality.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant and equipment are stated at cost. Equipment under capital leases
is stated at the present value of the minimum lease payments. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
related assets. Equipment held under capital leases and leasehold improvements
are amortized using the straight-line method over the shorter of the lease term
or estimated useful life of the asset. Estimated useful lives for buildings and
machinery and equipment are 20 years and 4 to 10 years, respectively.

LONG-LIVED ASSETS

In accordance with Statement of Financial Accounting Standard (SFAS) No. 144,
Accounting for the impairment or Disposal of Long Lived Assets, long lived
assets held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable.

38

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

PRE-PRODUCTION COSTS

The Company accounts for pre-production costs in accordance with (EITF) 99-5,
Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements.
All design and development costs for products to be sold under long-term supply
arrangements are expensed unless there is a contractual guarantee that provides
for specific required payments for design and development costs.

GOODWILL AND INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, under which goodwill will no longer be amortized but instead
be tested upon adoption of the Statement and then at least annually for
impairment and expensed to the extent the implied fair value of reporting units,
including goodwill, is less than carrying value (see Note 6). Acquired
intangible assets with finite lives are amortized over the useful life on a
straight line basis.

INCOME TAXES

Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement and
income tax basis of the Company's assets and liabilities.

39

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

STOCK-BASED COMPENSATION

The Company accounts for its stock based compensation in accordance with
Accounting Principles Board (APB) Opinion No. 25 and related interpretations and
provides the pro forma disclosure provisions of SFAS No. 123. The Company
applied APB Opinion No. 25 in accounting for its stock option plans, and
accordingly, no compensation cost has been recognized for stock options granted
at fair market value. Had the Company determined compensation cost based on the
fair value at the grant date under SFAS No. 123, net income and earnings per
share amounts would have been as follows:

FINANCIAL INSTRUMENTS

Fair values of the Company's long-term obligations approximate their carrying
values based on discounted cash flow analysis.

Available-for-sale securities are stated at fair value based on quoted market
prices, with the unrealized gains and losses, net of tax, reported in other
comprehensive income/loss. Realized gains and losses and declines in value
determined to be other-than-temporary on available-for-sale securities are
included in investment income. The cost of securities sold is based on the
average cost method. Interest and dividends on securities classified as
available-for-sale are included in other income.

The Company's other financial instruments have fair values which approximate
their respective carrying values due to their short maturities or variable rate
characteristics.

EARNINGS PER COMMON SHARE

The Company follows SFAS No. 128, Earnings per Share, in calculating basic and
fully diluted earnings per share. Earnings per share are computed by dividing
net income by the weighted average number of common shares outstanding during
the applicable periods.

40

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

2. ACQUISITIONS

TEMPCO ENGINEERING

On April 2, 2001, the Company acquired certain assets of Tempco Engineering,
Inc. and Hyco Precision, Inc. ("Tempco"), two privately held related metal
machining companies based in Southern California, funded by a secured note with
the Company's lender. The acquisition has been accounted for under the purchase
method, and accordingly, the results of operations were included in the
Company's financial statements from the date of acquisition. Tempco produces
components for photolithography equipment used in the manufacture of
semiconductors, as well as components for the defense and commercial aerospace
industries. Tempco's sales were approximately $16,000 in 2000. The purchase
price for the net assets acquired, net of acquired cash, was approximately
$15,200. The Company may pay additional contingent consideration of up to $1,250
if Tempco's EBITDA, as defined, exceeds certain limits for the two years ended
March 31, 2003. At December 31, 2002 Tempco had not and does not expect to meet
the financial thresholds that would obligate the Company to pay additional
consideration at the end of the contingency period, March 31, 2003. The excess
of the purchase price over the fair value of net assets acquired, $5,943, was
allocated to goodwill.

VERSAFORM

On May 16, 2002, the Company acquired all of the outstanding stock of Versaform
Corporation and BC 541775, Ltd., a holding company that owns 100% of the common
stock of Versaform Canada Corporation (collectively, "Versaform") for
approximately $11,787 consisting of cash and a note payable of $ 1.3 million.
Versaform forms large sheet metal and extrusion components predominantly for the
corporate, regional, and military aerospace markets from two facilities in
Oceanside, California and one facility in Langley, British Columbia, Canada.

The acquisition was accounted for as a purchase business combination, and
accordingly, the results of operations were included in the Company's financial
statements after May 16, 2002. The cost to acquire Versaform has been allocated
to the assets acquired and liabilities assumed according to their estimated fair
values at the time of the acquisition as follows:

Working capital $ 400
Property, plant, and equipment 3,179
Assumed long-term liabilities (871)
Customer-related intangible 3,975
Goodwill (nondeductible) 5,104
----------
$ 11,787
==========

The intangible asset relates to acquired customer relationships and is being
amortized over 15 years on a straight line basis. Based on the terms of the
purchase agreement, the Company is obligated to pay additional consideration if
sales to a specific customer exceed certain annual

41

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

thresholds over the three years following the acquisition. As of December 31,
2002, sales to the specific customer did not meet these thresholds and is not
expected to meet the thresholds for the remainder of the three year contingency
period. The purchase agreement allows for certain adjustments to the purchase
price for claims in excess of $100. The Company has filed a claim for
reimbursement of certain liabilities existing at the closing date and has
recorded a receivable from the seller of $196. The Company expects to resolve
the purchase price adjustment in the second quarter of 2003. Versaform's sales
were approximately $12,000 in 2001.

SOUTHERN STRETCH FORMING AND FABRICATION, INC.

On September 30, 2002, the Company acquired certain assets and assumed certain
liabilities of Southern Stretch Forming and Fabrication, Inc. ("SSFF"). The
former owner of Versaform, currently a director of the Company, held a 50%
interest in SSFF. Following the Company's acquisition of Versaform, the director
purchased the remaining 50% interest in SSFF and sold SSFF to the Company. (See
related party transactions at Note 12) The assets consisted primarily of
inventory, machinery and equipment. The acquisition was accounted for as a
purchase business combination, and accordingly, the related results of
operations have been included in the consolidated statement of operations after
September 30, 2002. The purchase price of $444, which includes the assumption of
debt and direct costs of the transaction, consisted of $235 in cash and 90,000
shares of LMI common stock, with a market value of $209.

The cost to acquire these assets has been allocated to the assets according to
their fair values and consisted of inventory of $115, and equipment and
machinery of $718, and assumed liabilities of $389. Net sales for SSFF for 2001
were approximately $3,820, of which approximately $1,739 were to the Company.

STRETCH FORMING CORPORATION

On June 12, 2002, the Company acquired certain assets of Stretch Forming
Corporation ("SFC"), based in Southern California. The purchase price of $950
was allocated to the assets acquired based on their fair value and consisted of
working capital of $465, equipment of $66, and an intangible asset of $419
related to production backlog, to be amortized over 3.5 years on a straight line
basis.

3. TREASURY STOCK TRANSACTIONS

The Board of Directors authorized the Company to repurchase shares of its common
stock and place these shares in a Treasury Stock account for use at management's
discretion. The Company purchased 119,000 shares and 1,900 shares in 2001 and
2002, respectively, in the open market at prices ranging from $4.48 to $2.00 per
share. In addition, the Company issued 30,928 shares in 2001 and 32,690 shares
in 2002 in conjunction with contributions to and purchases by the Company's
benefit plans. These transactions were recorded at cost in stockholders' equity.
A portion of the consideration for SSFF consisted of 90,000 shares of treasury
stock recorded at fair value.

42

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

4. INVENTORIES

Inventories consist of the following:

During the third and fourth quarter of 2002, the Company encountered production
difficulties and inefficiencies on new programs with two significant customers
due to several factors including inadequate tooling, poor performance of a
critical subcontractor, and changes in customer acceptance criteria. At December
31, 2002, the Company recorded a lower of cost or market reserve of $1,957 on
work in process primarily related to these programs of which approximately $696
relates to completion costs to be incurred in 2003.

The Company has presented claims for certain costs incurred and has requested
re-pricing of several components. As the claim has not been accepted or approved
by the customer, no claim recovery has been recorded in the December 31, 2002
financial statement.

5. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consist of the following:

Depreciation expense (including amortization expense on software) recorded by
the Company totaled $3,216, $3,730, and $4,284 for 2000, 2001 and 2002,
respectively.

43

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

6. GOODWILL AND INTANGIBLES

As required by SFAS No. 142, the Company performed the initial phase of its
transitional impairment test as of January 1, 2002 during the first six months
following adoption and determined that its operating segments constitute
reporting units. Additionally, the Company determined that the carrying value of
its Sheet Metal segment exceeded its fair value.

The initial phase of the transitional test indicated potential impairment of the
Sheet Metal segment's goodwill with a carrying value of $1,767 reflecting the
current industry conditions and estimates of aerospace industry spending in the
foreseeable future. The Company engaged valuation experts to assist in
performing a review of the fair value of the Sheet Metal segment's tangible and
intangible assets, including goodwill, as of January 1, 2002. Based upon the
valuation completed in the fourth quarter of 2002, relying primarily on a
discounted cash flow valuation technique, the Company recorded a $1,767 charge
($1,104 net of tax) for the impairment of the Sheet Metal segment's goodwill.
The charge is reflected as the cumulative effect of adopting the new accounting
standard as of January 1, 2002.

In the fourth quarter 2002, the Company performed the required annual impairment
test under SFAS No. 142. The initial phase of the required annual test indicated
potential impairment of the Sheet Metal segment's goodwill with a carrying value
of $5,104, all of which related to the May 2002 acquisition of Versaform. These
impairment indicators arose from poor operating performance at the other
operations in the Sheet Metal segment reflecting further deterioration in the
industry conditions and estimates of aerospace industry spending in the
foreseeable future. The Company engaged valuation experts to assist in
performing a review of the fair value of the Sheet Metal segment's tangible and
intangible assets, including goodwill, as of October 1, 2002. Based upon the
valuation, relying primarily on a discounted cash flow valuation technique, the
Company recorded a $5,104 charge as a component of operating income in the
fourth quarter of 2002.

The changes in the carrying amount of goodwill for the fiscal years ended 2000,
2001, and 2002 were as follows:

Goodwill at December 31, 2002 relates to the Machining and Technology segment.

44

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

The changes in the carrying amount of customer related intangibles for the year
ended December 31, 2002 were as follows (There were no customers related
intangibles prior to 2002):

Prior to the adoption of SFAS No. 142, amortization expense was recorded for
goodwill. The following table sets forth a reconciliation of net income and
earnings per share information for fiscal years 2000 and 2001 adjusted for
non-amortization provisions of SFAS No. 142.

45

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

7. LONG-TERM DEBT

Long-term debt consists of the following:

The Company has a loan agreement ("Loan Agreement") with Union Planters Bank,
NA. The Loan Agreement consists of a revolving line of credit ("Revolver"), a
term loan to finance the purchase of Tempco ("Tempco Term Loan"), and a term
loan to finance the purchase of Versaform ("Versaform Term Loan"). The Company's
Loan Agreement is secured by all the domestic assets of the Company and requires
compliance with certain non-financial and financial covenants including minimum
levels of EBITDA and tangible net worth.

At December 31, 2002, the Company was in violation of certain financial
covenants of the Loan Agreement, due to the operating losses and negative cash
flow from operations in 2002 (See Note 1). On April 15, 2003, the Company
obtained a waiver of the December 31, 2002 violations and an amendment to the
Loan Agreement from its lender. The amended Loan Agreement extends the maturity
of the line of credit to January 2004, increases the capacity under the line of
credit by $3 million and eased the quarterly financial covenant requirements
through December 31, 2003.

The Company's amended Revolver allows for a $10,000 line of credit, subject to a
borrowing base calculation, to fund various corporate needs. Interest is payable
with an interest rate of 3.6% monthly based on a quarterly cash flow leverage
calculation and the LIBOR rate. This facility matures in January 2004. The
credit facility prohibits the payment of cash dividends on common stock without
the prior written consent of Union Planters. The Company had $4,417 outstanding
on this line at December 31, 2002.

The Company drew $14,250 on the Tempco Term Loan on April 2, 2001. The Tempco
Term Loan requires monthly principal and interest payments over three years
using a seven year amortization and bears interest at ninety day LIBOR plus 3%,
subject to a cap of 8.5% and a floor of 7.0%. The interest rate was 7.0% at
December 31, 2002. Under the Loan Agreement, the Company has $1,250 available to
fund any additional contingent consideration which may be required under the
terms of the Tempco acquisition (see Note 2).

46

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

The Versaform Term Loan was issued for $11,000 on May 15, 2002. The Versaform
Term Loan requires monthly principal and interest payments over three years
using a seven year amortization and bears interest at the ninety day LIBOR plus
3%. The interest rate was 4.4% at December 31, 2002.

The Company entered into a note payable for $1,300 with the prior owner of
Versaform in connection with the acquisition. The prior owner has since become a
member of the board of directors of the Company. This note is payable monthly
over three years and bears interest at 7.0%. This note is secured by 65% of the
stock of the Company's Canadian subsidiary.

The Company entered into various notes payable for the purchase of certain
equipment. The notes are payable in monthly installments including interest
ranging from 6.99% - 10.0% through November 2006. The notes payable are secured
by equipment.

The Company entered into capital lease agreements for the purchase of certain
equipment. The leases are payable in monthly installments including interest
ranging from 4.98% - 9.15% through August 2005.

The aggregate maturities of long-term debt as of December 31, 2002 are as
follows:

47

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

8. LEASES

The Company leases certain facilities and equipment under various noncancelable
operating lease agreements which expire at various dates through 2009. At
December 31, 2002, the future minimum lease payments under operating leases with
initial noncancelable terms in excess of one year are as follows:

Rent expense totaled $1,044, $1,354, and $2,107 in 2000, 2001, and 2002
respectively.

9. DEFINED CONTRIBUTION PLANS

The Company has a noncontributory profit sharing plan and a contributory 401(k)
plan which covers substantially all full-time employees. Employees are eligible
to participate in both plans after reaching 1,000 hours of accredited service.
Contributions to the profit sharing plan are at the discretion of management and
become fully vested after seven years. Contributions by the Company to the
profit sharing plan totaled $105, $121 and $0 for 2000, 2001 and 2002
respectively. Contributions by the Company to the 401(k) plan, which are fully
vested to the employees immediately upon contribution, are based upon a
percentage of employee contributions. The Company's contributions to the 401(k)
plan totaled $88, $86 and $229 for 2000, 2001, and 2002 respectively. In
addition, at December 31, 2002, the Company had 600,000 common shares of its
stock reserved for contributions to the 401(k) plan.

48

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

10. STOCK OPTIONS

The Company's 1998 Employee Stock Option Plan provides options for up to 900,000
shares to be granted to key employees at exercise prices greater than or equal
to the fair market value per share on the date the option is granted. Options
issued under the Plan are at the discretion of management and may be in the form
of Incentive Stock Options or Non-Qualified Stock Options. Vesting periods may
apply.

At December 31, 2002, a total of 1,157,822 shares of authorized and unissued
common stock were reserved for issuance of stock awards and options granted or
authorized to be granted.

The number of options exercisable and the related range of exercise prices
December 31, 2000, 2001, and 2002 were 213,885 shares, with a range of exercise
prices from $2.75 to $6.25, 276,170 shares, with a range of exercise prices from
$2.00 to $5.93, and, 404,200 shares, with a range of exercise prices from $2.00
to $6.06, respectively.

The fair value for options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2000, 2001 and 2002, respectively: risk-free interest rates of
5.1%, 4.78% and 3.36%; dividend yields of 0%, 0% and 0%; volatility factors of
the expected market price of the Company's common stock of 57%; 104%, and 83%
and a weighted average expected life of the option of four years for 2000 and
six years for 2001 and 2002. The weighted average fair value of options granted
during 2000, 2001 and 2002 was $1.46, $1.96 and $3.40, respectively

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

49

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

11. INCOME TAXES

The temporary differences between the tax basis of assets and liabilities and
their financial reporting amounts that give rise to the deferred tax assets and
liabilities are as follows:

50

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

The Company's income tax provision (benefit) attributable to income before
income taxes and cumulative effect of change in accounting principle consisted
of the following for the year ended December 31:

The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense attributable to income before cumulative effect of
change in accounting principle is as follows:

12. RELATED PARTY TRANSACTIONS

The Company has entered into certain acquisition transactions with Brian Geary,
a member of the Company's Board of Directors, related to his former ownership of
Versaform and SSFF (See Note 2 for further description of these acquisitions).
As a part of the acquisition of Versaform, the consideration included a note
payable of $1.3 million to Mr. Geary which bears interest at 7% and is payable
in monthly installments through May 2005. In addition, a relative of Mr. Geary
retained ownership of a building and property where Versaform operates and
leases the facility to the Company for approximately $86 per year.

Prior to appointment as a Director of the Company, Mr. Geary owned 50% of SSFF.
Subsequently, Mr. Geary purchased the remaining 50% of SSFF and sold the entity
to the Company. Prior to approving the purchase of

51

SSFF, the Company's Audit Committee, at the request of the Board of Directors,
considered the potential conflict of interest regarding the acquisition of SSFF.
The Audit Committee concluded that the above transaction was negotiated on an
arms length basis, consummated on terms generally similar to those prevailing
with unrelated third parties, and were fair and in the best interest of the
Company and its shareholders.

The Company leases the two Tempco operating facilities from entities in which a
relative of Ernest Star, an officer of the Company, is a principal beneficiary.
In addition, Ernest Star is a trustee of a trust that serves as a landlord for
one of these leases. The leases governing the Company's occupancy of these
facilities were entered into at the time of the Tempco acquisition, prior to Mr.
Star's appointment as an officer, and were negotiated on an arms length basis at
terms generally similar to those prevailing with unrelated third parties.

13. COMMITMENTS AND CONTINGENCIES

The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position.

14. BUSINESS SEGMENT INFORMATION

As set forth in the criteria of statement of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, the Company is organized into
two reportable segments: Sheet Metal and Machining and Technology. The Sheet
Metal segment fabricates, finishes, and integrates close tolerance aluminum and
specialty alloy components primarily for the aerospace industry. The Machining
and Technology segment machines close tolerance aluminum and specialty alloy
components for the aerospace, semiconductor, and medical products industries.

The segments presented for the year ended December 31, 2002 differ from the
segments previously presented. For the year ended December 31, 2001 and prior,
the Company reported as one segment as it intended to fully integrate the
Machining and Technology business acquired in 2001 into its existing Sheet Metal
business. During 2002, operating activity of Machining and Technology evolved
and integration has been limited due to the significant growth in non-aerospace
business, which grew to over 50% of segment revenue in 2002. During 2002,
the Company determined that its Machining and Technology met the definition of a
reportable segment in accordance with SFAS No. 131 given its management
reporting structure and differences in products and customers. Prior period
reporting has been restated to conform to the new segment reporting.

52

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

The accounting policies of the segments are the same as those described in Note
1. Sales between segments are insignificant. Corporate assets, liabilities, and
expenses related to the Company's corporate offices are allocated to the
segments, except for income taxes and certain corporate office fixed assets and
enterprise wide software. The table below presents information about reported
segments for years ended December 31, on the basis used internally to evaluate
segment performance (Machining and Technology are presented beginning April,
2001, the date of acquisition):

53

LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2002

15. QUARTERLY FINANCIAL DATA (UNAUDITED)

(1) First quarter 2002 results have been restated to reflect the cumulative
effect of change in accounting principle related to the adoption of SFAS No. 142

54

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

55

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.

The information contained under the caption "Information About the Nominees and
Current Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"
in the Company's definitive proxy statement to be filed pursuant to Regulation
14A for the Company's 2003 Annual Meeting of Shareholders, which involves the
election of directors, is incorporated herein by this reference. Also see item
4(a) of Part I hereof.

ITEM 11. EXECUTIVE COMPENSATION.

The information contained under the captions "Directors Compensation,"
"Executive Compensation," "Option/SAR Grants in Last Fiscal Year," "Aggregated
Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option SAR Values,"
"Employment Arrangements with Named Officers", and "Compensation Committee
Report" in the Company's definitive proxy statement to be filed pursuant to
Regulation 14A for the Company's 2003 Annual Meeting of Shareholders, which
involves the election of directors, is incorporated herein by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information contained under the caption "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A for the
Company's 2003 Annual Meeting of Shareholders, which involves the election of
directors, is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information contained under the caption "Certain Transactions" in the
Company's definitive proxy statement to be filed pursuant to Regulation 14A for
the Company's 2003 Annual Meeting of Shareholders, which involves the election
of directors, is incorporated herein by this reference.

ITEM 14. CONTROLS AND PROCEDURES.

Within the 90 day period prior to the filing date of this report, the Company's
Chief Executive Officer and Chief Financial Officer carried out an evaluation
with the participation of other members of management as they deemed
appropriate, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934). Based upon and as of
the date of that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in all material respects in ensuring that material information
required to be disclosed in the periodic reports the Company files with the
Securities and Exchange Commission is recorded, processed, summarized and
reported in a timely manner.

56

Prior to and during this evaluation, certain significant deficiencies in
internal controls existed related to the accounting for inventory that could
adversely affect the Company's ability to record, process, summarize, and report
financial information. These deficiencies relate primarily to the decentralized
nature of accounting for inventory, including:

o Limited information technology resources for valuation,

o Insufficient review of inventory accounts, and

o Inconsistent application of accounting policies and related
controls by operating units.

The following actions have been taken to correct the deficiencies in internal
controls noted above:

o The Company has initiated a project to examine its inventory
policies, document controls and procedures in a written
manual, and conform practices at all of its operating units.
This project will be incorporated into the analysis of
internal controls as established under Sarbanes Oxley Section
404.

o Corporate oversight of the controls and procedures in place
over inventory has been increased and staffing will be added.

o Management has completed the necessary account analysis and
review prior to finalizing inventory valuation in its
December 31, 2002 financial statements.

Management, including Chief Executive Officer and Chief Financial Officer,
believe the results of the corrective actions initiated by the Company outlined
above will be effective in addressing the significant deficiencies in internal
controls over inventory.

Subsequent to the date of the evaluation, the Company's Chief Executive Officer
and Chief Financial Officer have concluded that there were no significant
changes in internal controls or in other factors that could significantly affect
its internal controls, including corrective actions with regard to the
significant deficiencies noted above.

57

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) 1. For a list of the Consolidated Financial Statements of the
Company included as part of this report, see the index at Item
8.

2. All schedules have been omitted as the required information is
not present in sufficient amounts or the required information
is included elsewhere in the Consolidated Financial Statement
or notes thereto.

3. Exhibits:

See Exhibit Index (each management contract or
compensatory plan or arrangement listed therein is
identified).

(b) Reports on Form 8-K:

(i) On November 14, 2002, the Company filed a Report on
Form 8-K announcing third quarter results.

(ii) On October 2, 2002, the Company filed a Report on
Form 8-K announcing the acquisitions of the Aerospace
Operations of Southern Stretch Forming and
Fabrication, Inc.

(c) Exhibits:

See Exhibit Index

(d) All schedules have been omitted as the required information is
not present in sufficient amounts or the required information
is included elsewhere in the Consolidated Financial Statement
or notes thereto.

58

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the County of St.
Charles and State of Missouri on the 15th day of April, 2003.

LMI AEROSPACE, INC.

By: /s/ Ronald S. Saks
-----------------------------------------
Ronald S. Saks
President and Chief 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 registrant and
in the capacities and on the dates indicated.

59

CERTIFICATIONS

I, Ronald S. Saks, certify that:

1. I have reviewed this annual report on Form 10-K of LMI Aerospace,
Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: April 15, 2003 /s/ Ronald S. Saks
-------------------------------------
Ronald S. Saks
Chief Executive Officer and President

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CERTIFICATIONS

I, Lawrence E. Dickinson, certify that:

1. I have reviewed this annual report on Form 10-K of LMI Aerospace,
Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: April 15, 2003 /s/ Lawrence E. Dickinson
-------------------------------------
Lawrence E. Dickinson
Chief Financial Officer and Secretary

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EXHIBIT INDEX

62

10.7 Loan Agreement between the Registrant and Magna Bank, N.A.
dated August 15, 1996, including amendments nos. 1 through 3,
previously filed as Exhibit 10.13 to the Form S-1 and
incorporated herein by reference.

10.8 Indenture of Trust and Loan Agreement, both with the
Industrial Development Authority of St. Charles County,
Missouri and dated as of September 1, 1990 previously filed as
Exhibit 10.14 to the Form S-1 and incorporated herein by
reference.

10.9 General Terms Agreement, Special Terms Agreement and Warranty
Agreements, between the Registrant and Boeing Seattle
previously filed as Exhibit 10.15 to the Form S-1 and
incorporated herein by reference.

10.10 Form of Master Order Agreement covering Boeing 777 and 747
Programs and Master Order Agreement covering Boeing 737
Leading Edge Program, both between the Registrant and Boeing
North American, previously filed as Exhibit 10.16 to the Form
S-1 and incorporated herein by reference.

10.11 Form of Contract between the Registrant and Boeing Wichita
previously filed as Exhibit 10.17 to the Form S-1 and
incorporated herein by reference.

10.12 General Conditions (Fixed Price - Non-Governmental) for the
G-14/F100 Program, General Conditions for the Wing Stub/Lower
45 Program Boeing Model 767 Commercial Aircraft and Form of
Master Agreement, all with Vought previously filed as Exhibit
10.18 to the Form S-1 and incorporated herein by reference.

10.13+ Amended and Restated 1998 Stock Option Plan, previously filed
as Exhibit 10.37 to the Registrant's Form S-8 (File No.
333-38090) dated as of May 24, 2000 and incorporated herein by
reference.

10.14 General Terms Agreement between Boeing Company and Leonard's
Metal, Inc. with Special Business Provision attached,
previously filed as Exhibit 10.15 to the Registrant's Form
10-Q dated as of November 16, 1998 and incorporated herein by
reference.

10.15 Lease Agreement between Mother Goose Corporation and Precise
Machine Partners L.L.P. (Leased premises at 2205 and 2215
River Hill Road, Irving, Texas) dated August 25, 1998,
previously filed as Exhibit 10.24 to the Registrant's Form
10-K for the fiscal year ended December 31, 1999, and
incorporated herein by reference.

10.16+ Employment Agreement effective as of January 24, 2000, between
LMI Aerospace, Inc. and Tom D. Baker, previously filed as
Exhibit 10.30 to the Registrant's Form 10-K for the fiscal
year ended December 31, 2000, and incorporated herein by
reference.

10.17+ Employment Agreement effective as of January 1, 2000, between
LMI Aerospace, Inc. and Lawrence E. Dickinson, previously
filed as Exhibit 10.32 to the Form 10-K for the fiscal year
ended December 31, 2000, and incorporated herein by reference.

10.18+ Employment Agreement effective as of January 1, 2000, between
LMI Aerospace, Inc. and Bradley L. Nelson, previously filed as
Exhibit 10.35 to the Form 10-K for the fiscal year ended
December 31, 2000, and incorporated herein by reference.

63

10.19 Fourth Amendment to Loan Agreement dated as of October 30,
2000, previously filed as Exhibit 10.37 to the Registrant's
Form 8-K dated December 26, 2000 and incorporated herein by
reference.

10.20 Fifth Amendment to and Restatement of Loan Agreement dated as
of April 2, 2001, previously filed as Exhibit 10.1 to the
Registrant's Form 10-Q dated August 9, 2001, and incorporated
herein by reference.

10.21+ Employment Agreement between Tempco Engineering, Inc. and
Ernest R. Star dated April 2, 2001, filed as exhibit 10.2 to
the Registrant's From 10-Q dated August 9, 2001 and
incorporated herein by reference.

10.22 Sixth Amendment to Loan Agreement dated as of October 30,
2001, filed as Exhibit 10.2 to the Registrant's Form 10-Q
dated November 14, 2001, and incorporated herein by reference.

10.23 Business Reformation Agreement between Leonard; Metal, Inc.
and Lockheed Martin Aeronautics Company dated September 21,
2001, filed as Exhibit 10.1 to the Registrant's Form 10-Q
dated November 14, 2001, and incorporated by reference.

10.24+ Employment Agreement effective as of January 1, 2002, between
LMI Aerospace, Inc. and Philip A. Lajeunesse, filed as Exhibit
10.26 to the Registrant's Form 10-K for the fiscal year ended
December 31, 2001, and incorporated herein by reference.

10.25 Lease dated April 2, 2001 by and between Peter Holz and Anna
L. Holz Trustees of the Peter and Anna L. Holz Trust dated
2/8/89, as to an undivided one-half interest, and Ernest R
.Star and Linda Ann Zoettl, Trustees under the Ernest L. Star
and Elizabeth H. Star 1978 Trust dated August 25, 1978, as to
an undivided one-half interest and Metal Corporation, filed as
Exhibit 10.27 to the Registrant's Form 10-K for the fiscal
year ended December 31, 2001, and incorporated herein by
reference.

10.26 Lease dated April 2, 2001, between Tempco Engineering, Inc.
and Metal Corporation, filed as Exhibit 10.28 to the
Registrant's Form 10-K for the fiscal year ended December 31,
2001, and incorporated herein by reference.

10.27+ Employment Agreement Effective as of January 1, 2002 between
LMI Aerospace, Inc. and Robert T. Grah, filed as Exhibit 10.29
to the Registrant's Form 10-K for the fiscal year ended
December 31, 2001, and incorporated herein by reference.

10.28+ Employment Agreement Effective as of January 1, 2002 between
LMI Aerospace, Inc. and Duane Hahn, filed as Exhibit 10.30 to
the Registrant's Form 10-K for the fiscal year ended December
31, 2001, and incorporated herein by reference.

10.29+ Employment Agreement Effective as of January 1, 2002 between
LMI Aerospace, Inc. and Michael J. Biffignani, filed as
Exhibit 10.31 to the Registrant's Form 10-K for the fiscal
year ended December 31, 2001, and incorporated herein by
reference.

10.30 Seventh Amendment to and Restatement of Loan Agreement dated
November 30, 2001, filed as Exhibit 10.1 to the Registrant's
Form 10-Q filed May 15, 2002 and incorporated herein by
reference.

64

10.31 Eighth Amendment to and Restatement of Loan Agreement dated
May 15, 2002, filed as Exhibit 10.1 to the Registrant's Form
8-K filed May 16, 2002 and incorporated herein by reference.

10.32 Ninth Amendment to Loan Agreement dated June 30, 2002, filed
as Exhibit 10.1 to the Registrant's Form 10-Q filed August 14,
2002 and incorporated herein by reference.

21.1 List of Subsidiaries of the Registrant (filed herewith).

23.1 Consent of Independent Auditors (filed herewith).

99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Statement of the Chief Executive Officer.

99.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Statement of the Chief Financial Officer.

- ----------

+ Management contract or compensatory plan or arrangement
required to be filed as exhibit to this report.

65