UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(MARK ONE)

OR

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

Vought Aircraft Industries, Inc.

(972) 946-2011
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act: None.

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

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 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. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ

The number of shares outstanding of the registrant’s $0.01 par value common stock at March 20, 2005 was 25,015,552 shares.

TABLE OF CONTENTS

Special Note Regarding Forward Looking Statements

     This annual report on Form 10-K contains forward-looking statements. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “assumption” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this annual report.

PART I

Item 1. Business

Overview

     Vought Aircraft Industries, Inc. and its wholly owned subsidiaries, VAC Industries, Inc., Vought Commercial Aircraft Corporation and Contour Aerospace Corporation (“Contour”) are herein referred to as the “Company” or “Vought.” We are one of the largest independent manufacturers in North America, and one of the largest independent providers in the world, both based on revenues, of aerostructures for commercial, military and business jet aircraft. We develop and manufacture fuselages, wings and wing assemblies, empennages (which are tail assemblies comprised of horizontal and vertical stabilizers, elevators and rudders), aircraft doors, nacelle components (which are the structures around engines) and control surfaces (such as rudders, spoilers, ailerons and flaps). These aerostructures are subsequently integrated by our customers into a wide range of commercial, military and business jet aircraft manufactured by some of the world’s leading aerospace companies. We also provide our customers with testing, logistics and engineering services. Our customers are some of the leading prime manufacturers of commercial, military and business jet aircraft, including Airbus S.A.S. (“Airbus”), Bell Helicopter Textron, Inc. (“Bell Helicopter”), The Boeing Company (“Boeing”), Embraer Empresa Brasileira de Aeronautica S.A. (“Embraer”), Gulfstream Aerospace Corp., a General Dynamics Company (“Gulfstream”), Lockheed Martin Corporation (“Lockheed Martin”), Northrop Grumman Corporation (“Northrop Grumman”), Sikorsky Aircraft Corporation, a United Technologies Company (“Sikorsky”), among others, and the U.S. Air Force (“Air Force”). We generated net sales of $1,214.7 million for the year ended December 31, 2004. Our Corporate office is in Dallas, Texas, and production work is performed at sites in Hawthorne and Brea, California; Dallas and Grand Prairie, Texas; Milledgeville, Georgia; Everett, Washington; Nashville, Tennessee; and Stuart, Florida. We broke ground on our Charleston, South Carolina site on February 7, 2005.

     On July 24, 2000, the inception date of the Company, Vought acquired from Northrop Grumman Corporation substantially all of the assets and non-intercompany liabilities of the Aerostructures Business Area for an original purchase price of $848.2 million. The acquisition was funded with $525.0 million of bank debt, $175.0 million of paid-in-kind holding company seller notes (the “Seller Note”), and $172.5 million of equity from the issuance of 17,253,500 shares of common stock for initial capitalization of the Company. In connection with settlement discussions between the Company and Northrop Grumman Corporation relating to purchase price adjustments, the Company paid off the Seller Note and related accrued interest of $20.7 million in full with $148.0 million in cash on July 24, 2001. As a result, the final purchase price for the acquisition aggregated to $800.5 million.

     On July 2, 2003, Vought acquired The Aerostructures Corporation (“Aerostructures”) pursuant to an Agreement and Plan of Merger, dated as of May 12, 2003, with TA Acquisition Holdings, Inc. (“Holdings”) pursuant to which Holdings merged with and into Vought and Vought thereby acquired Holdings’ wholly owned subsidiary, Aerostructures. In this annual report, we refer to the merger of Holdings with and into Vought as the “Aerostructures Acquisition.” In exchange for 100% of the outstanding common and preferred stock of Holdings, Vought (as the surviving entity) issued common stock to Holdings’ shareholders that represented 27.5% of the fully-diluted equity of the combined company, paid $44.9 million in cash to Aerostructures, which Aerostructures used to settle certain obligations pursuant to the Agreement and Plan of Merger and retired $135.2 million of Aerostructures’ debt.

     As discussed in the Management’s Discussion and Analysis of Results of Operations and Financial Condition– Liquidity and Capital Resources section, the Company also issued $270 million of 8% Senior Notes (the “Senior Notes”) in conjunction with the Aerostructures Acquisition. The Company began to consolidate the results of operations of Aerostructures as of the effective date of the transaction, July 2, 2003.

     We implemented a corporate reorganization of our Aerostructures subsidiary to be effective on January 1, 2004. Aerostructures incorporated a new subsidiary, Contour Aerospace Corporation. Then, Aerostructures contributed to Contour (i) its Everett, Washington facility, that builds fuselage skins, spars, stringers, pylons and machined components, and (ii) its Brea, California facility, that builds wing skins, spars, stringers, chords and ribs. Contemporaneous with the contribution of these assets and operations to Contour, Aerostructures merged with and into Vought, so that the remaining operating assets of Aerostructures are integrated with the ongoing operations of Vought. As a result of the reorganization, beginning in 2004, Aerostructures did not exist as a separate corporate

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entity and Contour became a direct subsidiary of Vought. Contour then became a guarantor under the indenture governing the Senior Notes.

     For financial reporting purposes, the Aerostructures Acquisition has been accounted for under the purchase method of accounting whereby the acquisition cost has been allocated to the underlying acquired assets and assumed liabilities based on their estimated fair values.

Consolidation Plan

     On February 26, 2004, we announced plans to consolidate portions of our manufacturing operations to Dallas and Grand Prairie, Texas. The plans include renovating and modernizing the Dallas and Grand Prairie facilities, closing the facilities in Nashville and Stuart and moving their operations to Dallas and Grand Prairie and reducing the size of the Hawthorne facility. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of the consolidation plan.

Markets

     We operate within the aerospace industry as a manufacturer of aerostructures for commercial, military and business jet aircraft. Market and economic trends that impact the rates of growth of the commercial, military and business jet aircraft markets affect our sales of products in these markets. The competitive outlook for each of our markets is discussed below:

     Commercial Aircraft Market. General economic activity, airline profitability, passenger and cargo traffic rates and aircraft retirements drive demand for new commercial aircraft. The primary manufacturers of large commercial aircraft are Airbus and Boeing. In addition, Embraer and Bombardier are the primary manufacturers of regional jets. From 1980 to 2001, the worldwide fleet of active commercial aircraft increased at an average annual rate of approximately 4.7%, but the rate of growth has declined following the terrorist attacks on September 11, 2001. Boeing’s Current Market Outlook (April 2004) projects that the worldwide fleet of active commercial aircraft will more than double over the next 20 years from approximately 16,168 aircraft at the end of 2003 to approximately 34,770 aircraft at the end of 2023 and that approximately 25,000 new aircraft (including replacements and growth of regional and large commercial aircraft) will enter service over that timeframe. Boeing’s outlook includes the freighter fleet nearly doubling from 1,766 freighters in 2003 to 3,456 in 2023. Airbus’ Global Market Forecast (December 2004) projects that approximately 16,600 new aircraft of 100 seats or more will enter service during the twenty-year period from 2004 until 2023.

     The broader commercial aircraft market can be categorized by aircraft size and seating as follows:

	•	Large wide-body aircraft with twin aisles (more than 200 seats). This category includes the Boeing 747, 767, 777 and 787 (scheduled for first delivery in 2008) aircraft and the Airbus A330, A340 and A380 aircraft (scheduled for first delivery in 2006).
	•	Smaller narrow-body aircraft with single aisles (excluding regional aircraft) (100 to 200 seats). Aircraft in this category include the Boeing 717 and 737 and the Airbus A320 family (A318/319/320/321).
	•	Regional jets (approximately 40 to 110 seats). The main manufacturers of regional jets are Bombardier and Embraer. Bombardier’s primary regional jets are the CRJ Series. Embraer produces small regional jets including the ERJ 135, 140 and 145 and larger (70-108 seats) regional aircraft known as the ERJ 170/175 and ERJ 190/195.

     Military Aircraft Market. The national defense budget and procurement funding decisions drive demand for new military aircraft. In November 2004, President Bush signed a $422 billion defense authorization bill (not including supplemental authorizations), reflecting a 3.4% increase over fiscal 2004, and reaffirming the U.S. Government’s increased focus on a long-term defense plan and national security policy. We expect that Department of Defense spending for procurement, operations and maintenance will grow with the overall level of defense spending, and we expect to benefit to the extent that such spending is allocated to aircraft and unmanned air vehicles (“UAVs”).

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     The market for military aircraft in which we participate can be categorized into the following types of programs:

	•	Transport Aircraft (e.g., Boeing C-17 Globemaster III, Lockheed Martin C-130J Hercules and Lockheed Martin C-5 Galaxy). The C-17 Globemaster III is the newest, most flexible strategic cargo plane in the airlift force of the U.S. and allied countries. The C-17 Globemaster III is capable of rapid, long-range delivery of troops and all types of equipment. The C-130J, which is smaller and has a shorter range than the C-17 Globemaster III, is the primary tactical transport aircraft for the U.S. and allied militaries. The U.S. Department of Defense Fiscal Year 2005 Budget reflects the Air Force’s planned follow-on multi-year procurement of 60 additional C-17 Globemaster III aircraft, which will provide needed airlift capability to meet both strategic (long range) and tactical (shorter range) requirements. The C-5 is the largest transport in the Air Force inventory. In operation since 1970, the Air Force is modernizing the C-5 to extend the aircraft’s operational life through 2040.
	•	Rotor Aircraft (e.g., Bell/ Boeing V-22 Osprey, Sikorsky Black Hawk). The V-22, currently undergoing testing, is an assault transport for troops, equipment and supplies from both amphibious assault ships and land bases. The V-22 will replace the U.S. Marines Corps’ (“Marines”) fleet of CH-46E and CH-53D helicopters, and will be used for combat, combat support and special operations. The Department of Defense is currently planning to procure a total of 458 V-22 aircraft, for the Marines, U.S. Special Forces and the U.S. Navy (“Navy”). The Black Hawk is a major part of the Army’s modernization plan and is expected to be the service’s primary utility helicopter for decades.
	•	Aerial Tanker Aircraft (e.g., Boeing KC-767 Tanker). The Air Force is planning to modernize its aging fleet of tanker aircraft. The KC-767 is a specially designed Boeing 767 which has the ability to refuel Air Force, Navy and Marine aircraft in mid-flight. In November 2003, Congress approved a program to begin replacing the Air Force’s KC-135 Tanker fleet by procuring 100 KC-767s through a combination of purchase and lease. On May 25, 2004, Secretary of Defense Rumsfeld announced that he was deferring a decision on the program pending additional studies. Currently, there are no provisions for the Air Force Tankers in the 2006 budget. It is anticipated that the re-competition proposals will be released in the fourth quarter of 2006. Continued delays and re-competition of this program will cause delays in our realization of all or a portion of the previously awarded revenues, depending on the outcome of the re-competition.
	•	Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) Aircraft (e.g., Northrop Grumman E-8C Joint STARS and Global Hawk and Lockheed Martin P-3 Orion). C4ISR aircraft are an increasingly important component of the Pentagon’s procurement strategy. C4ISR aircraft include the Global Hawk, an unmanned aerial vehicle capable of high altitude, long endurance reconnaissance missions, and the E-8C Joint STARS, an airborne battle management program providing commanders with ground surveillance and targeting information to support attack operations.
	•	Fighter/Attack Aircraft (e.g., Lockheed Martin F-22 Raptor and F-35 Joint Strike Fighter). The U.S. and foreign militaries continue to upgrade their aircraft fleets with more advanced fighters, including the F-22 and F-35. The F-22 is the most advanced air superiority fighter in the world. The aircraft is currently in low rate initial production for the Air Force. The F-35 is a tactical aircraft designed to serve the needs of the Air Force, Navy, Marines and U.K. Royal Navy. Still in development, the F-35 will replace the AV-8B Harrier, A-10, F-16 and F/A-18E/F Super Hornet.

     Business Jet Aircraft Market. General economic activity and corporate profitability drive demand for new business jet aircraft. In addition, business jet aircraft have increasingly been used as an alternative to commercial aircraft transportation due to security concerns and convenience. This market includes personal, business and executive aircraft. The primary business jet aircraft manufacturers are Bombardier, Cessna, Dassault Aviation, Gulfstream and Raytheon. Ownership of business jet aircraft has become widely accepted, such that most Fortune 100 companies now own several jets. As the popularity of business jet aircraft has grown over the past decade, several companies are offering fractional jet ownership. The Air Force operates a fleet of business jet aircraft for use by the executive and legislative branches of government as well as the U.S. joint command leadership. In addition, many foreign governments provide business jet aircraft to high-ranking officials.

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     As an independent aerostructures manufacturer, we believe we have leading market share positions in each of the commercial, military and business jet aircraft markets. The following chart summarizes our net sales by market for the years ended December 31, 2004, 2003, and 2002:

Products and Programs

     We design, manufacture and supply aerospace structural assemblies including the following:

	•	complete fuselages (including upper and lower ramp assemblies, fuselage sections, skin panels, aft sections, and pressure bulkheads);
	•	wings and wing assemblies (including skin panels, spars, and leading edges);
	•	empennages (which are tail assemblies and include horizontal and vertical stabilizers, horizontal and vertical leading edge assemblies, elevators and rudders);
	•	aircraft doors;
	•	nacelle components (which are the structures around engines and include fan cowls, inlet cowls, pylons and exhaust nozzles);
	•	detail parts (which are subassemblies of larger aerospace assemblies); and
	•	control surfaces (including flaps, ailerons, rudders, spoilers and elevators).

     We have significant design experience and provide engineering support to our customers. We have a diverse base of contracts in significant aerospace markets, including: (i) commercial aircraft, (ii) military aircraft and (iii) business jet aircraft.

     Commercial Aircraft Products. For the years ended December 31, 2004, 2003, and 2002, we generated $578.5 million, $517.3 million, and $585.2 million, respectively, in net sales from manufacturing aerostructures for the world’s largest producers of commercial wide body, narrow body and regional jets. We provide a broad array of support services, including engineering and design support as well as outsourcing services. We believe we are the largest manufacturer of aerostructures for Boeing Commercial Airplanes (“Boeing Commercial”). We have over 30 years of commercial aircraft experience with Boeing Commercial, and we have maintained a formal strategic alliance with Boeing Commercial since 1994. We also believe we are the largest U.S. manufacturer of aerostructures for Airbus based on revenues. We have over 15 years of commercial aircraft experience with Airbus. In addition, we manufacture commercial aircraft aerostructures for General Electric Company, Goodrich Corporation and Pratt & Whitney, a division of United Technologies Corporation.

     The following table summarizes the major commercial programs that we currently have under long-term contract by customer and product, indicating in each case whether we are a sole-source provider and the date on which the program commenced. For purposes of the table, the year of commencement of a program is the year a contract was signed with the original equipment manufacturer.

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     Military Aircraft Products. For the years ended December 31, 2004, 2003 and 2002, our military aircraft programs generated net sales of $434.8 million, $510.5 million, and $427.7 million, respectively, from the production of a broad array of products for military organizations both in the United States and around the world. In the United States, we provide aerostructures for a variety of military platforms, including fighter/attack transport, surveillance, rotor and unmanned aircraft utilized by all four branches of the U.S. military. We believe we are the largest subcontractor for the Boeing C-17 Globemaster III program based on revenues. We have been a major supplier for Boeing on the C-17 Globemaster III since inception of the program in 1983. We also provide military aerostructures to Bell Helicopter, Boeing Helicopter, Sikorsky, Lockheed Martin, Northrop Grumman and the United States Government.

     The following table summarizes the major military programs that we currently have under long-term contract by customer and product, indicating in each case whether we are a sole-source provider and the date on which the program commenced. For purposes of the table, the year of commencement of a program is the year a contract was signed with the original equipment manufacturer.

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     Business Jet Aircraft Products. For the years ended December 31, 2004, 2003 and 2002, our business jet aircraft programs generated $201.4 million, $181.0 million, and $187.8 million, respectively, in net sales. Our customers in this segment include the majority of the primary business jet aircraft manufacturers worldwide, including Gulfstream and Raytheon. We believe we are the largest aerostructures manufacturer to Gulfstream for their G300, G350, G400, G450, G500, and G550 models based on revenues.

     The following table summarizes the major business jet aircraft programs that we currently have under long-term contract by customer and product, indicating in each case whether we are a sole-source provider and the date on which the program commenced. For purposes of the table, the year of commencement of a program is the year a contract was signed with the original equipment manufacturer.

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End Markets and Customers

     Our products are sold for a broad range of end uses. We have excellent relationships with our customers due to our low-cost, high quality, on-time deliveries and we are considered a value-added partner in the planning and development of new programs. Although the majority of our customers are in the U.S., we have also established a strong and expanding base of international customers, including Airbus U.K., Airbus Deutschland, and Embraer. The significant increase in international sales in 2004 is attributable to full year sales for the programs acquired in the Aerostructures Acquisition of 2003. The following chart illustrates the split between domestic and foreign revenue:

     We generate a large proportion of our revenues from Airbus, Boeing, and Gulfstream. Sales to Airbus, Boeing and Gulfstream were $170.2 million, $711.0 million, and $167.8 million, respectively, for the year ended December 31, 2004, $73.4 million, $876.3 million and $143.7 million, respectively, for the year ended December 31, 2003, and $0.0 million, $971.9 million and $142.7 million, respectively, for the year ended December 31, 2002.

Competitive Strengths

     Industry Leader. We are one of the largest independent manufacturers in North America and one of the largest independent providers in the world, both based on revenues, of structural assemblies for commercial, military and business jet aircraft. We draw upon more than 85 years of experience in the design, manufacture and timely delivery of complex aerostructures assemblies and related products and services, incorporating leading-edge, proprietary design, manufacturing and assembly techniques.

     Strong Customer Relationships. Our relationships with Airbus, Bell Helicopter, Boeing, Gulfstream, Lockheed Martin and Northrop Grumman extend more than 15, 10, 30, 30, 50 and 20 years, respectively. We believe we are the largest independent aerostructures manufacturer for Boeing Commercial based on revenues. In addition, we believe we are the largest U.S. aerostructures provider to Airbus, and we believe we are the largest provider of aerostructures to Gulfstream for their G300, G350, G400, G450, G500, and G550 models, both based on revenues.

     Well Positioned in the Military Aircraft Market. We serve virtually every segment of the military aircraft market, with particular strength in fixed wing transport and rotor aircraft. Currently, we provide aerostructures for more than a dozen military programs, including the Bell/Boeing V-22 Osprey tilt rotor transport and the Boeing C-17 Globemaster III. In 2004, we added a new customer, Sikorsky.

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     Sole-source Supplier on Long-Term Contracts. We normally produce our products and provide our services under long-term, fixed-price contracts. The nature of these contracts, as well as the long lead times associated with building aircraft, provides us with a high degree of visibility on earnings and cash flows. We are the sole-source provider for the aerostructures manufactured under all of our contracts, except for our Airbus A319/320 contract.

     High Barriers to Entry. The dynamics of the aircraft industry make it extremely challenging for new competitors to enter the market. It is difficult and expensive for new entrants to compete for new program awards due to the substantial up-front, non-recurring investment associated with new programs, the sophisticated manufacturing capability necessary to compete in our market, and the experience-based industry knowledge we have acquired. Our established relationships with our customers, particularly Boeing and Airbus, make it less likely that an existing program could be lost to a new competitor. In addition, new entrants to the industry must have extensive certifications and approvals from customers and government regulators, such as the Defense Contract Management Agency and the Federal Aviation Administration (“FAA”).

     State-of-the-Art Manufacturing and Technological Capabilities. Our proprietary technologies and tool designs are fully integrated with our engineering designs, assuring dimensional control and detailed part fit and providing our customers with the latest technological solutions for manufacturing aerostructures. We also have the capability to build our own assembly tools, composite tools and fabrication fixtures. In addition, we are experienced in all phases of the engineering, production and quality assurance processes. Our capabilities and technological expertise allow us to manufacture and assemble aerostructures on a cost-competitive and efficient basis. In recognition of this expertise, we were named by Boeing as a “structures partner” for their 787 aircraft and are jointly developing advanced technologies for next generation aircraft.

     Experienced Management Team with Proven Track Record. Our operations are led by an executive management team with an average of over 20 years of industry and company experience. Our dedicated and experienced management team has demonstrated a commitment to generating free cash flow for debt repayment by strengthening existing customer and supplier relationships, winning new business and reducing costs. We have successfully reduced overhead, improved working capital management and implemented other initiatives to increase labor efficiencies.

Business Strategy

     Win New Business. We are highly focused on winning new military and commercial business in order to further diversify our portfolio of products and customers.

     Integrate Quality Throughout the Enterprise. We emphasize quality in the design and production of cost-competitive, fully integrated major aircraft assemblies as a support partner to the world’s leading aerospace companies.

     Increase Profitability and Productivity. We focus on lean manufacturing, enterprise focused strategic sourcing and innovation to increase profitability and productivity. We share the benefit of these improvements with our customers in order to further strengthen our strategic relationships. For example, we have a global network of suppliers focused on strategic cost reduction and manufacturing flexibility to maximize production and cost efficiency, while supporting our customers’ need for strategic work placement. Other initiatives include web-based development and information distribution systems, determinant assembly processes, first-time quality throughout the extended enterprise (including suppliers), flexible tooling and the conversion of two-dimensional to digital and three-dimensional product definition.

     Continue as a Strategic Partner to our Customers. We strengthen customer relationships and expand market opportunities by partnering with customers on their business endeavors and providing innovative approaches to aircraft systems integration. We provide prime contractors with development and support services to ensure our participation on their current and future programs while managing the risk/reward of each project and assessing the return on investment, on a case-by-case basis.

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Manufacturing

     Our expertise is in designing and manufacturing large, complex aerostructures. We maintain state of the art manufacturing facilities in Dallas, Texas; Grand Prairie, Texas; Nashville, Tennessee; Hawthorne, California; Stuart, Florida; Brea, California; Everett, Washington; and Milledgeville, Georgia and we operate one of the few structural test laboratories in the world capable of full-scale carrier landing simulation. Each manufacturing location has responsibility for developing and executing specific plans to meet our commitments to our customers and to meet our profitability objectives and supporting strategies. Key capabilities and specialized equipment critical to meeting these objectives include the following:

	•	Full sheet and extrusion forming and precision trim and drill capabilities
	•	Specialized forming including hot and cold metal forming and age cure forming of wing skins greater than 50 feet long
	•	Full machining capabilities, including machining for monolithic structures and long-bed machining on beds up to 150 feet long
	•	Specialized engineering and design capabilities
	•	Robotic and environmentally controlled paint facilities
	•	In-house tool fabrication facilities enabling reconfigurable tooling
	•	Automated fastening, riveting and high-speed machining
	•	Metal and composite bonding using autoclaves up to 15x90 feet in size
	•	Automated design and precision manufacturing assembly through a proprietary system adaptable to all similar digitally designed products
	•	Chemical processing tanks
	•	Five-axis core cutters, spar mills, skin mills, cavity mills and gantry profilers
	•	Electronic measurement devices, including laser trackers, theodolite and portable coordinate measuring machines
	•	Graphite composite tape laying and fiber placement machines in environmentally controlled facilities

Raw Materials, Purchased Parts and Suppliers

     The principal raw materials used in our manufacturing operations are aluminum and graphite epoxy. We also purchase engineered components including metal derivative products, such as stringers, sheet metal webs, panels and formed parts, as well as graphite composite components, tape, fabric, non-metallic and metallic honeycomb core, titanium fasteners, lock bolts and other machined parts. In addition, we also purchase assemblies and subassemblies from our network of global suppliers. Currently we have over 400 active production suppliers with sourcing from the United States, Canada, Israel, South Korea, Japan, the People’s Republic of China and Europe.

     Some raw materials and operating supplies are subject to price fluctuations caused by market dynamics. Our strategic sourcing initiatives are intended to minimize the impact of commodity price risk. We have long-term supply agreements with a number of our major suppliers. We generally do not employ forward contracts or other financial instruments to hedge commodity price risk. We are experiencing delays in the receipt of metallic raw materials common with overall capacity constraints across the industry. Based upon market conditions and industry analysis we expect these delays to continue well into 2006 as metallic (aluminum) raw material production capability adjusts to the industry upturn, increased infrastructure demand in the People’s Republic of China, and increased aluminum usage in an ever wider range of consumer products. Although these delays have the potential to

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affect cost and production schedules, we do not anticipate these effects will have a material impact on cash flows or results of operations.

Research and Development and Specialized Engineering Services

     Our scientists, engineers and other personnel have capabilities and expertise in structural design, stress analysis, fatigue and damage tolerance, testing, systems engineering, factory support, product support, tool design, inspection and systems installation design. At December 31, 2004, we employed approximately 350 engineers. The costs incurred relating to independent research and development for the years ended December 31, 2004, 2003 and 2002, were $6.7 million, $5.5 million and $5.7 million, respectively.

Intellectual Property

     We have a number of patents related to our processes and products. While in the aggregate our patents are of material importance to our business, we believe no single patent or group of patents is of material importance to our business as a whole. We also rely on trade secrets, confidentiality agreements, unpatented know-how and creative product development and continuing technological advancement to maintain our competitive position.

Competition

     In the production and sale of aerospace structural assemblies, we compete with numerous U.S. and international companies on a worldwide basis. Our primary competition comes from internal work completed by the operating units of original equipment manufacturers including Airbus, Boeing, Gulfstream, Lockheed Martin, Northrop Grumman, Sikorsky and Raytheon. These original equipment manufacturers may choose not to outsource production due to, among other things, their own direct labor and other overhead considerations and capacity utilization at their own facilities. Consequently, traditional factors affecting competition, such as price and quality of service, may not be significant determinants when original equipment manufacturers decide whether to produce a part in-house or to outsource. The prime manufacturers typically choose to outsource for the following reasons: (i) lower cost; (ii) the prime manufacturers’ capacity limitations; (iii) our engineering and design capabilities; (iv) reduced investment; and (v) risk sharing.

     We also face competition from independent aerostructures suppliers in the U.S. and overseas. Our ability to compete for large structural assembly contracts depends upon: (i) our underlying cost structure; (ii) the readiness and availability of our facilities, equipment and personnel to undertake the programs; (iii) our engineering and design capabilities; and (iv) our ability to manufacture both metal and composite structures.

Employees

     As of December 31, 2004, we employed approximately 6,300 people, of whom approximately 2,900 are represented by four separate unions. Local 848 of the United Automobile, Aerospace and Agricultural Implement Workers of America represents approximately 57% of the employees located in Dallas, Texas, or approximately 2,100 employees. This union contract is in effect through September 30, 2007. The International Association of Machinists and Aerospace Workers represents approximately 70% of the employees located in Nashville, Tennessee, or approximately 730 employees. This union contract is in effect through September 27, 2008. Local 20 of the International Brotherhood of Electrical Workers represents approximately 55 employees. This union contract is in effect through April 6, 2008. Local 263 of the Security, Police and Fire Professionals of America, (formerly United Plant Guard Workers of America), represents approximately 30 employees. This union contract is in effect through October 2, 2005.

     From time to time, unions have sought and may seek to organize at some of our facilities. We cannot predict the impact of any unionization of our workforce. We have not suffered an interruption of business as a result of a labor dispute since 1989, at the Nashville facility. We believe we have constructive working relationships with our unions and have been successful in negotiating collective bargaining agreements.

Backlog

     We calculate backlog using a method that results in a number that is substantially less than the estimated aggregate dollar value of our contracts. Using our measure of backlog, we estimate that at December 31, 2004, our funded backlog was approximately $1.7 billion. Our backlog may fluctuate at any given time depending on whether we have received significant new firm orders, funded orders or authorizations to proceed immediately before the

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date of measurement. For example, our military funded orders or authorizations to proceed generally are awarded when the Department of Defense budget for the relevant year has been approved, resulting in a significant increase in backlog at that time.

     The following factors should be considered when evaluating our backlog. For our commercial and business jet aircraft programs, changes in the economic environment and the financial condition of airlines may cause our aerospace manufacturing customers to reschedule or delay firm orders, which would adversely affect our backlog. For our military aircraft programs, the Department of Defense and other government agencies, have the right to terminate both our contracts and/or our customers’ contracts either for default or, if the government deems it to be in its best interest, for convenience.

Environmental Matters

     Our manufacturing operations are subject to various federal, state and local environmental laws and regulations, including those related to pollution, air emissions and the protection of human health and the environment. We routinely assess compliance and continuously monitor our obligations with respect to these requirements. Based upon these assessments and other available information, we believe that our manufacturing facilities are in substantial compliance with all applicable existing federal, state and local environmental laws and regulations and we do not expect environmental costs to have a material adverse effect on us. The operation of manufacturing plants entails risk in these areas and there can be no assurance that we will not incur material costs or liabilities in the future that could adversely affect us. For example, such costs or liabilities could arise due to changes in the existing law or its interpretations, or newly discovered contamination.

     Under federal and state environmental laws, owners and operators of contaminated properties can be held responsible for up to 100% of the costs to remediate such contamination, regardless of whether they caused such contamination. Our facilities have been previously owned and operated by other entities and remediation is currently taking place at several facilities in connection with contamination that occurred prior to our ownership. In particular, we acquired several of our facilities from Northrop Grumman in July of 2000, including the Hawthorne, California facility, the Stuart, Florida facility, the Milledgeville and Perry, Georgia facilities and two Dallas, Texas facilities. Of those facilities, remediation projects are underway in Hawthorne, Stuart, Milledgeville and Dallas. Under our asset purchase agreement with Northrop Grumman, we obtained from Northrop Grumman an indemnity relating to contamination at all sites occurring prior to our ownership (so-called “pre-closing liabilities”). The indemnity effectively caps our exposure to such cleanup liabilities at $12 million, with Northrop Grumman assuming responsibility for all such costs in excess of $12 million. In accordance with the terms of the environmental indemnity, Northrop Grumman is managing all environmental remedial projects at the various sites, except with respect to most of the remediation activities now underway at the Dallas facility. The Dallas facility is a Naval Weapons Industrial Reserve Plant, which the Navy leases to us. The Navy manages and finances most of the remediation activities at this site (although Northrop Grumman has managed other remediation activities at the site). Should the Navy cease to finance and perform remediation activities at the Dallas site, we would look to Northrop Grumman to manage those activities in accordance with its indemnity obligations. Although we have no reason to believe that Northrop Grumman will not satisfy its indemnity obligations, if Northrop Grumman failed to do so, we could be exposed to environmental cleanup liabilities that could be material. As of December 31, 2004, our balance sheet included an accrued liability of $5.8 million for accrued environmental liabilities.

     The Nashville, Tennessee facility was acquired from Textron Inc. in 1996. In connection with that acquisition, Textron agreed to indemnify up to $60 million against any pre-closing environmental liabilities with regard to claims made within ten years of the date on which the facility was acquired, including with respect to a solid waste landfill located onsite that was closed pursuant to a plan approved by the Tennessee Division of Solid Waste Management. While there are no pending environmental claims relating to the Nashville facility, there is no assurance that environmental claims will not arise after the expiration of the Textron indemnity in 2006, or that Textron will satisfy its indemnity obligations with respect to any environmental claims that are made before the indemnity expires.

Regulatory Conditions

     The commercial and business jet aerospace industries are highly regulated in the United States by the FAA. As producers of major aerostructures for commercial and business jet aircraft, our production activities are currently performed under the auspices of the applicable FAA production certificates held by the prime manufacturers. We are approved by the FAA to build aerostructures under the prime manufacturers’ programs. In addition, we are certified

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by the FAA in Stuart, Florida and Milledgeville, Georgia to repair and overhaul damaged parts for delivery and re-installation on commercial and business jet aircraft. In addition, we are certified by Boeing, General Dynamics, Lockheed Martin, Northrop Grumman, Pratt & Whitney and Raytheon. FAA and prime manufacturer certification is a significant barrier to entry for potential new competitors.

     The military aerospace industry is highly regulated by the U.S. Department of Defense. The Defense Contract Management Agency has certified us to provide products to the U.S. military. We are subject to review by the Defense Contract Management Agency whether we contract directly with the U.S. Government or if we provide aerostructures to a prime contractor that contracts directly with the U.S. Government. The U.S. Government contracts held by the Company and our customers are subject to unique procurement and administrative rules based on both laws and regulations. U.S. Government contracts are, by their terms, subject to termination by the U.S. Government either for its convenience or default by the contractor. In addition, U.S. Government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a yearly basis, even though contract performance may take many years. Consequently, at the outset of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future years.

     In addition, use of foreign suppliers and sale to foreign customers, such as Airbus, and foreign governments may subject us to the requirements of the U.S. Export Administration Regulations and the International Trafficking in Arms Regulations.

Additional Information

     Our principal executive offices are located at 9314 West Jefferson Boulevard M/S 2-01, Dallas, TX 75211. Our telephone number is (972) 946-2011.

     Our SEC filings are available to the public at the SEC’s web site at http://www.sec.gov.

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Item 2. Properties

     Our corporate offices and principal corporate support activities are located in Dallas, Texas. We own and lease manufacturing facilities located throughout the United States. We currently have manufacturing facilities in Texas, California, Tennessee, Georgia, Washington and Florida. General information about our principal manufacturing facilities is presented in the chart below.

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Item 3. Legal Proceedings

     In the normal course of business, we are party to various lawsuits, legal proceedings and claims arising out of our business. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of these proceedings, even if determined adversely, would not have a material adverse effect on our business, financial condition or results of operations.

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

     None.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

     The Company’s common stock is not publicly traded.

Item 6. Selected Financial Data

     The following selected consolidated financial data are derived from our consolidated financial statements included elsewhere in this annual report. The information set forth below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and their related notes included elsewhere in this annual report. The historical results presented are not necessarily indicative of future results.

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

Critical Accounting Policies

     Vought’s discussion and analysis of its financial position and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses. Although Vought evaluates its estimates, which are based on the most current and best available information and on various other assumptions that are believed to be reasonable under the circumstances, on an ongoing basis, actual results may differ from these estimates under different assumptions or conditions. Vought believes the following items are the critical accounting policies and more significant estimates and assumptions used in the preparation of its financial statements. These accounting policies conform to the accounting policies contained in the consolidated financial statements of Vought included in this annual report.

     Accounting Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes and, in particular, estimates of contract costs and revenues used in the earnings recognition process. The Company has recorded all estimated contract losses. Actual results could differ from those estimates.

     Revenue and Profit Recognition. The majority of our sales are made pursuant to written contractual arrangements or “contracts” to design, develop and manufacture aerostructures to the specifications of the customer under firm fixed price contracts. These contracts are within the scope of the American Institute of Certified Public Accountants Statement of Position 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” (SOP 81-1) and sales and profits on contracts are recognized using percentage-of-completion methods of accounting. Sales and profits are recognized on production contracts as units are delivered and accepted by the customer (the “units-of-delivery” method). Under the percentage-of-completion method of accounting, a single estimated total profit margin is used to recognize profit for each contract over its entire period of performance, which can exceed one year. Amounts representing contract change orders or claims are included in sales only when they can be reliably estimated and their realization is reasonably assured. Revenues for claims and unapproved change orders, which were less than $5 million for each of 2004, 2003 and 2002, are included in contract analyses as costs related to the claim are incurred. Additionally, some contracts contain provisions for revenue sharing, price re-determination or cost and or performance incentives. Such amounts or incentives are included in sales when the amounts can be reliably estimated and their realization is reasonably assured. The impact of revisions in profit estimates is recognized on a cumulative catch-up basis in the period in which the revisions are made. Provisions for anticipated losses on contracts are recorded in the period in which they become evident (“forward losses”) and are first offset against costs that are included in inventory, with any remaining amount reflected in accrued contract liabilities. Revisions in contract estimates, if significant, can materially affect Vought’s results of operations and cash flows, as well as Vought’s valuation of inventory. Furthermore, certain contracts are combined or segmented in accordance with SOP 81-1 for revenue recognition.

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     Accounting for the sales and profit on a contract requires estimates of (1) the contract value or total contract revenue, (2) the total costs at completion, which is equal to the sum of the actual incurred costs to date on the contract and the estimated costs to complete the contract’s scope of work and (3) the measurement of progress towards completion. The estimated profit or loss on a contract is equal to the difference between the total contract value and the estimated total cost at completion, which includes direct production cost (material and labor), manufacturing and engineering overhead, product tooling cost and certain allowable general and administrative expenses. Under the units-of-delivery percentage of completion method, sales on a contract are recorded as the units are delivered during the period at an amount equal to the contractual selling price of those units. The profit recorded on a contract under the units-of-delivery method is equal to the estimated total profit margin for the contract stated as a percentage of contract revenue multiplied by the sales recorded on the contract during the period. Adjustments to original estimates for a contract’s revenues, estimated costs at completion and estimated total profit are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur. These estimates are also sensitive to the assumed rate of production. Generally, the longer it takes to complete the contract quantity the more relative overhead that contract will absorb.

     Although fixed-price contracts, which extend several years into the future, generally permit the Company to keep unexpected profits if costs are less than projected, the Company also bears the risk that increased or unexpected costs may reduce the Company’s profit or cause the Company to sustain losses on the contract. In a fixed-price contract, the Company must fully absorb cost overruns, not withstanding the difficulty of estimating all of the costs it will incur in performing these contracts and in projecting the ultimate level of sales that may otherwise be achieved. The Company’s failure to anticipate technical problems, estimate delivery reductions, estimate costs accurately or control costs during performance of a fixed price contract may reduce the profitability of a fixed price contract or cause a loss. The Company believes they have recorded adequate provisions in the financial statements for losses on fixed-price contracts, but the Company cannot be certain that the contract loss provisions will be adequate to cover all actual future losses.

     Accounts Receivable. Accounts receivable include amounts billed and currently due from customers, amounts currently due but unbilled, particular estimated contract changes, claims in negotiation that are probable of recovery, and amounts retained by the customer pending contract completion. Unbilled amounts are usually billed and collected within one year. The Company continuously monitors collections and payments from customers and maintains a provision for estimated credit losses as deemed appropriate as based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within the Company’s expectations, we cannot guarantee that we will continue to experience the same credit loss rates in the future.

     Inventories. Inventoried costs primarily relate to work in process under fixed-price contracts, and represent accumulated contract costs less the portion of such costs allocated to delivered items. Accumulated contract costs include direct production costs, manufacturing and engineering overhead, production tooling costs, and particular general and administration expenses that are allowed under government contracts.

     In accordance with industry practice, inventoried costs are classified as a current asset and include amounts related to contracts having production cycles longer than one year; therefore, a portion thereof will not be realized within one year.

     The excess of production costs of delivered items over the estimated average costs is carried in inventory under the learning curve concept. Under this concept, production costs per unit are expected to decrease over time due to efficiencies arising from continuous improvement in the performance of repetitive tasks.

     Impairment of Long-Lived Assets and Identifiable Intangible Assets. The Company records impairment losses on long-lived assets, including identifiable intangible assets, when events and circumstances indicate that the assets might be impaired and the undiscounted projected cash flows associated with those assets are less than the carrying amounts of those assets. In those situations where the undiscounted projected cash flows are less than the carrying amounts of those assets, impairment loss on a long-lived asset or identifiable intangible asset is measured based on the excess of the carrying amount of the asset over the asset’s fair value, generally determined based upon discounted projected cash flows. For assets held for sale, impairment losses are recognized based upon the excess of carrying value over the estimated fair value of the assets, less estimated selling costs. During fiscal 2004, the Company recognized an intangible asset impairment charge of $26.0 million (net of amortization) to write down the estimated value of identified contract intangible assets as a result of reduced cash flow on the contracts. A

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significant change in events, circumstances or future cash flows could result in further impairment of long-lived assets, including identifiable intangible assets.

          Impairment of Goodwill. Effective January 1, 2002, we adopted SFAS No. 142 (SFAS 142), “Goodwill and Other Intangible Assets.” This Statement changed the accounting for goodwill from an amortization approach to an impairment only approach. Pursuant to SFAS 142, goodwill must be tested for impairment annually at the same time every year, and in between annual testing dates if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying value. We estimated the fair value of the Company using primarily a discounted cash flow analysis based on delivery forecasts using customer guidance, current backlog and reports from aerospace analysts and projected operating results and then applying an appropriate discount rate. Additionally, the Company uses a market multiple approach and a corporate transaction approach to support the results of the discounted cash flow analysis. The fair value of the Company was determined to be in excess of its carrying value, therefore there was no indicator of goodwill impairment. Using the SFAS 142 approach described above, there was no impairment to goodwill as of December 31, 2004 or December 31, 2003. A significant change in cash flows or cost of capital in the future could result in an impairment of goodwill.

          Stock-Based Compensation. Vought grants stock options for a fixed number of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants using the intrinsic value method. Some stock-based arrangements at Vought, including non-recourse notes issued to officers for stock purchases and deferred compensation liabilities for Vought’s rabbi trust, require recognition of stock-based compensation expense when the fair value of Vought’s common stock increases. As Vought’s common stock is not traded on a public stock exchange, Vought’s Board of Directors estimates the fair value of the common stock for purposes of granting stock options or recognizing stock-based compensation expense. A 10% increase or decrease in the Company’s stock value would require a corresponding stock compensation gain or loss related to non-recourse notes and Vought’s rabbi trust of $1.3 million and $(1.3) million, respectively.

          Warranty Reserves. A reserve has been established to provide for the estimated future cost of warranties on the Company’s delivered products. Management periodically reviews the reserves and adjustments are made accordingly. A provision for warranty on products delivered is made on the basis of the Company’s historical experience and identified warranty issues. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship. The assumptions made in determining the warranty reserves could differ from actual performance resulting in a different outcome. If the actual performance differs by 10%, the result would be an approximate increase or decrease of $1.0 million to the warranty reserve.

          Income Taxes. Income taxes are accounted for using the liability method. Deferred income taxes are determined based upon the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Due to the uncertain nature of the ultimate realization of the deferred tax assets, the Company has established a valuation allowance against its net deferred tax asset of $426.1 million and will recognize benefits only as reassessment demonstrates they are more likely than not to be realized. The valuation allowance has been recorded in income and equity (for items of comprehensive loss) as appropriate.

          Pensions and Other Post Retirement Benefits. Pension expense is based on information provided by outside actuarial firms that use assumptions to estimate the total benefits ultimately payable to participants and allocates this cost to service periods. The actuarial assumptions used to calculate pension costs are reviewed annually. The pension plans are valued annually on December 31. The projected unit credit method is utilized in recognizing the pension liabilities. Pension assumptions are based upon management’s best estimates, after consulting with outside investment advisors and actuaries, as of the annual measurement date.

          The assumed discount rate utilized is determined as of the measurement date based upon on a review of interest rates associated with long-term high quality corporate bonds. The discount rate is utilized principally in calculating the Company’s pension obligation, which is represented by the Projected Benefit Obligation (PBO) in calculating net pension expense. At December 31, 2004, 2003 and 2002, the discount rate was 5.75%, 6.25% and 6.75%, respectively. The effect of lowering the discount rate increased the PBO in fiscal 2004 and 2003 by $ 104.1 million and $78.3 million, respectively.

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          The assumed expected long-term rate of return on assets is the weighted average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the PBO. It is the Company’s policy to invest approximately 37% to 73% of the pension fund assets in equity securities, 28% to 32% in fixed income securities, 4% to 6% in real estate funds, 4% to 12% in private equity funds and 1% to 4% in other assets. This expected average long-term rate of return on assets is based principally on the counsel of the Company’s outside investment advisors. This rate is utilized principally in calculating the expected return on plan assets component of the annual pension expense. To the extent the actual rate of return on assets realized over the course of a year differs with the assumed rate, that year’s annual pension expense is not affected. The gain or loss reduces or increases future pension expense over the average remaining service period of active plan participants expected to receive benefits.

          The assumed average rate of compensation represents the average annual compensation increase expected over the remaining employment periods for the participating employees. This rate is estimated to be 4% and is utilized principally in calculating the PBO and annual pension expense.

          In addition to the Pension, the Company provides certain healthcare and life insurance benefits for eligible retired employees, the benefits are unfunded as of December 31, 2004. Employees achieve eligibility to participate in these contributory plans upon retirement from active service if they meet specified age and years of service requirements. Election to participate for some employees must be made at the date of retirement. Qualifying dependents at the date of retirement are also eligible for medical coverage. Current plan documents reserve the Company’s right to amend or terminate the plans at any time, subject to applicable collective bargaining requirements for represented employees. In 2004, some future retirees affected by the facility consolidation received benefit and cost-sharing improvements. In 2003, the Company adopted changes to the plans for certain non-represented employees that increased the retiree cost-sharing provisions of the plan for some current retirees and for certain future retirees. In 2002, the Company adopted certain benefit changes for some of its current and future retiree groups. Premiums charged to retirees for medical coverage are based on years of service and are adjusted annually for changes in the cost of the plans as determined by an independent actuary. In addition to this medical inflation cost-sharing feature, the plans also have provisions for deductibles, co-payments, coinsurance percentages, out-of-pocket limits, schedules of reasonable fees, managed care providers, coordination of benefits with other plans, and a Medicare carve-out. At December 31, 2004, 2003 and 2002, the discount rate used to determine these healthcare and insurance benefits was 5.75%, 6.25% and 6.75%, respectively. The effect of lowering the discount rate was an increase to post employment benefits of $30.2 million and $18.3 million during fiscal 2004 and 2003, respectively.

General Business Issues

          While we have long-term contracts for most of our programs, we generally build our inventory and deliver products pursuant to separate purchase orders under those contracts. We measure backlog for commercial and business jet programs as firm orders, and backlog for military programs as funded orders or authorizations to proceed, in each case for products that have not yet been shipped to our customer. In addition to our backlog, our contracts provide for additional units for which we have not yet received a firm order, a funded order or an authorization to proceed. Our measure of backlog produces a number that is significantly lower than the estimated aggregate dollar value of our contracts because this measure excludes (i) commercial orders that are not firm, (ii) military orders that are not funded or authorized and (iii) commercial and military units under contract for which we have not yet received orders. Using our measure of backlog, we estimate that as of December 31, 2004, our backlog was approximately $1.7 billion. Our backlog may fluctuate at any time depending on new firm orders, funded orders or authorizations to proceed that are received, as well as orders that are shipped, immediately before the date of measurement.

          On February 26, 2004 we announced plans to consolidate portions of our manufacturing operations to Dallas and Grand Prairie, Texas. We received a $35 million grant from the Texas Enterprise Fund in April 2004 and are in the process of working with the Texas General Land Office and several other state and local agencies to help us accomplish the consolidation. By accepting this grant, the Company is obligated to add 3,000 jobs in Texas over the next 6 years with a prorated penalty (based on any shortfall in our ability to maintain a total of 6,000 jobs in Texas with the total penalty amount not to exceed the amount of the grant) assessed beginning in 2010 if that goal is not reached. We are in the process of renovating and modernizing the Dallas facilities and will complete production at the Nashville and Stuart sites and reduce the size of the Hawthorne site. When completed, this project will reduce our occupied square feet by more than three million square feet, reduce maintenance expenses and increase productivity. As part of this plan, the Company is incurring charges for Nashville and Stuart employee termination

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benefits and relocation costs, certain pension costs, consolidation of excess facilities and various other closure costs. The final planned completion dates of closing the Stuart and Nashville facilities are December 31, 2005 and December 31, 2006, respectively. Based upon the Company’s restructuring plan, the Company currently estimates that the benefit to operating earnings and cash flows, annually, will potentially be $50.0 million, following the substantial completion of such project. However, due to the scale and nature of estimates involved with consolidation of facilities of this size, there can be no assurance that the benefit will be realized in full or that unanticipated additional costs will not outweigh the benefits of the project.

          As a result of the pending closure of the Stuart and Nashville facilities, the Company offered relocation or termination benefits (voluntary and involuntary) to the approximately 1,300 employees at these facilities. The Company has recorded a liability in the amount of $5.3 million associated with the severance termination benefits of which $0.3 million has been paid as of December 31, 2004. Additionally, the Company estimates total costs of approximately $2.8 million associated with the non-union employee retention termination benefits and is recognizing this liability ratably over the employees’ retention period. At December 31, 2004, a liability for the retention termination benefits has been recorded in the amount of approximately $1.1 million.

          As part of the restructuring plan, the Company negotiated termination benefit agreements with union employees at the Nashville location. As a result of the union negotiations, certain retention termination benefits were agreed to which are estimated to be approximately $4.7 million. In April 2004, the Company began recognizing this liability ratably over the employee retention period. A liability for retention termination benefits for union employees has been recorded in the amount of approximately $1.3 million of which $0.1 million has been paid as of December 31, 2004.

          See Note 13 to the Company’s consolidated financial statements Pension and Other Post-Retirement Benefits for further discussion of the effects of the restructuring on the pension and other post-employment benefits at the Nashville and Stuart facilities.

          Approximately 425 out of the 1,300 employees at these locations have elected to relocate to Dallas. The Company currently estimates that the relocation costs associated with these transfers will be approximately $11.0 million and will be recognized as incurred over 34 months. During 2004, the Company incurred approximately $1.6 million of the relocation expense.

          Since the announcement for the closures of the Stuart and Nashville facilities, the Company has been evaluating the fixed assets associated with these facilities and developing a plan for moving these assets to Dallas or for selling or abandoning the assets once the facilities are vacated. For the Nashville facility, the Company has performed an initial assessment of the recoverability for those assets that will not be moved and has determined that, at present, no impairment has taken place. Nonetheless, an impairment charge for these assets could be necessary in future periods. Related to the shutdown of the Nashville facility, the Company has accelerated depreciation over the remaining periods of those assets that will not be transferred to Dallas. The Company estimates that approximately $21.6 million of depreciation will be accelerated over the remaining life of these assets so that they will be fully depreciated by the end of fiscal 2006 when production has ceased at this facility. As of December 31, 2004, the Company has recognized accelerated depreciation for these assets of $15.9 million. Substantially all of the fixed assets from the Stuart facility are expected to be moved and utilized after the plant closes. The Company is in the process of evaluating the lease for the Stuart facility and a potential buyout of the remaining lease term after the facility has been exited. If an agreement is reached, the Company will record any liability associated with the buyout at the time an agreement is reached and the liability becomes measurable. The Company currently has $1.5 million in net book value of leasehold improvements at Stuart. As a result of the closure, the Company has accelerated the depreciation on these items so they will be fully depreciated by the end of 2005. The increased depreciation for these assets was $1.3 million during 2004.

          The Company is currently in the process of reviewing final qualified proposals to buy the Hawthorne facility which the Company would lease back through 2005, after which, the Company plans to reduce the total square footage under the lease, with the lease extending to approximately 2010.

          The Dallas facility is currently a Naval Weapons Industrial Reserve Plant, which is owned by the Navy. As part of the restructure plan, options are being considered that could change the ownership structure of the plant.

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          The restructuring and other related charges are or will be recorded to contract costs. In accordance with SOP 81-1, the total additional costs associated with the planned facility closures for relocation, termination and retention benefits, and pension and other post-employment benefits (“OPEB”) were considered in the Company’s estimated costs at completion for contracts at each site. As a result of including the estimated restructuring costs in each facility’s contracts, the Company recorded a charge to cost of sales in the amount of $53.9 million for the twelve months ended December 31, 2004, which is reflective of increased forward losses as a result of these costs at the Stuart and Dallas facilities and reduced profit margins or increased forward losses on contracts in process at the Nashville facility.

          Vought has reached a preliminary agreement with the State of South Carolina to develop a new manufacturing site in Charleston, South Carolina for manufacturing and assembly work for the Boeing 787 Dreamliner commercial aircraft program. In connection with that program, Vought is in the process of finalizing a joint venture with Alenia North America (“Alenia”), a subsidiary of Finmeccanica SpA, called Global Aeronautica, LLC. Vought and Alenia will each have a 50% stake in the joint venture, which will combine the two companies’ respective 787 program fuselage products to deliver an integrated product to Boeing. Vought will be the sole-source supplier of the aft fuselage for Boeing’s 787 program under a contract that currently is under negotiation, but is expected to represent approximately $5 billion in total contract value through 2021.

Financial Business Trends

          The financial health of the commercial airline industry has a direct and significant effect on our commercial aircraft programs. The commercial airline industry continues to suffer from the effects of an economic downturn that began in 2000, and most recently by rapidly increasing fuel costs. As commercial airline companies delay or cancel new aircraft orders, aircraft manufacturers and their suppliers have experienced reduced delivery rates. For example, Boeing delivered 381 aircraft in 2002, down approximately 28% from 527 aircraft in 2001, and Boeing’s deliveries in 2003 were further reduced by approximately 26% to 281 aircraft. Boeing’s deliveries were up slightly in 2004 to 285. Airbus, which delivered 303 aircraft in 2002, delivered 305 aircraft in 2003 and 320 aircraft in 2004. In addition, Boeing has announced its decision to end production of the 757 program, and the final aircraft was produced in late 2004. The backlog and demand for the Boeing 747 and 767 programs has also declined in recent years. We cannot make assurances that the commercial airlines will order additional aircraft in the future in sufficient quantities to justify continued production of these models.

          Lower production rates have caused us to record significant forward losses against our commercial programs. As required by generally accepted accounting principles, Vought immediately accrues forward loss provisions when a loss is reasonably determinable. The estimated loss may arise based on a reduction in delivery rates or on other changes in production that increase estimated future costs. Moreover, changes in production rates on a given program can impact the overhead absorption of other programs, effectively reallocating fixed overhead costs among programs and over remaining deliverables under the contract. Subsequent revisions in forward loss estimates are recorded in the period in which the revised losses become evident and the resulting increase or decrease is reflected in net income. The impact of revisions in loss estimates is recognized on a cumulative catch-up basis in the period in which the revisions are made.

          The market for business jets was also impacted by the economic downturn discussed above. In this area of the business, we believe demand appears to be increasing in 2005.

          In contrast, our sales associated with military aircraft continue to trend upwards in line with recent increases in U.S. military spending and the company’s emphasis on developing its military product lines. The Department of Defense budget for fiscal year 2005 supports this trend. In 2004, Vought was selected by Sikorsky to provide the entire cabin structure for the Black Hawk helicopter. With a potential value of $1.3 billion, the contract covers 1,100 shipsets of structure over the next 15 years. In 2001 and 2002, Vought was awarded contracts to build the F-22 Raptor horizontal stabilator, Global Hawk enhanced wing, C-5 Galaxy flight control surfaces, F-35 Joint Strike Fighter lower wing skins and also signed an agreement to provide 60 additional empennage sets, nacelle components and refueling receptacles for the C-17 Globemaster III. In negotiating the follow-on contract for the C-17 Globemaster III program, we agreed to a lower price per ship set in order to obtain a long-term multi-year contract with more favorable terms and conditions. Accordingly, our revenues on the C-17 Globemaster III program in 2004 reflected the new terms and pricing which impacted our total net sales. In the first quarter of 2003, Aerostructures signed a contract extension to provide an additional 62 empennages for the C-130J.

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          We are aggressively pursuing additional new business opportunities in the near term, particularly in military aircraft programs, which have the potential to further add to the long-term contracts of the company.

Results of Operations

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

          Net Sales. Net sales for the year ended December 31, 2004 were $1,214.7 million, an increase of $5.9 million or less than 1% compared with net sales of $1,208.8 million for the prior year. On July 2, 2003, the Company completed the acquisition of Aerostructures. As such, the comparative period for 2003 includes only six months of sales activity for programs acquired from Aerostructures. When comparing the current and prior year:

	•	Commercial net sales were up $61.2 million or 12% in 2004 as a result of an additional six months of sales on the Airbus and other commercial programs obtained in the Aerostructures Acquisition totaling $86.1 million. This increase was partially offset by decreased deliveries on the Boeing 747, 757, 767, and 777 programs of $55.6 million. The lower delivery rates on these programs were due to the cancellation of the 757 program and slow recovery in the commercial airline industry which has caused commercial airlines to order fewer airplanes from Boeing which in turn has decreased Boeing’s demand for our products. Management believes, based upon current contractual delivery schedules provided by customers, that Airbus and Boeing deliveries will continue to trend upwards through 2005.
	•	Military net sales decreased approximately $75.7 million or 15% in 2004 due to lower selling prices for the C-17 program and the completion of a detail parts contract with Northrop Grumman. This decrease in pricing was partially offset by an additional six months of sales in 2004 from the contracts acquired from Aerostructures totaling $23.5 million. Management believes, based upon current contractual delivery schedules provided by customers and pending new business proposals, that sales will trend upward for 2005.
	•	Business Jet net sales increased approximately $20.4 million or 11% due primarily to an additional six months of sales totaling $17.3 million and an increase of $5.5 million from contracts obtained in the Aerostructures Acquisition. Management believes, based upon current contractual delivery schedules provided by customers, that sales will continue to trend upwards into 2005.

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          Cost of Sales. Cost of sales for the year ended December 31, 2004 was $1,027.5 million, an increase of $15.2 million compared with cost of sales of $1,012.3 million for 2003. The slight increase in cost of sales was caused primarily by restructuring and facility consolidation charges of $94.6, partially offset by improved program margins of $72.8 million. The improved program margins resulted primarily from benefits obtained from the Company’s cost reduction programs.

          Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2004 were $273.6 million, an increase of $39.0 million compared with selling, general and administrative expenses of $234.6 million for the prior year. The increase was primarily due to $23.2 million of expenses incurred as part of our investment in the 787 program, increased retiree fringe benefits of $6.0 million and slightly higher expenses due to six months of additional expenses in 2004 from the Aerostructures facilities, partially offset by lower stock compensation expense of $11.1 million in 2004.

          Operating loss. Operating loss for the year ended December 31, 2004 was ($112.4) million, compared to an operating loss of ($38.1) million for the same period in the prior year. The increase in loss of ($74.3) million is primarily due to the restructuring and facility consolidation charges of $94.6 million during 2004, $23.2 million of costs incurred related to our investment in the Boeing 787 program, lower margin on the C-17 program due to lower prices on the current contract, and the fourth quarter 2004 impairment charge related to intangible assets of $26.0, partially offset by the improved program margins resulted primarily from benefits obtained from the Company’s cost reduction programs.

          Interest expense, net. Interest expense, net for the year ended December 31, 2004 was $42.8 million, an increase of $12.8 million or 43% compared with $30.0 million for the prior year. Interest expense, net increased primarily due to interest rate swap gains of $10.3 million included in fiscal 2003.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

          Net Sales. Net sales for the year ended December 31, 2003 were $1,208.8 million, an increase of $8.1 million or less than 1% compared with net sales of $1,200.7 million for the prior year. When comparing the current and prior year:

	•	Commercial net sales were down 12% in 2003 as a result of lower deliveries on the Boeing 747, 757, 767, and 777 programs, partially offset by revenue from Airbus programs obtained in the Aerostructures Acquisition. The lower delivery rates on these programs were due to the continuing excess capacity in the commercial airline industry which caused commercial airlines to order fewer airplanes from Boeing which in turn decreased Boeing’s demand for our products.
	•	Military net sales were up 19% in 2003 due to increased deliveries on the Boeing C-17, and the C-130 as well as additional V-22 work obtained in the Aerostructures transaction.
	•	Business jets net sales decreased by 3% in 2003 due to a reduced demand for business jets and therefore reduced sales of our product. The reduction in demand for business jets was a result of the continued general economic downturn that began in 2000 and the intensification of that downturn as a result of the terrorist attacks of September 11, 2001, which led business jet customers to defer orders and reduce spending.

          Cost of Sales. Cost of sales was down 4% in 2003 due to lower production rates on Boeing commercial programs, partially offset by cost of sales from programs acquired with Aerostructures and a $4.4 million charge due to Boeing’s decision to end production of the 757 program. Forward losses, also included in cost of sales, were significant in 2003.

          Forward losses are recorded when the total estimated contract or purchase order cost exceeds the contract or purchase order value (see ‘Critical accounting policies’ and other discussions herein). Our commercial Boeing contracts require investment in capital equipment and manufacturing facilities, which results in higher annual fixed costs. Production rates on the Boeing commercial programs declined 25% during 2003. Non-cash forward losses of $87.3 million were recorded in fiscal 2003 compared to $73.2 million recorded in fiscal 2002. The total contract costs estimated in 2003 reflected the impact of significantly higher program costs due to the cancellation of the Boeing 757 program, the extended delay of the Boeing 767 Tanker program and further deterioration of production rates on the 747 and 767 programs.

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          Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2003 were up 26% compared with the prior year. The increase was primarily due to the Aerostructures Acquisition (including higher intangible amortization), which increased selling, general and administrative expenses by $20.3 million, a 2003 non-cash stock compensation charge of $11.1 million, higher retiree healthcare expenses of $7.8 million and higher disallowed costs on government contracts of $3.6 million. The non-cash stock compensation charge reflects the impact of an estimated increase in the fair value of Vought’s common stock from $10.00 per share at December 31, 2002 to $32.33 per share during fiscal 2003, related to non-recourse notes previously issued to officers for stock purchases, increased deferred compensation liability for Vought’s rabbi trust and the modification of stock options in connection with executive retirements. As a percentage of net sales, selling, general and administrative expenses increased to 19% from 16% in 2002.

          The combined effect of the changes to net sales, cost of sales and selling, general and administrative expenses discussed above, resulted in an operating loss of $38.1 million for the year ended December 31, 2003.

          Interest expense, net. Interest expense, net for the year ended December 31, 2003 was $30.0 million, a decrease of $5.8 million or 16% compared with $35.8 million for the year ended December 31, 2002. Interest expense, net declined due to $99.7 million of reductions of Vought senior secured credit facilities made during the intervening period partially offset by the issuance of $270 million of 8% Senior Notes due 2011 and income due to interest rate swap gains of $10.3 million in the year ended December 31, 2003 compared to gains of $6.1 million in the prior year.

Liquidity and Capital Resources

          On February 26, 2004, we announced a major project to consolidate manufacturing to the Dallas and Grand Prairie, Texas facilities. We are in the process of renovating and modernizing the Dallas facilities and will complete production at the Nashville and Stuart sites and reduce the size of the Hawthorne site. Funding to complete the project will come from a combination of the Texas Enterprise Fund, the Texas General Land Office, sale of facilities which are no longer required, savings realized as we vacate excess plant space, operational cash flow, and the revolver. Based upon the Company’s restructuring plan, the Company currently estimates that the benefit to operating earnings and cash flows, annually, will potentially be $50 million, following the substantial completion of such project. However, due to the scale and nature of estimates involved with consolidation of facilities of this size, there can be no assurance that the benefit will be realized in full or that unanticipated additional costs will not outweigh the benefits of the project.

          On July 2, 2003, Vought issued $270.0 million of 8% Senior Notes due 2011 (“Senior Notes”) with interest payable on January 15 and July 15 of each year, beginning January 15, 2004. The notes may be redeemed in full or in part prior to maturity, by paying specified premiums. Additionally, prior to July 15, 2006, Vought may redeem up to 35% of the notes from the proceeds of certain equity offerings. The notes are senior unsecured obligations guaranteed by all of Vought’s existing and future domestic subsidiaries.

          As of December 31, 2004, we had long-term debt of approximately $693.0 million, which included $421.0 million incurred under our senior secured credit facilities and $270.0 million of Senior Notes. In addition, we had $2.0 million of long-term capital lease obligations.

          We completed the syndication of a $650 million senior secured credit facility (“Credit Facility”) pursuant to the terms and conditions of a Credit Agreement dated December 22, 2004 (“Credit Agreement”). The Credit Facility is comprised of a $150 million six-year revolving credit facility, a $75 million synthetic letter of credit facility and a $425 million seven-year term loan B (“Term Loan”). The proceeds were used to refinance the Company’s existing credit facility and for general corporate purposes, including investment in the Boeing 787 program and the execution of the ongoing manufacturing facility consolidation and modernization plan. The Term Loan will amortize at $1 million per quarter with a bullet payment at the maturity date of December 22, 2011. Under the Credit Agreement, the Company has the option to solicit from existing or new lenders, up to $200 million in additional term loans subject to substantially the same terms and conditions as the outstanding term loans though pricing may be separately negotiated at that time. Additionally, the Company also has the option to convert up to $25 million of the Letter of Credit Facility to outstanding term loans which would also be subject to the same terms and conditions as the outstanding term loans made as of the closing date. The Credit Facility replaces the Company’s prior credit facility which consisted of a $150.0 million revolving credit facility and $295.9 million of term loans maturing in June 2008.

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          As of the December 31, 2004, there are no borrowings under the Revolver, $425.0 million of borrowings under the Term Loan, and $50 million outstanding Letters of Credit under the $75 million synthetic facility. The Company is obligated to pay an annual commitment fee on the unused revolving credit facility of 0.5% or less dependent upon the leverage ratio.

          Net cash used in operating activities for the year ended December 31, 2004 was $25.8 million, a decrease of $124.6 million or 126.1% compared to net cash provided by operating activities of $98.8 million for the prior year. The decrease from the prior year was primarily due to lower cash receipts on the C-17 program in addition to facility consolidation costs and our expenditures related to our investment in the Boeing 787 program.

          Cash used in investing activities generally has been for capital expenditures. Net cash used for capital expenditures for the year ended December 31, 2004 was $69.6 million, an increase of $35.0 million or 101.2% compared to $34.6 million for the prior year. The increase reflects increases in investment in our facilities and capabilities, such as the site consolidation project, continuing modernization, productivity, efficiency and technology improvements.

          The principal source of liquidity for Vought is cash provided by operations. Vought’s liquidity requirements and working capital needs depend on a number of factors, including the level of delivery rates under our contracts and working capital needs fluctuate between periods as a result of changes in delivery rates under existing contracts and production associated with new contracts. For some military aircraft programs, milestone payments finance working capital, which helps to improve liquidity. In general, our business generates sufficient cash flow to manage our general liquidity needs and Vought has not historically needed short-term borrowings to finance normal operations. The following table summarizes the scheduled maturities of financial obligations and expiration dates of commitments as of December 31, 2004:

          In addition to the financial obligations detailed in the table above, the Company also has contractual obligations at December 31, 2004 as follows: an aggregate projected pension benefit obligation, excluding post retirement benefits, of approximately $1,848.6 million and aggregate plan assets of approximately $1,346.4 million. The Company currently plans to make aggregate contributions of $197.2 million to the pension plans over the next five years as follows: $27.3 million, $37.4 million, $33.5 million, $56.0 million, and $43.0 million, for 2005, 2006, 2007, 2008 and 2009, respectively. Additionally, the net present value of our current post retirement benefit plan is approximately $701.7 million to which we plan to contribute $57.3 million, $56.6 million, $59.0 million, $59.7 million and $59.1 million in 2005, 2006, 2007, 2008 and 2009, respectively. Current plan documents reserve the

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Company’s right to amend or terminate the plans at any time, subject to applicable collective bargaining requirements for represented employees.

          At December 31, 2004 and 2003, our pension obligation liability increased due to lowering of the discount rate. The effect of lowering that rate in 2004 and 2003 increased our pension benefit obligation by $104.1 million and $78.3 million, respectively. During 2004 and 2003, the actual rate of return on plan assets realized over the course of the year was greater than the assumed rate by 1.1% and 13.9%, respectively.

          At December 31, 2004 and 2003, the post retirement liabilities increased primarily due to lowering of the discount rate. The new rates had the effect of increasing our post retirement liabilities in 2004 and 2003 by $30.2 million and $18.3 million, respectively.

          We believe that cash flow from operations, cash and cash equivalents on hand, and funds available under our amended credit facility will provide adequate funds for our working capital needs, planned capital expenditures, and near term debt service obligations. Our ability to pay interest and principal on the indebtedness and to satisfy our other obligations will depend upon future operating performance and the availability of refinancing indebtedness, which will be affected by prevailing economic conditions and financial, business and other factors, some of which are beyond our control.

          Vought has reached a preliminary agreement with the State of South Carolina to develop a new manufacturing site in Charleston, South Carolina for manufacturing and assembly work for the Boeing 787 Dreamliner commercial aircraft program. In connection with that program, Vought is in the process of finalizing a joint venture with Alenia North America (“Alenia”), a subsidiary of Finmeccanica SpA, called Global Aeronautica, LLC. Vought and Alenia will each have a 50% stake in the joint venture, which will combine the two companies’ respective 787 program fuselage products to deliver an integrated product to Boeing. Vought will be the sole-source supplier of the aft fuselage for Boeing’s 787 program under a contract that currently is under negotiation, but is expected to represent approximately $5 billion in total contract value through 2021. Vought’s funding requirement for the 787 program is expected to be approximately $140 million for investment and approximately $50 million for working capital, with significant additional funding to come from other sources. Vought’s investment in the 787 program primarily will be in tooling and capital expenditures, design and engineering, and a cash contribution to the joint venture of approximately $20 million in total over the next several years. Vought believes that the 787 program represents the next generation of commercial aircraft, and expects that the 787 program will evolve into a broader family of more efficient and capable commercial aircraft that will come into production over the next decades.

          Vought’s total investment in the 787 program and its facility consolidation and modernization plan is expected to be approximately $876 million. The majority of the funding requirement is expected to be financed by cash currently on hand, proceeds from the new credit facilities, sale-leaseback and operating lease arrangements, state grants and other sources. The remaining funding requirements, estimated at $50 to $100 million, are expected to be met by cash flow from operations.

          We may continue to manage market risk with respect to interest rates by entering into swap agreements, as we have done in the past. Our supply base contracting policy manages commodities price risk by entering into long-term fixed-price contracts in most cases. However, we do not have any futures hedge with respect to raw materials, such as aluminum, used to build our products, and therefore we may be subject to price fluctuations for raw materials or utilities over the long term. Similarly, we do not hedge for foreign currency exchange risk because we have minimal exposure to this risk. In the case of our substantial sales to Airbus in Europe, purchase prices and payment terms under the relevant contracts are denominated in U.S. dollars.

          Debt Covenants. The Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations on the Company and its subsidiaries with respect to indebtedness, liens, investments, distributions, mergers and acquisitions, dispositions of assets, subordinated debt and transactions with affiliates. The Credit Facility also includes financial covenants including leverage ratio, interest coverage ratio and capital expenditure limitations. The Senior Notes also contain various restrictive covenants including the incurrence of additional indebtedness unless the debt is otherwise permitted under the indenture. We are currently in compliance with the covenants in the Credit Facility and the Senior Notes.

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Inflation

          A majority of our sales are conducted pursuant to long-term contracts that set fixed unit prices and some of which provide for price adjustment through escalation clauses. The effect of inflation on our sales and earnings is minimal because the selling prices of those contracts, established for deliveries in the future, generally reflect estimated costs to be incurred in these future periods. Our estimated costs take into account the anticipated rate of inflation for the duration of the relevant contract.

          Our supply base contracts are conducted on a fixed price basis in U.S. Dollars. In some cases our supplier arrangements contain escalation adjustment provisions based on accepted industry indices, with appropriate forecasting incorporated in program financial estimates. As the metallic raw material industry is experiencing a significant demand pressure, it is expected raw material market pricing will increase as a cost consideration for the company, despite current existing Long Term Agreement protections. Strategic cost reduction plans will continue to focus on mitigating the affects of this demand curve on company operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

          As a result of our operating and financing activities, we are exposed to various market risks that may affect our consolidated results of operations and financial position. These market risks include fluctuations in interest rates, which impact the amount of interest we must pay on our variable-rate debt.

          Other than the interest rate swaps described below, financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable.

          Accounts receivable include amounts billed and currently due from customers, amounts currently due but unbilled, particular estimated contract changes, claims in negotiation that are probable of recovery, and amounts retained by the customer pending contract completion. Vought continuously monitors collections and payments from customers and maintains a provision for estimated credit losses as deemed appropriate as based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within Vought’s expectations, we cannot guarantee that we will continue to experience the same credit loss rates in the future.

          We maintain cash and cash equivalents with various financial institutions and perform periodic evaluations of the relative credit standing of those financial institutions. We have not experienced any losses in such accounts and believe that we are not exposed to any significant credit risk on cash and cash equivalents.

          We are highly dependent on the availability of essential materials and parts from our suppliers. We are dependent upon the ability of our suppliers to provide material that meets specifications, quality standards, delivery schedules and anticipated costs. We are experiencing delays in the receipt of metallic raw materials common with overall capacity constraints across the industry. Based upon market conditions and industry analysis we expect these delays to continue well into 2006 as metallic (aluminum) raw material production capability adjusts to the industry upturn, increased infrastructure demand in the People’s Republic of China, and increased aluminum usage in an ever wider range of consumer products. Although these delays have the potential to affect cost and production schedules, we do not anticipate these effects will have a material impact on cash flows or results of operations.

          Our suppliers’ failure to provide acceptable raw materials, components, kits and subassemblies would adversely affect our production schedules and contract profitability. We maintain an extensive qualification and performance surveillance system to control risk associated with such supply base reliance. We are dependent on third parties for all information technology services. To a lesser extent, we also are exposed to fluctuations in the prices of certain commodities, such as electricity, natural gas and aluminum.

Interest Rate Risks

          From time to time, we may enter into interest rate swap agreements or other financial instruments in the normal course of business for purposes other than trading. These financial instruments are used to mitigate interest rate or other risks, although to some extent they expose us to market risks and credit risks. We control the credit risks associated with these instruments through the evaluation of the creditworthiness of the counter parties. In the event that a counter party fails to meet the terms of a contract or agreement then our exposure is limited to the current value, at that time, of the interest rate differential, not the full notional or contract amount. Management

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believes that such contracts and agreements have been executed with creditworthy financial institutions. As such, we consider the risk of nonperformance to be remote.

          Management has performed sensitivity analyses to determine how market rate changes will affect the fair value of the market risk sensitive hedge positions and all other debt that we will bear. Such an analysis is inherently limited in that it represents a singular, hypothetical set of assumptions. Actual market movements may vary significantly from our assumptions. Fair value sensitivity is not necessarily indicative of the ultimate cash flow or earnings effect we would recognize from the assumed market rate movements. We are exposed to cash flow risk due to changes in interest rates with respect to the entire $425.0 million of variable rate debt under our senior secured credit facilities. A one-percentage point increase in interest rates on our variable rate debt as of December 31, 2004 would decrease our annual pre-tax income by approximately $4.3 million. All of our remaining debt is at fixed rates, therefore, changes in market interest rates under these instruments would not significantly impact our cash flows or results of operations.

          In the past, Vought entered into two interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate debt. Under these agreements, Vought exchanged floating rate interest payments for fixed rate payments periodically over the term of the swap agreements. An underlying notional amount is used to measure the interest to be paid or received and does not represent the amount of exposure to credit loss. The first agreement was entered into on October 4, 2000 for a notional amount of $100.0 million and expired on December 31, 2002. The agreement entitled Vought to pay a fixed interest rate amount of 6.51% on the notional amount in exchange for receiving a variable 30-day LIBOR on the notional amount. The second agreement was entered into on October 4, 2000 for a notional amount of $200.0 million and expired on December 31, 2003. The second agreement entitled Vought to pay a fixed interest rate amount of 6.525%, on the notional amount in exchange for receiving a variable 30-day LIBOR on the notional amount. Management held the swap agreements until their maturity. As a result of the interest rate swaps, gains of $10.3 million and $6.1 million were recorded as other interest income in 2003 and 2002, respectively.

          Under the Credit Agreement, we have a requirement to hedge 50% of our outstanding debt balance net of the fixed rate instrument balances for two years. To comply with this requirement, we entered into an interest rate cap subsequent to year-end 2004 whereby $100 million is capped at a maximum LIBOR rate of 6%. This cap expires on January 1, 2007.

          In the past, Aerostructures also has entered into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate debt. In connection with the acquisition of Aerostructures and the issuance of the 8% Senior Notes due 2011, Vought settled Aerostructures’ two swap agreements by payment of approximately $1.0 million.

          We have no current plans to enter into additional interest rate swaps.

Utility Price Risks

          We have exposure to utility price risks as a result of volatility in the cost and supply of energy and in natural gas prices. To minimize this risk, we have entered into fixed price contracts at certain of the manufacturing locations for a portion of its energy usage for periods of up to three years. Although these contracts would reduce the risk to us during the contract period, future volatility in the supply and pricing of energy and natural gas could have an impact on our consolidated results of operations.

Related Party Transaction

          A management agreement between Vought and TC Group L.L.C., an affiliate of The Carlyle Group, requires Vought to pay an annual fee of $2.0 million for various management services. Vought paid TC Group L.L.C. fees and allowable expenses of $2.1 million in 2004 and $2.0 million in each of the fiscal years 2003 and 2002. In addition, we paid TC Group L.L.C. fees of $3.5 million, $2.5 million, and $0.0 million in 2004, 2003, and 2002, respectively, in connection with investment banking and financial advisory services.

          After we acquired our assets and operations from Northrop Grumman in July 2000, we contracted with Northrop Grumman Information Technology, for which we incurred expenses of $70.0 million, $43.7 million, and $44.4 million in the fiscal years 2004, 2003 and 2002, respectively. Northrop Grumman subleased office and production space from Vought in Dallas, Texas and Hawthorne, California, for $3.7 million, $5.3 million, and $6.1 million in the fiscal years 2004, 2003 and 2002, respectively.

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          Upon retirement of two officers during 2002, we modified an agreement in order to provide for the future forgiveness of their stock purchase indebtedness of $1.0 million plus accrued interest if a liquidity event (as defined) occurs.

Accounting Changes and Pronouncements

          On December 8, 2003, the President signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”). The Act introduces a prescription drug benefit under Medicare (“Medicare Part D”) as well as a federal subsidy to employers who sponsor retiree health care benefit plans that provide a prescription drug plan that is at least actuarially equivalent to Medicare Part D. The FASB issued Staff Positions (“FSPs”) that allow companies to defer recognition of the impact that the Act might have on the benefit obligations they provide their retirees. The Company deferred recognition of the impact of the Act as permitted by the FSPs at December 31, 2003. As a result of the restructuring announced February 26, 2004, the deferral election expired. The Company has included the estimated effects of the Act in its 2004 expenses and the accumulated postretirement benefit obligation (“APBO”) at December 31, 2004. See Note 13 - Pension and Other Postretirement Benefits for further discussion of the adoption of this pronouncement.

          On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123 Accounting for Stock-Based Compensation. Statement 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123R is similar to the approach described in Statement 123. However, Statement 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

          Statement 123R must be adopted no later than July 1, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. We expect to adopt Statement 123R on June 26, 2005.

          Statement 123R permits public companies to adopt its requirements using one of two methods:

	1.	A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123R for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123R that remain unvested on the effective date.
	2.	A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

          The Company plans to adopt Statement 123 using the modified prospective method.

          As permitted by Statement 123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123R’s fair value method will result in $0.7 million in amortization that will be included in our results of operations subsequent to June 30, 2005, based on current assumptions regarding vesting of current grants. The impact of adoption of Statement 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123R in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income in Note 2 to our Consolidated Financial Statements.

          In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151 “Inventory Costs.” This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In addition, this Statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement will be effective for the Company in fiscal 2006. We are currently evaluating the impact of this new Standard.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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Report of Independent Registered Public Accounting Firm

The Board of Directors
Vought Aircraft Industries, Inc.

We have audited the accompanying consolidated balance sheets of Vought Aircraft Industries, Inc. and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 Vought Aircraft Industries, Inc. and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Fort Worth, Texas

February 28, 2005

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Item 8. Financial Statements and Supplementary Data

Vought Aircraft Industries, Inc.

See accompanying notes

32

Vought Aircraft Industries, Inc.

See accompanying notes

33

Vought Aircraft Industries, Inc.

See accompanying notes

34

Vought Aircraft Industries, Inc.

See accompanying notes

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Vought Aircraft Industries, Inc.

1. BASIS OF PRESENTATION

          Organization

          Vought Aircraft Industries, Inc. and its wholly owned subsidiaries are herein referred to as the “Company” or “Vought.” The Company is one of the world’s largest independent suppliers of commercial and military aerostructures. The majority of the Company products are sold to The Boeing Company, and for military contracts, ultimately to the U.S. Government. The Corporate office is in Dallas, Texas and production work is performed at sites in Hawthorne and Brea, California, Everett, Washington, Dallas and Grand Prairie, Texas, Milledgeville, Georgia, Nashville, Tennessee, and Stuart, Florida. We broke ground on our Charleston, South Carolina site on February 7, 2005.

          The financial health of the commercial airline industry has a direct and significant effect on the Company’s commercial business programs. The commercial airline industry has been negatively impacted in recent periods by an economic downturn that began in 2000, and most recently, by rapidly increasing fuel costs. As commercial airline companies have delayed or cancelled new aircraft orders, aircraft manufacturers and their suppliers have experienced reduced delivery rates.

          In 2004, Vought was selected by Sikorsky to provide the entire cabin structure for the Black Hawk helicopter. The contract covers 1,100 shipsets of structure over the next 15 years. In addition, from 2001 to 2003, the Company was awarded several contracts, including the Lockheed Martin F-22 Raptor horizontal stabilator, Northrop Grumman Global Hawk enhanced wing design, Lockheed Martin C-5 Galaxy aircraft flight control surfaces, lower wing skins for the Lockheed Martin F-35 Joint Strike Fighter and an agreement to provide 60 additional C-17 Globemaster III shipsets of aerostructures.

          Vought has reached a preliminary agreement with the State of South Carolina to develop a new manufacturing site in Charleston, South Carolina for manufacturing and assembly work for the Boeing 787 Dreamliner commercial aircraft program. In connection with that program, Vought is in the process of finalizing a joint venture with Alenia North America (“Alenia”), a subsidiary of Finmeccanica SpA, called Global Aeronautica, LLC. Vought and Alenia will each have a 50% stake in the joint venture, which will combine the two companies’ respective 787 program fuselage products to deliver an integrated product to Boeing. Vought will be the sole-source supplier of the aft fuselage for Boeing’s 787 program under a contract that currently is under negotiation.

          On February 26, 2004, we announced plans to consolidate portions of our manufacturing operations to Dallas and Grand Prairie, Texas. The Company plans to phase out operations at their Nashville, Tennessee and Stuart, Florida sites by December 31, 2006. The Company is working with the State of Texas to facilitate the renovation of its Texas operations. Plans for the Vought manufacturing facility in Texas include resolving their long-term occupancy at the existing Dallas Jefferson Street facility following the expiration of the current lease in 2006. The solution includes investment tools at the disposal of the Texas General Land Office, which are expected to allow Vought to solidify a long-term lease agreement in addition to modernization and renovation of the current facilities. State and local authorities are also committed to providing appropriate economic development incentives.

          Some programs that Vought will establish in Dallas will require air delivery of large structures. In addition to the plan modernization, runway availability is a key element of the consolidation plan. The City of Dallas and the State of Texas plan to reopen the Hensley Field runway that is located next to the Company’s Dallas site. Vought intends to use the runway as a private industrial airfield to meet these new program requirements.

          The Company believes that these plans are necessary to ensure that Vought is well-positioned, both now and in the future, to better meet the needs of its customers, the current industry environment and to be prepared for opportunities for growth. However, the Company’s future ability to increase product sales and meet future debt and pension funding requirements will continue to be significantly influenced by the commercial airline industry recovery and future military spending.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Principles of Consolidation

          The Consolidated Financial Statements include Vought Aircraft Industries, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

          Accounting Estimates

          The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes and, in particular, estimates of contract costs and revenues used in the earning recognition process. The Company has recorded all estimated contract losses. Actual results could differ from those estimates.

          Cash and Cash Equivalents

          The Company considers cash on hand, deposits with banks, and other short-term marketable securities with original maturities of three months or less as cash and cash equivalents.

          Accounts Receivable

          Accounts receivable include amounts billed and currently due from customers, amounts currently due but unbilled, certain estimated contract changes, claims in negotiation that are probable of recovery, and amounts retained by the customer pending contract completion. Unbilled amounts are usually billed and collected within one year. The Company continuously monitors collections and payments from their customers and maintains a provision for estimated credit losses, as deemed appropriate, based upon historical experience and any specific customer collection issues that have been identified.

          Inventories

          Inventoried costs primarily relate to work in process under fixed-price contracts. They represent accumulated contract costs less the portion of such costs allocated to delivered items. Accumulated contract costs include direct production costs, manufacturing and engineering overhead, production tooling costs, and certain allowable general and administrative expenses.

          In accordance with industry practice, inventoried costs are classified as a current asset and include amounts related to contracts having production cycles longer than one year; therefore, a portion thereof will not be realized within one year.

          The excess of production costs of delivered items over the estimated average costs is carried in inventory under the learning curve concept. Under this concept, production costs per unit are expected to decrease over time due to efficiencies arising from continuous improvement in the performance of repetitive tasks.

          Property, Plant and Equipment

          Additions to property, plant and equipment are recorded at cost. Depreciation is calculated principally on the straight-line method over the estimated useful lives of the assets. Repairs and maintenance, which are not considered betterments and do not extend the useful life of property and equipment, are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the asset and accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in income.

          Impairment of Long Lived Assets, Identifiable Intangible Assets and Goodwill

          The Company records impairment losses on long-lived assets, including identifiable intangible assets, when events and circumstances indicate that the assets might be impaired and the undiscounted projected cash flows associated with those assets are less than the carrying amounts of those assets. In those situations where the undiscounted projected cash flows are less than the carrying amounts of those assets, impairment loss on a long-lived asset is measured based on the excess of the carrying amount of the asset over the asset’s fair value, generally determined based upon discounted projected cash flows. For assets held for sale, impairment losses are recognized based upon the excess of carrying value over the estimated fair value of the assets, less estimated selling costs. For

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goodwill, effective January 1, 2002, the Company performs an annual impairment test, in accordance with Statement of Financial Accounting Standards (SFAS) 142 (further described in Note 8- Goodwill and Intangible Assets).

     Derivatives

     Derivatives consist of interest rate swap agreements. Gains and losses from interest rate swaps are included on the accrual basis in interest expense. (further described in Note 12 – Derivatives and Other Financial Instruments).

     Advance and Progress Payments

     Advance payments by customers for deposits on orders not yet delivered are recorded as current liabilities. Progress payments received on contracts-in-process are first offset against related contract costs that are included in inventory, with any remaining amount reflected in current liabilities.

     Revenue and Profit Recognition

     The majority of our sales are made pursuant to written contractual arrangements or “contracts” to design, develop and manufacture aerostructures to the specifications of the customer under firm fixed price contracts. Sales and profits on contracts are recognized using percentage-of-completion methods of accounting. Sales and profits are recognized on production contracts as units are delivered and accepted by the customer (the “units-of-delivery” method). Under the percentage-of-completion method of accounting, a single estimated total profit margin is used to recognize profit for each contract over its entire period of performance, which can exceed one year. Amounts representing contract change orders or claims are included in sales only when they can be reliably estimated and their realization is reasonably assured. Revenues for claims and unapproved change orders, which were less than $5 million for each of 2004, 2003 and 2002, are included in contract analyses as costs related to the claim are incurred. Additionally, some contracts contain provisions for revenue sharing, price re-determination or cost and or performance incentives. Such amounts or incentives are included in sales when the amounts can be reliably estimated and their realization is reasonably assured. The impact of revisions in profit estimates is recognized on a cumulative catch-up basis in the period in which the revisions are made. Provisions for anticipated losses on contracts are recorded in the period in which they become evident (“forward losses”) and are first offset against costs that are included in inventory, with any remaining amount reflected in accrued contract liabilities. Revisions in contract estimates, if significant, can materially affect Vought’s results of operations and cash flows, as well as Vought’s valuation of inventory. Furthermore, certain contracts are combined or segmented for revenue recognition in accordance with SOP 81-1.

     Accounting for the sales and profit on a contract requires estimates of (1) the contract value or total contract revenue, (2) the total costs at completion, which is equal to the sum of the actual incurred costs to date on the contract and the estimated costs to complete the contract’s scope of work and (3) the measurement of progress towards completion. The estimated profit or loss on a contract is equal to the difference between the total contract value and the estimated total cost at completion, which includes direct production cost (material and labor), manufacturing and engineering overhead, product tooling cost and certain allowable general and administrative expenses. Under the units-of-delivery percentage of completion method, sales on a contract are recorded as the units are delivered during the period at an amount equal to the contractual selling price of those units. The profit recorded on a contract under the units-of-delivery method is equal to the estimated total profit margin for the contract stated as a percentage of contract revenue multiplied by the sales recorded on the contract during the period. Adjustments to original estimates for a contract’s revenues, estimated costs at completion and estimated total profit are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur. These estimates are also sensitive to the assumed rate of production. Generally, the longer it takes to complete the contract quantity the more relative overhead that contract will absorb.

     Although fixed-price contracts, which extend several years into the future, generally permit the Company to keep unexpected profits if costs are less than projected, the Company also bears the risk that increased or unexpected costs may reduce the Company’s profit or cause the Company to sustain losses on the contract. In a fixed-price contract, the Company must fully absorb cost overruns, not withstanding the difficulty of estimating all of the costs it will incur in performing these contracts and in projecting the ultimate level of sales that may otherwise be achieved. The Company’s failure to anticipate technical problems, estimate delivery reductions, estimate costs accurately or control costs during performance of a fixed price contract may reduce the profitability of a fixed price

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contract or cause a loss. The Company believes they have recorded adequate provisions in the financial statements for losses on fixed-price contracts, but the Company cannot be certain that the contract loss provisions will be adequate to cover all actual future losses.

     Stock-Based Compensation

     The Company grants stock options for a fixed number of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants using the intrinsic value method. The following schedule reflects the impact on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock Based Compensation, to stock based employee compensation: